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 June 30, 2020
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: 000-50567
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $1.00 par value	MVBF	The 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 August 5, 2020, the Registrant had 11,964,925 shares of common stock outstanding with a par value of $1.00 per share.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	3
Item 1	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to the Consolidated Financial Statements	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3	Quantitative and Qualitative Disclosures About Market Risk	77
Item 4	Controls and Procedures	77
PART II	OTHER INFORMATION	78
Item 1	Legal Proceedings	78
Item 1A	Risk Factors	78
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	80
Item 3	Defaults Upon Senior Securities	80
Item 4	Mine Safety Disclosures	80
Item 5	Other Information	80
Item 6	Exhibits	81
	SIGNATURES	82

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)

	June 30, 2020		December 31, 2019
	(Unaudited)		(Note 1)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	28,636	$	18,430
Interest bearing balances with banks	50,218		9,572
Total cash and cash equivalents	78,854		28,002
Certificates of deposit with other banks	13,046		12,549
Investment securities available-for-sale, at fair value	220,699		235,821
Equity securities	19,464		18,514
Loans held for sale	242,089		109,788
Loans:	1,494,672		1,374,541
Less: Allowance for loan losses	(17,742)		(11,775)
Net Loans	1,476,930		1,362,766
Premises and equipment, net	24,586		21,974
Bank owned life insurance	35,818		35,374
Accrued interest receivable and other assets	84,439		53,142
Assets of branches held for sale (See Note 1)	—		46,554
Goodwill	19,232		19,630
TOTAL ASSETS	$	2,215,157	$	1,944,114
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	528,527	$	278,547
Interest bearing	1,335,436		986,495
Total deposits	1,863,963		1,265,042
Deposits of branches held for sale (See Note 1)	—		188,270
Accrued interest payable and other liabilities	72,145		41,685
Repurchase agreements	9,815		10,172
FHLB and other borrowings	36,610		222,885
Subordinated debt	4,124		4,124
Total liabilities	1,986,657		1,732,178
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1,000; 20,000 authorized; 733 issued in 2020 and 2019, respectively	7,334		7,334
Common stock, par value $1; 20,000,000 shares authorized; 12,065,627 shares issued and 11,968,425 shares outstanding in 2020 and 11,995,366 shares issued and 11,944,289 shares outstanding in 2019	12,066		11,995
Additional paid-in capital	123,848		122,516
Retained earnings	89,197		72,496
Accumulated other comprehensive loss	(2,193)		(1,321)
Treasury stock, 97,202 shares in 2020 and 51,077 shares in 2019, at cost	(1,752)		(1,084)
Total stockholders’ equity	228,500		211,936
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,215,157	$	1,944,114

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)

	Six Months Ended June 30				Three Months Ended June 30
	2020		2019		2020		2019
INTEREST INCOME
Interest and fees on loans	$	39,088	$	36,231	$	20,149	$	18,569
Interest on deposits with other banks	191		247		80		125
Interest on investment securities - taxable	1,143		1,647		477		768
Interest on tax exempt loans and securities	2,051		1,968		1,068		1,008
Total interest income	42,473		40,093		21,774		20,470
INTEREST EXPENSE
Interest on deposits	6,946		8,671		3,036		4,548
Interest on repurchase agreements	15		25		5		11
Interest on FHLB and other borrowings	825		2,324		252		1,095
Interest on subordinated debt	58		572		23		287
Total interest expense	7,844		11,592		3,316		5,941
NET INTEREST INCOME	34,629		28,501		18,458		14,529
Provision for loan losses	7,734		900		6,596		600
Net interest income after provision for loan losses	26,895		27,601		11,862		13,929
NONINTEREST INCOME
Service charges on deposit accounts	736		648		286		333
Income on bank owned life insurance	444		749		221		224
Interchange and debit card transaction fees	342		322		242		181
Mortgage fee income	26,163		16,534		14,944		9,864
Gain on sale of portfolio loans	130		178		—		123
Insurance and investment services income	396		323		189		167
Gain (loss) on sale of available-for-sale securities, net	830		(168)		554		(50)
Gain (loss) on sale of equity securities, net	30		(7)		30		(7)
Gain on derivatives, net	9,873		1,581		13,435		1,131
Commercial swap fee income	340		518		20		438
Holding gain on equity securities	17		13,767		3		13,587
Compliance consulting income	1,950		—		941		—
Bargain purchase gain	4,671		—		4,671		—
Gain on sale of banking centers	9,631		—		9,631		—
Other operating income	810		707		346		396
Total noninterest income	56,363		35,152		45,513		26,387
NONINTEREST EXPENSES
Salary and employee benefits	38,841		25,014		22,659		13,280
Occupancy expense	2,407		2,351		1,187		1,166
Equipment depreciation and maintenance	1,791		1,758		914		904
Data processing and communications	2,896		1,957		1,733		969
Mortgage processing	1,741		1,525		890		716
Marketing, contributions, and sponsorships	664		508		328		294
Professional fees	4,325		1,709		2,994		881
Printing, postage, and supplies	380		307		203		172
Insurance, tax, and assessment expense	1,030		992		566		487
Travel, entertainment, dues, and subscriptions	2,059		1,594		841		904
Other operating expenses	1,855		1,123		1,018		617
Total noninterest expense	57,989		38,838		33,333		20,390
Income from continuing operations, before income taxes	25,269		23,915		24,042		19,926
Income tax expense - continuing operations	6,187		5,792		6,008		4,995
Net income from continuing operations	$	19,082	$	18,123	18,034		14,931
Income from discontinued operations, before income taxes	$	—	$	600	—		600
Income tax expense - discontinued operations	$	—	$	154	—		154
Net income from discontinued operations	$	—	$	446	—		446
Net income	19,082		18,569		18,034		15,377
Preferred dividends	229		243		$	115	$	122
Net income available to common shareholders	$	18,853	$	18,326	17,919		15,255

4

Earnings per share from continuing operations - basic	$	1.58	$	1.54	$	1.50	$	1.27
Earnings per share from discontinued operations - basic	$	—	$	0.04	$	—	$	0.04
Earnings per share - basic	$	1.58	$	1.58	$	1.50	$	1.31
Earnings per share from continuing operations - diluted	$	1.55	$	1.41	$	1.49	$	1.15
Earnings per share from discontinued operations - diluted	$	—	$	0.03	$	—	$	0.03
Earnings per share - diluted	$	1.55	$	1.44	$	1.49	$	1.18
Weighted average shares outstanding - basic	11,948,790		11,625,903		11,954,813		11,644,061
Weighted average shares outstanding - diluted	12,156,214		13,139,612		12,011,845		13,155,302

See accompanying notes to unaudited consolidated financial statements.

5

MVB Financial Corp. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited) (Dollars in thousands)

	Six Months Ended June 30				Three Months Ended June 30
	2020		2019		2020		2019
Net Income	$	19,082	$	18,569	$	18,034	$	15,377
Other comprehensive (loss) income:
Unrealized holding gains on securities available-for-sale	1,965		6,550		551		4,691
Income tax effect	(531)		(1,769)		(149)		(1,267)
Reclassification adjustment for (gain) loss recognized in income	(830)		168		(554)		50
Income tax effect	225		(45)		150		(13)
Change in defined benefit pension plan	(1,707)		(847)		(1,001)		(518)
Income tax effect	461		228		270		140
Reclassification adjustment for amortization of net actuarial loss recognized in income	210		135		105		68
Income tax effect	(57)		(36)		(28)		(18)
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income	(833)		(126)		960		332
Income tax effect	225		34		(259)		(90)
Total other comprehensive (loss) income	(872)		4,292		45		3,375
Comprehensive income	$	18,210	$	22,861	$	18,079	$	18,752

