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EX-32.2 - EXHIBIT 32.2 - MVB FINANCIAL CORPexhibit322-soxsection906cf.htm
EX-32.1 - EXHIBIT 32.1 - MVB FINANCIAL CORPexhibit321-soxsection906ce.htm
EX-31.2 - EXHIBIT 31.2 - MVB FINANCIAL CORPexhibit312-soxsection302cf.htm
EX-31.1 - EXHIBIT 31.1 - MVB FINANCIAL CORPexhibit311-soxsection302ce.htm

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, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
 
Commission File Number: 000-50567
 
mvbfinanciallogo.jpg
 
MVB Financial Corp.
(Exact name of registrant as specified in its charter)
 
 
 
West Virginia
 
20-0034461
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
301 Virginia Avenue, Fairmont, WV
 
26554
(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)
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 and posted on its corporate Website, if any, 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. (Check one):
 
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
 
If a 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 May 3, 2017, the Registrant had 10,440,328 shares of common stock outstanding with a par value of $1.00 per share.



TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Unaudited) (Dollars in thousands except per share data)
 
 
March 31, 2017
 
December 31, 2016
 
 
(Unaudited)
 
(Note 1)
ASSETS
 
 
 
 
Cash and cash equivalents:
 
 
 
 
     Cash and due from banks
 
$
16,338

 
$
14,846

     Interest bearing balances with banks
 
1,940

 
2,494

     Total cash and cash equivalents
 
18,278

 
17,340

Certificates of deposit with other banks
 
14,527

 
14,527

Investment Securities:
 
 
 
 

     Securities available-for-sale
 
172,754

 
162,368

Loans held for sale
 
71,921

 
90,174

Loans:
 
1,076,782

 
1,052,865

     Less: Allowance for loan losses
 
(9,372
)
 
(9,101
)
     Net Loans
 
1,067,410

 
1,043,764

Premises and equipment
 
26,079

 
25,081

Bank owned life insurance
 
23,167

 
22,970

Accrued interest receivable and other assets
 
21,335

 
24,100

Goodwill
 
18,480

 
18,480

TOTAL ASSETS
 
$
1,433,951

 
$
1,418,804

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 

Deposits:
 
 
 
 

     Noninterest bearing
 
$
119,271

 
$
115,692

     Interest bearing
 
1,017,195

 
991,325

     Total deposits
 
1,136,466

 
1,107,017

 
 
 
 
 
Accrued interest payable and other liabilities
 
12,930

 
16,557

Repurchase agreements
 
21,695

 
25,160

FHLB and other borrowings
 
90,611

 
90,921

Subordinated debt
 
33,524

 
33,524

     Total liabilities
 
1,295,226

 
1,273,179

 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 

Preferred stock, par value $1,000; 20,000 authorized; 783 and 9,283 issued in 2017 and 2016, respectively (See Footnote 7)
 
7,834

 
16,334

Common stock, par value $1; 20,000,000 shares authorized; 10,047,621 issued and 9,996,544 outstanding in 2017 and 2016, respectively
 
10,048

 
10,048

Additional paid-in capital
 
93,560

 
93,412

Retained earnings
 
32,387

 
31,192

Accumulated other comprehensive loss
 
(4,020
)
 
(4,277
)
Treasury stock, 51,077 shares, at cost
 
(1,084
)
 
(1,084
)
     Total stockholders’ equity
 
138,725

 
145,625

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,433,951

 
$
1,418,804


See accompanying notes to unaudited consolidated financial statements.

3


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited) (Dollars in thousands except per share data)
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
INTEREST INCOME
 
 
 
 
     Interest and fees on loans
 
$
11,882

 
$
12,431

     Interest on deposits with other banks
 
79

 
88

     Interest on investment securities - taxable
 
546

 
310

     Interest on tax exempt loans and securities
 
561

 
553

     Total interest income
 
13,068

 
13,382

 
 
 
 
 
INTEREST EXPENSE
 
 
 
 
     Interest on deposits
 
1,906

 
1,888

     Interest on repurchase agreements
 
17

 
21

     Interest on FHLB and other borrowings
 
288

 
226

     Interest on subordinated debt
 
551

 
552

     Total interest expense
 
2,762

 
2,687

 
 
