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MVBF MVB Financial

Filed: 3 May 21, 4:13pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 001-38314
mvbf-20210331_g1.jpg
MVB Financial Corp.
(Exact name of registrant as specified in its charter)
West Virginia20-0034461
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
301 Virginia Avenue, Fairmont, WV26554
(Address of principal executive offices)(Zip Code)
(304) 363-4800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $1.00 par valueMVBFThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:
As of April 30, 2021, the Registrant had 11,622,335 shares of common stock outstanding with a par value of $1.00 per share.



TABLE OF CONTENTS


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Forward-Looking Statements:

Statements in this Quarterly Report on Form 10-Q that are based on other than historical data are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others, statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations and future financial condition, results of operations and performance of the Company and its subsidiaries (collectively, “we,” “our,” or “us”), including the Bank, and statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” “outlook” or the negative of those terms or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing the Company's view as of any subsequent date. Forward-looking statements involve significant risks and uncertainties (both known and unknown) and actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in the Management’s Discussion and Analysis section. Factors that might cause such differences include, but are not limited to:
lthe length, severity, magnitude and duration of the Coronavirus Disease (“COVID-19”) pandemic and the direct and indirect impacts of the COVID-19 pandemic, including its impact on the Company’s financial condition and business operations;
lchanges in the economy, which could materially impact credit quality trends and the ability to generate loans and gather deposits, including the pace of recovery following the COVID-19 pandemic;
lability to successfully execute business plans, manage risks and achieve objectives, including strategies related to recent investments in financial technology (“Fintech”);
lmarket, economic, operational, liquidity, credit and interest rate risks associated with the Company's business;
lchanges in local, national and international political and economic conditions, including without limitation, changes in the political and economic climate, economic conditions and other major developments, including wars, natural disasters, epidemics and pandemics, military actions and terrorist attacks;
lchanges in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices;
lunanticipated changes in the Company's liquidity position, including but not limited to changes in access to sources of liquidity and capital to address its liquidity needs;
lchanges in interest rates;
lthe quality and composition of the loan and securities portfolios;
lability to successfully conduct acquisitions and integrate acquired businesses and potential difficulties in expanding businesses in existing and new markets;
lability to successfully manage credit risk and the sufficiency of allowance for credit losses;
lincreases in the levels of losses, customer bankruptcies, bank failures, claims and assessments;
lchanges in government legislation and accounting policies, including the Dodd-Frank Act and Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”);
luncertainty about the discontinued use of the London Inter-bank Offered Rate (“LIBOR”) and the transition to an alternative rate;
lcompetition and consolidation in the financial services industry;
lnew legal claims against us, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies or changes in existing legal matters;
lsuccess in gaining regulatory approvals, when required, including for proposed mergers or acquisitions;
lchanges in consumer spending and savings habits, including demand for loan products and deposit flow;
lincreased competitive challenges and expanding product and pricing pressures among financial institutions and non-bank financial companies;
loperational risks or risk management failures by us or critical third parties, including without limitation, with respect to data processing, information systems, cyber-security, technological changes, vendor problems, business interruptions and fraud risk;
lfailure or circumvention of internal controls;
llegislation or regulatory changes which adversely affect operations or business, including changes to address the impact of COVID-19 through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and other legislative and regulatory responses to the COVID-19 pandemic; and
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lability to comply with applicable laws and regulations; changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (“FASB”) or regulatory agencies, including the impact of future adoption of new Current Expected Credit Losses (“CECL”) standard; and
lcosts of deposit insurance and changes with respect to Federal Deposit Insurance Corporation (“FDIC”) insurance coverage levels.
l
other risks and uncertainties detailed in Part I, Item 1A, Risk Factors, in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).

Certain risk factors that might cause actual results to differ materially from those presented are more fully described in the 2020 Form 10-K, filed with the SEC on March 9, 2021, within Part I, Item 1A, Risk Factors, and from time to time, in other filings with the Securities and Exchange Commission (“SEC”). Actual results may differ materially from those expressed in or implied by any forward-looking statement. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except to the extent required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

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PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements

MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, 2021December 31, 2020
(Unaudited)(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks$19,603 $19,110 
Interest-bearing balances with banks320,013 244,783 
Total cash and cash equivalents339,616 263,893 
Certificates of deposit with banks11,803 11,803 
Investment securities available-for-sale423,122 410,624 
Equity securities28,200 27,585 
Loans held-for-sale1,062 
Loans receivable1,694,385 1,453,744 
Allowance for loan losses(26,214)(25,844)
Loans receivable, net1,668,171 1,427,900 
Premises and equipment, net27,290 26,203 
Bank-owned life insurance41,512 41,262 
Equity method investment39,883 46,494 
Accrued interest receivable and other assets64,142 72,300 
Goodwill2,350 2,350 
TOTAL ASSETS$2,646,089 $2,331,476 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Deposits: 
Noninterest-bearing$837,221 $715,791 
Interest-bearing1,379,332 1,266,598 
Total deposits2,216,553 1,982,389 
Accrued interest payable and other liabilities36,612 55,931 
Repurchase agreements10,613 10,266 
FHLB and other borrowings102,185 
Subordinated debt43,443 43,407 
Total liabilities2,409,406 2,091,993 
STOCKHOLDERS’ EQUITY
Preferred stock - par value $1,000; 20,000 shares authorized; 0 shares issued and outstanding as of March 31, 2021 and 733 shares issued and outstanding as December 31, 20207,334 
Common stock - par value $1; 20,000,000 shares authorized; 12,438,061 and 11,590,045 shares issued and outstanding, respectively, as of March 31, 2021 and 12,374,322 and 11,526,306 shares issued and outstanding, respectively, as of December 31, 202012,438 12,374 
Additional paid-in capital130,337 129,119 
Retained earnings112,068 105,171 
Accumulated other comprehensive income (loss)(1,892)2,226 
Treasury stock - 848,016 shares as of March 31, 2021 and December 31, 2020, at cost(16,741)(16,741)
Total equity attributable to parent236,210 239,483 
Noncontrolling interest473 
Total stockholders' equity236,683 239,483 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,646,089 $2,331,476 

See accompanying notes to unaudited consolidated financial statements.
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MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited) (Dollars in thousands, except per share data)
Three Months Ended March 31
20212020
INTEREST INCOME
     Interest and fees on loans$16,892 $18,939 
     Interest on deposits with banks122 111 
     Interest on investment securities631 666 
     Interest on tax-exempt loans and securities1,418 983 
     Total interest income19,063 20,699 
INTEREST EXPENSE
     Interest on deposits1,048 3,910 
     Interest on short-term borrowings44 583 
     Interest on subordinated debt466 35 
Total interest expense1,558 4,528 
NET INTEREST INCOME17,505 16,171 
     Provision for loan losses618 1,138 
     Net interest income after provision for loan losses16,887 15,033 
NONINTEREST INCOME
     Payment card and service charge income1,493 550 
     Mortgage fee income11,219 
     Insurance and investment services income224 207 
     Gain on sale of available-for-sale securities, net1,143 276 
     Loss on derivatives, net(3,562)
     Holding gain on equity securities, net515 14 
     Compliance consulting income1,281 1,009 
     Equity method investment income6,469 
     Other operating income1,333 1,137 
     Total noninterest income12,458 10,850 
NONINTEREST EXPENSES
     Salaries and employee benefits11,911 16,182 
     Occupancy expense1,158 1,220 
     Equipment depreciation and maintenance1,041 877 
     Data processing and communications909 1,163 
     Mortgage processing851 
     Marketing, contributions and sponsorships65 336 
     Professional fees1,742 1,331 
     Insurance, tax and assessment expense538 464 
     Travel, entertainment, dues and subscriptions884 1,218 
     Other operating expenses870 1,014 
     Total noninterest expense19,118 24,656 
Income before income taxes10,227 1,227 
Income tax expense2,169 179 
Net income before noncontrolling interest8,058 1,048 
Net loss attributable to noncontrolling interest27 
Net income attributable to parent8,085 1,048 
Preferred dividends35 114 
Net income available to common shareholders$8,050 $934 
Earnings per common shareholder - basic$0.70 $0.08 
Earnings per common shareholder - diluted$0.66 $0.08 
Weighted-average shares outstanding - basic11,530,279 11,942,767 
Weighted-average shares outstanding - diluted12,286,731 12,298,092 

See accompanying notes to unaudited consolidated financial statements.
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MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
Three Months Ended March 31
20212020
Net income$8,058 $1,048 
Other comprehensive loss:
Unrealized holding gain (loss) on securities available-for-sale(6,331)1,414 
Income tax effect1,483 (382)
Reclassification adjustment for gain recognized in income(1,143)(276)
Income tax effect268 75 
Change in defined benefit pension plan1,705 (706)
Income tax effect(399)190 
Reclassification adjustment for amortization of net actuarial loss recognized in income127 105 
Income tax effect(30)(28)
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income264 (1,793)
Income tax effect(62)484 
Total other comprehensive loss(4,118)(917)
Comprehensive loss attributable to noncontrolling interest27 
Comprehensive income$3,967 $131 

See accompanying notes to unaudited consolidated financial statements.

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MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) (Dollars in thousands except per share data)
 Preferred stockCommon stockAdditional paid-in capitalRetained earningsAccumulated other comprehensive income (loss)Treasury stockTotal stockholders' equity attributable to parentNoncontrolling interestTotal stockholders' equity
SharesAmountSharesAmountSharesAmount
Balance at December 31, 2020733 $7,334 12,374,322 $12,374 $129,119 $105,171 $2,226 848,016 $(16,741)$239,483 $$239,483 
Net income— — — — — 8,085 — — — 8,085 (27)8,058 
Other comprehensive loss— — — — — — (4,118)— — (4,118)— (4,118)
Dividends on common stock ($0.10 per share)— — — — — (1,153)— — — (1,153)— (1,153)
Dividends on preferred stock— — — — — (35)— — — (35)— (35)
Stock-based compensation— — — — 592 — — — — 592 — 592 
Redemption of preferred stock(733)(7,334)— — — — — — — (7,334)— (7,334)
Common stock options exercised— — 52,584 53 637 — — — — 690 — 690 
Restricted stock units issued— — 11,155 11 (11)— — — — — — 
Noncontrolling interests due to acquisition— — — — — — — — — — 500 500 
Balance at March 31, 2021$12,438,061 $12,438 $130,337 $112,068 $(1,892)848,016 $(16,741)$236,210 $473 $236,683 
Balance at December 31, 2019733 $7,334 11,995,366 $11,995 $122,516 $72,496 $(1,321)51,077 $(1,084)$211,936 $$211,936 
Net income— — — — — 1,048 — — — 1,048 — 1,048 
Other comprehensive loss— — — — — — (917)— — (917)— (917)
Dividends on common stock ($0.09 per share)— — — — — (1,076)— — — (1,076)— (1,076)
Dividends on preferred stock— — — — — (114)— — — (114)— (114)
Stock-based compensation— — — — 498 — — — — 498 — 498 
Common stock options exercised— — 2,500 35 — — — — 38 — 38 
Common stock repurchased— — — — — — — 16,300 (260)(260)— (260)
Balance at March 31, 2020733 $7,334 $— 11,997,866 $11,998 $— $123,049 $— $72,354 $— $(2,238)$— 67,377 $(1,344)$211,153 $$0$211,153 

See accompanying notes to unaudited consolidated financial statements.
8


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
Three Months Ended March 31,
20212020
OPERATING ACTIVITIES
Net income$8,058 $1,048 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
     Net amortization and accretion of investments898 302 
     Net amortization of deferred loan costs669 114 
     Provision for loan losses618 1,138 
     Depreciation and amortization1,003 908 
     Stock-based compensation592 498 
     Loans originated for sale(484,989)
     Proceeds of loans sold1,062 419,868 
     Holding gain on equity securities(515)(14)
     Mortgage fee income(11,219)
     Gain on sale of available-for-sale securities(1,156)(276)
     Loss on sale of available-for-sale securities13 
     Gain on sale of portfolio loans(130)
     Income on bank-owned life insurance(249)(223)
     Deferred income taxes(1,036)(929)
     Equity method investment income(6,469)
     Return on equity method investment13,080 
     Other assets10,768 (18,831)
     Other liabilities(17,120)14,116 
     Net cash from operating activities10,216 (78,619)
INVESTING ACTIVITIES
     Purchases of available-for-sale investment securities(74,714)(16,325)
     Maturities/paydowns of available-for-sale investment securities13,674 18,990 
     Sales of available-for-sale investment securities41,037 10,318 
     Purchases of premises and equipment(1,436)(1,384)
     Loans, net(241,558)(16,063)
     Purchases of restricted bank stock(295)(7,439)
     Redemptions of restricted bank stock13,414 
     Proceeds from sale of other real estate owned52 
     Purchase of bank-owned life insurance(1)
     Purchase of equity securities(100)(498)
     Net cash from investing activities(263,393)1,065 
FINANCING ACTIVITIES
     Deposits, net234,164 332,734 
     Repurchase agreements, net347 (826)
     FHLB and other borrowings, net102,185 (192,070)
     Payment of subordinated debt issuance costs36 
     Preferred stock redemption(7,334)
     Common stock repurchased(260)
     Common stock options exercised690 38 
     Cash dividends paid on common stock(1,153)(1,076)
     Cash dividends paid on preferred stock(35)(114)
     Net cash from financing activities328,900 138,426 
Increase in cash and cash equivalents75,723 60,872 
Cash and cash equivalents, beginning of period263,893 28,002 
Cash and cash equivalents, end of period$339,616 $88,874 
Cash payments for:
     Interest on deposits, repurchase agreements and borrowings$1,261 $5,511 
Supplemental disclosure of cash flow information:
     Fair value of noncontrolling interest at acquisition date$500 $
     Loans transferred to other real estate owned23 
     Employee stock-based compensation tax withholding obligations35 
See accompanying notes to unaudited consolidated financial statements.
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Notes to the Consolidated Financial Statements

Note 1 – Nature of Operations and Basis of Presentation

Business and Organization

MVB Financial Corp. (“MVB” or the “Company”) is a financial holding company organized as a West Virginia corporation that operates principally through its wholly owned subsidiary, MVB Bank, Inc. (the “Bank”). The Bank’s subsidiaries include MVB Insurance, LLC, a title insurance company (“MVB Insurance”), MVB Community Development Corporation (“MVB CDC”), ProCo Global, Inc. (“Chartwell”, which began doing business under the registered trade name Chartwell Compliance), Paladin Fraud, LLC (“Paladin Fraud”) and MVB Technology, LLC (“MVB Technology”). The Company also owns a minority interest in Intercoastal Mortgage Company, LLC (“ICM”) and the Bank owns a majority interest in Flexia Payments, LLC (“Flexia”)

The Company conducts a wide range of business activities, primarily commercial and retail (“CoRe”) banking. The Company also continues to be involved in new innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in Fintech related companies. The Company considers Fintech companies as those entities that use technology to electronically move funds.