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 at December 31, 2018	7,834		11,658		116,897		48,274		(6,806)		(1,084)		176,773
Net Income	—		—		—		3,192		—		—		3,192
Other comprehensive income	—		—		—		—		917		—		917
Cash dividends paid ($0.035 per common share)	—		—		—		(408)		—		—		(408)
Dividends on preferred stock	—		—		—		(121)		—		—		(121)
Stock based compensation	—		—		425		—		—		—		425
Common stock options exercised	—		8		86		—		—		—		94
Balance at March 31, 2019	$	7,834	$	11,666	$	117,408	$	50,937	$	(5,889)	$	(1,084)	$	180,872
Net Income	—		—		—		15,377		—		—		15,377
Other comprehensive income	—		—		—		—		3,375		—		3,375
Cash dividends paid ($0.04 per common share)	—		—		—		(464)		—		—		(464)
Dividends on preferred stock	—		—		—		(122)		—		—		(122)
Stock based compensation	—		—		401		—		—		—		401
Common stock options exercised	—		26		211		—		—		—		237
Restricted stock units vested	—		10		(10)		—		—		—		—
Common stock issued from subordinated debt conversion, net of costs	—		62		938		—		—		—		1,000
Balance at June 30, 2019	$	7,834	$	11,764	$	118,948	$	65,728	$	(2,514)	$	(1,084)	$	200,676
Balance at December 31, 2019	$	7,334	$	11,995	$	122,516	$	72,496	$	(1,321)	$	(1,084)	$	211,936
Net Income	—		—		—		1,048		—		—		1,048
Other comprehensive loss	—		—		—		—		(917)		—		(917)
Cash dividends paid ($0.09 per common share)	—		—		—		(1,076)		—		—		(1,076)
Dividends on preferred stock	—		—		—		(114)		—		—		(114)
Stock based compensation	—		—		498		—		—		—		498
Common stock options exercised	—		3		35		—		—		—		38
Common stock repurchased	—		—		—		—		—		(260)		(260)
Balance at March 31, 2020	$	7,334	$	11,998	$	123,049	$	72,354	$	(2,238)	$	(1,344)	$	211,153
Net Income	—		—		—		18,034		—		—		18,034
Other comprehensive income	—		—		—		—		45		—		45
Cash dividends paid ($0.09 per common share)	—		—		—		(1,076)		—		—		(1,076)
Dividends on preferred stock	—		—		—		(115)		—		—		(115)
Stock based compensation	—		—		627		—		—		—		627
Restricted stock units vested	—		49		(49)		—		—		(7)		(7)
Common stock issued related to Paladin acquisition	—		19		221		—		—		—		240
Common stock repurchased	—		—		—		—		—		(401)		(401)
Balance at June 30, 2020	$	7,334	$	12,066	$	123,848	$	89,197	$	(2,193)	$	(1,752)	$	228,500

See accompanying notes to unaudited consolidated financial statements.

7

MVB Financial Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited) (Dollars in thousands)

	Six Months Ended June 30,
	2020		2019
OPERATING ACTIVITIES
Net Income	$	19,082	$	18,569
Adjustments to reconcile net income to net cash used in operating activities:
Net amortization and accretion of investments	638		568
Net amortization of deferred loan costs	381		178
Provision for loan losses	7,734		900
Depreciation and amortization	1,708		1,525
Stock based compensation	1,125		826
Loans originated for sale	(1,334,910)		(641,406)
Proceeds of loans sold	1,228,772		613,841
Mortgage fee income	(26,163)		(16,534)
Gain on sale of available-for-sale securities	(830)		(80)
Loss on sale of available-for-sale securities	—		248
Gain on sale of equity securities	(30)		(2)
Loss on sale of equity securities	—		9
Gain on sale of portfolio loans	(130)		(178)
Income on bank owned life insurance	(444)		(749)
Deferred taxes	1,280		(4,188)
Amortization of operating lease right-of-use asset	15		39
Holding gain on equity securities	(17)		(13,767)
Bargain purchase gain	(4,671)		—
Gain on sale of banking centers	(9,631)		—
Changes in other assets	(32,467)		(12,867)
Changes in other liabilities	27,841		23,208
Net cash used in operating activities	(120,717)		(29,860)
INVESTING ACTIVITIES
Purchases of investment securities available-for-sale	(51,201)		(35,528)
Maturities/paydowns of investment securities available-for-sale	37,637		21,522
Sales of investment securities available-for-sale	41,160		26,616
Purchases of premises & equipment	(2,519)		(629)
Net increase in loans	(55,365)		(22,987)
Purchases of restricted bank stock	(18,615)		(18,568)
Redemptions of restricted bank stock	27,982		17,757
Proceeds from sale of certificates of deposit with banks	—		248
Purchases of certificates of deposit with banks	(497)		—
Proceeds from sale of other real estate owned	4,440		695
Proceeds from death benefit of bank owned life insurance policies	—		688
Purchase of equity securities	(1,260)		(1,250)
Sales of equity securities	357		5,968
Net cash paid for branch divestiture	(136,005)		—
Net cash provided by business combinations	64,633		—
Net cash used in investing activities	(89,253)		(5,468)
FINANCING ACTIVITIES
Net increase in deposits	456,265		68,583
Net decrease in repurchase agreements	(357)		(5,496)
Net change in FHLB & other borrowings	(192,075)		(27,987)
Common stock options exercised	38		331
Common stock repurchased	(668)		—
Cash dividends paid on common stock	(2,152)		(872)
Cash dividends paid on preferred stock	(229)		(243)
Net cash provided by financing activities	260,822		34,316
Increase (decrease) in cash and cash equivalents	50,852		(1,012)
Cash and cash equivalents at beginning of period	28,002		22,221
Cash and cash equivalents at end of period	$	78,854	$	21,209

8

Business combination non-cash disclosures:
Assets acquired in business combination (net of cash received)	$	87,722	$	—
Liabilities assumed in business combination	148,731		—
Supplemental disclosure of cash flow information:
Loans transferred to other real estate owned	$	23	$	79
Cashless stock options exercised	35		—
Restricted stock units vested	49		10
Common stock issued related to Paladin acquisition	240		—
Common stock converted from subordinated debt	—		1,000
Initial recognition of operating lease right-of-use assets	—		12,935
Initial recognition of operating lease liabilities	—		15,659
Cash payments for:
Interest on deposits, repurchase agreements and borrowings	10,264		12,600
Income taxes	1,455		1,096

See accompanying notes to unaudited consolidated financial statements.

9

Notes to the Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies

Nature of Operations

MVB Financial Corp. (“the Company”) is a financial holding company and was organized in 2003. MVB operates principally through its wholly owned subsidiary, MVB Bank, Inc. (“MVB Bank” or the “Bank”). MVB Bank’s subsidiaries include Potomac Mortgage Group (“PMG” which began doing business under the registered trade name “MVB Mortgage”), MVB Insurance, LLC (“MVB Insurance”), MVB Community Development Corporation (“MVB CDC”), ProCo Global, Inc. (“ProCo” which began doing business under the registered trade name Chartwell Compliance “Chartwell”), and Paladin Fraud, LLC (“Paladin”).

Principles of Consolidation and 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, 2019 has been derived from audited financial statements included in the Company’s 2019 filing on Form 10-K. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The accounting and reporting policies of the Company 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, 2019, Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

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

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

Business Combinations

GAAP requires that the acquisition method of accounting, formerly referred to as the purchase method, be used for all business combinations that an acquirer be identified for each business combination. Under GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non-controlling interest in the acquired entity at the acquisition date.

Assets and Liabilities of Branches Held for Sale

On November 21, 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc., a subsidiary of Summit Financial Group, Inc. pursuant to which Summit will purchase certain assets and assume certain liabilities of three branch locations in Berkeley County, WV and one branch location in Jefferson County, WV. Pursuant to the terms of the Purchase Agreement, Summit agreed to assume certain deposit liabilities and to acquire certain loans, as well as cash, real property, personal property, and other fixed assets associated with the branch locations. The Company closed this transaction on April 24, 2020, and as such, no assets or liabilities of branches are classified as held for sale as of June 30, 2020. The Company recognized a gain on sale of banking centers of $9.6 million.