 
 
 
NET INTEREST INCOME
 
10,306

 
10,695

     Provision for loan losses
 
518

 
625

     Net interest income after provision for loan losses
 
9,788

 
10,070

 
 
 
 
 
NONINTEREST INCOME
 
 
 
 
     Service charges on deposit accounts
 
187

 
173

     Income on bank owned life insurance
 
147

 
161

     Visa debit card and interchange income
 
295

 
292

     Mortgage fee income
 
9,634

 
6,785

     Gain on sale of portfolio loans
 
9

 
149

     Insurance and investment services income
 
124

 
53

     Gain on sale of securities
 
183

 
381

     (Loss) gain on derivatives
 
(1,947
)
 
401

     Other operating income
 
192

 
217

     Total noninterest income
 
8,824

 
8,612

 
 
 
 
 
NONINTEREST EXPENSES
 
 
 
 
     Salary and employee benefits
 
9,962

 
10,308

     Occupancy expense
 
994

 
938

     Equipment depreciation and maintenance
 
689

 
560

     Data processing and communications
 
1,214

 
1,124

     Mortgage processing
 
894

 
861

     Marketing, contributions and sponsorships
 
327

 
297

     Professional fees
 
677

 
705

     Printing, postage and supplies
 
217

 
216

     Insurance, tax and assessment expense
 
461

 
374

     Travel, entertainment, dues and subscriptions
 
501

 
368

     Other operating expenses
 
381

 
240

     Total noninterest expense
 
16,317

 
15,991

Income from continuing operations, before income taxes
 
2,295

 
2,691

Income tax expense - continuing operations
 
721

 
846

Net income from continuing operations
 
1,574

 
1,845

Loss from discontinued operations, before income taxes
 

 
(79
)
Income tax benefit - discontinued operations
 

 
(30
)
Net loss from discontinued operations
 

 
(49
)
Net income
 
$
1,574

 
$
1,796

Preferred dividends
 
129

 
186

Net income available to common shareholders
 
$
1,445

 
$
1,610

 
 
 
 
 

4


Earnings per share from continuing operations - basic
 
$
0.14

 
$
0.21

Earnings per share from discontinued operations - basic
 
$

 
$
(0.01
)
Earnings per common shareholder - basic
 
$
0.14

 
$
0.20

 
 
 
 
 
Earnings per share from continuing operations - diluted
 
$
0.14

 
$
0.20

Earnings per share from discontinued operations - diluted
 
$

 
$

Earnings per common shareholder - diluted
 
$
0.14

 
$
0.20

 
 
 
 
 
Cash dividends declared
 
$
0.025

 
$
0.02

Weighted average shares outstanding - basic
 
9,996,544

 
8,061,998

Weighted average shares outstanding - diluted
 
10,009,341

 
9,901,250


See accompanying notes to unaudited consolidated financial statements.


5


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Net Income
 
$
1,574

 
$
1,796

 
 
 
 
 
     Other comprehensive income:
 
 
 
 
 
 
 
 
 
     Unrealized holding gains on securities available-for-sale
 
448

 
418

 
 
 
 
 
     Unrealized holding gains during the year related to reclassified held-to-maturity securities
 

 
1,825

 
 
 
 
 
     Income tax effect
 
(179
)
 
(897
)
 
 
 
 
 
     Reclassification adjustment for gain recognized in income
 
(183
)
 
(112
)
 
 
 
 
 
     Reclassification adjustment for gain recognized in income related to reclassified held-to-maturity securities
 

 
(269
)
 
 
 
 
 
     Income tax effect
 
73

 
152

 
 
 
 
 
     Change in defined benefit pension plan
 
164

 
(517
)
 
 
 
 
 
     Income tax effect
 
(66
)
 
207

 
 
 
 
 
Total other comprehensive income
 
257

 
807

 
 
 
 
 
Comprehensive income
 
$
1,831

 
$
2,603


See accompanying notes to unaudited consolidated financial statements.