COVID-19 Pandemic

Throughout 2020 and into 2021, economies throughout the world have been severely disrupted as a result of the outbreak of COVID-19. The outbreak and any preventative or protective actions that the Company or its clients may take in respect of this virus may result in a period of disruption, including the Company’s financial reporting capabilities, its operations generally and could potentially impact the Company’s clients, providers and third parties. The extent to which the COVID-19 pandemic impacts the Company’s future operating results will depend on future developments, which are highly uncertain and cannot be predicted.

Principles of Consolidation and Basis of Presentation

The financial statements are consolidated to include the accounts of the Company, its subsidiary, the Bank and the Bank’s subsidiaries. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, practices in the banking industry and with instructions to Form 10-Q. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements included in the Company's Annual Report on Form 10-K for the 2020 Form 10-K. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

In February 2021, the Bank entered into an agreement to acquire an 80% interest in Flexia. Flexia owns a license for technology which allows users to access a reloadable account that combines a debit card account and casino gaming accounts into one card, allowing them for non-cash transactions at participating casinos in the United States and Canada. Although the Company owns, through its subsidiary, the Bank, an 80% interest in Flexia, the Company is required to consolidate 100% of Flexia within the consolidated financial statements. The remaining 20% is accounted for separately as noncontrolling interests within the consolidated financial statements. Noncontrolling interest represents the portion of ownership and profit or loss that is attributable to the minority owners of Flexia.

In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the period. Estimates are based on known facts and circumstances and actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses (“ALL”), purchased credit impaired loans (“PCI loans”), derivative instruments, goodwill and deferred tax assets and liabilities.

Unconsolidated investments where the Company has the ability to exercise significant influence over the operating and financial policies of the respective investee are accounted for using the equity method of accounting; those that are not consolidated or accounted for using the equity method of accounting are accounted for under cost or fair value accounting. For these investments accounted for under the equity method, the Company records its investment in non-consolidated affiliates and the portion of
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income or loss in equity in earnings of non-consolidated affiliates. The Company periodically evaluates these investments for impairment. As of March 31, 2021, the Company holds 1 equity method investment.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2020 Form 10-K.

In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance in November 2018, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, in April 2019, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, in May 2019, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326 and in November 2019, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, all of which clarifies codification and corrects unintended application of the guidance. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. PCI loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. The guidance was initially effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. On November 15, 2019, the FASB issued ASU 2019-10, Financial Investments – Credit Issues (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which finalizes a delay in the effective date of the standard for smaller reporting companies until January 2023. The Company expects to recognize a one-time cumulative effect adjustment to the ALL as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In that regard, the Company has formed a cross-functional implementation team. The team is working to develop an implementation plan which will include assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. The Company is also in the process of implementing a third-party vendor solution to assist it in the application of this standard. The adoption of this standard could result in an increase in the ALL as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, it expects that the impact of adoption will be significantly influenced by the composition, characteristics and quality of its loan portfolio, as well as the prevailing economic conditions and forecasts as of the adoption date.

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirement for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under Accounting Standards Codification (“ASC”) 715-20 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: 1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; 2) the amount and timing of plan assets expected to be returned to the employer; 3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; 4) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; 5) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy; however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets and 6) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (i) aggregate of the service and interest cost components of net periodic benefit costs and (ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: 1) the weighted-
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average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and 2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: 1) the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs more than plan assets; and 2) the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018-14 is effective for public business entities for fiscal years ending after December 15, 2020. As ASU 2018-14 revises disclosure requirements. As ASU 2018-04 only revises disclosure requirements, the adoption did not have a material impact on the Company's interim consolidated financial statements. The Company's year-end disclosures will be revised to comply with the new requirements.

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments and certain derivatives, including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments were effective for the Company beginning January 1, 2021 and did not have a material effect on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional expedients and exceptions for certain contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform. The guidance is effective from the date of issuance until December 31, 2022. The guidance permits entities to not apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. In January 2021, ASU 2021-01 was issued by the FASB and clarifies that certain exceptions in reference rate reform apply to derivatives that are affected by the discounting transition. The Company will continue to assess the impact as the reference rate transition occurs over the next two years.

Note 2 – Investment Securities

The following tables present amortized cost and fair values of investment securities available-for-sale as of the periods indicated:
March 31, 2021
(Dollars in thousands)Amortized CostUnrealized GainUnrealized LossFair Value
United States government agency securities$48,483 $446 $(825)$48,104 
United States sponsored mortgage-backed securities90,076 428 (1,297)89,207 
United States treasury securities56,953 97 (80)56,970 
Municipal securities206,135 4,607 (1,008)209,734 
Other debt securities7,500 7,500 
Total debt securities409,147 5,578 (3,210)411,515 
Other securities11,543 109 (45)11,607 
Total investment securities available-for-sale$420,690 $5,687 $(3,255)$423,122 

December 31, 2020
(Dollars in thousands)Amortized CostUnrealized GainUnrealized LossFair Value
United States government agency securities$56,207 $995 $(210)$56,992 
United States sponsored mortgage-backed securities94,968 972 (171)95,769 
Municipal securities223,642 8,327 (82)231,887 
Other debt securities7,500 7,500 
Total debt securities382,317 10,294 (463)392,148 
Other securities18,401 146 (71)18,476 
Total investment securities available-for-sale$400,718 $10,440 $(534)$410,624 

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The following table presents amortized cost and fair values of available-for-sale debt securities by contractual maturity as of the period indicated:
March 31, 2021
(Dollars in thousands)Amortized CostFair Value
Within one year$$
After one year, but within five years62,819 63,045 
After five years, but within ten years37,397 37,427 
After ten years308,931 311,043 
Total$409,147 $411,515 

The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled.

Investment securities with a carrying value of $239.4 million and $229.4 million at March 31, 2021 and December 31, 2020, respectively, were pledged to secure public funds, repurchase agreements and potential borrowings at the Federal Reserve Discount Window.

The Company’s investment portfolio includes securities that are in an unrealized loss position as of March 31, 2021, the details of which are included in the following table. Although these securities, if sold at March 31, 2021, would result in a pretax loss of $3.3 million, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the ability to hold these securities until all principal has been recovered. It is more likely than not that the Company will not, for liquidity purposes, sell any securities at a loss. Declines in the fair values of these securities can be traced to general market conditions, which reflect the prospect for the economy as a whole. When determining other-than-temporary impairment on securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has been downgraded by a rating agency and whether or not the financial condition of the security issuer has severely deteriorated. As of March 31, 2021, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain any material realized losses as a result of the current decline in fair value.

The following tables presents investments in an unrealized loss position as of the periods indicated:
March 31, 2021
(Dollars in thousands)Less than 12 months12 months or more
Description and number of positionsFair ValueUnrealized LossFair ValueUnrealized Loss
United States government agency securities (28)$23,502 $(705)$11,617 $(120)
United States sponsored mortgage-backed securities (21)68,695 (1,287)2,005 (10)
United States treasury securities (9)35,568 (80)
Municipal securities (86)73,445 (952)2,049 (56)
Other securities (3)1,957 (43)1,013 (2)
$203,167 $(3,067)$16,684 $(188)

December 31, 2020
(Dollars in thousands)Less than 12 months12 months or more
Description and number of positionsFair ValueUnrealized LossFair ValueUnrealized Loss
United States government agency securities (27)$19,021 $(68)$12,574 $(142)
United States sponsored mortgage-backed securities (9)15,331 (155)3,349 (16)
Municipal securities (14)11,856 (82)
Other securities (5)3,947 (71)
$50,155 $(376)$15,923 $(158)

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The following table summarizes investment sales and related gains and losses for the periods shown:
Three Months Ended March 31,
(Dollars in thousands)20212020
Sales of available-for-sale investments$41,037 $10,318 
Gains, gross1,156 276 
Losses, gross13 

For the three months ended March 31, 2021 and 2020, the Company sold 0 equity investments.

For the three months ended March 31, 2021, the Company recognized unrealized holding gains on equity securities of $0.5 million which are included in noninterest income. Unrealized holding gains on equity securities for the three months ended March 31, 2020 were not material.

Qualified Affordable Housing Projects

The Company has invested, as a limited partner, in 3 Section 42 affordable housing investment funds. In exchange for these investments, the Company receives its pro rata share of income, expense, gains and losses, including tax credits, that are received by the projects. As of March 31, 2021 and December 31, 2020, the Company has recognized, as an investment, $2.7 million and $2.8 million in the aggregate between the 3 affordable housing investment funds and has recognized cumulative losses of $1.3 million and $1.2 million from these funds as of March 31, 2021 and December 31, 2020, respectively.

Note 3 – Loans and Allowance for Loan Losses

Prior to the ICM transaction, the Company routinely generated one to four family mortgages for sale into the secondary market. During the three months ended March 31, 2020, the Company received sales proceeds of $419.9 million, resulting in mortgage fee income of $11.2 million.

The following table presents the components of loans as of the periods indicated:
(Dollars in thousands)March 31, 2021December 31, 2020
Commercial and non-residential real estate$1,353,339 $1,141,114 
Residential real estate275,710 240,264 
Home equity28,843 30,828 
Consumer3,149 3,156 
Total1,661,041 1,415,362 
Purchased credit impaired loans:
Commercial and non-residential real estate19,834 21,008 
Residential real estate14,306 16,943 
Consumer1,284 1,488 
Total purchased credit impaired loans35,424 39,439 
Total Loans$1,696,465 $1,454,801 
Deferred loan origination costs and (fees), net(2,080)(1,057)
Loans receivable$1,694,385 $1,453,744 

The Company currently manages its loan portfolios and the respective exposure to credit losses (credit risk) by the following specific portfolio segments which are levels at which the Company develops and documents its systematic methodology to determine the allowance for credit losses attributable to each respective portfolio segment. These segments are as follows:

Commercial business loans – Commercial loans are made to provide funds for equipment and general corporate needs, as well as to finance owner occupied real estate, and to finance future cash flows of Federal Government lease contracts. Repayment of these loans primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. This segment includes both company originated and purchased participation loans. Credit risk arises from the
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successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

Commercial real estate loans – Commercial real estate loans consist of non-owner occupied properties, such as investment properties for retail, office and multifamily with a history of occupancy and cash flow. This segment includes both company originated and purchased participation loans. These loans carry the risk of adverse changes in the local economy and a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial acquisition, development and construction loans – Commercial acquisition, development and construction loans are intended to finance the construction of commercial and residential properties, including the construction of single-family dwellings, and also includes loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.

Commercial Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans –This segment includes the loan originated through the recently created SBA PPP loans. Credit risk is heightened as this SBA program mandates that these loans require no collateral and no guarantors of the loans. However, the loans are backed by a full guaranty of the SBA, so long as the loans were originated in accordance with the program guidelines. Additionally, these loans are eligible for full forgiveness by the SBA so long as the borrowers comply with the program guidelines as it pertains to their eligibility to borrow these funds, as well as their use of the funds.

Residential mortgage loans – This residential real estate subsegment contains permanent and construction mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios and collateral values. Credit risk arises from the borrower’s, and where applicable the builder's, continuing financial stability, which can be adversely impacted by job loss, divorce, illness or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

Home equity lines of credit – This segment includes subsegment for senior lien and subordinate lien lines of credit. Credit risk is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

Consumer loans – This segment of loans includes primarily installment loans and personal lines of credit. Consumer loans include installment loans used by clients to purchase automobiles, boats and recreational vehicles. Credit risk is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

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The following table presents impaired loans by class, excluding PCI loans, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of the periods indicated:
 Impaired Loans with Specific AllowanceImpaired Loans with No Specific AllowanceTotal Impaired Loans
(Dollars in thousands)Recorded InvestmentRelated AllowanceRecorded InvestmentRecorded InvestmentUnpaid Principal Balance
March 31, 2021
Commercial
     Commercial business$3,504 $741 $3,824 $7,328 $8,770 
     Commercial real estate767 267 956 1,723 1,877 
     Acquisition and development2,035 2,035 3,441 
          Total commercial4,271 1,008 6,815 11,086 14,088 
Residential1,927 1,927 2,160 
Home equity95 95 95 
Consumer
          Total impaired loans$4,271 $1,008 $8,840 $13,111 $16,346 
December 31, 2020
Commercial
     Commercial business$3,431 $1,032 $5,653 $9,084 $10,440 
     Commercial real estate772 264 944 1,716 1,864 
     Acquisition and development2,534 2,534 3,939 
          Total commercial4,203 1,296 9,131 13,334 16,243 
Residential1,960 1,960 2,232 
Home equity95 95 95 
Consumer
          Total impaired loans$4,203 $1,296 $11,191 $15,394 $18,575 

The following table presents the average recorded investment in impaired loans, excluding PCI loans, and related interest income recognized for the periods indicated:
Three Months Ended March 31,
20212020
(Dollars in thousands)Average Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash BasisAverage Investment in Impaired LoansInterest Income Recognized on Accrual BasisInterest Income Recognized on Cash Basis
Commercial
  Commercial business$6,521 $$$3,261 $$
  Commercial real estate2,278 11 10 2,898 26 23 
  Acquisition and development357 2,048 29 19 
  SBA PPP
    Total commercial9,156 11 10 8,207 55 42 
Residential1,944 2,382 
Home equity69 101 
Consumer19 
Total$11,172 $14 $14 $10,709 $60 $47 

As of March 31, 2021, the Bank’s other real estate owned balance totaled $5.2 million, of which $4.1 million was related to the acquisition of The First State Bank (“First State”) in 2020. The Bank held 37 foreclosed residential real estate properties representing $3.5 million, or 67.3%, of the total balance of other real estate owned. The remaining $1.7 million, or 32.7%, of other real estate owned is the result of the foreclosure of 7 unrelated commercial loans. There are 9 additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure, with a total recorded investment of
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$0.7 million as of March 31, 2021. These include five MVB loans totaling $0.2 million and four First State loans totaling $0.5 million. These loans are included in the table above and have 0 specific allowance allocated to them.