10

Assets to be acquired and liabilities to be assumed are summarized as follows:

(Dollars in thousands)	As of December 31, 2019,
Loans	$	42,916
Premises and equipment, net	3,638
Assets of branches held for sale	$	46,554
Noninterest-bearing deposits	$	19,251
Interest-bearing deposits	169,019
Deposits of branches held for sale	$	188,270

Coronavirus Disease (“COVID-19”) Pandemic

The consolidated financial statements contained in this Quarterly Report as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of June 30, 2020. During 2020, economies throughout the world have been severely disrupted by the effects of the quarantines, business closures, and the reluctance of individuals to leave their homes as a result of the outbreak of COVID-19. The full impact of COVID-19 is unknown and rapidly evolving. 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. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect the business and the Company’s financial condition and results of operations. The extent to which the COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. Banking and financial services have been designated essential businesses; therefore, the Company’s operations are continuing. The Company is currently evaluating and quantifying the impact on its consolidated financial statements.

In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The CARES Act also established the Paycheck Protection Program (“PPP”), to be administered by the U.S. Small Business Administration (“SBA”), whereby certain small businesses are eligible for a loan with an interest rate of 1% to fund payroll expenses, rent, and related costs. The PPP loan may be forgiven if the funds are used for payroll and other qualified expenses. The Company is actively participating with the PPP, evaluating other programs available to assist our clients, and providing consumer deferrals consistent with government-sponsored enterprise (“GSE”) guidelines. The Company originated 455 PPP loans with balances of $89.8 million as of June 30, 2020. For more information on the PPP loans, see Note 4, “Loans and Allowance for Loan Losses” of the Notes to the Consolidated Financial Statements, included in Item 1, Financial Statements, of this Quarterly Report on Form 10-Q.

Purchased Credit Impaired Loans

Through the FDIC-assisted acquisition of The First State Bank (“First State”), the Company purchased individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.

Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan's or pool's contractual principal and interest over expected cash flows is not recorded (non-accretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

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Note 2 – Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 ASC 715-20 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal, addition, and 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-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 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include additions, modification, and removal of disclosure requirements. The ASU removed the following disclosure requirements: 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) the policy for timing of transfers between levels, 3) the valuation process for Level 3 fair value measurements, and 4) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: 1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: 1) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; 2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and 3) clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 is effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The Company adopted this standard and there was no material impact.

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 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

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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 was initially effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company has formed an implementation team led by the CFO, that also includes other lines of business and functions within the Company. The Company has also engaged a third party to assist with a data gap analysis and will utilize the data to determine the impact of the pronouncement. Additionally, the Company has researched and acquired software to assist in the development of models that can meet the requirements of the new guidance. While this standard may potentially have a material impact on the Company’s consolidated financial statements, we are still in the process of completing our evaluation. 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. As the Company is a smaller reporting company for fiscal year 2019, the proposed delay would be applicable.

Note 3 – Investment Securities

There were no held-to-maturity securities at June 30, 2020 or December 31, 2019.

Amortized cost and fair values of investment securities available-for-sale at June 30, 2020 are summarized as follows:

(Dollars in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
U. S. Agency securities	$	41,417	$	833	$	(270)	$	41,980
U.S. Sponsored Mortgage-backed securities	33,753		573		(52)		34,274
Municipal securities	126,203		4,110		(108)		130,205
Total debt securities	201,373		5,516		(430)		206,459
Other securities	14,161		182		(103)		14,240
Total investment securities available-for-sale	$	215,534	5,698		$	(533)	$	220,699

Amortized cost and fair values of investment securities available-for-sale at December 31, 2019 are summarized as follows:

(Dollars in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss		Fair Value
U. S. Agency securities	$	52,046	$	199	$	(249)	$	51,996
U.S. Sponsored Mortgage-backed securities	58,748		188		(624)		58,312
Municipal securities	108,750		4,399		(57)		113,092
Total debt securities	219,544		4,786		(930)		223,400
Other securities	12,247		181		(7)		12,421
Total investment securities available-for-sale	$	231,791	$	4,967	$	(937)	$	235,821

The following table summarizes amortized cost and fair values of available-for-sale debt securities by contractual maturity:

	June 30, 2020
(Dollars in thousands)	Amortized Cost		Fair Value
Within one year	$	90	$	90
After one year, but within five	8,527		8,907
After five years, but within ten	22,148		22,946
After ten years	170,608		174,516
Total	$	201,373	$	206,459

Investment securities with a carrying value of $119.5 million at June 30, 2020, 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 June 30, 2020, the details of which are included in the following table. Although these securities, if sold at June 30, 2020 would result in a pretax loss of $533 thousand, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the

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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 June 30, 2020, 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.

The following table discloses investments in an unrealized loss position at June 30, 2020:

(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 (22)	$	4,652	$	(74)	$	13,452	$	(196)
U.S. Sponsored Mortgage-backed securities (9)	2,625		(18)		3,174		(34)
Municipal securities (9)	6,134		(108)		—		—
Other securities (5)	4,416		(103)		—		—
	$	17,827	$	(303)	$	16,626	$	(230)

The following table discloses investments in an unrealized loss position at December 31, 2019:

(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 (26)	$	8,160	$	(59)	$	15,399	$	(190)
U.S. Sponsored Mortgage-backed securities (40)	16,660		(170)		27,498		(454)
Municipal securities (13)	6,018		(40)		828		(17)
Other securities (2)	1,093		(7)		—		—
	$	31,931	$	(276)	$	43,725	$	(661)

For the three-month periods ended June 30, 2020 and 2019, the Company sold investments available-for-sale of $30.9 million and $12.9 million, respectively. These sales resulted in gross gains of $554 thousand and $47 thousand and gross losses of $0 and $97 thousand, respectively.

For the six-month periods ended June 30, 2020 and 2019, the Company sold investments available-for-sale of $41.2 million and $26.6 million, respectively. These sales resulted in gross gains of $830 thousand and $80 thousand and gross losses of $0 and $248 thousand, respectively.

For the three-month periods ended June 30, 2020 and 2019, the Company sold equity investments totaling $357 thousand and $6.0 million. These sales resulted in gross gains of $30 thousand and $0 and gross losses of $0 and $7 thousand, respectively.

For the six-month periods ended June 30, 2020 and 2019, the Company sold equity investments totaling $357 thousand and $6.0 million, respectively. These sales resulted in gross gains of $30 thousand and $2 thousand and gross losses of $0 and $9 thousand, respectively.

For the three-month periods ended June 30, 2020 and 2019, the Company recognized unrealized holding gains on equity securities of $3 thousand and $13.6 million, respectively. For the six-month periods ended June 30, 2020 and 2019, the Company recognized unrealized holding gains on equity securities of $17 thousand and $13.8 million, respectively. These were recorded in noninterest income in the consolidated statements of income.

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Note 4 – Loans and Allowance for Loan Losses

The components of loans in the Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, were as follows:

(Dollars in thousands)	June 30, 2020		December 31, 2019
Commercial and Non-Residential Real Estate	$	1,127,792	$	1,063,828
Residential Real Estate	279,626		271,604
Home Equity	37,383		35,106
Consumer	3,525		3,697
Purchased credit impaired loans:
Commercial and Non-Residential Real Estate	19,799		—
Residential Real Estate	27,033		—
Home Equity	—		—
Consumer	1,603		—
Total Loans	$	1,496,761	$	1,374,235
Deferred loan origination (fees) and costs, net	(2,089)		306
Loans receivable	$	1,494,672	$	1,374,541

Performing loans acquired as a result of the FDIC-assisted acquisition of First State are included with the Company's legacy loan portfolio within this Note. The purchased credit impaired loans acquired from First State are discussed in a separate section, Purchased Credit Impaired Loans, at the end of this Note and are not included, unless otherwise indicated.

For loans with maturities over one year, loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan. For loans with an original maturity of less than one year, loan origination fees and direct loan origination costs are recognized when incurred.

