SEGMENT REPORTING

The Company has identified three reportable segments: commercial and retail banking; mortgage banking; and financial holding company. Insurance services was previously identified as a reportable segment until entering into an Asset Purchase Agreement, as discussed below and in Note 23, "Discontinued Operations" of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. Revenue from financial holding company activities is mainly comprised of intercompany service income and dividends.

Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The mortgage banking services are conducted by MVB Mortgage. Revenue from insurance services is comprised mainly of commissions on the sale of insurance products.

On June 30, 2016, the Company entered into an Asset Purchase Agreement with USI Insurance Services (“USI”), in which USI purchased substantially all of the assets and assumed certain liabilities of MVB Insurance, which resulted in a pre-tax gain of $6.9 million, as discussed in Note 23, "Discontinued Operations" of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. MVB Insurance retained the assets related to, and continues to operate, its title insurance business. The title insurance business is immaterial in terms of revenue and the Company has reorganized MVB Insurance as a subsidiary of the Bank.

Information about the reportable segments and reconciliation to the consolidated financial statements for the years ended December 31, 2017, 2016, and 2015 are as follows:



	2017
(Dollars in thousands)	Commercial & Retail Banking		Mortgage Banking			Financial Holding Company			Intercompany Eliminations			Consolidated
Revenues:
Interest income	$	52,423	$	4,698		$	4		$	(527	)	$	56,598
Mortgage fee income	736		37,262			—			(849		)	37,149
Insurance and investment services income	563		—			—			—			563
Other income	5,303		(2,372		)	5,466			(5,403		)	2,994
Total operating income	59,025		39,588			5,470			(6,779		)	97,304
Expenses:
Interest expense	9,118		2,317			2,241			(1,375		)	12,301
Salaries and employee benefits	12,266		26,196			5,646			—			44,108
Provision for loan losses	1,967		206			—			—			2,173
Other expense	19,523		8,188			4,085			(5,404		)	26,392
Total operating expenses	42,874		36,907			11,972			(6,779		)	84,974
Income (loss) from continuing operations, before income taxes	16,151		2,681			(6,502		)	—			12,330
Income tax expense (benefit) - continuing operations	5,820		1,082			(2,147		)	—			4,755
Net income (loss) from continuing operations	10,331		1,599			(4,355		)	—			7,575
Income (loss) from discontinued operations	—		—			—			—			—
Income tax expense (benefit) - discontinued operations	—		—			—			—			—
Net income (loss) from discontinued operations	—		—			—			—			—
Net income (loss)	$	10,331	$	1,599		$	(4,355	)	$	—		$	7,575
Preferred stock dividends	—		—			498			—			498
Net income (loss) available to common shareholders	$	10,331	$	1,599		$	(4,853	)	$	—		$	7,077

Capital Expenditures for the year ended December 31, 2017	$	3,226	$	1,187		$	83		$	—		$	4,496
Total Assets as of December 31, 2017	1,533,497		149,323			184,600			(333,118		)	1,534,302
Goodwill as of December 31, 2017	1,598		16,882			—			—			18,480



	2016
(Dollars in thousands)	Commercial & Retail Banking			Mortgage Banking		Financial Holding Company			Insurance			Intercompany Eliminations			Consolidated
Revenues:
Interest income	$	50,413		$	4,285	$	3		$	—		$	(578	)	$	54,123
Mortgage fee income	(252		)	36,960		—			—			(1,035		)	35,673
Insurance and investment services income	420			—		—			—			—			420
Other income	5,485			1,674		5,247			—			(5,294		)	7,112
Total operating income	56,066			42,919		5,250			—			(6,907		)	97,328
Expenses:
Interest expense	8,437			2,082		2,226			—			(1,613		)	11,132
Salaries and employee benefits	11,592			27,696		5,937			—			—			45,225
Provision for loan losses	3,632			—		—			—			—			3,632
Other expense	18,009			8,125		3,144			—			(5,294		)	23,984
Total operating expenses	41,670			37,903		11,307			—			(6,907		)	83,973
Income (loss) from continuing operations, before income taxes	14,396			5,016		(6,057		)	—			—			13,355
Income tax expense (benefit) - continuing operations	4,496			1,954		(2,072		)	—			—			4,378
Net income (loss) from continuing operations	9,900			3,062		(3,985		)	—			—			8,977
Income (loss) from discontinued operations	—			—		6,926			(580		)	—			6,346
Income tax expense (benefit) - discontinued operations	—			—		2,629			(218		)	—			2,411
Net income (loss) from discontinued operations	—			—		4,297			(362		)	—			3,935
Net income (loss)	$	9,900		$	3,062	$	312		$	(362	)	$	—		$	12,912
Preferred stock dividends	—			—		1,128			—			—			1,128
Net income (loss) available to common shareholders	$	9,900		$	3,062	$	(816	)	$	(362	)	$	—		$	11,784

Capital Expenditures for the year ended December 31, 2016	$	1,145		$	220	$	303		$	—		$	—		$	1,668
Total Assets as of December 31, 2016	1,415,735			122,242		180,340			—			(299,513		)	1,418,804
Goodwill as of December 31, 2016	1,598			16,882		—			—			—			18,480