6


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) (Dollars in thousands except per share data)
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Treasury Stock
 
Total Stockholders' Equity
Balance December 31, 2015
 
$
16,334

 
$
8,113

 
$
74,228

 
$
20,054

 
$
(2,933
)
 
$
(1,084
)
 
$
114,712

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 

 

 

 
1,796

 

 

 
1,796

Other comprehensive income
 

 

 

 

 
807

 

 
807

Cash dividends paid ($0.02 per share)
 

 

 

 
(161
)
 

 

 
(161
)
Dividends on preferred stock
 

 

 

 
(186
)
 

 

 
(186
)
Stock based compensation
 

 

 
105

 

 

 

 
105

Common stock options exercised
 

 
16

 
(24
)
 

 

 

 
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2016
 
$
16,334

 
$
8,129

 
$
74,309

 
$
21,503

 
$
(2,126
)
 
$
(1,084
)
 
$
117,065

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
 
16,334

 
10,048

 
93,412

 
31,192

 
(4,277
)
 
(1,084
)
 
145,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$

 
$

 
$

 
$
1,574

 
$

 
$

 
$
1,574

Other comprehensive income
 

 

 

 

 
257

 

 
257

Cash dividends paid ($0.025 per share)
 

 

 

 
(250
)
 

 

 
(250
)
Dividends on preferred stock
 

 

 

 
(129
)
 

 

 
(129
)
Stock based compensation
 

 

 
148

 

 

 

 
148

Redemption of preferred stock
 
(8,500
)
 

 

 

 

 

 
(8,500
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2017
 
$
7,834

 
$
10,048

 
$
93,560

 
$
32,387

 
$
(4,020
)
 
$
(1,084
)
 
$
138,725


See accompanying notes to unaudited consolidated financial statements.


7


MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
 
 
Three Months Ended
March 31,

 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
1,574

 
$
1,796

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
     Net amortization and accretion of investments
 
319

 
180

     Net amortization of deferred loan (fees) costs
 
90

 
(22
)
     Provision for loan losses
 
518

 
625

     Depreciation and amortization
 
617

 
800

     Stock based compensation
 
148

 
105

     Loans originated for sale
 
(313,263
)
 
(317,168
)
     Proceeds of loans sold
 
341,150

 
327,700

     Mortgage fee income
 
(9,634
)
 
(6,785
)
     Gain on sale of securities
 
(549
)
 
(381
)
     Loss on sale of securities
 
366

 

     Gain on sale of portfolio loans
 
(9
)
 
(149
)
     Income on bank owned life insurance
 
(147
)
 
(161
)
     Deferred taxes
 
(25
)
 
(520
)
     Other, net
 
(1,414
)
 
1,731

     Net cash provided by operating activities
 
19,741

 
7,751

INVESTING ACTIVITIES
 
 
 
 
     Purchases of investment securities available-for-sale
 
(37,919
)
 
(32,885
)
     Maturities/paydowns of investment securities available-for-sale
 
4,717

 
1,613

     Maturities/paydowns of investment securities held-to-maturity
 

 
400

     Sales of investment securities available-for-sale
 
22,945

 
21,225

     Purchases of premises and equipment
 
(1,588
)
 
(652
)
     Net increase in loans
 
(24,245
)
 
(43,449
)
     Purchases of restricted bank stock
 
(4,276
)
 
(5,450
)
     Redemptions of restricted bank stock
 
4,818

 
6,933

     Proceeds from sale of other real estate owned
 

 
15

     Purchase of bank owned life insurance
 
(50
)
 

     Net cash used in investing activities
 
(35,598
)
 
(52,250
)
FINANCING ACTIVITIES
 
 
 
 
     Net increase in deposits
 
29,449

 
79,254

     Net increase (decrease) in repurchase agreements
 
(3,465
)
 
2,124

     Net change in short-term FHLB borrowings
 
(14,769
)
 
(36,908
)
     Principal payments on FHLB borrowings
 
(24
)
 
(23
)
     Proceeds from new FHLB borrowings
 
14,483

 

     Preferred stock redemption
 
(8,500
)
 

     Common stock options exercised
 

 
(8
)
     Cash dividends paid on common stock
 
(250
)
 
(161
)
     Cash dividends paid on preferred stock
 
(129
)
 