An allowance for loan losses (“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 (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 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 performing loans and purchased credit impaired loans acquired from First State, were $2.1 million and $2.0 million, while the related reserves were $69 thousand and $139 thousand as of June 30, 2020 and December 31, 2019. 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 below in the impaired loans by class table, which are based on the federal call code assigned to each loan, provide the starting point for the ALL 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.

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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, conclusion of loan reviews, audits, and exams, 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 June 30, 2020 and December 31, 2019, the liability for unfunded commitments related to loans held for investment, excluding loans acquired from First State, was $332 thousand.

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 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.

The following tables summarize 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 as of June 30, 2020:

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
December 31, 2019	$	10,098	$	1,272	$	327	$	78	$	11,775
Charge-offs	(1,756)		—		(23)		—		(1,779)
Recoveries	6		—		4		2		12
Provision	7,053		574		(44)		(22)		7,561
ALL balance at June 30, 2020	$	15,401	$	1,846	$	264	$	58	$	17,569
Individually evaluated for impairment	$	1,547	$	—	$	—	$	—	$	1,547
Collectively evaluated for impairment	$	13,854	$	1,846	$	264	$	58	$	16,022

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
ALL balance at March 31, 2020	$	9,597	$	1,272	$	236	$	56	$	11,161
Charge-offs	—		—		(23)		—		(23)
Recoveries	6		—		2		—		8
Provision	5,798		574		49		2		6,423
ALL balance at June 30, 2020	$	15,401	$	1,846	$	264	$	58	$	17,569

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The following table summarizes the primary segments of the Company's loan portfolio as of June 30, 2020:

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
Individually evaluated for impairment	$	14,372	$	3,082	$	102	$	—	$	17,556
Collectively evaluated for impairment	1,113,420		276,544		37,281		3,525		1,430,770
Total Loans	1,127,792		279,626		37,383		3,525		1,448,326

The following tables summarize 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 as of June 30, 2019:

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
December 31, 2018	$	8,605	$	1,405	$	684	$	245	$	10,939
Charge-offs	(666)		—		—		(10)		(676)
Recoveries	1		1		2		1		5
Provision	1,031		(177)		26		20		900
ALL balance at June 30, 2019	$	8,971	$	1,229	$	712	$	256	$	11,168
Individually evaluated for impairment	$	534	$	—	$	—	$	—	$	534
Collectively evaluated for impairment	$	8,437	$	1,229	$	712	$	256	$	10,634

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
ALL balance at March 31, 2019	$	8,864	$	1,417	$	704	$	257	$	11,242
Charge-offs	(666)		—		—		(10)		(676)
Recoveries	1		—		1		—		2
Provision (recovery)	772		(188)		7		9		600
ALL balance at June 30, 2019	$	8,971	$	1,229	$	712	$	256	$	11,168

The following table summarizes the primary segments of the Company's loan portfolio as of June 30, 2019:

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
Individually evaluated for impairment	$	7,771	$	3,112	$	250	$	37	$	11,170
Collectively evaluated for impairment	977,059		270,715		58,643		8,812		1,315,229
Total Loans	$	984,830	$	273,827	$	58,893	$	8,849	$	1,326,399

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 evaluates residential mortgage loans, home equity lines of credit, and consumer loans in homogeneous pools, rather than on an individual basis, when each of those loans are below specific thresholds based on outstanding principal balance. Such loans that individually exceed these thresholds are evaluated individually 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.

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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 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 SBA Paycheck Protection Program loans –This segment includes the loan originated through the recently created Small Business Administration’s Paycheck Protection Program 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 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 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, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2020 and December 31, 2019:

	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
June 30, 2020
Commercial
Commercial Business	$	8,637	$	1,068	$	661	$	9,298	$	10,499
Commercial Real Estate	2,100		479		992		3,092		3,198
Acquisition & Development	—		—		2,035		2,035		3,435
SBA Paycheck Protection Program	—		—		—		—		—
Total Commercial	10,737		1,547		3,688		14,425		17,132
Residential	—		—		3,212		3,212		3,372
Home Equity	—		—		111		111		137
Consumer	—		—		—		—		—
Total Impaired Loans	$	10,737	$	1,547	$	7,011	$	17,748	$	20,641
December 31, 2019
Commercial
Commercial Business	$	2,606	$	249	$	644	$	3,250	$	4,308
Commercial Real Estate	1,786		325		295		2,081		2,171
Acquisition & Development	—		—		2,070		2,070		3,467
SBA Paycheck Protection Program	—		—		—		—		—
Total Commercial	4,392		574		3,009		7,401		9,946
Residential	—		—		1,953		1,953		2,045
Home Equity	—		—		95		95		100
Consumer	—		—		34		34		35
Total Impaired Loans	$	4,392	$	574	$	5,091	$	9,483	$	12,126

Excluding loans acquired from First State, impaired loans have increased by $8.1 million, or 85.1%, during the six months ended June 30, 2020. This change is the net effect of multiple factors, including the identification of $8.2 million of impaired loans, curtailments of $348 thousand, the foreclosure of one consumer loan which required the reclassification of $23 thousand to other real estate owned, the reclassification of $26 thousand to performing loans based on improved repayment performance, and normal loan amortization of $295 thousand.

The $8.2 million of loans recently classified as impaired are primarily concentrated in a single commercial loan relationship that includes three loans for a total of $6.1 million, or 74.4% of the total of recently impaired loans. The remaining $2.1 million represents two unrelated commercial loans totaling $718 thousand, four unrelated mortgage loans totaling $1.4 million, and a single home equity line of credit in the amount of $34 thousand.

Impaired loans acquired from First State, excluding purchased credit impaired loans, totaled $192 thousand as of June 30, 2020.

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

	Six Months Ended June 30, 2020						Three Months Ended June 30, 2020
(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	$	3,972	$	1	$	—	$	4,681	$	1	$	—
Commercial Real Estate	3,054		52		52		3,211		26		29
Acquisition & Development	2,043		57		19		2,038		29		—
SBA Paycheck Protection Program	—		—		—		—		—		—
Total Commercial	9,069		110		71		9,930		56		29
Residential	2,547		11		9		2,712		6		4
Home Equity	110		—		—		120		—		—
Consumer	10		—		—		—		—		—
Total	$	11,736	$	121	$	80	$	12,762	$	62	$	33

	Six Months Ended June 30, 2019						Three Months Ended June 30, 2019
(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	$	3,516	$	—	$	—	$	3,424	$	—	$	—
Commercial Real Estate	3,809		81		83		3,579		40		45
Acquisition & Development	2,194		61		60		2,173		31		31
SBA Paycheck Protection Program	—		—		—		—		—		—
Total Commercial	9,519		142		143		9,176		71		76
Residential	2,990		7		7		3,123		3		4
Home Equity	166		1		1		210		1		1
Consumer	51		—		—		23		—		—
Total	$	12,726	$	150	$	151	$	12,532	$	75	$	81

As of June 30, 2020, the Bank’s other real estate owned balance totaled $1.2 million, excluding other real estate owned acquired from First State. The Bank held three foreclosed residential real estate properties representing $357 thousand, or 30%, of the total balance of other real estate owned. These properties are held primarily as a result of the foreclosures of one commercial loan relationship, which included two properties for a total of $294 thousand. The remaining residential real estate property, with a book balance of $63 thousand, was the result of the foreclosure of an unrelated borrower. The remaining $826 thousand, or 70%, of other real estate owned is the result of the foreclosure of two unrelated commercial development loans. There are four additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $214 thousand as of June 30, 2020. These loans are included in the table above and have no specific allowance allocated to them.