Bank management uses a 9 point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first 6 categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions.

Loans categorized as “Pass” rated have adequate sources of repayment, with little identifiable risk of collection and general conformity to the Bank's policy requirements, product guidelines and underwriting standards. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.

Loans categorized as “Special Mention” rated have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.

Loans categorized as “Substandard” rated are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that bank will sustain some loss if the deficiencies are not corrected.

Loans categorized as “Doubtful” rated have all the weakness inherent in those classified substandard with the added characteristic that the weakness make collections or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Any portion of a loan that has been or is expected to be charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as past due status, bankruptcy, repossession or death occurs to raise awareness of a possible credit event. The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis. The Credit Department ensures that a review of all commercial relationships of $1.0 million or greater is performed annually.

Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis. The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio. The Bank engages an external consultant to conduct independent loan reviews on at least an annual basis. Generally, the external consultant reviews larger commercial relationships or criticized relationships. The Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

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The following table represents the classes of the loan portfolio, excluding PCI loans, summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the periods indicated:
(Dollars in thousands)PassSpecial MentionSubstandardDoubtfulTotal
March 31, 2021
Commercial
     Commercial business$523,254 $14,114 $14,081 $962 $552,411 
     Commercial real estate425,841 31,503 33,774 533 491,651 
     Acquisition and development87,603 25,064 4,366 1,683 118,716 
     SBA PPP190,561 190,561 
          Total commercial1,227,259 70,681 52,221 3,178 1,353,339 
Residential271,772 933 2,834 171 275,710 
Home equity28,295 380 142 26 28,843 
Consumer3,120 24 3,149 
          Total Loans$1,530,446 $72,018 $55,202 $3,375 $1,661,041 
December 31, 2020
Commercial
     Commercial business$496,222 $9,529 $17,045 $1,095 $523,891 
     Commercial real estate356,544 32,044 34,001 533 423,122 
     Acquisition and development80,771 25,001 4,184 2,170 112,126 
     SBA PPP81,975 81,975 
          Total commercial1,015,512 66,574 55,230 3,798 1,141,114 
Residential236,250 948 2,896 170 240,264 
Home equity30,277 381 144 26 30,828 
Consumer3,124 32 3,156 
          Total Loans$1,285,163 $67,935 $58,270 $3,994 $1,415,362 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

A loan that has deteriorated and requires additional collection efforts by the Bank could warrant non-accrual status. A thorough review is presented to the Chief Credit Officer and/or the SARC, as required with respect to any loan which is in a collection process and to make a determination as to whether the loan should be placed on non-accrual status. The placement of loans on non-accrual status is subject to applicable regulatory restrictions and guidelines. Generally, loans should be placed in non-accrual status when the loan reaches 90 days past due, when it becomes likely the borrower cannot or will not make scheduled principal or interest payments, when full repayment of principal and interest is not expected or when the loan displays potential loss characteristics. Normally, all accrued interest is charged off when a loan is placed in non-accrual status, unless the Company believes it is likely the accrued interest will be collected. Any payments subsequently received are applied to principal. To remove a loan from non-accrual status, all principal and interest due must be paid up to date and the Bank is reasonably sure of future satisfactory payment performance. Usually, this requires the receipt of six consecutive months of regular, on-time payments. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or SARC.

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The following table presents the classes of the loan portfolio, excluding PCI loans, summarized by aging categories of performing loans and non-accrual loans as of the periods indicated:
(Dollars in thousands)Current30-59 Days Past Due60-89 Days Past Due90+ Days Past DueTotal Past DueTotal LoansNon-Accrual90+ Days Still Accruing
March 31, 2021
Commercial
     Commercial business$551,150 $23 $244 $994 $1,261 $552,411 $6,938 $
     Commercial real estate490,992 69 42 548 659 491,651 956 
     Acquisition and development116,190 578 1,948 2,526 118,716 2,036 
     SBA PPP190,561 190,561 
          Total commercial1,348,893 670 286 3,490 4,446 1,353,339 9,930 
Residential267,500 1,740 5,767 703 8,210 275,710 1,549 
Home equity28,657 75 16 95 186 28,843 95 
Consumer3,145 3,149 
          Total Loans$1,648,195 $2,485 $6,069 $4,292 $12,846 $1,661,041 $11,577 $
December 31, 2020
Commercial
     Commercial business$521,799 $1,040 $33 $1,019 $2,092 $523,891 $8,601 $
     Commercial real estate422,343 34 212 533 779 423,122 944 
     Acquisition and development109,686 2,440 2,440 112,126 2534 
     SBA PPP81,975 81,975 
          Total commercial1,135,803 1,074 245 3,992 5,311 1,141,114 12,079 
Residential235,420 2,058 1,969 817 4,844 240,264 1,534 
Home equity30,369 289 75 95 459 30,828 95 
Consumer3,156 3,156 
          Total Loans$1,404,748 $3,421 $2,289 $4,904 $10,614 $1,415,362 $13,713 $

An ALL is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the 2 components represents the Bank’s ALL. The Bank’s methodology allows for the analysis of certain impaired loans in homogeneous pools, rather than on an individual basis, when those loans are below specific thresholds based on outstanding principal balance. More specifically, residential mortgage loans, home equity lines of credit and consumer loans, when considered impaired, are evaluated collectively for impairment by applying allocation rates derived from the Bank’s historical losses specific to impaired loans. Total collectively evaluated impaired loans, excluding the PCI loans acquired from First State, were $2.0 million and $2.0 million, while the related reserves were $0.1 million and $0.1 million as of March 31, 2021 and December 31, 2020. Such collectively evaluated impaired loans are included in total loans individually evaluated for impairment and in total impaired loans.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by qualified factors.

The segments described above, which are based on the federal call code assigned to each loan, provide the starting point for the ALL analysis. Company and Bank management track the historical net charge-off activity at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. All pools currently utilize a rolling 12 quarters.

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“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory and governmental sources are: lending policies and procedures, nature and volume of the portfolio, experience and ability of lending management and staff, volume and severity of problem credits, quality of the loan review system, changes in the value of underlying collateral, effect of concentrations of credit from a loan type, industry and/or geographic standpoint, changes in economic and business conditions, consumer sentiment and other external factors. The combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are determined internally based upon the likelihood of loss as a loan risk grading deteriorates.

To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of letters of credit, non-revolving lines of credit and revolving lines of credit and based its calculation on the expectation of future advances of each loan category. Letters of credit were determined to be highly unlikely to advance since they are generally in place only to ensure various forms of performance of the borrowers. In the Bank’s history, there have been no letters of credit drawn upon. In addition, many of the letters of credit are cash secured and do not warrant an allocation. Non-revolving lines of credit were determined to be highly likely to advance as these are typically construction lines. Meanwhile, the likelihood of revolving lines of credit advancing varies with each individual borrower. Therefore, the future usage of each line was estimated based on the average line utilization of the revolving line of credit portfolio as a whole.

Once the estimated future advances were calculated, an allocation rate, which was derived from the Bank’s historical losses and qualitative environmental factors, was applied in the similar manner as those used for the allowance for loan loss calculation. The resulting estimated loss allocations were totaled to determine the liability for unfunded commitments related to these loans, which management considers necessary to anticipate potential losses on those commitments that have a reasonable probability of funding. As of March 31, 2021 and December 31, 2020, the liability for unfunded commitments related to loans held for investment, excluding loans acquired from First State, was $0.6 million.

Bank management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following table presents the primary segments of the ALL, excluding PCI loans, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of the periods indicated:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
ALL balance at December 31, 2020$24,033 $1,378 $298 $51 $25,760 
     Charge-offs(265)(265)
     Recoveries10 17 
     Provision501 135 (19)(5)612 
ALL balance at March 31, 2021$24,279 $1,513 $283 $49 $26,124 
Individually evaluated for impairment$1,008 $$$$1,008 
Collectively evaluated for impairment$23,271 $1,513 $283 $49 $25,116 

The following table presents the primary segments of the Company's loan portfolio, excluding PCI loans, as of the periods indicated:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
March 31, 2021
     Individually evaluated for impairment$11,086 $1,927 $95 $$13,111 
     Collectively evaluated for impairment1,342,253 273,783 28,748 3,146 1,647,930 
Total Loans$1,353,339 $275,710 $28,843 $3,149 $1,661,041 

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The following table presents the primary segments of the ALL, excluding PCI loans, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of the periods indicated:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
ALL balance at December 31, 2019$10,098 $1,272 $327 $78 $11,775 
     Charge-offs(1,756)(1,756)
     Recoveries
     Provision1,255 (93)(24)1,138 
ALL balance at March 31, 2020$9,597 $1,272 $236 $56 $11,161 
Individually evaluated for impairment$532 $$$$532 
Collectively evaluated for impairment$9,065 $1,272 $236 $56 $10,629 

The following table presents the primary segments of the Company's loan portfolio, excluding PCI loans, as of the periods indicated:
(Dollars in thousands)CommercialResidentialHome EquityConsumerTotal
March 31, 2020
     Individually evaluated for impairment$7,737 $2,385 $104 $$10,226 
     Collectively evaluated for impairment1,086,757 259,108 36,752 3,763 1,386,380 
Total Loans$1,094,494 $261,493 $36,856 $3,763 $1,396,606 

The ALL is based on estimates and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

Troubled Debt Restructurings

At both March 31, 2021 and December 31, 2020, the Bank had specific reserve allocations for troubled debt restructurings (“TDRs”) of $0.6 million. Loans considered to be troubled debt restructured loans totaled $8.3 million and $10.2 million as of March 31, 2021 and December 31, 2020, respectively. Of these totals, $1.5 million and $1.6 million, respectively, represent accruing troubled debt restructured loans and represent 11% and 10%, respectively, of total impaired loans. Meanwhile, as of March 31, 2021, $2.8 million represent 4 loans to 2 borrowers that have defaulted under the restructured terms. The largest of these loans, $2.2 million, is a commercial loan and the other three of these loans, totaling $0.6 million, are commercial acquisition and development loans that were considered TDRs due to extended interest only periods and/or unsatisfactory repayment structures once transitioned to principal and interest payments. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of March 31, 2021 and December 31, 2020.

During the quarter ended March 31, 2021, no additional loans were classified as TDRs and 0 restructured loan defaulted under their modified terms that were not already classified as non-performing for having previously defaulted under their modified terms. The following table presents the new TDRs as of the period indicated:
Three Months Ended March 31, 2020
(Dollars in thousands)Number of ContractsPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Commercial
     Commercial business$154 $149 
     Commercial real estate159 159 
          Total commercial313 308 
          Total$313 $308 

The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.

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Purchased Credit Impaired Loans

As a result of the acquisition of First State, the Company has PCI loans. The following table presents the carrying amount of the PCI loan portfolio as of the periods indicated:
(Dollars in thousands)March 31, 2021December 31, 2020
Commercial$19,834 $21,008 
Residential14,306 16,943 
Consumer1,284 1,488 
Outstanding balance$35,424 $39,439 
Carrying amount, net of allowance$35,334 $39,355 

The following table presents the accretable yield, or income expected to be collected, as of the periods indicated:
(Dollars in thousands)March 31, 2021December 31, 2020
Beginning balance$8,313 $
New loans purchased11,746 
Accretion of income(1,021)(2,945)
Other changes in expected cash flows955 (488)
Ending balance$8,247 $8,313 

There were no PCI loans purchased during the three months ended March 31, 2021. Income is not recognized on PCI loans if the Company cannot reasonably estimate cash flows expected to be collected and, as of March 31, 2021, the Company held no such loans.

The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment for the PCI loan portfolio as of the periods indicated:
(Dollars in thousands)CommercialResidentialTotal
December 31, 2020$$84 $84 
     Provision90 (84)
ALL balance at March 31, 2021$90 $$90 
Collectively evaluated for impairment$90 $$90 

For the PCI loan portfolio disclosed above, the Company increased the ALL by $0.01 million during the three months ended March 31, 2021.

There were no PCI as of March 31, 2020 and, accordingly, there was no ALL related to PCI loans for the three months ended March 31, 2020.

As of March 31, 2021, the loans in the Company's PCI portfolio were all collectively evaluated for impairment and are segmented into three categories: commercial loans totaling $19.8 million, residential loans totaling $14.3 million, and consumer loans totaling $1.3 million, for a portfolio total of $35.4 million.