(186
)
     Net cash provided by financing activities
 
16,795

 
44,092

(Decrease) increase in cash and cash equivalents
 
938

 
(407
)
Cash and cash equivalents at beginning of period
 
17,340

 
29,133

Cash and cash equivalents at end of period
 
$
18,278

 
$
28,726

Supplemental disclosure of cash flow information:
 
 
 
 
     Loans transferred to other real estate owned
 
$

 
$

     Cashless stock options exercised
 
$

 
$
16

Cash payments for:
 
 
 
 
     Interest on deposits, repurchase agreements and borrowings
 
$
2,943

 
$
3,089

     Income taxes
 
$

 
$

See accompanying notes to unaudited consolidated financial statements.

8


Notes to the Consolidated Financial Statements

Note 1 – Basis of Presentation

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10‑Q. Accordingly, they do not include all the information and footnotes required by GAAP for annual year-end 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, 2016 has been derived from audited financial statements included in the Company’s 2016 filing on Form 10-K. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The accounting and reporting policies of MVB Financial Corp. (“the Company” or “MVB”) and its subsidiary (“Subsidiary”), MVB Bank, Inc. (the “Bank”), the Bank’s subsidiaries Potomac Mortgage Group, Inc., which does business as MVB Mortgage (“MVB Mortgage”) and MVB Insurance, LLC ("MVB Insurance"), conform to accounting principles generally accepted in the United States and practices in the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates, such as the allowance for loan losses, are based upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change. Actual results could differ from those estimates. All significant inter-company accounts and transactions have been eliminated in consolidation.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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 December 31, 2016, Form 10-K filed with the Securities and Exchange Commission.

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

All financial information is reported on a continuing operations basis, unless otherwise noted. For a discussion regarding discontinued operations, see Note 12, "Discontinued Operations" of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.

Note 2 – Recent Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends guidance on the amortization period of premiums on certain purchased callable debt securities. Specifically, the amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2018, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements, as it is our current policy to amortize premiums of investment securities to the earliest call date.

In March 2017, the FASB issued ASU 2017-07, Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Topic 715, Compensation–Retirement Benefits, requires an entity to present net periodic pension cost and net periodic postretirement benefit cost as a net amount that may be capitalized as part of an asset where appropriate.Users have communicated that the service cost component generally is analyzed differently from the other components of net periodic pension cost and net periodic postretirement benefit cost. To improve the consistency, transparency, and usefulness of financial information for users, the amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December

9


15, 2017, including all interim periods within those fiscal years. The Company is currently evaluating the provisions of this ASU to determine the potential impact to the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350), currently requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this Update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2019, including all interim periods within those fiscal years. The Company is currently evaluating the provisions of this ASU to determine the potential impact to the Company's consolidated financial statements.

In January 2017, the FASB Issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments–Equity Method and Joint Ventures (Topic 323). This Accounting Standards Update adds and amends SEC paragraphs pursuant to the SEC Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force (EITF) meetings. The September announcement is about the Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards are Adopted in a Future Period. The November announcement made amendments to conform the SEC Observer Comment on Accounting for Tax Benefits Resulting from Investments in Qualified Affordable Housing Projects to the guidance issued in Accounting Standards Update No. 2014-01,Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The adoption of this guidance is not expected to be material to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The amendments in this Update provide a screen to determine when a set is not a business. If the screen is not met, it (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace the missing elements. For public companies, this update will be effective for fiscal years effective for fiscal years beginning after December 15, 2017, including all interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current 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. Purchased credit impaired 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 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company's project management team and MLC are in the process of developing an understanding of this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would

10


not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. While we are currently evaluating the impact of the new standard, we expect an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities, as well as resulting depreciation expense of the right-of-use assets and interest expense of the lease liabilities in the Consolidated Statements of Income, for arrangements previously accounted for as operating leases.