	2015
(Dollars in thousands)	Commercial & Retail Banking		Mortgage Banking		Financial Holding Company			Insurance		Intercompany Eliminations			Consolidated
Revenues:
Interest income	$	40,524	$	3,882	$	2		$	—	$	(308	)	$	44,100
Mortgage fee income	7		30,560		—			—		(1,095		)	29,472
Insurance and investment services income	338				—			—		—			338
Other income	3,721		1,673		4,331			—		(4,580		)	5,145
Total operating income	44,590		36,115		4,333			—		(5,983		)	79,055
Expenses:
Interest expense	6,776		1,647		2,204			—		(1,402		)	9,225
Salaries and employee benefits	11,049		20,774		4,250			—		—			36,073
Provision for loan losses	2,493		—		—			—		—			2,493
Other expense	16,132		7,471		2,534			—		(4,362		)	21,775
Total operating expenses	36,450		29,892		8,988			—		(5,764		)	69,566
Income (loss) from continuing operations, before income taxes	8,140		6,223		(4,655		)	—		(219		)	9,489
Income tax expense (benefit) - continuing operations	2,176		2,394		(1,597		)	—		(87		)	2,886
Net income (loss) from continuing operations	5,964		3,829		(3,058		)	—		(132		)	6,603
Income (loss) from discontinued operations	—		—		—			134		219			353
Income tax expense (benefit) - discontinued operations	—		—		—			53		87			140
Net income (loss) from discontinued operations	—		—		—			81		132			213
Net income (loss)	$	5,964	$	3,829	$	(3,058	)	$	81	$	—		$	6,816
Preferred stock dividends	—		—		575			—		—			575
Net income (loss) available to common shareholders	$	5,964	$	3,829	$	(3,633	)	$	81	$	—		$	6,241

Capital Expenditures for the year ended December 31, 2015	$	1,174	$	354	$	616		$	9	$	—		$	2,153
Total Assets as of December 31, 2015	1,378,988		125,227		148,509			5,017		(273,265		)	1,384,476
Goodwill as of December 31, 2015	1,598		16,882		—			—		—			18,480

Commercial & Retail Banking

For the year ended December 31, 2017, the Commercial & Retail Banking segment earned $10.3 million compared to $9.9 million in 2016. Net interest income increased by $1.3 million, primarily the result of a $1.3 million increase in interest on taxable investment securities and a $734 thousand increase in interest and fees on loans which was offset by a $546 thousand increase in interest on deposits and a $132 thousand increase in interest on FHLB and other borrowings. Noninterest income increased by $949 thousand, primarily the result of a $988 thousand increase in mortgage fee income, a $419 thousand increase on commercial swap fee income, a $447 thousand increase in other operating income, offset by a $557 thousand decrease in gain on sale of securities and a $504 thousand decrease in gain on sale of portfolio loans. Noninterest expense increased by $2.2 million, primarily the result of the following: $674 thousand increase in salaries and employee benefits expense, $599 thousand increase in occupancy and equipment expense, and $227 thousand increase in data processing and communications expense, which was offset by a $209 thousand decrease in professional fees. The $599 thousand increase in occupancy and equipment expense was primarily the result of two new full-service branches opened in 2017 and increased equipment expense related to depreciation and continued maintenance of property and software. The $227 thousand increase in data processing and communications was primarily the result of the core conversion completed in April 2017, along with overall growth in terms of personnel and office space company-wide and the usage of additional products, services, and providers to better serve the client base. In addition, provision expense decreased by $1.7 million. Also, income tax expense increased $1.3 million as a result of both increased net income before income taxes and as a result of tax reform in which the Company was required to re-measure its net deferred tax asset and resulted in an income tax charge of $646 thousand.

Mortgage Banking

For the year ended December 31, 2017, the Mortgage Banking segment earned $1.6 million compared to $3.1 million in 2016. Net interest income increased $178 thousand, noninterest income decreased by $3.7 million, and noninterest expense decreased by $1.4 million. The decrease in noninterest income was primarily the result of a $4.1 million decrease in the gain on derivative. The decrease in the gain on derivatives was largely the result of a 39.0% decrease in the locked mortgage pipeline for 2017 compared to a 31.6% increase in the locked mortgage pipeline for 2016. The decrease in noninterest expense was primarily the result of the following: $1.5 million decrease in salaries and employee benefits expense, which was primarily due to a 15.6% decrease in origination volume and a $1.2 million decrease in the earn out paid to management of the mortgage company related to the 2012 acquisition. Other items that impacted noninterest expense were as follows: a $242 thousand increase in occupancy and equipment expense and a $146 thousand increase in travel, entertainment, dues, and subscriptions expense, which were offset by a $159 thousand decrease in marketing expense and a $148 thousand decrease in mortgage processing expense.

Financial Holding Company

Excluding discontinued operations, for the year ended December 31, 2017, the Financial Holding Company segment lost $4.4 million compared to a loss of $4.0 million in 2016. Interest expense increased $15 thousand, noninterest income increased $219 thousand and noninterest expense increased $650 thousand. In addition, the income tax benefit increased $75 thousand. The increase in noninterest expense was primarily due to a $604 thousand increase in professional fees, a $169 thousand increase in travel, entertainment, dues, and subscriptions expense, a $125 thousand increase in occupancy and equipment expense, and a $100 thousand increase in other operating expense.

Insurance

In June 2016, primarily all the assets of the Insurance segment were sold and the segment was reorganized as a subsidiary of the Bank. There was no insurance segment in 2017. The discontinued insurance segment lost $362 thousand in 2016.