As of June 30, 2019, the Bank’s other real estate owned balance totaled $1.4 million. The Bank held twelve foreclosed residential real estate properties representing $583 thousand, or 41%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily two commercial loan relationships, one of which included two properties for a total of $294 thousand, while the other included seven properties for a total of $174 thousand. The three remaining residential real estate properties, totaling $115 thousand, were result of the foreclosure of three unrelated borrowers. The remaining $826 thousand, or 59%, of other real estate owned is the result of the foreclosure of three unrelated commercial development loans. There are two additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $516 thousand as of June 30, 2019. These loans are included in the table above and have no specific allowance allocated to them.

As of June 30, 2020, other real estate owned acquired from the acquisition of First State totaled $7.7 million, a decrease of $4.4 million since the acquisition on April 3, 2020. During the period between acquisition and June 30, 2020, there were 81 properties sold totaling $4.4 million.

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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 $1 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 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 June 30, 2020 and December 31, 2019:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2020
Commercial
Commercial Business	$	463,570	$	8,782	$	9,497	$	—	$	481,849
Commercial Real Estate	365,802		53,890		7,028		—		426,720
Acquisition & Development	114,343		10,487		4,631		—		129,461
SBA Paycheck Protection Program	89,762		—		—		—		89,762
Total Commercial	1,033,477		73,159		21,156		—		1,127,792
Residential	275,357		1,400		2,758		111		279,626
Home Equity	36,899		382		102		—		37,383
Consumer	3,489		36		—		—		3,525
Total Loans	$	1,349,222	$	74,977	$	24,016	$	111	$	1,448,326
December 31, 2019
Commercial
Commercial Business	$	511,590	$	17,398	$	11,894	$	—	$	540,882
Commercial Real Estate	406,712		3,564		1,494		—		411,770
Acquisition & Development	106,428		1,869		2,879		—		111,176
SBA Paycheck Protection Program	—		—		—		—		—
Total Commercial	1,024,730		22,831		16,267		—		1,063,828
Residential	267,367		1,946		2,177		114		271,604
Home Equity	34,641		383		82		—		35,106
Consumer	3,613		56		28		—		3,697
Total Loans	$	1,330,351	$	25,216	$	18,554	$	114	$	1,374,235

Excluding the loans acquired from First State, loans classified as Special Mention totaled $74.8 million and $25.2 million as of June 30, 2020 and December 31, 2019, respectively. The increase of $49.6 million, or 197%, was concentrated in the commercial

21

loan portfolio. This increase is primarily the result of the risk grade downgrade of six relationships, totaling $66.4 million. These relationships represent borrowers in industries that now represent increased risk as a result of the COVID-19 pandemic. More specifically, two relationships with loans totaling $30.8 million, include the financing on six separate hotel properties. An additional $30.0 million of the total represents loans to two relationships that were originated to finance three separate retail commercial real estate projects. The fifth relationship includes $3.4 million in loans originated to finance movie cinemas, while the final relationship includes $2.2 million in loans originated to finance an owner-occupied property that houses a private school. Offsetting these additions to the total of Special Mention loans were two unrelated commercial loans which were paid in full since December 31, 2019, for a total of $11.7 million. Additionally, the total was impacted by the charge-off of a $1.8 million government lease finance loan stemming from the non-renewal of the underlying lease agreement. Lastly, a $1.9 million loan originated to finance the infrastructure of residential home sites was reclassified as Substandard in the second quarter of 2020. These lots are adjacent to a resort hotel property and are dependent on the hotel operations for repayment. These matters are being monitored and any significant developments will result in reevaluation of the risk grades, where appropriate, and the potential recognition of future recoveries.

Excluding loans acquired from First State, loans classified as Substandard totaled $23.9 million and $18.6 million as of June 30, 2020 and December 31, 2019, respectively. The increase of $5.3 million, or 29%, was concentrated in the commercial loan portfolio. The increase is primarily the result of the risk grade downgrade of two unrelated commercial loans totaling $6.7 million. These loans include a $4.8 million loan originated to finance a hotel property, and the $1.9 million residential infrastructure loan noted above. Additionally, the risk grade downgrade of twelve unrelated commercial loans totaling $967 thousand further impacted the total of Substandard commercial loans. Meanwhile, Substandard mortgage loans increased by $451 thousand as a result of long-term erratic payment performance that has required non-accrual status of these loans. Meanwhile, the total increase of Substandard commercial loans was offset by the $1.8 million decrease in the outstanding balance of a performing Substandard loan, which is classified due to identified operational risks, and the payoff of an unrelated loan in the amount of $537 thousand. These matters are being monitored and any significant developments will result in reevaluation of the risk grades.

Loans acquired from First State classified as Special Mention and Substandard, excluding purchased credit impaired loans, totaled $182 thousand and $130 thousand, respectively, as of June 30, 2020.

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 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 on-time payments. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or MLC.

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The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and non-accrual loans as of June 30, 2020 and December 31, 2019:

(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
June 30, 2020
Commercial
Commercial Business	$	481,455	$	152	$	—	$	242	$	394	$	481,849	$	8,899	$	—
Commercial Real Estate	425,824		—		—		896		896		426,720		1,333		—
Acquisition & Development	128,672		—		—		789		789		129,461		378		—
SBA Paycheck Protection Program	89,762		—		—		—		—		89,762		—		—
Total Commercial	1,125,713		152		—		1,927		2,079		1,127,792		10,610		—
Residential	277,230		—		647		1,749		2,396		279,626		2,734		—
Home Equity	36,999		228		—		156		384		37,383		111		—
Consumer	3,503		3		19		—		22		3,525		—		—
Total Loans	$	1,443,445	$	383	$	666	$	3,832	$	4,881	$	1,448,326	$	13,455	$	—
December 31, 2019
Commercial
Commercial Business	$	537,602	$	3,189	$	47	$	44	$	3,280	$	540,882	$	2,848	$	—
Commercial Real Estate	411,070		522		178		—		700		411,770		295		—
Acquisition & Development	110,717		180		—		279		459		111,176		390		—
SBA Paycheck Protection Program	—		—		—		—		—		—		—		—
Total Commercial	1,059,389		3,891		225		323		4,439		1,063,828		3,533		—
Residential	267,515		3,003		549		537		4,089		271,604		1,461		—
Home Equity	34,382		545		84		95		724		35,106		95		—
Consumer	3,610		1		58		28		87		3,697		34		—
Total Loans	$	1,364,896	$	7,440	$	916	$	983	$	9,339	$	1,374,235	$	5,123	$	—

Troubled Debt Restructurings

The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. At June 30, 2020 and December 31, 2019, the Bank had specific reserve allocations for TDR’s of $1.2 million and $527 thousand, respectively.

Loans considered to be troubled debt restructured loans totaled $13.9 million and $7.7 million as of June 30, 2020 and December 31, 2019, respectively. Of these totals, $4.3 million and $4.4 million, respectively, represent accruing troubled debt restructured loans and represent 24% and 46%, respectively of total impaired loans. Meanwhile, as of June 30, 2020, $3.0 million represent four loans to two borrowers that have defaulted under the restructured terms. The largest of these loans, at $2.3 million, is a commercial loan and the other three of these loans, totaling $657 thousand, are commercial acquisition and development loans that were considered TDR’s 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 June 30, 2020 and December 31, 2019.

Three commercial loans to one borrower totaling $6.1 million were classified as TDR’s in the three months ended June 30, 2020. Upon the identification of financial difficulties on the part of the borrowers, the loans were modified to allow for extended interest-only payments. Meanwhile, one mortgage loan with a balance of $87 thousand was classified as a TDR as a result of extended repayment terms. These loans have paid as agreed under their modified terms.

During the quarter ended June 30, 2020, no restructured loan defaulted under their modified terms that were not already classified as non-performing for having previously defaulted under their modified terms.

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Two unrelated commercial loans totaling $336 thousand were classified as TDR’s during the six months ended June 30, 2019. Upon the identification of financial difficulties on the part of the borrowers, these loans were modified to lower loan payments by lengthening the amortization period beyond what is typical for a commercial loan of this type. These loans have paid as agreed since they were renewed under modified terms.