In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments -  Overall: Classification and Measurement (Subtopic 825-10). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from this presentation. The amendments in this ASU 2016-01 address the following: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the provisions of this amendment to determine the potential impact the new standard will have on the Company's consolidated financial statements as it relates to accounting for financial instruments. The Company is currently evaluating the provisions of this amendment to determine the potential impact the new standard will have on the Company's consolidated financial statements as it relates to accounting for financial instruments.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue pronouncement creates a single source of revenue guidance for all companies in all industries and is more principles-based than current revenue guidance. The pronouncement provides a five-step model for a company to recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The five steps are, (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when each performance obligation is satisfied. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the update. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is now permitted as of the original effective date for interim and annual reporting periods in fiscal years beginning after December 15, 2016. In March 2016, the FASB issued ASU 2016-08, which amends the principle versus agent guidance in the revenue standard. In April 2016, the FASB issued ASU 2016-10, which clarifies when promised goods or services are separately identifiable in the revenue standard. In May 2016, FASB issued ASU 2016-12, which provides narrow-scope improvements and practical expedients to the revenue standard. While the Company is currently evaluating the impact of this standard on individual customer contracts, management has evaluated the impact of this standard on the broad categories of its customer contracts and revenue streams. The Company currently anticipates this standard will not have a material impact on its consolidated financial statements because revenue related to financial instruments, including loans and investment securities are not in scope of these updates. Loan interest income, investment interest income, insurance services revenue and BOLI are accounted for under other U.S. GAAP standards and out of scope of ASC 606 revenue standard. The Company plans to adopt the revenue recognition standard as of January 1, 2018. The Company is currently reviewing all streams of revenue that may be subject to this revised guidance. While we have not yet identified any material changes to the timing of revenue recognition, the Company’s review is ongoing.

Note 3 – Investment Securities

Prior to the final determination of Basel III, investments were recorded as held-to-maturity due to the uncertainty of the capital treatment of available-for-sale investments. Upon the issuance of the final ruling, the Company opted out of the Other Comprehensive Income treatment of available-for-sale investments permitted under Basel III. Due to the change in capital treatment under the final ruling of Basel III, the Company’s purpose of recording investments as held-to-maturity changed; therefore, during the period ended March 31, 2016, the Company reclassified $52.4 million, with unrealized holding gains of $1.8 million, of the remaining held-to-maturity investments into available-for-sale investments.

There were no held-to-maturity securities at March 31, 2017 or December 31, 2016.


11


Amortized cost and fair values of investment securities available-for-sale at March 31, 2017 are summarized as follows:

(Dollars in thousands)
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
U. S. Agency securities
 
$
48,874

 
$
6

 
$
(419
)
 
$
48,461

U.S. Sponsored Mortgage-backed securities
 
59,364

 
19

 
(1,267
)
 
58,116

Municipal securities
 
53,216

 
389

 
(1,482
)
 
52,123

Total debt securities
 
161,454

 
414

 
(3,168
)
 
158,700

Equity and other securities
 
13,699

 
370

 
(15
)
 
14,054

Total investment securities available-for-sale
 
$
175,153

 
$
784

 
$
(3,183
)
 
$
172,754


Amortized cost and fair values of investment securities available-for-sale at December 31, 2016 are summarized as follows:

(Dollars in thousands)
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
U. S. Agency securities
 
$
29,234

 
$
7

 
$
(425
)
 
$
28,816

U.S. Sponsored Mortgage-backed securities
 
56,080

 
14

 
(1,362
)
 
54,732

Municipal securities
 
72,075

 
744

 
(2,023
)
 
70,796

Total debt securities
 
157,389

 
765

 
(3,810
)
 
154,344

Equity and other securities
 
7,643

 
381

 

 
8,024

Total investment securities available-for-sale
 
$
165,032

 
$
1,146

 
$
(3,810
)
 
$
162,368


The following table summarizes amortized cost and fair values of debt securities by maturity:

 
 
March 31, 2017
 
 
Available for sale
(Dollars in thousands)
 
Amortized Cost
 
Fair Value
Within one year
 
$
200

 
$
202

After one year, but within five
 
21,426

 
21,390

After five years, but within ten
 
16,822

 
16,638

After ten years
 
123,006

 
120,470

Total
 
$
161,454

 
$
158,700


Investment securities with a carrying value of $74.1 million at March 31, 2017, 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, 2017, the details of which are included in the following table. Although these securities, if sold at March 31, 2017 would result in a pretax loss of $3.2 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. Management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis. 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, 2017, 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 temporary decline in fair value.