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The following table presents the classes of the PCI loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the periods indicated:
(Dollars in thousands)PassSpecial MentionSubstandardDoubtfulTotal
March 31, 2021
Commercial
     Commercial business$14,678 $35 $466 $2,411 $17,590 
     Commercial real estate1,220 1,222 
     Acquisition and development1,022 1,022 
          Total commercial16,920 37 466 2,411 19,834 
Residential11,864 327 861 1,254 14,306 
Consumer1,278 1,284 
          Total Loans$30,062 $364 $1,327 $3,671 $35,424 
December 31, 2020
Commercial
Commercial business$12,263 $136 $345 $4,860 $17,604 
Commercial real estate982 263 21 1,269 
Acquisition and development1,900 235 2,135 
Total commercial15,145 139 608 5,116 21,008 
Residential15,157 1,665 121 16,943 
Consumer1,256 232 1,488 
Total Loans$31,558 $139 $2,273 $5,469 $39,439 

The following table presents the classes of the PCI loan portfolio summarized by aging categories of performing loans and non-accrual loans as of the periods indicated:
(Dollars in thousands)Current30-59 Days Past Due60-89 Days Past Due90+ Days Past DueTotal Past DueTotal Loans
March 31, 2021
Commercial
     Commercial business$15,907 $296 $111 $1,276 $1,683 $17,590 
     Commercial real estate1,197 23 25 1,222 
     Acquisition and development784 238 238 1,022 
          Total commercial17,888 534 134 1,278 1,946 19,834 
Residential11,806 204 493 1,803 2,500 14,306 
Consumer1,278 1,284 
          Total Loans$30,972 $738 $627 $3,087 $4,452 $35,424 
December 31, 2020
Commercial
     Commercial business$16,264 $71 $65 $1,204 $1,340 $17,604 
     Commercial real estate1,157 112 112 1,269 
     Acquisition and development2,135 2,135 
          Total commercial19,556 71 65 1,316 1,452 21,008 
Residential13,714 710 145 2,374 3,229 16,943 
Consumer1,245 239 243 1,488 
          Total Loans$34,515 $784 $211 $3,929 $4,924 $39,439 

None of the PCI loans are considered non-accrual as they are all currently accreting interest income under PCI accounting.

As the Company's PCI loan portfolio is accounted for in pools with similar risk characteristics in accordance with ASC 310-30,
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this portfolio is not subject to the impaired loan and TDR guidance. Rather, the revised estimated future cash flows of the individually modified loans are included in the estimated future cash flows of the pool.

PPP Loans and CARES Act Deferrals

The Company is actively participating in the PPP as a lender, evaluating other programs available to assist its clients and providing deferrals consistent with GSE guidelines. The Company originated 634 PPP loans with outstanding balances of $88.5 million through our internal commercial team and originated PPP loans totaling $102.1 million through our partnership with a Fintech company as of March 31, 2021.

As of March 31, 2021, commercial loans totaling $34.7 million and mortgage loans totaling $9.0 million were approved for modifications, such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings in reliance on guidance issued by banking regulators titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”

Note 4 – Premises and Equipment

The following table presents the components of premises and equipment as of the periods indicated:
(Dollars in thousands)March 31, 2021December 31, 2020
Land$3,936 $3,936 
Buildings and improvements14,350 14,350 
Furniture, fixtures and equipment17,705 17,451 
Software3,191 1,548 
Construction in progress53 28 
Leasehold improvements3,079 3,079 
42,314 40,392 
Accumulated depreciation(15,024)(14,189)
Net premises and equipment$27,290 $26,203 

The Company leases certain premises and equipment under operating and finance leases. At March 31, 2021, the Company had lease liabilities totaling $18.2 million, of which $18.1 million was related to operating leases and $0.1 million was related to finance leases, and right-of-use assets totaling $17.5 million, of which $17.3 million was related to operating leases and $0.2 million was related to finance leases, related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. At March 31, 2021, the weighted-average remaining lease term for finance leases was 2.1 years and the weighted-average discount rate used in the measurement of finance lease liabilities was 2.3%. At March 31, 2021, the weighted-average remaining lease term for operating leases was 12.7 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 2.9%.

At December 31, 2020, the Company had lease liabilities totaling $18.4 million, of which $18.3 million was related to operating leases and $0.2 million was related to finance leases, and right-of-use assets totaling $17.7 million, of which $17.5 million was related to operating leases and $0.2 million was related to finance leases, related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the year ended December 31, 2020, the weighted-average remaining lease term for finance leases was 2.3 years and the weighted-average discount rate used in the measurement of finance lease liabilities was 2.4%. At December 31, 2020, the weighted-average remaining lease term for operating leases was 12.9 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 2.9%.

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The following table presents lease costs for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands)20212020
Amortization of right-of-use assets, finance leases$14 $18 
Interest on lease liabilities, finance leases11
Operating lease cost477544
Short-term lease cost14
Variable lease cost1010
Total lease cost$503 $587 


The following table presents future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of March 31, 2021:
(Dollars in thousands)Finance LeasesOperating Leases
2021$44 $1,285 
202241 1,825 
20231,779 
20241,709 
20251,708 
2026 and thereafter13,863 
Total future minimum lease payments$99 $22,169 
Less: Amounts representing interest(2)(4,045)
Present value of net future minimum lease payments$97 $18,124 

Note 5 – Equity Method Investment

In the third quarter of 2020, the Company acquired a portion of ICM and recognizes its ownership as an equity method investment initially recorded at fair value and subsequently adjusted for the Company's share of ICM's earnings. In accordance with Rule 8-03(b)(3) of Regulation S-X, the Company must assess whether its equity method investment is a significant equity method investment. In evaluating the significance of this investment, the Company performed the income, asset and investment tests described in S-X 3-05 and S-X 1-02(w). Rule 8-03(b)(3) of Regulation S-X requires summarized financial information in a quarterly report if any of the three tests exceeds 20%. Under the income test, the Company’s proportionate share of its equity method investee's aggregated net income exceeded the applicable threshold of 20%, and accordingly it is required to provide summarized income statement information for this investee for all periods presented. The Company's share of net income from its equity method investment totaled $6.5 million for the three months ended March 31, 2021.

The following table presents summarized income statement information for the Company's equity method investment for the period indicated. As ICM did not exist prior to July 1, 2020, no historical financial information is presented.
Three Months Ended March 31,
(Dollars in thousands)2021
Total revenues$50,797 
Net income$15,864 
Gain on sale of loans$47,594 
Volume of loans sold$1,778,090 

As of March 31, 2021 and December 31, 2021, the locked mortgage pipeline was $1.43 billion and $1.54 billion, respectively.
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Note 6 – Deposits

The following table presents the components of deposits as of the periods indicated:
(Dollars in thousands)March 31, 2021December 31, 2020
Noninterest-bearing demand$837,221 $715,791 
Interest-bearing demand698,218 496,502 
Savings and money markets520,998 545,501 
Time deposits, including CDs and IRAs160,116 224,595 
Total deposits$2,216,553 $1,982,389 
Time deposits that meet or exceed the FDIC insurance limit$14,829 $16,955 

The following table presents the maturities of time deposits as of the period indicated:
(Dollars in thousands)March 31, 2021
2021$56,037 
202266,154 
202322,254 
202412,479 
20253,192 
Total$160,116 

As of March 31, 2021, overdrawn deposit accounts totaling $0.01 million were reclassified as loan balances.

Note 7 – Borrowed Funds

The Bank is a member of the FHLB of Pittsburgh, Pennsylvania. As of March 31, 2021, the Bank's maximum borrowing capacity with the FHLB was $451.7 million and the remaining borrowing capacity was $440.4 million, with the difference being deposit letters of credit.

The Bank also maintains borrowing capacity with the Federal Reserve Bank under the discount window program and with the Federal Reserve Board under the Federal Reserve's Paycheck Protection Program Liquidity Facility (“PPPLF”) program in the amount of the outstanding pledged PPP loans. As of March 31, 2021 the Bank had borrowed $102.2 million under the PPPLF. As of December 31, 2020, 0 amounts were outstanding.

Short-term borrowings

The following table presents information related to short-term borrowings as of and for the periods indicated:
(Dollars in thousands)Three Months Ended March 31, 2021Year Ended December 31, 2020
Balance at end of period$102,185 $
Average balance during the period46,349 68,407 
Maximum month-end balance102,185 154,248 
Weighted-average rate during the period0.35 %0.58 %
Weighted-average rate at end of period0.28 %%
Long-term borrowings

As of March 31, 2021 and December 31, 2020, the Bank had 0 long-term borrowings with the FHLB or the Federal Reserve.

Repurchase agreements

Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase (“repurchase agreements”) with clients representing funds deposited by clients, on an overnight basis, that are collateralized by investment securities owned by the Company. Repurchase agreements with clients are included in borrowings section on the consolidated balance sheets. All
26


repurchase agreements are subject to terms and conditions of repurchase/security agreements between the Company and the client and are accounted for as secured borrowings. The Company’s repurchase agreements reflected in liabilities consist of client accounts and securities which are pledged on an individual security basis.

The Company monitors the fair value of the underlying securities on a monthly basis. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The primary risk with the Company’s repurchase agreements is market risk associated with the investments securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

All of the Company’s repurchase agreements were overnight agreements at March 31, 2021 and December 31, 2020. These borrowings were collateralized with investment securities with a carrying value of $11.0 million and $10.7 million at March 31, 2021 and December 31, 2020, respectively, and were comprised of United States government agency securities and United States sponsored mortgage-backed securities. Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.

The following table presents information related to repurchase agreements as of and for the periods shown:
(Dollars in thousands)Three Months Ended March 31, 2021Year Ended December 31, 2020
Balance at end of period$10,613 $10,266 
Average balance during the period10,249 9,856 
Maximum month-end balance10,613 10,505 
Weighted-average rate during the period0.13 %0.23 %
Weighted-average rate at end of period0.13 %0.14 %

Subordinated Debt

The following table presents information related to subordinated debt as of and for the periods shown:
(Dollars in thousands)Three Months Ended March 31, 2021Year Ended December 31, 2020
Balance at end of period$43,443 $43,407 
Average balance during the period43,425 7,568 
Maximum month-end balance43,443 43,524 
Weighted-average rate during the period4.29 %3.45 %
Weighted-average rate at end of period4.02 %4.02 %

In November 2020, the Company completed the private placement of $40 million fixed-to-floating rate subordinated notes to certain qualified institutional investors. These notes are unsecured and have a ten-year term, maturing December 1, 2030 and will bear interest at a fixed rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR, plus 401 basis points, payable quarterly in arrears. These notes have been structured to qualify as Tier 2 capital for regulatory capital purposes.

In March 2007, the Company completed the private placement of $4 million Floating Rate, Trust Preferred Securities through its MVB Financial Statutory Trust I subsidiary (the “Trust”). The Company established the Trust for the sole purpose of issuing the Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The proceeds from the sale of the Trust Preferred Securities will be loaned to the Company under subordinated Debentures (the “Debentures”) issued to the Trust pursuant to an Indenture. The Debentures are the only asset of the Trust. The Trust Preferred Securities have been issued to a pooling vehicle that will use the distributions on the Trust Preferred Securities to securitize note obligations. The securities issued by the Trust are includable for regulatory purposes as a component of the Company’s Tier 1 capital. The Trust Preferred Securities and the Debentures mature in 2037 and have been redeemable by the Company since 2012. Interest payments are due in March, June, September and December and are adjusted at the interest due dates at a rate of 1.6% over the three-month LIBOR Rate. The obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantees.

All borrowings and subordinated debt mature after 2025.

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Note 8 – Pension and Supplemental Executive Retirement Plans

The Company participates in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-time employees. Benefits are based on years of service and the employee’s compensation. Accruals under the Plan were frozen as of May 31, 2014. Freezing the plan resulted in a re-measurement of the pension obligations and plan assets as of the freeze date. The pension obligation was re-measured using the discount rate based on the Citigroup Above Median Pension Discount Curve in effect on May 31, 2014 of 4.5%.

On June 19, 2017, the Company and MVB Mortgage approved a Supplemental Executive Retirement Plan (“SERP”), pursuant to which the Chief Executive Officer of MVB Mortgage is entitled to receive certain supplemental nonqualified retirement benefits. The SERP took effect on December 31, 2017. As the executive completed three years of continuous employment with MVB Mortgage prior to retirement date (which shall be no earlier than the date he attains age 55) he will, upon retirement, be entitled to receive $1.8 million payable in 180 equal consecutive monthly installments of $10 thousand. The liability is calculated by discounting the anticipated future cash flows at 4.0%. The liability accrued for this obligation was $1.2 million as of both March 31, 2021 and December 31, 2020. Service cost was $0.01 million and $0.1 million for each of the three months ended March 31, 2021 and 2020.

The following table presents information pertaining to the activity in the Company’s defined benefit plan, using the latest available actuarial valuations with a measurement date of March 31, 2021 and 2020 for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands)20212020
Service cost$$
Interest cost78 91 
Expected return on plan assets(118)(109)
Amortization of net actuarial loss127 105 
Amortization of prior service cost
     Net periodic benefit cost$87 $87 
Contributions paid$3,835 $349 

Note 9 – Stock Offerings

In December 2020, the Company issued a notice of redemption to redeem all of the Company’s outstanding shares of Convertible Noncumulative Perpetual Preferred Stock, Series B, par value $1.00 per share, with a liquidation preference of $1,000 per share (the “Series B Preferred Stock”) and all of the Company’s outstanding shares of Convertible Noncumulative Perpetual Preferred Stock, Series C, par value $1.00 per share, with a liquidation preference of $1,000 per share (the “Series C Preferred Stock, together with the Series B Preferred Stock, referred to herein as the “Preferred Stock”), at a redemption price per share equal to $10,000, plus declared and unpaid dividends of $46.03 per share of Series B Preferred Stock, and $49.86 per share of Series C Preferred Stock, for the period from and including December 31, 2020, to but excluding January 28, 2021 (the “Preferred Stock Redemption”). The Preferred Stock Redemption is in accordance with the terms of the Company’s Articles of Incorporation, as amended. All outstanding shares of the Company's preferred stock were redeemed in January 2021.