	New TDR's 1
	Six Months Ended June 30, 2020					Three Months Ended June 30, 2020
(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial
Commercial Business	5	$	6,237	$	6,232	3	$	6,083	$	6,083
Commercial Real Estate	2	159		159		—	—		—
Acquisition & Development	—	—		—		—	—		—
SBA Paycheck Protection Program	—	—		—		—	—		—
Total Commercial	7	6,396		6,391		3	6,083		6,083
Residential	1	87		87		1	87		87
Home Equity	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	8	6,483		6,478		4	6,170		6,170

	Six Months Ended June 30, 2019					Three Months Ended June 30, 2019
(Dollars in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial
Commercial Business	2	$	336	$	333	1	$	68	$	68
Commercial Real Estate	—	—		—		—	—		—
Acquisition & Development	—	—		—		—	—		—
SBA Paycheck Protection Program	—	—		—		—	—		—
Total Commercial	2	336		333		1	68		68
Residential	—	—		—		—	—		—
Home Equity	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	336	$	333	1	$	68	$	68

¹ The pre-modification and post-modification balances represent the balances outstanding immediately before and after modification of the loan.

Purchased Credit Impaired Loans

As a result of the FDIC-assisted acquisition of First State on April 3, 2020, the Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The Company did not hold any purchased credit impaired loans as of June 30, 2019 or December 31, 2019.

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The carrying amount of the purchased credit impaired loan portfolio is as follows:

(Dollars in thousands)	As of June 30, 2020
Commercial	$	20,904
Residential	25,928
Home Equity	—
Consumer	1,603
Outstanding balance	$	48,435
Carrying amount, net of allowance	$	48,262

Accretable yield, or income expected to be collected, is as follows:

(Dollars in thousands)	As of June 30, 2020
Beginning balance	$	—
New loans purchased	11,746
Accretion of income	(959)
Reclassification from non-accretable difference	545
Disposals	—
Ending balance	$	11,332

For the purchased credit impaired loan portfolio disclosed above, the Company increased the allowance for loan losses by $173 thousand during the three and six month periods ended June 30, 2020. No allowances for loan losses were reversed during the three and six month periods ended June 30, 2020.

Purchased credit impaired loans purchased during the three and six month periods ended June 30, 2020, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

(Dollars in thousands)	As of June 30, 2020
Contractually required payments receivable of loans purchased during the period:
Commercial	$	36,046
Residential	47,787
Home Equity	—
Consumer	2,990
Cash flows expected to be collected at acquisition	$	86,823
Fair value of loans acquired at acquisition	$	50,235

Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected and, as of June 30, 2020, the Company held no such loans.

25

The following tables summarize 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 as of June 30, 2020 for the purchased credit impaired loan portfolio:

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
December 31, 2019	$	—	$	—	$	—	$	—	$	—
Charge-offs	—		—		—		—		—
Recoveries	—		—		—		—		—
Provision	121		52		—		—		173
ALL balance at June 30, 2020	$	121	$	52	$	—	$	—	$	173
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	$	121	$	52	$	—	$	—	173

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
ALL balance at March 31, 2020	$	—	$	—	$	—	$	—	$	—
Charge-offs	—		—		—		—		—
Recoveries	—		—		—		—		—
Provision	121		52		—		—		173
ALL balance at June 30, 2020	$	121	$	52	$	—	$	—	$	173

The following table summarizes the primary segments of the Company's purchased credit impaired loan portfolio as of June 30, 2020:

(Dollars in thousands)	Commercial		Residential		Home Equity		Consumer		Total
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	19,799		27,033		—		1,603		48,435
Total Loans	19,799		27,033		—		1,603		48,435

The following table represents the classes of the purchased credit impaired 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 June 30, 2020:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2020
Commercial
Commercial Business	$	14,623	$	1,425	$	402	$	—	$	16,450
Commercial Real Estate	1,340		—		16		—		1,356
Acquisition & Development	1,853		—		140		—		1,993
Total Commercial	17,816		1,425		558		—		19,799
Residential	26,013		—		1,020		—		27,033
Home Equity	—		—		—		—		—
Consumer	1,128		233		242		—		1,603
Total Loans	$	44,957	$	1,658	$	1,820	$	—	$	48,435

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The following table presents the classes of the purchased credit impaired loan portfolio summarized by aging categories of performing loans and non-accrual loans as of June 30, 2020:

(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
June 30, 2020
Commercial
Commercial Business	$	14,615	$	230	$	14	$	1,591	$	1,835	$	16,450	$	448	$	—
Commercial Real Estate	1,292		48		—		16		64		1,356		64		—
Acquisition & Development	1,668		144		41		140		325		1,993		140		—
Total Commercial	17,575		422		55		1,747		2,224		19,799		652		—
Residential	21,263		935		568		4,267		5,770		27,033		3,496		—
Home Equity	—		—		—		—		—		—		—		—
Consumer	1,354		4		3		242		249		1,603		241		—
Total Loans	$	40,192	$	1,361	$	626	$	6,256	$	8,243	$	48,435	$	4,389	$	—

As the Company's purchased credit impaired loan portfolio is accounted for in pools with similar risk characteristics in accordance with ASC 310-30, 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.

Note 5 – Premises and Equipment

Premises and equipment were as follows:

(Dollars in thousands)	June 30, 2020		December 31, 2019
Land	$	3,936	$	3,105
Buildings and improvements	14,350		13,352
Furniture, fixtures and equipment	16,440		15,553
Construction in progress	977		1,019
Leasehold improvements	2,951		1,985
	38,654		35,014
Accumulated depreciation	(14,068)		(13,040)
Net premises and equipment	$	24,586	$	21,974

The Company leases certain premises and equipment under operating and finance leases. At June 30, 2020, the Company had lease liabilities totaling $19.6 million and right-of-use assets totaling $18.3 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the three and six months ended June 30, 2020, the weighted average remaining lease term for finance leases was 2.2 years and the weighted average discount rate used in the measurement of finance lease liabilities was 2.80%. For the three and six months ended June 30, 2020, the weighted average remaining lease term for operating leases was 10.8 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.33%.

Lease costs were as follows:

(Dollars in thousands)	Six Months Ended June 30, 2020		Three Months Ended June 30, 2020		Six Months Ended June 30, 2019		Three Months Ended June 30, 2019
Amortization of right-of-use assets, finance leases	$	36	$	18	$	40	$	20
Interest on lease liabilities, finance leases	2		1		4		2
Operating lease cost	1,121		577		1007		477
Short-term lease cost	26		12		41		16
Variable lease cost	20		10		20		10
Total lease cost	$	1,205	$	618	$	1,112	$	525

27

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the six months ended June 30, 2020.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more are as follows:

	June 30, 2020
(Dollars in thousands)	Finance Leases		Operating Leases
2020	$	77	$	1,337
2021	77		1,334
2022	13		1,348
2023	—		1,246
2024	—		1,214
2025 and thereafter	—		17,219
Total future minimum lease payments	$	167	$	23,698
Less: Amounts representing interest	(5)		(4,211)
Present value of net future minimum lease payments	$	162	$	19,487

Note 6 – Deposits

Deposits were as follows:

(Dollars in thousands)	June 30, 2020		December 31, 2019
Noninterest-bearing demand	$	528,527	$	278,547
Interest-bearing demand	355,324		351,435
Savings and money markets	536,378		363,026
Time deposits, including CDs and IRAs	443,734		272,034
Total deposits	$	1,863,963	$	1,265,042
Time deposits that meet or exceed the FDIC insurance limit	$	8,420	$	8,955

Maturities of time deposits were as follows:

(Dollars in thousands)	June 30, 2020
2020	$	271,291
2021	79,804
2022	61,148
2023	20,388
2024	11,103
Total	$	443,734

Note 7 – Borrowed Funds

Short-term borrowings

Along with traditional deposits, the Bank has access to short-term borrowings from the FHLB, Federal Reserve discount window borrowings, and Fed Funds purchased from correspondent banks to fund its operations and investments. Short-term borrowings totaled $0.0 million at June 30, 2020, compared to $192.1 million at December 31, 2019.