12


The following table discloses investments in an unrealized loss position at March 31, 2017:

(Dollars in thousands)
 
Less than 12 months
 
12 months or more
Description and number of positions
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. Agency securities (31)
 
$
34,831

 
$
(349
)
 
$
6,628

 
$
(70
)
U.S. Sponsored Mortgage-backed securities (31)
 
35,851

 
(962
)
 
12,712

 
(305
)
Municipal securities (68)
 
35,260

 
(1,482
)
 

 

Equity and other securities (1)
 
$
1,485

 
$
(15
)
 
$

 
$

 
 
$
107,427

 
$
(2,808
)
 
$
19,340

 
$
(375
)

The following table discloses investments in an unrealized loss position at December 31, 2016:

(Dollars in thousands)
 
Less than 12 months
 
12 months or more
Description and number of positions
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. Agency securities (16)
 
$
28,814

 
$
(425
)
 
$

 
$

U.S. Sponsored Mortgage-backed securities (29)
 
33,209

 
(1,040
)
 
13,919

 
(322
)
Municipal securities (86)
 
42,727

 
(2,023
)
 

 

 
 
$
104,750

 
$
(3,488
)
 
$
13,919

 
$
(322
)

For the three month periods ended March 31, 2017 and 2016, the Company sold investments available-for-sale of $22.9 million, $21.2 million, respectively. These sales resulted in gross gains of $549 thousand and $381 thousand and gross losses of $366 thousand and $0, respectively.

For the three month periods ended March 31, 2017 and 2016, the Company sold no investments held-to-maturity.

Note 4 – Loans and Allowance for Loan Losses

All loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan. As of March 31, 2017 and 2016, net deferred fees of $914 thousand and $987 thousand, respectively, were included in the carrying value of loans.

An allowance for loan losses is maintained to absorb losses from the loan portfolio. The allowance for loan losses 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 allowance for loan losses is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) 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 two components represents the Bank’s allowance for loan losses.

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 allowance for loan losses analysis. Company and bank management tracks 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.

“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.


13


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: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volume and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint. 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. For the three months ended March 31, 2017 and 2016, the liability for unfunded commitments was $284 thousand and $224 thousand, respectively.

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 allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance for loan losses.

The allowance for loan losses 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 allowance for loan losses that is representative of the risk found in the components of the portfolio at any given date.

The following tables summarize the primary segments of the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2017:

(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
Allowance for loan losses balance at December 31, 2016
 
$
7,181

 
$
990

 
$
728

 
$
202

 
$
9,101

     Charge-offs
 
(113
)
 
(141
)
 
(33
)
 
(3
)
 
(290
)
     Recoveries
 
9

 
32

 
1

 
1

 
43

     Provision
 
208

 
204

 
94

 
12

 
518

Allowance for loan losses balance at March 31, 2017
 
$
7,285

 
$
1,085

 
$
790

 
$
212

 
$
9,372

Individually evaluated for impairment
 
$
279

 
$
46

 
$
36

 
$
25

 
$
386

Collectively evaluated for impairment
 
$
7,006

 
$
1,039

 
$
754

 
$
187

 
$
8,986


The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2017:

(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
     Individually evaluated for impairment
 
$
10,300

 
$
1,356

 
$
647

 
$
125

 
$
12,428

     Collectively evaluated for impairment
 
742,960

 
243,235

 
64,523

 
13,636

 
1,064,354

Total Loans
 
$
753,260

 
$
244,591

 
$
65,170

 
$
13,761

 
$
1,076,782



14


The following tables summarize the primary segments of the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2016:

(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
Allowance for loan losses balance at December 31, 2015
 
$
6,066

 
$
1,095

 
$
715

 
$
130

 
$
8,006

     Charge-offs
 
(102
)
 
(67
)
 

 
(22
)
 
(191
)
     Recoveries
 

 

 