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Note 10 – Fair Value of Financial Instruments

The following table presents the carrying values and estimated fair values of the Company’s financial instruments are summarized as follows as of the periods indicated:
(Dollars in thousands)Carrying ValueEstimated Fair ValueQuoted Prices in Active Markets for Identical Assets (Level I)Significant Other Observable Inputs (Level II)Significant Unobservable Inputs (Level III)
March 31, 2021
Financial Assets:
Cash and cash equivalents$339,616 $339,616 $339,616 $$
Certificates of deposit with banks11,803 11,986 11,986 
Securities available-for-sale423,122 423,122 382,850 40,272 
Equity securities28,200 28,200 543 27,657 
Loans receivable, net1,668,171 1,675,631 1,675,631 
Mortgage servicing rights2,886 2,886 2,886 
Interest rate swap8,367 8,367 8,367 
Fair value hedge1,750 1,750 1,750 
Accrued interest receivable8,513 8,513 2,819 5,694 
Bank-owned life insurance41,512 41,512 41,512 
Financial Liabilities:
Deposits$2,216,553 $2,196,951 $$2,196,951 $
Repurchase agreements10,613 10,613 10,613 
FHLB and other borrowings102,185 102,185 102,185 
Interest rate swap8,367 8,367 8,367 
Fair value hedge1,427 1,427 1,427 
Accrued interest payable869 869 869 
Subordinated debt43,443 45,798 45,798 
December 31, 2020
Financial assets:
Cash and cash equivalents$263,893 $263,893 $263,893 $$
Certificates of deposits with banks11,803 11,986 11,986 
Securities available-for-sale410,624 410,624 366,945 43,679 
Equity securities27,585 27,585 472 27,113 
Loans held-for-sale1,062 1,062 1,062 
Loans receivable, net1,427,900 1,434,275 1,434,275 
Mortgage servicing rights2,942 2,942 2,942 
Interest rate swap13,822 13,822 13,822 
Fair value hedge2,215 2,215 2,215 0
Accrued interest receivable7,793 7,793 2,770 5,023 
Bank-owned life insurance41,262 41,262 41,262 
Financial liabilities:
Deposits$1,982,389 $1,964,860 $$1,964,860 $
Repurchase agreements10,266 10,266 10,266 
Interest rate swap13,822 13,822 13,822 
Fair value hedge2,141 2,141 2,141 
Accrued interest payable572 572 572 
Subordinated debt43,407 45,536 45,536 

Note 11 – Fair Value Measurements

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions,
29


risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.

The methods of determining the fair value of assets and liabilities presented in this footnote are consistent with our methodologies disclosed in Note 1 - Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company’s 2020 Annual Report on Form 10-K.

Assets Measured on a Recurring Basis

As required by accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company classified investments in government securities as Level II instruments and valued them using the market approach. The following measurements are made on a recurring basis.

Available-for-sale investment securities Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level I securities include those traded on an active exchange, such as the New York Stock Exchange, United States Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level II securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds and corporate debt securities. There have been no changes in valuation techniques for the three months ended March 31, 2021. Valuation techniques are consistent with techniques used in prior periods. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and classified as Level III instruments. The Company classified investments in government securities as Level II instruments and valued them using the market approach.

Equity securities Certain equity securities are recorded at fair value on both a recurring and nonrecurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. The valuation methodologies utilized may include significant unobservable inputs. There have been no changes in valuation techniques for the three months ended March 31, 2021. Valuation techniques are consistent with techniques used in prior periods.

Loans held-for-sale The fair value of mortgage loans held-for-sale is determined, when possible, using quoted secondary-market prices or investor commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.

Interest rate swap Interest rate swaps are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.

Fair value hedgeTreated like an interest rate swap, fair value hedges are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data.

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The following tables present assets and liabilities reported on the consolidated statements of financial condition at their fair value on a recurring basis as of the periods indicated by level within the fair value hierarchy.
 March 31, 2021
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
United States government agency securities$$48,104 $$48,104 
United States sponsored mortgage-backed securities89,207 89,207 
United States treasury securities56,970 56,970 
Municipal securities169,462 40,272 209,734 
Other securities11,607 11,607 
Equity securities543 543 
Interest rate swap8,367 8,367 
Fair value hedge1,750 1,750 
Liabilities:
Interest rate swap8,367 8,367 
Fair value hedge1,427 1,427 

 December 31, 2020
(Dollars in thousands)Level ILevel IILevel IIITotal
Assets:
United States government agency securities$$56,992 $$56,992 
United States sponsored mortgage-backed securities95,769 95,769 
Municipal securities188,208 43,679 231,887 
Other securities18,476 18,476 
Equity securities472 472 
Loans held-for-sale1,062 1,062 
Interest rate swap13,822 13,822 
Fair value hedge2,215 2,215 
Liabilities:
Interest rate swap13,822 13,822 
Fair value hedge2,141 2,141 

The following table represents recurring level III assets as of the periods indicated:
(Dollars in thousands)Interest Rate Lock CommitmentsMunicipal SecuritiesTotal
Balance at December 31, 2020$$43,679 $43,679 
Realized and unrealized gains included in earnings19 19 
Purchase of securities1,191 1,191 
Maturities/calls(3,933)(3,933)
Unrealized gain included in other comprehensive income (loss)1,127 1,127 
Unrealized loss included in other comprehensive income (loss)$$(1,811)$(1,811)
Balance at March 31, 2021$$40,272 $40,272 
Balance at December 31, 2019$1,660 $37,259 $38,919 
Realized and unrealized losses included in earnings4,131 4,131 
Purchase of securities522 522 
Unrealized gain included in other comprehensive income (loss)(1,155)(1,155)
Balance at March 31, 2020$5,791 $36,626 $42,417 
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Assets Measured on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a nonrecurring basis during 2021 and 2020 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other noninterest expense.

Impaired loans Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

Other real estate owned Other real estate owned, which is obtained through the Bank’s foreclosure process is valued utilizing the appraised collateral value. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. At the time, the foreclosure is completed, the Company obtains a current external appraisal.

Other debt securitiesCertain debt securities are recorded at fair value on a nonrecurring basis. These other debt securities, which include preferred member interest in an equity method investment, are securities without a readily determinable fair value and are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer.

Equity securities Certain equity securities are recorded at fair value on a nonrecurring basis. Equity securities without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus any changes resulting from observable price changes in orderly transactions, as defined, for identical or similar investments of the same issuer.

The following table presents the fair value of these assets as of the periods indicated:
March 31, 2021
(Dollars in thousands)Level ILevel IILevel IIITotal
Impaired loans$$$12,103 $12,103 
Other real estate owned5,183 5,183 

December 31, 2020
(Dollars in thousands)Level ILevel IILevel IIITotal
Impaired loans$$$14,098 $14,098 
Other real estate owned5,730 5,730 
Other debt securities7,500 7,500 
Equity securities27,113 27,113 

There were no changes to the fair value of other debt securities or equity securities measured on a non-recurring basis as of March 31, 2021.
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The following tables present quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value as of the periods indicated:
 Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)Fair ValueValuation TechniqueUnobservable Input Range
March 31, 2021
Nonrecurring measurements:
Impaired loans$12,103 
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
   
Liquidation expense 2
5% - 10%
Other real estate owned$5,183 
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
   
Liquidation expense 2
5% - 10%
Other debt securities$7,500 Net asset valueCost minus impairment0%
Equity securities$27,657 Net asset valueCost minus impairment0%
Recurring measurements:
Municipal securities 5
$40,272 
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%
December 31, 2020
Nonrecurring measurements:
Impaired loans$14,098 
Appraisal of collateral 1
Appraisal adjustments 2
20% - 62%
Liquidation expense 2
5% - 10%
Other real estate owned$5,730 
Appraisal of collateral 1
Appraisal adjustments 2
20% - 30%
Liquidation expense 2
5% - 10%
Other debt securities$7,500 Net asset valueCost minus impairment0%
Equity securities$27,113 Net asset valueCost minus impairment0%
Recurring measurements:
Municipal securities 5
$43,679 
Appraisal of bond 3
Bond appraisal adjustment 4
5% - 15%

1 Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.
2 Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
3 Fair value determined through independent analysis of liquidity, rating, yield and duration.
4 Appraisals may be adjusted for qualitative factors such as local economic conditions.
5 Municipal securities classified as Level III instruments are comprised of TIF bonds related to certain local municipal securities.

Note 12 – Earnings per Share

The Company determines basic earnings per share (“EPS”) by dividing net income less preferred stock dividends by the weighted-average number of common shares outstanding during the period. Diluted EPS is determined by dividing net income less dividends on convertible preferred stock plus interest on convertible subordinated debt by the weighted-average number of shares outstanding, increased by both the number of shares that would be issued assuming the exercise of stock options under the Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt, if dilutive.

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The following table presents the Company's calculation of EPS for the periods indicated:
 Three Months Ended March 31,
(Dollars in thousands except shares and per share data)20212020
Numerator for basic earnings per share:
Net income$8,085 $1,048 
Less: Dividends on preferred stock35 114 
Net income available to common shareholders - basic$8,050 $934 
Numerator for diluted earnings per share:
Net income available to common shareholders - diluted$8,050 $934 
Denominator:
Total weighted-average shares outstanding11,530,279 11,942,767 
Effect of dilutive stock options and restricted stock units756,452 355,325 
Total diluted weighted-average shares outstanding12,286,731 12,298,092 
Earnings per share - basic$0.70 $0.08 
Earnings per share - diluted$0.66 $0.08 

For the three months ended March 31, 2021 and 2020, approximately 12 thousand and 366 thousand, respectively, options to purchase shares of common stock were not included in the computation of diluted EPS because the effect would be antidilutive.

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Note 13 – Comprehensive Income

The following tables present the components of accumulated other comprehensive income (“AOCI”) as of and for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands)20212020 
Details about AOCI componentsAmount reclassified from AOCIAmount reclassified from AOCIAffected income statement line item
Available-for-sale securities 
     Unrealized holding gains$1,143 $276 Gain (loss) on sale of available-for-sale securities
 1,143 276 Total before tax
 (268)(75)Income tax expense
 875 201 Net of tax
Defined benefit pension plan items 
     Amortization of net actuarial loss(127)(105)Salaries and benefits
 (127)(105)Total before tax
 30 28 Income tax expense
 (97)(77)Net of tax
Investment hedge
Carrying value adjustment(264)1,793 Interest on investment securities
(264)1,793 Total before tax
62 (484)Income tax expense
(202)1,309 Net of tax
Total reclassifications$576 $1,433  

(Dollars in thousands)Unrealized gains (losses) on available for-sale securitiesDefined benefit pension plan itemsInvestment hedgeTotal
Balance at January 1, 2021$7,586 $(5,047)$(313)$2,226 
     Other comprehensive income (loss) before reclassification(4,848)1,306 (3,542)
     Amounts reclassified from AOCI(875)97 202 (576)
Net current period OCI(5,723)1,403 202 (4,118)
Balance at March 31, 2021$1,863 $(3,644)$(111)$(1,892)
Balance at January 1, 2020$2,942 $(4,295)$32 $(1,321)
     Other comprehensive income (loss) before reclassification1,032 (516)516 
     Amounts reclassified from AOCI(201)77 (1,309)(1,433)
Net current period OCI831 (439)(1,309)(917)
Balance at March 31, 2020$3,773 $(4,734)$(1,277)$(2,238)

Note 14 – Segment Reporting

The Company has identified 3 reportable segments: CoRe banking; mortgage banking; and financial holding company. Revenue from CoRe banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. The Fintech division, Chartwell and Paladin Fraud reside in the CoRe banking segment. Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage loan origination process. Prior to July 1, 2020, the mortgage banking services were conducted by PMG. In July 2020, the Company announced the completion of PMG’s combination with Intercoastal to form ICM. The Company has recognized its ownership as an equity method investment, initially recorded at fair value. Income related to this equity method investment is included in the Mortgage Banking segment. Revenue from financial holding company activities is mainly comprised of intercompany service income and dividends.

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The following tables present information about the reportable segments and reconciliation to the consolidated financial statements for the periods indicated:
Three Months Ended March 31, 2021CoRe BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$18,959 $104 $$(1)$19,063 
Interest expense1,092 466 1,558 
Net interest income17,867 104 (465)(1)17,505 
Provision for loan losses620 (2)618 
Net interest income after provision for loan losses17,247 106 (465)(1)16,887 
Total noninterest income6,437 6,407 1,581 (1,967)12,458 
Noninterest Expenses:   
Salaries and employee benefits8,842 3,069 11,911 
Other expense8,029 63 1,083 (1,968)7,207 
Total noninterest expenses16,871 63 4,152 (1,968)19,118 
Income (loss) before income taxes6,813 6,450 (3,036)10,227 
Income tax expense (benefit)1,149 1,564 (544)2,169 
Net income before noncontrolling interest5,664 4,886 (2,492)8,058 
Net loss attributable to noncontrolling interest27 27 
Net income attributable to parent$5,691 $4,886 $(2,492)$$8,085 
Preferred stock dividends— 35 35 
Net income (loss) available to common shareholders$5,691 $4,886 $(2,527)$$8,050 
Capital expenditures for the three months ended March 31, 2021$1,936 $$$$1,936 
Total assets as of March 31, 20212,669,092 57,205 280,152 (360,360)2,646,089 
Total assets as of December 31, 20202,343,556 58,140 284,943 (355,163)2,331,476 
Goodwill as of March 31, 20212,350 2,350 
Goodwill as of December 31, 20202,350 2,350 

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Three Months Ended March 31, 2020CoRe BankingMortgage BankingFinancial Holding CompanyIntercompany EliminationsConsolidated
(Dollars in thousands)
Interest income$18,774 $2,418 $$(494)$20,699 
Interest expense3,838 1,387 35 (732)4,528 
Net interest income14,936 1,031 (34)238 16,171 
Provision for loan losses1,132 1,138 
Net interest income after provision for loan losses13,804 1,025 (34)238 15,033 
Noninterest income:
Mortgage fee income110 11,347 (238)11,219 
Other income3,346 (3,562)1,504 (1,657)(369)
Total noninterest income3,456 7,785 1,504 (1,895)10,850 
Noninterest Expense:
Salaries and employee benefits5,866 7,884 2,432 16,182 
Other expense6,659 2,397 1,075 (1,657)8,474 
Total noninterest expenses12,525 10,281 3,507 (1,657)24,656 
Income (loss) before income taxes4,735 (1,471)(2,037)1,227 
Income tax expense (benefit)1,012 (349)(484)179 
Net income before noncontrolling interest3,723 (1,122)(1,553)1,048 
Preferred stock dividends114 114 
Net income (loss) available to common shareholders$3,723 $(1,122)$(1,667)$$934 
Capital expenditures for the three months ended March 31, 2020$1,295 $69 $20 $$1,384 

Note 15 – Acquisition

Flexia Payments, LLC Acquisition

In February 2021, the Bank entered into an agreement to acquire an 80% interest in Flexia. The Bank invested approximately $2.5 million for the 80% interest. At the time of acquisition, Flexia had 0 assets or liabilities. Soon after the Bank's investment, Flexia purchased a license for technology which allows users to access a reloadable account that combines a debit card account and casino gaming accounts into one card, allowing them for non-cash transactions at participating casinos, for approximately $1 million for exclusive use in the United States and Canada. On the acquisition date, $0.5 million was recorded on the consolidated balance sheet for the 20% noncontrolling interest.