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Information related to short-term borrowings is summarized as follows:

(Dollars in thousands)	As of and for the three months ended June 30, 2020			As of and for the year ended December 31, 2019
Balance at end of period	$	—		$	192,063
Average balance during the period	63,635			187,226
Maximum month-end balance	154,248			240,811
Weighted-average rate during the period	0.23		%	2.24		%
Weighted-average rate at end of period	0.39		%	1.81		%

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 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 and included in repurchase agreements on the consolidated balance sheets. 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 June 30, 2020 and December 31, 2019. These borrowings were collateralized with investment securities with a carrying value of $10.0 million and $10.5 million at June 30, 2020 and December 31, 2019, respectively, and were comprised of U.S. Government Agencies and Mortgage backed securities. Declines in the value of the collateral would require the Company to increase the amounts of securities pledged.

Repurchase agreements totaled $9.8 million at June 30, 2020, compared to $10.2 million at December 31, 2019.

Information related to repurchase agreements is summarized as follows:

(Dollars in thousands)	As of and for the three months ended June 30, 2020			As of and for the year ended December 31, 2019
Balance at end of period	$	9,815		$	10,172
Average balance during the period	9,682			11,252
Maximum month-end balance	9,815			14,655
Weighted-average rate during the period	0.17		%	0.43		%
Weighted-average rate at end of period	0.06		%	0.44		%

Long-term notes from the FHLB were as follows:

(Dollars in thousands)	June 30, 2020		December 31, 2019
Fixed interest rate note, originated in April 2007, due in April 2022, with interest of 5.18% payable monthly	$	810	$	822
Fixed interest rate notes, originating in November 2019, due between November 2022 and November 2024, with interest of between 1.74% and 1.81% and interest-only payments monthly	30,000		30,000
Fixed interest rate note, originated in December 2017, due in December 2020, with interest of 2.18% and interest-only payments monthly	5,800		—
	$	36,610	$	30,822

The fixed interest rate note, originated in December 2017, due in December 2020, with interest of 2.18% and interest-only payments monthly, was acquired as a result of the First State acquisition on April 3, 2020.

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Subordinated Debt

Information related to subordinated debt is summarized as follows:

(Dollars in thousands)	As of and for the three months ended June 30, 2020			As of and for the year ended December 31, 2019
Balance at end of period	$	4,124		$	4,124
Average balance during the period	4,124			12,125
Maximum month-end balance	4,124			17,524
Weighted-average rate during the period	2.31		%	6.35		%
Weighted-average rate at end of period	1.93		%	3.51		%

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 1.62% 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.

On June 30, 2014, the Company issued its Convertible Subordinated Promissory Notes Due 2024 (the “Notes”) to various investors in the aggregate principal amount of $29,400,000. The Notes were issued in $100,000 increments per Note subject to a minimum investment of $1,000,000. The Notes expire 10 years after the initial issuance date of the Notes (the “Maturity Date”).

Interest on the Notes accrues on the unpaid principal amount of each Note (paid quarterly in arrears on January 1, April 1, July 1, and October 1 of each year) which rate shall be dependent upon the principal invested in the Notes and the holder’s ownership of common stock in the Company. For investments of less than $3,000,000 in Notes, an ownership of Company common stock representing at least 30% of the principal of the Notes acquired, the interest rate on the Notes is 7% per annum. For investments of $3,000,000 or greater in Notes and ownership of the Company’s common stock representing at least 30% of the principal of the Notes acquired, the interest rate on the Notes is 7.5% per annum. For investments of $10,000,000 or greater, the interest rate on the Notes is 7% per annum, regardless of whether the holder owns or acquires MVB common stock. The principal on the Notes shall be paid in full at the Maturity Date. On the fifth anniversary of the issuance of the Notes, a holder may elect to continue to receive the stated fixed rate on the Notes or a floating rate determined by LIBOR plus 5% up to a maximum rate of 9%, adjusted quarterly.

The Notes are unsecured and subject to the terms and conditions of any senior debt and after consultation with the Board of Governors of the Federal Reserve System, the Company may, after the Notes have been outstanding for 5 years, and without premium or penalty, prepay all or a portion of the unpaid principal amount of any Note together with the unpaid interest accrued on such portion of the principal amount of such Note. All such prepayments shall be made pro rata among the holders of all outstanding Notes.

At the election of a holder, any or all of the Notes may be converted into shares of common stock during the 5-day period after the first, second, third, fourth, and fifth anniversaries of the issuance of the Notes or upon a notice to prepay by the Company. On December 28, 2017, the Company distributed notices to the holders of the Notes that provide that the Company has elected to waive the timing requirements associated with when a conversion may occur and, instead, the Company will accept notices of conversion at any time prior to July 1, 2019, which is the final conversion date for the Notes. The Notes will convert into common stock based on $16 per share of the Company’s common stock. The conversion price will be subject to anti-dilution adjustments for certain events such as stock splits, reclassifications, non-cash distributions, extraordinary cash dividends, pro rata repurchases of common stock, and business combination transactions. The Company must give 20 days’ notice to the holders of the Company’s intent to prepay the Notes, so that holders may execute the conversion right set forth above if a holder so desires.

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Repayment of the Notes is subordinated to the Company’s outstanding senior debt including (if any) without limitation, senior secured loans. No payment will be made by the Company, directly or indirectly, on the Notes, unless and until all of the senior debt then due has been paid in full. Notwithstanding the foregoing, so long as there exists no event of default under any senior debt, the Company would make, and a holder would receive and retain for the holder’s account, regularly scheduled payments of accrued interest and principal pursuant to the terms of the Notes.

The Company must obtain a consent of the holders of the Notes prior to issuing any new senior debt in excess of $15,000,000 after the date of issuance of the Notes and prior to the Maturity Date.

An event of default will occur upon the Company’s bankruptcy or any failure to pay interest, principal, or other amounts owing on the Notes when due. Upon the occurrence and during the continuance of an event of default (but subject to the subordination provisions of the Notes) the holders of a majority of the outstanding principal amount of the Notes may declare all or any portion of the outstanding principal amount of the Notes due and payable and demand immediate payment of such amount.

The Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed on any interest payment date after a date five years from the original issue date. As of June 30, 2020, all subordinated debt notes have been converted or redeemed.

The Company reflects subordinated debt in the amount of $4.1 million as of June 30, 2020 and $4.1 million as of December 31, 2019 and interest expense of $58 thousand and $572 thousand for the six months ended June 30, 2020 and 2019.

In 2018, $16.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 1,000,000 new shares and provided an annual interest expense savings of $1.1 million.

In 2019, $1.0 million of subordinated debt was converted into common stock, which resulted in the issuance of 62,500 new shares, and $12.4 million of subordinated debt was redeemed. These transactions provided an annual interest expense savings of $970 thousand.

A summary of maturities of borrowings and subordinated debt over the next five years is as follows (dollars in thousands):

Year	Amount
2020	$	5,817
2021	32
2022	10,761
2023	10,000
2024	10,000
Thereafter	4,124
	$	40,734

Note 8 – Fair Value of Financial Instruments

Accounting standards require that the Company adopt fair value measurement for financial assets and financial liabilities. This enhanced guidance for using fair value to measure assets and liabilities applies whenever other standards require or permit assets or liabilities to be measured at fair value. This guidance does not expand the use of fair value in any new circumstances.

Accounting standards establish a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by these standards are as follows:

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.

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The methods of determining the fair value of assets and liabilities presented in this footnote are consistent with our methodologies disclosed in Note 17, “Fair Value of Financial Instruments” and Note 18, “Fair Value Measurement” of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of the Company’s 2019 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 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, U.S. 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 and six months ended June 30, 2020. 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 and six months ended June 30, 2020. 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 lock commitments – The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage-backed security prices, and estimates of the fair value of the mortgage servicing rights and the probability that the mortgage loan will fund within the terms of the interest rate lock commitments.