 
7

 
7

     Provision
 
257

 
129

 
32

 
207

 
625

Allowance for loan losses balance at March 31, 2016
 
$
6,221

 
$
1,157

 
$
747

 
$
322

 
$
8,447

Individually evaluated for impairment
 
$
946

 
$
212

 
$

 
$
211

 
$
1,369

Collectively evaluated for impairment
 
$
5,275

 
$
945

 
$
747

 
$
111

 
$
7,078


The following table summarizes the primary segments of the Company loan portfolio as of March 31, 2016:

(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
     Individually evaluated for impairment
 
$
10,974

 
$
1,049

 
$
28

 
$
375

 
$
12,426

     Collectively evaluated for impairment
 
742,824

 
235,594

 
68,290

 
16,472

 
1,063,180

Total Loans
 
$
753,798

 
$
236,643

 
$
68,318

 
$
16,847

 
$
1,075,606


Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company also separately evaluates individual consumer loans for impairment. The Chief Credit Officer identifies these loans individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow Management to evaluate the significance of the payment delays and the circumstances surrounding the loan and the borrower.

Once the determination has been made that a loan is impaired, the amount of the impairment is measured using one of three valuation methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.

During December 2013, the Bank purchased $74.3 million in performing commercial real estate secured loans in the northern Virginia area. At the time of acquisition, none of these loans were considered impaired. They were acquired at a premium of roughly 1.024 or $1.8 million, which is being amortized in accordance with ASC 310-20. These loans are collectively evaluated for impairment under ASC 450. The loans continue to be individually monitored for payoff activity, and any necessary adjustments to the premium are made accordingly.

At March 31, 2017 and December 31, 2016, these balances totaled $20.3 million and $20.5 million, respectively. Of the $54 million decrease since originally purchased, MVB refinanced $19.6 million and sold participations totaling $10.5 million and sold $9.7 million back to the institution from which the loans were originally purchased in December 2013. The remainder of the decrease was the result of $6.5 million in loan amortization and $7.7 million in principal paydowns and/or loan payoffs. The weighted average yield on the remaining portfolio is 5.57%.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2017 and December 31, 2016:

15



 
 
Impaired Loans with Specific Allowance
 
Impaired Loans with No Specific Allowance
 
Total Impaired Loans
(Dollars in thousands)
 
Recorded Investment
 
Related Allowance
 
Recorded Investment
 
Recorded Investment
 
Unpaid Principal Balance
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
3,316

 
$
31

 
$
30

 
$
3,346

 
$
4,106

     Commercial Real Estate
 
1,244

 
173

 
1,946

 
3,190

 
3,217

     Acquisition & Development
 
263

 
75

 
3,501

 
3,764

 
6,033

          Total Commercial
 
4,823

 
279

 
5,477

 
10,300

 
13,356

Residential
 
385

 
46

 
971

 
1,356

 
1,417

Home Equity
 
577

 
36

 
70

 
647

 
659

Consumer
 
56

 
25

 
69

 
125

 
335

          Total Impaired Loans
 
$
5,841

 
$
386

 
$
6,587

 
$
12,428

 
$
15,767

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$

 
$

 
$
3,342

 
$
3,342

 
$
4,102

     Commercial Real Estate
 
2,757

 
302

 
892

 
3,649

 
3,676

     Acquisition & Development
 
264

 
74

 
3,526

 
3,790

 
6,059

          Total Commercial
 
3,021

 
376

 
7,760

 
10,781

 
13,837

Residential
 
783

 
122

 
378

 
1,161

 
1,166

Home Equity
 
62

 
36

 
70

 
132

 
135

Consumer
 
16

 
9

 
62

 
78

 
285

          Total Impaired Loans
 
$
3,882

 
$
543

 
$
8,270

 
$
12,152

 
$
15,423


Impaired loans have increased by $276 thousand, or 2.3%, during the first quarter of 2017. This change is the net effect of multiple factors, including the identification of $902 thousand of impaired loans, principal curtailments of $394 thousand, partial charge-offs of $173 thousand, and normal loan amortization.