Note 16 – Subsequent Event

In April 2021, the Bank entered into a Stock Purchase Agreement with Trabian Technology, Inc. (“Trabian”), a leading software development firm servicing financial institutions. Per the agreement, the Bank acquired a majority interest in Trabian for 17,597 unregistered shares of MVB common stock and an undisclosed amount of cash.

In April 2021, the Bank entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc. (“Summit”) pursuant to which Summit will purchase certain assets and assume certain liabilities of 4 branch locations in West Virginia. Per the agreement, Summit will assume approximately $193 million in deposits and will acquire approximately $57 million in loans, as well as cash, real property, personal property and other fixed assets. The purchase price will be calculated at closing and includes a 6% premium on the deposits assumed. The Bank expects to close the purchase early in the third quarter of 2021.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes thereto included elsewhere in this report. A discussion of changes in the Company's results of operations from 2019 to 2020 has been omitted from this report but may be found in Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations, of its Quarterly Report on Form 10-Q for the period ended March 31, 2020, filed with the SEC on April 28, 2020. Further, the Company encourages you to revisit the Forward-Looking Statements at the beginning of this report.

Executive Summary

Financial Results

Total assets increased $314.6 million to $2.65 billion at March 31, 2021 from $2.33 billion at December 31, 2020. Earning assets increased $327.9 million to $2.48 billion at March 31, 2021 from $2.15 billion at December 31, 2020. This increase of $327.9 million in earning assets was primarily driven by the $240.6 million increase in total loans to $1.69 billion during the three months ended March 31, 2021. Deposits increased $234.2 million to $2.22 billion at March 31, 2021, from $1.98 billion at December 31, 2020.

Net interest income increased $1.3 million, noninterest income increased $1.6 million and noninterest expenses decreased by $5.5 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The Company’s yield on earning assets (tax-equivalent) in the three months ended March 31, 2021 was 3.54% compared to 4.67% in the three months ended March 31, 2020. Total loans increased by $240.6 million to $1.69 billion during the three months ended March 31, 2021. The overall cost of interest-bearing liabilities for the Company was 0.48% in the three months ended March 31, 2021 compared to 1.34% in the three months ended March 31, 2020. This cost of interest-bearing liabilities, combined with the earning asset yield, resulted in a net interest margin (tax-equivalent) of 3.26% in the three months ended March 31, 2021 compared to 3.66% in the three months ended March 31, 2020.

The Company earned $8.1 million in three months ended March 31, 2021 compared to $1.0 million in three months ended March 31, 2020. The three months ended March 31, 2021 earnings equated to a return on average assets of 1.3% and a return on average equity of 13.6%, compared to the three months ended March 31, 2020 results of 0.2% and 1.9%, respectively. Basic earnings per share were $0.70 in three months ended March 31, 2021 compared to $0.08 in three months ended March 31, 2020. Diluted earnings per share were $0.66 in the three months ended March 31, 2021 compared to $0.08 in the three months ended March 31, 2020.

COVID-19 Pandemic

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy, as well as financial markets. The full impact of COVID-19 is unknown and continues to evolve. Financial markets adjusted dramatically to the reduced economic activity and the pace of recovery is uncertain. The financial market benchmark most relevant to the Company’s current and future profitability is the United States Government Treasury yield curve. The United States Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits and other fixed income yield curves. The United States Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset-sensitive position, management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the United States Government Treasury curve will experience some degree of an upward shift over time.

Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. The Company actively participated in the PPP, is evaluating other programs available to assist its clients and is providing consumer deferrals consistent with government-sponsored enterprise (“GSE”) guidelines. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.

There was considerable demand for the PPP implemented by the CARES Act to combat the economic slowdown brought on by the COVID-19 pandemic. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production as a result of the COVID-19 pandemic. The intended use of this funding is to pay employees who may be temporarily unable to work. The original tranche of PPP funding of $349 billion ran out 13 days after the program's
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implementation. The second tranche of PPP funding of $310 billion had funds available as of the program's closure date. On July 2, 2020, additional legislation was passed that allowed small businesses to apply for loans through August 8, 2020. On January 8, 2021, the SBA announced that the PPP program would reopen on January 11, 2021 for new borrowers and certain existing PPP borrowers. During the latest round, funds totaling $284 billion were authorized through March 31, 2021. As of March 31, 2021, the Company originated 634 PPP loans with outstanding balances of $88.5 million through our internal commercial team and originated PPP loans totaling $102.1 million through our partnership with a Fintech company.

As of March 31, 2021, commercial loans totaling $34.7 million and mortgage loans totaling $9.0 million were approved for modifications, such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings in reliance on guidance issued by banking regulators titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”

Net Interest Income and Net Interest Margin (Average Balance Schedules)

The following tables present, for the periods indicated, information about (1) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (2) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (3) the interest rate spread; (4) net interest income and margin; and (5) net interest income and margin (on a tax-equivalent basis) as of and for the periods indicated. The average balances presented are derived from daily average balances.
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Three Months Ended March 31,
20212020
(Dollars in thousands)Average BalanceInterest Income/ExpenseYield/CostAverage BalanceInterest Income/ExpenseYield/Cost
Assets
Interest-bearing deposits in banks$259,491 $65 0.10 %$13,643 $49 1.44 %
CDs with other banks11,803 57 1.96 12,549 62 1.98 
Investment securities:
     Taxable172,902 631 1.48 127,327 666 2.10 
     Tax-exempt 2
212,488 1,714 3.27 110,188 1,110 4.04 
Loans and loans held-for-sale: 1
     Commercial 3
1,262,444 14,171 4.55 1,089,212 13,863 5.11 
     Tax exempt 2
7,205 81 4.56 11,760 134 4.58 
     Real estate293,076 2,684 3.71 429,720 4,953 4.62 
     Consumer7,696 37 1.95 7,473 123 6.60 
Total loans1,570,421 16,973 4.38 1,538,165 19,073 4.97 
Total earning assets2,227,105 19,440 3.54 1,801,872 20,960 4.67 
Less: Allowance for loan losses(26,170)(11,366)
Cash and due from banks20,951 20,766 
Other assets209,995 136,744 
     Total assets$2,431,881 $1,948,016 
Liabilities
Deposits:
     NOW$518,937 $344 0.27 %$407,462 $798 0.79 %
     Money market checking487,281 231 0.19 432,175 1,451 1.35 
     Savings39,668 0.06 36,867 0.01 
     IRAs12,693 42 1.34 16,573 78 1.89 
     CDs168,951 425 1.02 334,810 1,582 1.90 
Repurchase agreements and federal funds sold10,249 0.12 9,520 10 0.42 
FHLB and other borrowings46,349 41 0.36 115,930 573 1.98 
Subordinated debt43,425 466 4.35 4,124 35 3.40 
     Total interest-bearing liabilities1,327,553 1,558 0.48 1,357,461 4,528 1.34 
Noninterest bearing demand deposits821,923 331,962 
Other liabilities45,311 43,463 
     Total liabilities2,194,787 1,732,886 
Stockholders’ equity
Preferred stock2,349 7,334 
Common stock12,378 11,997 
Paid-in capital136,864 122,663 
Treasury stock(16,741)(1,135)
Retained earnings100,273 74,401 
Accumulated other comprehensive (loss)1,971 (130)
     Total stockholders’ equity237,094 215,130 
     Total liabilities and stockholders’ equity$2,431,881 $1,948,016 
Net interest spread (tax-equivalent)3.06 %3.33 %
Net interest income and margin (tax-equivalent) 2
$17,882 3.26 %$16,432 3.66 %
Less: Tax-equivalent adjustments$(377)$(261)
Net interest spread3.00 %3.27 %
Net interest income and margin$17,505 3.19 %$16,171 3.60 %

1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
2 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the three months ended March 31, 2021 and 2020, which is a non-U.S. GAAP financial measure. Please see the reconciliation of this non-U.S. GAAP financial measure to its most directly comparable U.S. GAAP financial measure following this table.
3 The Company’s PPP loans, totaling $190.6 million at March 31, 2021, are included in this amount for the three months ended March 31, 2021.

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The following table presents the reconciliation of net interest margin for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands)20212020
Net interest margin - U.S. GAAP basis
Net interest income$17,505 $16,171 
Average interest-earning assets2,227,105 1,801,872 
Net interest margin3.19 %3.60 %
Net interest margin - non-U.S. GAAP basis
Net interest income$17,505 $16,171 
Plus: Impact of fully tax-equivalent adjustment377 261 
Net interest income on a fully tax-equivalent basis17,882 16,432 
Average interest-earning assets2,227,105 1,801,872 
Net interest margin on a fully tax-equivalent basis3.26 %3.66 %


Key Metrics
Three Months Ended March 31,
(Dollars in thousands, except per share data)20212020
     Book value per common share$20.38 $17.08 
     Efficiency ratio 1
63.8 %91.3 %
     Overhead ratio 2 3
3.1 %5.1 %
     Net loan charge-offs to total loans 4
0.1 %0.5 %
     Allowance for loan losses to total loans 5
1.5 %0.8 %
     Nonperforming loans$11,577 $5,909 
     Nonperforming loans to total loans0.7 %0.4 %
     Equity to assets8.9 %10.1 %
     Bank leverage ratio11.3 %9.8 %
1 Noninterest expense as a percentage of net interest income and noninterest income
2 Annualized for the quarterly periods presented
3 Noninterest expense as a percentage of average assets
4 Charge-offs less recoveries
5 Excludes loans held-for-sale

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds interest expense incurred on interest-bearing liabilities. Interest-earning assets include loans, investment securities and certificates of deposit in banks. Interest-bearing liabilities include interest-bearing deposits and borrowed funds such as sweep accounts and repurchase agreements. Net interest income, which is the primary source of revenue for the Bank, is also impacted by changes in market interest rates, as well as the mix of interest-earning assets and interest-bearing liabilities. Net interest income is impacted favorably by increases in noninterest-bearing demand deposits and equity.

Net interest margin is calculated by dividing net interest income by average interest-earning assets and serves as a measurement of
the net revenue stream generated by the Bank’s balance sheet. Net interest margin (tax equivalent) was 3.26% for the three months ended March 31, 2021 compared to 3.66% for the three months ended March 31, 2020. The net interest margin continues to face considerable pressure due to low interest rates and competitive pricing of loans and deposits in the Bank’s markets. During 2020, the Federal Reserve lowered its key interest rate from a range of 1.50% to 1.75% to a range of 0.00% to 0.25% and remains at this rate as of March 31, 2021. Management’s estimate of the impact of future changes in market interest rates is shown in the section captioned Interest Rate Risk, in Item 3 – Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Net interest spread is calculated by taking the difference between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk. Net interest spread (tax-equivalent) was 3.06% for the three months ended March 31, 2021 compared to 3.33% for the three months
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ended March 31, 2020. The difference between the net interest margin (tax-equivalent) and net interest spread (tax-equivalent) was 20 basis points in the three months ended March 31, 2021 compared to 33 basis points in the three months ended March 31, 2020. The increase of $490.0 million in average noninterest-bearing demand deposits helped maintain the favorable spread.

Company management continues to analyze methods to deploy assets into an earning asset mix which will result in a stronger net interest margin. Loan growth continues to be strong and management anticipates that loan activity will remain strong in the near term future.

During the three months ended March 31, 2021, net interest income increased by $1.3 million, or 8.25%, to $17.5 million from $16.2 million during the three months ended March 31, 2020. This increase is largely due to the increase in the average earning assets of $425.2 million being primarily funded by the increase in noninterest-bearing demand deposits of $490.0 million. Also impacting the yield were the sale of four branches to Summit in April 2020, the accretion related to loans acquired from First State and amortization of PPP origination fees. Average total earning assets was $2.23 billion in the three months ended March 31, 2021 compared to $1.80 billion in the three months ended March 31, 2020. Although there was an increase in average total earning assets, total interest income decreased by $1.6 million, or 7.90%, to $19.1 million in the three months ended March 31, 2021 from $20.7 million in the three months ended March 31, 2020. This decrease in total interest income was driven by the effect of the Federal Reserve lowering its key interest rates, which resulted in the decrease in yield on earning assets of 113 basis points. Average total loans and loans held-for-sale increased to $1.57 billion in the three months ended March 31, 2021 from $1.54 billion in the three months ended March 31, 2020, primarily as the result of a $173.2 million increase in average commercial loans; however, PPP loans with an outstanding balance of $190.6 million accounted for a portion of the increase and carried just a 1% yield, outside of origination fee accretion. Yield on total loans and loans held-for-sale decreased 59 basis points. Changes in the balance sheet related to the Summit and First State transactions also impacted yield on earning assets.

Average investment securities increased $147.9 million as the result of a $102.3 million increase in tax-exempt investments and a $45.6 million increase in taxable investments. Yield on tax-exempt securities decreased 77 basis points and taxable securities yield decreased 62 basis points.

Average interest-bearing liabilities decreased by $29.9 million. The decrease was primarily the result of decreases of $165.9 million in the average balance of certificates of deposit and $69.6 million in the average balance of FHLB and other borrowings, partially offset by increases of $111.5 million in the average balance of negotiable order of withdrawal accounts, $55.1 million in money market checking accounts and $39.3 million in the average balance of subordinated debt.

Average interest-bearing deposits were $1.23 billion for both the three months ended March 31, 2021 and for the three months ended March 31, 2020. Total interest expense decreased by $3.0 million, caused primarily by a $2.9 million decrease in deposit interest. The result was a 86-basis point decrease in the cost of interest bearing liabilities.

