Note 6 — Fair Value of Financial Instruments

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair value as of December 31, 2012 and September 30, 2013 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. All measurements are made on a recurring basis, with the exception of other real estate and impaired loans, which are measured on a non-recurring basis.

	December 31, 2012
(In Thousands)	Level I		Level II		Level III		Total
Assets:
U.S. Government Agency Securities	$	—	$	22,192	$	—	$	22,192
U.S. Sponsored Mortgage backed securities	—		56,376		—		56,376
Other Securities	—		934				934
Loans held for sale	—		85,529		—		85,529
Derivative on loans held for sale	—		1,261		—		1,261
Other Real Estate Owned	—		—		207		207
Impaired Loans	—		—		2,395		2,395

	September 30, 2013
(In Thousands)	Level I		Level II		Level III		Total
Assets:
U.S. Government Agency Securities	$	—	$	59,789	$	—	$	59,789
U.S. Sponsored Mortgage backed securities	—		49,106		—		49,106
Other Securities	—		934		—		934
Loans held for sale	—		46,655		—		46,655
Derivative on loans held for sale	—		2,636		—		2,636
Other Real Estate Owned	—		—		647		647
Impaired loans	—		—		2,762		2,762

The following table’s present additional quantitative information about assets measured at fair value on a non-recurring basis and for which MVB has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
December 31, 2012:
Impaired loans	$	2,395	Appraisal of collateral (1)	Appraisal adjustments (2) Liquidation expenses (2)	0% to -50.0% (-25.2%) -1.5% to 8.0% (-5.5%)
Other real estate owned and repossessed assets	$	207	Appraisal of collateral (1),(3)
September 30, 2013:
Impaired loans	$	2,762	Appraisal of collateral (1)	Appraisal adjustments (2) Liquidation expenses (2)	0% to -50.0% (-25.2%) -1.5% to 8.0% (-5.5%)
Other real estate owned and repossessed assets	$	647	Appraisal of collateral (1),(3)

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 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) Includes qualitative adjustments by management and estimated liquidation expenses.

The following summarizes the methods and significant assumptions used by the Company, the Bank, and as appropriate, other Subsidiaries, in estimating its fair value disclosures for financial instruments.

Cash and due from banks and interest bearing balances: The carrying values of short-term financial instruments including cash and due from banks, interest bearing balances, and certificates of deposit in other banks approximate the fair value of these instruments.

Certificates of deposits: The estimated fair values of certificates of deposits held by Bank at other banks.

Securities: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities.

Loans: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms of borrowers of similar credit quality. No prepayments of principal are assumed.

Loans held for sale: Estimated fair values of loans held for sale approximate their carrying values.

Derivative on loans held for sale: Estimated fair values of the derivative on loans held for sale approximate their carrying values.

Bank owned life insurance: Estimated fair values of bank owned life insurance approximate the cash surrender value of the policies.

Accrued interest receivable and payable: The carrying values of accrued interest receivable and payable approximate their estimated fair values.

Deposits: The estimated fair values of demand deposits (i.e., non-interest bearing checking, NOW and money market), savings accounts and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed.

Repurchase agreements: The fair values of repurchase agreements approximate their carrying values.

FHLB and other borrowings: The fair values of FHLB and other borrowings are based upon rates currently available for borrowings with similar terms and maturities.

Subordinated debt: The fair value of long-term debt approximates its fair value.

Off-balance sheet instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments and standby letters of credit are deemed significant, and therefore, the estimated fair values and carrying values are not shown.

The carrying values and estimated fair values of the Company’s financial instruments are summarized as follows:

					Fair Value Measurements at December 31, 2012
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial assets:
Cash and due from banks	$	21,637	$	21,637	$	21,637	$	—	$	—
Interest bearing balances	3,703		4,127		4,127		—		—
Certificates of deposits	9,427		9,427		9,427		—		—
Securities available-for-sale	79,502		79,502		—		79,502		—
Securities held-to-maturity	35,370		36,218		—		36,218		—
Loans	442,367		453,082		—		—		453,082
Loans held for sale	85,529		85,529		85,529		—		—
Derivative on loans held for sale	1,261		1,261		1,261		—		—
Bank owned life insurance	10,524		10,524		10,524		—		—
Accrued interest receivable	1,778		1,778		1,778		—		—
	$	691,098	$	703,085	$	134,283	$	115,720	$	453,082

Financial liabilities:
Deposits	$	486,519	$	498,244	$	329,083	$	—	$	169,161
Repurchase agreements	70,234		70,234		70,234		—		—
FHLB and other Borrowings	91,617		94,487		—		—		94,487
Accrued interest payable	329		329		329		—		—
Subordinated debt	4,124		4,664		4,664		—		—
	$	652,823	$	667,958	$	404,310	$	—	$	263,648

					Fair Value Measurements at September 30, 2013
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial assets:
Cash and due from banks	$	27,111	$	27,111	$	27,111	$	—	$	—
Interest bearing balances	21,371		21,371		21,371		—		—
Certificates of deposits	9,427		9,427		9,427		—		—
Securities available-for-sale	109,829		109,829		—		109,829		—
Securities held-to-maturity	55,208		52,883		—		52,883		—
Loans	517,458		524,768		—		—		524,768
Loans held for sale	46,655		46,655		46,655		—		—
Derivative on loans held for sale	2,636		2,636		2,636		—		—
Bank owned life insurance	15,945		15,945		15,945		—		—
Accrued interest receivable	2,210		2,210		2,210		—		—
	$	807,850	$	812,835	$	125,355	$	162,712	$	524,768

Financial liabilities:
Deposits	$	620,010	$	610,834	398,977		—		211,857
Repurchase agreements	86,147		86,147		86,147		—		—
FHLB and other Borrowings	52,246		46,656		—		—		46,656
Accrued interest payable	321		321		321		—		—
Subordinated debt	4,124		4,664		4,664		—		—
	$	762,848	$	748,622	$	490,109	$	—	$	258,513

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 or the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s or the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, 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.