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:

 
 
Three Months Ended
March 31, 2017
 
Three Months Ended
March 31, 2016
(Dollars in thousands)
 
Average Investment in Impaired Loans
 
Interest Income Recognized on Accrual Basis
 
Interest Income Recognized on Cash Basis
 
Average Investment in Impaired Loans
 
Interest Income Recognized on Accrual Basis
 
Interest Income Recognized on Cash Basis
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
  Commercial Business
 
$
3,349

 
$
39

 
$
13

 
$
3,838

 
$
39

 
$
26

  Commercial Real Estate
 
2,803

 
25

 
26

 
6,541

 
28

 
25

  Acquisition & Development
 
3,775

 
2

 
3

 
2,722

 
2

 
3

    Total Commercial
 
9,927

 
66

 
42

 
13,101

 
69

 
54

Residential
 
1,417

 
2

 
17

 
1,059

 
5

 
3

Home Equity
 
653

 

 

 
28

 

 

Consumer
 
142

 

 

 
198

 

 

Total
 
$
12,139

 
$
68

 
$
59

 
$
14,386

 
$
74

 
$
57


As of March 31, 2017, the Bank held three foreclosed residential real estate properties representing $273 thousand, or 66%, of the total balance of other real estate owned. There are four additional consumer mortgage loans collateralized by residential real estate

16


properties in the process of foreclosure. The total recorded investment in these loans was $331 thousand as of March 31, 2017. These loans are included in the table above and have a total of $12 thousand in specific allowance allocated to them.

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

The following table represents the classes of the 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 March 31, 2017 and December 31, 2016:

(Dollars in thousands)
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
361,762

 
$
3,658

 
$
6,774

 
$
44

 
$
372,238

     Commercial Real Estate
 
239,998

 
26,786

 
3,509

 
254

 
270,547

     Acquisition & Development
 
102,803

 
1,888

 
2,583

 
3,201

 
110,475

          Total Commercial
 
704,563

 
32,332

 
12,866

 
3,499

 
753,260

Residential
 
241,832

 
1,909

 
570

 
280

 
244,591

Home Equity
 
63,813

 
1,220

 
137

 

 
65,170

Consumer
 
13,324

 
344

 
31

 
62

 
13,761

          Total Loans
 
$
1,023,532

 
$
35,805

 
$
13,604

 
$
3,841

 
$
1,076,782

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
377,631

 
$
2,933

 
$
6,833

 
$
69

 
$
387,466

     Commercial Real Estate
 
240,851

 
26,340

 
3,532

 
737

 
271,460

     Acquisition & Development
 
90,875

 
1,905

 
2,584

 
3,226

 
98,590

          Total Commercial
 
709,357

 
31,178

 
12,949

 
4,032

 
757,516

Residential
 
212,869

 
1,664

 
787

 
132

 
215,452

Home Equity
 
64,706

 
582

 
98

 

 
65,386

Consumer
 
14,134

 
302

 
13

 
62

 
14,511

          Total Loans
 
$
1,001,066

 
$
33,726

 
$
13,847

 
$
4,226

 
$
1,052,865


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.

17



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 Management Loan Committee ("MLC"), 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 Management 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 a six-month recent history of payments due. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and or MLC.

The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2017 and December 31, 2016:
(Dollars in thousands)
 
Current
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90+ Days Past Due
 
Total Past Due
 
Total Loans
 
Non-Accrual
 
90+ Days Still Accruing
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Commercial Business
 
$
370,415

 
$
1,326

 
$
423

 
$
74

 
$
1,823

 
$
372,238

 
$
74

 
$

     Commercial Real Estate
 
269,606

 
9

 

 
932

 
941

 
270,547

 
932

 

     Acquisition & Development
 
107,724

 
175

 

 
2,576

 
2,751

 
110,475

 
3,502

 

          Total Commercial
 
747,745

 
1,510

 
423

 
3,582

 
5,515

 
753,260

 
4,508

 

Residential
 
242,976

 
944

 
72

 
599

 
1,615

 
244,591

 
1,269

 

Home Equity
 
65,100

 

 

 
70

 
70

 
65,170

 
620

 

Consumer
 
13,450

 
229

 
13

 
69

 
311

 
13,761

 
122

 

          Total Loans
 
$
1,069,271

 
$
2,683

 
$
508

 
$
4,320

 
$
7,511

 
$
1,076,782

 
$
6,519

 
$