The Company’s average earning assets increased $425.2 million and net interest income increased by $1.3 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The net interest margin continues to be pressured by falling rates and increased competition for high quality loan growth.

The Bank’s yield on earning assets declined due to decreases in the loan portfolio yield of 59 basis points, driven by the addition of PPP loans originated in the second quarter of 2020 and the first quarter of 2021, and the investment portfolio yield of 53 basis points, while the cost of interest bearing liabilities decreased by 86 basis points.

The cost of interest-bearing liabilities decreased to 0.48% in the three months ended March 31, 2021 from 1.34% in the three months ended March 31, 2020. This decrease is primarily the result of decreases of 162 basis points in the cost of FHLB and other borrowings and a 93 basis point decrease in the cost of deposits. Further discussion on borrowings is included in Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.

Provision for Loan Losses

The provision for loan losses, which is a product of management’s formal quarterly analysis, is recorded in response to inherent losses in the loan portfolio. Loan loss provision of $0.6 million and $1.1 million were made for the three months ended March 31, 2021 and 2020, respectively. The decrease in loan loss provision is mainly the result of changes in the level of recognized charge-offs and changes in the resulting historical loss rates. In addition, changes to the outstanding balances of the loan portfolios, changes to the qualitative adjustment factor framework within the allowance methodology and adjustments to the risk grading of significant loans within the portfolio were all contributing factors in the ultimate change in loan loss provision.

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Total loan balances increased $240.6 million during the three months ended March 31, 2021 versus an increase of $22.0 million in the three months ended March 31, 2020. The commercial loan portfolio increased by $212.2 million during the three months ended March 31, 2021, in comparison to an increase of $30.7 million in the three months ended March 31, 2020, while the residential mortgage loan portfolio increased by $35.4 million during the three months ended March 31, 2021, while decreasing by $10.1 million in the three months ended March 31, 2020. Included in the commercial and total loan volume increases are SBA PPP loans totaling $190.6 million as of March 31, 2021. This portion of loan growth is significant to the overall change in provision as these loans are guaranteed by the SBA, and accordingly, are subject to a loan loss allocation that is only a fraction of the typical allocation rate applied to other loans in the portfolio. In addition, net charge-offs during the three months ended March 31, 2021 totaled $0.2 million, in comparison to net charge-offs of $1.8 million in the three months ended March 31, 2020. Additionally, provision was impacted by a $0.3 million decrease in the specific loan loss allocations in the three months ended March 31, 2021, relative to a $0.1 million decrease in the three months ended March 31, 2020.

Meanwhile, management has continued to evaluate the qualitative factor framework within the allowance for loan loss methodology in order to assess how well the framework can appropriately respond to the unprecedented risk presented by the COVID-19 pandemic. As a result, the framework was significantly enhanced in the third quarter of 2020 to consider a much greater degree of risk than when the framework was originally designed. The framework has consistently generated an adequate allowance for loan loss within a generally stable economic environment, but the onset of the COVID-19 pandemic made it apparent that the framework required modifications to consider this greater degree of risk. While the ultimate timing and severity of impacts to the economic and business conditions in which the Company operates are not yet fully known, it appears that the impacts will continue to be significant and it is likely that the impacts will evolve over time as businesses and individuals learn to adapt to a new way of operating and living. The breadth of the COVID-19 pandemic and the fact that it impacts virtually all industries has inherently created additional risk within the loan portfolios, despite there being no change to the nature of those portfolios. Furthermore, as a result of the ongoing analysis of the loan portfolios, it has become apparent that a significant number of borrowers are experiencing a strain on their operations, and as a result present an increase in the volume and severity of problem loans. Additionally, it is evident that consumer sentiment has been impacted, although not as significantly as during the Great Recession. Other significant factors include the increasingly volatile social atmosphere, the evolving political climate and the timing and effectiveness of vaccines. The unprecedented initiatives of the Federal Government to provide support to the economy through new loan programs has simultaneously served to temporarily mitigate some of the impacts to the economy and borrowers, while also adding some degree of increased risk to lending policies and procedures as a result of the pace and manner in which these programs have been developed and made available to the public. As a result, quantifiable evidence of the impacts to the Company's loan portfolios have not yet fully revealed themselves in terms of delinquent loans or deterioration in collateral values. Meanwhile, the Company has not currently made any significant changes to lending strategies that would impact the concentrations of credit risk within those portfolios.

Noninterest Income

Payment card and service charge income, mortgage fee income, consulting compliance income, and gains on equity securities generate the core of the Company’s noninterest income. During the three months ended March 31, 2021, equity method investment income has generated additional noninterest income. Total of noninterest income for the three months ended March 31, 2021 and 2020 was $12.5 million and $10.8 million, respectively.

The increase in noninterest income for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily the result of an increase of $6.5 million in equity method investment income from ICM and a decrease of $3.6 million in the loss on derivatives. These increases were partially offset by a decrease of $11.2 million in mortgage fee income.

Equity method investment income of $6.5 million was due to the ICM combination in July 2020. Prior to this combination, income from the Company's mortgage activities was recognized through mortgage fee income.

Payment card and service charge income increased from $0.6 million in the three months ended March 31, 2020 to $1.5 million in the three months ended March 31, 2021 due to the expansion of the Company's Banking as a Service (“BaaS”) platform.

Loss on derivatives decreased from $3.6 million for the three months ended March 31, 2020 to zero for the three months ended March 31, 2021, due to the removal of the mortgage derivative driven by the ICM combination.

Mortgage fee income decreased $11.2 million in the three months ended March 31, 2021 due to the ICM combination in July 2020. Prior to this combination, income from the Company's mortgage activities was recognized through mortgage fee income.

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Noninterest Expense

Noninterest expense was $19.1 million and $24.7 million in in the three months ended March 31, 2021 and 2020, respectively. Approximately 62% and 66% of noninterest expense for the three months ended March 31, 2021 and 2020, respectively, was related to personnel costs. Personnel costs are a significant part of the Company's noninterest expense as such costs are critical to services organizations. Salaries and benefits decreased by $4.3 million, primarily as a result of the ICM combination and the sale of four branches to Summit in April 2020.

Mortgage processing decreased by $0.9 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily as the result of the ICM combination.

Return on Assets and Equity

Assets

The Company’s return on average assets was 1.3% for the three months ended March 31, 2021, compared to 0.2% for the three months ended March 31, 2020. The increased return in 2021 is a result of a $7.0 million increase in earnings, while average total assets increased by $483.9 million, mainly as the result of a $245.8 million increase in average interest-bearing deposits with banks, a $147.9 million increase in average investment securities and a $32.3 million increase in average total loans.

Equity

The Company’s return on average stockholders’ equity was 13.6% for the three months ended March 31, 2021, compared to 1.9% for the three months ended March 31, 2020. The increased return in 2021 is a result of a $7.0 million increase in earnings, while average equity increased by $22.0 million.

Statement of Financial Condition

Cash and Cash Equivalents

Cash and cash equivalents totaled $339.6 million at March 31, 2021, compared to $263.9 million at December 31, 2020.

Management believes the current balance of cash and cash equivalents adequately serves the Company’s liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable the Company to meet cash obligations as they come due. Due to the increase in liquidity driven by growth in noninterest-bearing deposits, management has elected to maintain a higher cash and cash equivalents balance to provide flexibility during the COVID-19 pandemic.

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Investment Securities

Investment securities, including equity securities, totaled $451.3 million at March 31, 2021, compared to $438.2 million at December 31, 2020. The following table presents a summary of the investment securities portfolio as of the periods indicated. The available-for-sale securities are reported at estimated fair value.
(Dollars in thousands)March 31, 2021December 31, 2020
Available-for-sale securities:
United States government agency securities$48,104 $56,992 
United States sponsored mortgage-backed securities89,207 95,769 
United States treasury securities56,970 — 
Municipal securities209,734 231,887 
Other debt securities7,500 7,500 
Other securities11,607 18,476 
Total investment securities available-for-sale$423,122 $410,624 
Equity securities$28,200 $27,585 

Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through the Asset and Liability Committee (“ALCO”) meetings. The ALCO also monitors net interest income and assists in the management of interest rate risk for the Company. Through active balance sheet management and analysis of the investment securities portfolio, sufficient liquidity is maintained to satisfy depositor requirements and the various credit needs of its customers. Management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.

Loans

The Company’s loan portfolio totaled $1.69 billion as of March 31, 2021 and totaled $1.45 billion as of December 31, 2020. The Bank’s lending is primarily focused in North Central West Virginia and Northern Virginia. The portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages, and consumer lending. The growth in loans is primarily attributable to organic growth within the Bank’s primary lending areas and Northern Virginia.

For more information regarding the Company's loans, please see Note 3 – Loans and Allowance for Loan Losses accompanying the consolidated financial statements included elsewhere in this report.

Loan Concentration

At March 31, 2021 and December 31, 2020, commercial and non-residential real estate loans comprised the largest component of the loan portfolio. A large portion of commercial loans are secured by real estate and they are diverse with respect to geographical location and industry. Loans that are not secured by real estate are typically secured by accounts receivable, mortgages or equipment. While the loan concentration is in commercial loans, the commercial portfolio is comprised of loans to many different borrowers, in numerous different industries, primarily located in the Company's market areas.

Allowance for Loan Losses

The ALL was $26.2 million or 1.5% of total loans at March 31, 2021 compared to $25.8 million or 1.8% of total loans at December 31, 2020. The decrease in this ratio was the direct result of changes in the level of recognized charge-offs and changes in the resulting historical loss rates. In addition, changes to the outstanding balances of the loan portfolios, changes to the qualitative adjustment factor framework within the allowance methodology and adjustments to the risk grading of significant loans within the portfolio were all contributing factors in the change.

Management continually monitors the risk in the loan portfolio through review of the monthly delinquency reports and the Loan Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the ALL. This analysis involves both experience of the portfolio to date and the makeup of the overall portfolio. Specific loss estimates are derived for individual loans based on specific criteria such as current delinquent status, related deposit account activity where applicable and changes in the local and national economy. When appropriate, management also considers public knowledge and verifiable information from the local market to assess risks to specific loans and the loan portfolios as a whole.

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Funding Sources

The Bank considers a number of alternatives, including but not limited to deposits, short-term borrowings and long-term borrowings when evaluating funding sources. Traditional deposits continue to be the most significant source of funds, totaling $2.22 billion, or 93.4% of funding sources, at March 31, 2021. This same information at December 31, 2020 reflected $1.98 billion in deposits representing 97.4% of such funding sources.

FHLB and other borrowings and subordinated debt represented 6.1% of funding sources at March 31, 2021. FHLB and other borrowings, including PPPLF borrowings, totaled $102.2 million at March 31, 2021. Subordinated debt totaled $43.4 million at March 31, 2021.

FHLB and other borrowings and subordinated debt represented 2.1% of funding sources at December 31, 2020. There were no FHLB and other borrowings at December 31, 2020. Subordinated debt totaled $43.4 million at December 31, 2020.

Repurchase agreements, which are available to large corporate customers, represented 0.4% and 0.5% of funding sources at December 31, 2020 and 2019, respectively.

Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source for the
Company. At March 31, 2021, noninterest-bearing balances totaled $837.2 million, compared to $715.8 million at December 31, 2020, or 37.8% and 36.1% of total deposits, respectively. Interest-bearing deposits totaled $1.38 billion at March 31, 2021, compared to $1.27 billion at December 31, 2020, or 62.2% and 63.9% of total deposits, respectively. The main driver of deposit growth has been the increase in Fintech deposits through adding new relationships and continuing to grow current relationships. This growth in Fintech deposits is primarily due to the increasing in gaming deposits, primarily as a result of the increasing number of states legalizing sports gaming. The Company currently expects its Fintech banking to continue to grow.

The following table sets forth the balance of each of the deposit categories as of the periods indicated:
(Dollars in thousands)March 31, 2021December 31, 2020
Noninterest-bearing demand$837,221 $715,791 
Interest-bearing demand698,218 496,502 
Savings and money markets520,998 545,501 
Time deposits, including CDs and IRAs160,116 224,595 
Total deposits$2,216,553 $1,982,389 
Time deposits that meet or exceed the FDIC insurance limit$14,829 $16,955 

Average interest-bearing deposits totaled $1.23 billion during both the three months ended March 31, 2021 and 2020. Average noninterest-bearing deposits totaled $821.9 million during the three months ended March 31, 2021 compared to $332.0 million during the three months ended March 31, 2020.

Along with traditional deposits, the Bank has access to both short-term borrowings from FHLB and overnight repurchase agreements to fund its operations and investments. For details on the Company's borrowings, please refer to Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.

Capital and Stockholders' Equity

During the quarter ended March 31, 2021, stockholders’ equity decreased approximately $3.3 million to $236.7 million. This decrease consists of the redemption of preferred stock of $7.3 million, other comprehensive loss of $4.1 million and cash dividends of $1.2 million. These decreases were offset by net income for the quarter of $8.1 million, common stock options exercised totaling $0.7 million, stock-based compensation of $0.6 million and noncontrolling interest due to acquisition of $0.5 million. With the stockholders’ equity decreasing as noted above, the equity to assets ratio decreased from 10.3% to 8.9% due to a reduction in equity and the $314.6 million increase in total assets during the quarter. The Company paid dividends to common shareholders of $1.2 million in each of the three months ended March 31, 2021 and 2020 compared to earnings of $8.1 million in the three months ended March 31, 2021 versus $1.0 million in the three months ended March 31, 2020, resulting in the dividend payout ratio decreasing from 115.2% in the three months ended March 31, 2020 to 14.3% in the three months ended March 31, 2021.
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The Company and the Bank are also subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The Bank is
required to comply with applicable capital adequacy standards established by the FDIC. The Company is exempt from the Federal
Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement. West Virginia state chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions. Bank regulators have established “risk-based” capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets companies hold in their portfolios. A
weight category of 0% (lowest risk assets), 20%, 50%, 100% or 150% (highest risk assets) is assigned to each asset on the balance
sheet. Detailed information concerning the Company’s risk-based capital ratios can be found in Supervision and Regulation in Item 1 – Business and Note 15 – Regulatory Capital Requirements to the consolidated financial statements and accompanying notes contained in the 2020 Form 10-K.

In November 2019, federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020. The intent of the CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions as directed under the EGRRCPA. Under the CBLR, if a qualifying depository institution elects to use such measure, such institutions will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e. leverage ratio) exceeds a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios.

In April 2020, under the CARES Act, the 9% leverage ratio threshold was temporarily reduced to 8% in response to the COVID-19 pandemic. The threshold will increase to 8.5% in 2021 and return to 9% in 2022. The Bank elected to begin using the CBLR for the first quarter of 2021 and intends to utilize this measure for the foreseeable future. Eligibility criteria to utilize the CBLR includes the following:

●    Total assets of less than $10 billion;
●    Total trading assets plus liabilities of 5% or less of consolidated assets;
●    Total off-balance sheet exposures of 25% or less of consolidated assets;
●    Cannot be an advanced approaches banking organization; and
●    Leverage ratio greater than 9%, or temporarily prescribed threshold established in response to COVID-19.

The Bank's CBLR at March 31, 2021 was 11.3%, which is above the well capitalized standard of 8.5%. Management believes that capital continues to provide a strong base for profitable growth.

Liquidity

Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated operating cash needs, loan demand and deposit withdrawals, without incurring a sustained negative impact on net interest income. It is the Company’s policy to manage liquidity so that there is no need to make unplanned sales of assets or to borrow funds under emergency conditions.

The main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from investment maturities, principal payments from loans and income from loans and investment securities. During the three months ended March 31, 2021, cash provided by financing activities totaled $328.9 million, while outflows from investing activity totaled $263.4 million. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from the FHLB, national market certificate of deposit issuance programs, the Federal Reserve discount window, brokered deposits and Certificate of Deposit Account Registry Services. These external sources often provide attractive interest rates and flexible maturity dates that enable the Bank to match funding with contractual maturity dates of assets. Securities in the investment portfolio are classified as available-for-sale and can be utilized as an additional source of liquidity.

The Company has an effective shelf registration covering $75 million of debt and equity securities, all of which is available, subject to authorization from the Board of Directors and market conditions, to issue debt or equity securities at the Company's discretion. While the Company seeks to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit it to sell securities on acceptable terms, or at all.

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Current Economic Conditions

The Company considers its primary market area for CoRe banking services to be comprised of North Central West Virginia and Northern Virginia, where the Bank currently operates a total of 13 full-service banking branches: ten in West Virginia and three in Virginia. The Company considers its Fintech banking market to be customers located throughout the entire United States.

The Company believes that the current economic climate in its primary market areas reflect economic climates that are consistent with the general national economic climate. Unemployment in the United States was 6.2% and 4.5% for March 2021 and 2020, respectively.

Commitments and Contingent Liabilities

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Company upon extension of credit, varies and is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

Concentration of Credit Risk

The Company grants a majority of its commercial, financial, agricultural, real estate and installment loans to customers throughout the North Central West Virginia and Northern Virginia markets. Collateral for loans is primarily residential and commercial real estate, personal property and business equipment. The Company evaluates the credit worthiness of each of its customers on a case-by-case basis and the amount of collateral it obtains is based upon management’s credit evaluation.

Regulatory

The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. In accordance with these requirements, the Company implemented a deposit reclassification program that allowed the Company to maintain no such reserve balances as of March 31, 2021 and December 31, 2020.

Contingent Liability

The subsidiary bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

Off-Balance Sheet Commitments

The Bank has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact on the consolidated financial statements and could have a significant impact in future periods. Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition,
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the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits.

Commitments to extend credit, including loan commitments, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

Future Outlook

The Company has invested in the infrastructure to support anticipated future growth in each key area, including personnel, technology and processes to meet the growing compliance requirements in the industry. The Company believes it is well positioned in some of the finest markets in West Virginia and Virginia and will continue to focus on margin improvement; leveraging capital; organic portfolio loan growth; and operating efficiency. The key challenge for the Company in the future is to attract core deposits to fund growth in new markets through continued delivery of outstanding client service coupled with high-quality products and technology. The Company is expanding the treasury services function to support the banking needs of financial and emerging technology companies, which will further enhance core deposits, notably through its expansion of deposit acquisition and fee income strategies through the Fintech division. During 2020 and into 2021, the Company entered into agreements for debit card program sponsorship to further enhance fee income and noninterest income. In addition, the Company continues to expand into the Fintech industry through the acquisition of technology, including a software development team, in order to scale and diversify its banking capabilities.

Critical Accounting Policies and Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP required management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.

There have been no significant changes to the Company's critical accounting policies and estimates or in the underlying accounting assumptions and estimates used in these critical accounting policies from those disclosed in the consolidated financial statements and accompanying notes contained in the 2020 Form 10-K.

Recent Accounting Pronouncements and Developments

Recent accounting pronouncements and developments applicable to the Company are described further in Note 1 – Nature of Operations and Basis of Presentation accompanying the consolidated financial statements included elsewhere in this report.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk is composed primarily of interest rate risk. The ALCO is responsible for reviewing the interest rate sensitivity position and establishes policies to monitor and coordinate the Company’s sources, uses and pricing of funds.

Interest Rate Risk

The objective of the asset/liability management function is to structure the balance sheet in ways that maintain consistent growth in net interest income and minimize exposure to market risks within its policy guidelines. This objective is accomplished through management of balance sheet liquidity and interest rate risk exposure based on changes in economic conditions, interest rate levels and customer preferences. The Company manages balance sheet liquidity through the investment portfolio, sales of commercial and residential real estate loans and through the utilization of diversified funding sources, including retail deposits, a variety of wholesale funding sources and borrowings through the FHLB. Interest rate risk is managed through the use of interest rate caps, commercial loan swap transactions and interest rate lock commitments on mortgage loans held-for-sale, as well as the structuring of loan terms that provide cash flows to be consistently re-invested along the rate cycle.

The Company's primary market risk is interest rate fluctuation. Interest rate risk results from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic conditions, financial conditions, movements in interest rates and consumer preferences affect the difference between interest earned on assets and interest paid on liabilities. The Company’s interest rate risk represents the levels of exposure its income and market values have to fluctuations in interest rates. Interest rate risk is measured as the change in earnings and the theoretical market value of equity that results from changes in interest rates. The ALCO oversees the management of interest rate risk and its objective is to maximize stockholder value, enhance profitability and increase capital, serve customer and community needs and protect the Company from any material financial consequences associated with changes in interest rates.
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Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); changing rate relationships across yield curves that affect bank activities (basis risk); changing rate relationships across the spectrum of maturities (yield curve risk); and interest rate related options embedded in certain bank products (option risk). Changes in interest rates may also affect a bank’s underlying economic value. The values of a bank’s assets, liabilities and interest-rate related, off-balance sheet contracts are affected by changes in rates because the present values of future cash flows, and in some cases the cash flows themselves, are changed when discounting by different rates.

The Company believes that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. Management and the Board of Directors have chosen an interest rate risk profile that is consistent with the Company's strategic business plan. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to decrease any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.

The Company’s Board of Directors has established a comprehensive interest rate risk management policy, which is administered by the ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in interest rates. The Company measures the potential adverse impacts that changing interest rates may have on short-term earnings, long-term value and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors embedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology employed. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts or the impact of rate changes on demand for loan and deposit products.

A base case forecast is prepared using market consensus rate forecasts and alternative simulations reflecting more and less extreme behavior of rates each quarter. The analysis is presented to the ALCO and the Board of Directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain, when other business conditions so dictate, or when necessary to model potential balance sheet changes.

The balance sheet is subject to quarterly testing for interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, 300 and 400 basis points (“bp”). The goal is to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

At March 31, 2021, the Company is shown in an asset sensitive position for the first year after rate shocks. Management continuously strives to reduce higher costing fixed rate funding instruments, while increasing assets that are more fluid in their repricing. Theoretically, an asset sensitive position is more favorable in a rising rate environment, since more assets than liabilities will reprice in a given time frame as interest rates rise. Similarly, a liability sensitive position is theoretically favorable in a declining interest rate environment, since more liabilities than assets will reprice in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.

Estimated Changes in Net Interest Income
Change in interest rates+400 bp+300 bp+200 bp+100 bp-100 bp-200 bp-300 bp-400 bp
Policy Limit25.0 %20.0 %15.0 %10.0 %10.0 %15.0 %20.0 %25.0 %
December 31, 202042.7 %30.7 %19.3 %9.6 %(6.6)%(9.6)%(12.4)%(12.9)%
December 31, 20195.7 %3.5 %1.3 %0.3 %(6.9)%(18.4)%(26.8)%(32.5)%

As shown above, measures of net interest income at risk in a rising rate environment were more favorable at December 31, 2020 versus December 31, 2019 and less favorable in a falling rate environment for the same time periods. One factor explaining this year-over-year difference is the general level of market interest rates. A parallel downward interest rate shock would further compress the yields on assets and liabilities, while a parallel upward interest rate shock would widen the spread between yields on assets and liabilities.

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Net interest income at risk exceeded policy limits in the -200 bp, -300 bp and -400 bp parallel instantaneous interest rate shock scenarios. The policy violations in these scenarios are driven largely by the general level or market interest rates described in the preceding paragraph as well as the Company's cost of funding. The Company's deposit costs are low and have little room to reprice to a lower interest rate in a falling rate environment. However, the Company's floating rate assets are exposed to the full effect of repricing to a lower interest rate in a falling rate environment.

The paragraph above discusses net interest income at risk in various shock scenarios; scenarios in which interest rates immediately move by a large margin. The Company's net interest income profile exhibits declining net interest income when rates fall gradually, but the impact is not as extreme as is suggested in a shock scenario. Essentially, a gradual interest rate decline scenario smooths the impact of falling rates over a 12 or 24 month period. The Company's expectation is that over any given one to two year period, interest rates will likely move at a gradual pace.

As interest rates fall, mortgage companies experience a higher volume of loan originations and refinance activity. This benefit is not reflected in measures of net interest income at risk, as origination and refinance activity was classified as fee income prior to the combination with ICM. This increase in fee income represents a benefit to net income that offsets the losses to net interest income experienced in a falling rate environment. After the ICM combination, the income related to loan originations and refinance activity is reflected as income from an equity method investment.

The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which theoretically approximates the fair value of the Company’s net assets.

Estimated Changes in Economic Value of Equity (EVE)
Change in interest rates+400 bp+300 bp+200 bp+100 bp-100 bp-200 bp-300 bp-400 bp
Policy Limit35.0 %25.0 %17.0 %12.0 %12.0 %17.0 %25.0 %35.0 %
December 31, 20202.7 %3.8 %5.0 %3.0 %(3.1)%4.1 %14.8 %20.0 %
December 31, 201910.6 %8.6 %6.7 %5.0 %(15.1)%(36.8)%(44.1)%(32.5)%

The EVE at risk in down rate scenarios increased at December 31, 2020, when compared to December 31, 2019. The increase in economic value of equity in rising rate environments is largely attributable to the effect that an increase in interest rates has on the present value of non-interest-bearing deposits. The discount rate for non-interest-bearing deposits rises as interest rates rise; however, these deposits pay a rate of zero. The cost of these liabilities does not increase as interest rates rise, but the discount rate applied to the expected future cash flows of these liabilities increases with interest rates. Any increase in the market rates used to discount the cash flows of these liabilities reduces the present value of these liabilities. The decrease in present value of these liabilities results in a net increase to economic value of equity. A falling rate environment would result in a higher net present value for these liabilities and would lead to a net decrease to economic value of equity.

Additionally, interest-bearing deposits contribute to the large declines in economic value of equity in falling rate environments as a result of their low cost. Interest-bearing deposit costs are modeled with a floor of zero, meaning that the interest rates paid on deposits cannot be negative. In the event of a large downward interest rate shock, deposit costs would not move below zero. However, the discount rates applied to the expected future cash flows of these deposits could sustain a large decline in interest rates before reaching zero. This has the effect of increasing the present value of the interest-bearing-deposit liability and ultimately decreasing economic value of equity.

The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown occurring as a result of the COVID-19 pandemic is still unknown. Financial markets adjusted dramatically to the reduced economic activity and the pace of recovery is uncertain. The financial market benchmark most relevant to the Company’s current and future profitability is the United States Government Treasury yield curve. The United States Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits and other fixed income yield curves. The United States Government Treasury yield curve experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, management expects that net interest income will begin to increase as the curve begins to shift upward. As the outlook for the COVID-19 pandemic improves, management expects that the United States Government Treasury curve will experience some degree of an upward shift over time.

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Credit Risk

The Company has counter-party risk which may arise from the possible inability of third-party investors to meet the terms of their forward sales contracts. The Company works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. The Company monitors the financial condition of these third parties on an annual basis and the Company does not expect these third parties to fail to meet their obligations.

Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike industrial companies, the Company's assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Item 4 – Controls and Procedures

As of March 31, 2021, the Company carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.

During the three months ended March 31, 2021, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

From time to time in the ordinary course of business, the Company and its subsidiaries are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings, the results are difficult to predict at all. The Company is not aware of any asserted or unasserted legal proceedings or claims that the Company believes would have a material adverse effect on the Company’s financial condition or results of the Company’s operations.

Item 1A – Risk Factors

Our operations are subject to many risks that could adversely affect our future financial condition and performance, including the risk factors that are described in the 2020 Form 10-K. There have been no material changes in our risk factors from those disclosed.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) Issuer purchases of Registered Equity Securities:

There was no share repurchase activity during the three months ended March 31, 2021.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

Item 6 – Exhibits

The following exhibits are filed herewith:

Certificate of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certificate of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MVB Financial Corp.
Date:May 3, 2021By:/s/ Larry F. Mazza
Larry F. Mazza
President, CEO and Director
(Principal Executive Officer)
Date:May 3, 2021By:/s/ Donald T. Robinson
Donald T. Robinson
Executive Vice President and CFO
(Principal Financial and Accounting Officer)


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