•Mortgage-backed security hedges – MBS hedges are considered derivatives and are recorded at fair value based on observable market data of the individual mortgage-backed security.

•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 hedge – Treated 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 the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of June 30, 2020 and December 31, 2019 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.

	June 30, 2020
(Dollars in thousands)	Level I		Level II		Level III		Total
Assets:
U.S. Government Agency securities	$	—	$	41,980	$	—	$	41,980
U.S. Sponsored Mortgage backed securities	—		34,274		—		34,274
Municipal securities	—		89,748		40,457		130,205
Other securities	—		14,240		—		14,240
Equity securities	383		—		—		383
Loans held for sale	—		242,089		—		242,089
Interest rate lock commitment	—		—		7,338		7,338
Interest rate swap	—		16,514		—		16,514
Fair value hedge	—		2,430		—		2,430
Bank-owned life insurance	—		35,818		—		35,818
Liabilities:
Interest rate swap	—		16,514		—		16,514
Fair value hedge	—		2,659		—		2,659
Mortgage-backed security hedges	—		858		—		858

	December 31, 2019
(Dollars in thousands)	Level I		Level II		Level III		Total
Assets:
U.S. Government Agency securities	$	—	$	51,996	$	—	$	51,996
U.S. Sponsored Mortgage backed securities	—		58,312		—		58,312
Municipal securities	—		75,833		37,259		113,092
Other securities	—		12,421		—		12,421
Loans held for sale	—		109,788		—		109,788
Interest rate lock commitment	—		—		1,660		1,660
Interest rate swap	—		5,722		—		5,722
Fair value hedge	—		1,770		—		1,770
Bank-owned life insurance	—		35,374		—		35,374
Liabilities:
Interest rate swap	—		5,722		—		5,722
Fair value hedge	—		1,418		—		1,418
Mortgage-backed security hedges	—		186		—		186

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The following table represents recurring level III assets:

(Dollars in thousands)	Interest Rate Lock Commitments		Municipal Securities		Equity Securities		Total
Balance at December 31, 2019	$	1,660	$	37,259	$	—	$	38,919
Realized and unrealized gains included in earnings	5,678		—		—		5,678
Purchase of securities	—		20,780		—		20,780
Unrealized gain included in other comprehensive income (loss)	—		1,645		—		1,645
Unrealized loss included in other comprehensive income (loss)	—		(19,227)		—		(19,227)
Balance at June 30, 2020	$	7,338	$	40,457	$	—	$	47,795
Balance at March 31, 2020	$	5,791	$	36,626	$	—	$	42,417
Realized and unrealized gains included in earnings	1,547		—		—		1,547
Purchase of securities	—		20,258		—		20,258
Unrealized gain included in other comprehensive income (loss)	—		1,366		—		1,366
Unrealized loss included in other comprehensive income (loss)	—		(17,793)		—		(17,793)
Balance at June 30, 2020	$	7,338	$	40,457	$	—	$	47,795
Balance at December 31, 2018	$	1,750	$	33,122	$	300	$	35,172
Realized and unrealized gains included in earnings	791		—		—		791
Purchase of securities	—		109		1,250		1,359
Unrealized gain included in other comprehensive income (loss)	—		6,915		—		6,915
Unrealized loss included in other comprehensive income (loss)	—		(9,609)		—		(9,609)
Balance at June 30, 2019	$	2,541	$	30,537	$	1,550	$	34,628
Balance at March 31, 2019	$	2,256	$	36,801	$	750	$	39,807
Realized and unrealized losses included in earnings	285		—		—		285
Purchase of securities	—		109		800		909
Unrealized gain included in other comprehensive income (loss)	—		2,160		—		2,160
Unrealized loss included in other comprehensive income (loss)	—		(8,424)		—		(8,424)
Balance at June 30, 2019	$	2,541	$	30,537	$	1,550	$	34,628

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. generally accepted accounting principles. 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 2020 and 2019 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

34

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.

•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.

Assets measured at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019 are included in the table below:

	June 30, 2020
(Dollars in thousands)	Level I		Level II		Level III		Total
Impaired loans	$	—	$	—	$	16,201	$	16,201
Other real estate owned	—		—		8,907		8,907
Equity securities	—		—		19,081		19,081

	December 31, 2019
(Dollars in thousands)	Level I		Level II		Level III		Total
Impaired loans	$	—	$	—	$	8,909	$	8,909
Other real estate owned	—		—		1,397		1,397
Equity securities	—		—		18,514		18,514

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The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at June 30, 2020 and December 31, 2019.

	Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
June 30, 2020
Nonrecurring measurements:
Impaired loans	$	16,201	Appraisal of collateral 1	Appraisal adjustments 2	20% - 62%
				Liquidation expense 2	5% - 10%
Other real estate owned	$	8,907	Appraisal of collateral 1	Appraisal adjustments 2	20% - 30%
				Liquidation expense 2	5% - 10%
Equity securities	$	19,081	Net asset value	Cost minus impairment	0%
Recurring measurements:
Municipal securities (Local TIF bonds)	$	40,457	Appraisal of bond 3	Bond appraisal adjustment 4	5% - 15%
Interest rate lock commitments	$	7,338	Pricing model	Pull through rates	76% - 84%

	Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range
December 31, 2019
Nonrecurring measurements:
Impaired loans	$	8,909	Appraisal of collateral 1	Appraisal adjustments 2	20% - 62%
				Liquidation expense 2	5% - 10%
Other real estate owned	$	1,397	Appraisal of collateral 1	Appraisal adjustments 2	20% - 30%
				Liquidation expense 2	5% - 10%
Equity securities	$	18,514	Net asset value	Cost minus impairment	0%
Recurring measurements:
Municipal securities (Local TIF bonds)	$	37,259	Appraisal of bond 3	Bond appraisal adjustment 4	5% - 15%
Interest rate lock commitments	$	1,660	Pricing model	Pull through rates	77% - 82%

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.

Estimated fair value of financial instruments have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments.

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

Fair Value Measurements at:

(Dollars in thousands)	Carrying Value		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)
June 30, 2020
Financial assets:
Cash and cash equivalents	$	78,854	$	78,854	$	78,854	$	—	$	—
Certificates of deposits with other banks	13,046		13,387		—		13,387		—
Securities available-for-sale	220,699		220,699		—		180,242		40,457
Equity securities	19,464		19,464		383		—		19,081
Loans held for sale	242,089		242,089		—		242,089		—
Loans, net	1,476,930		1,502,388		—		—		1,502,388
Mortgage servicing rights	3,331		3,331		—		—		3,331
Interest rate lock commitment	7,338		7,338		—		—		7,338
Interest rate swap	16,514		16,514		—		16,514		—
Accrued interest receivable	8,900		8,900		—		1,515		7,385
Bank-owned life insurance	35,818		35,818		—		35,818		—
Financial liabilities:
Deposits	$	1,863,963	$	1,892,397	$	—	$	1,892,397	$	—
Repurchase agreements	9,815		9,815		—		9,815		—
FHLB and other borrowings	36,610		37,336		—		37,336		—
Mortgage-backed security hedges	858		858		—		858		—
Interest rate swap	16,514		16,514		—		16,514		—
Fair value hedge	2,659		2,659		—		2,659		—
Accrued interest payable	622		622		—		622		—
Subordinated debt	4,124		4,124		—		4,124		—
December 31, 2019
Financial assets:
Cash and cash equivalents	$	28,002	$	28,002	$	28,002	$	—	$	—
Certificates of deposits with other banks	12,549		12,586		—		12,586		—
Securities available-for-sale	235,821		235,821		—		198,562		37,259
Equity securities	18,514		18,514		—		—		18,514
Loans held for sale	109,788		109,788		—		109,788		—
Loans, net	1,362,766		1,364,706		—		—		1,364,706
Mortgage servicing rights	348		348		—		—		348
Interest rate lock commitment	1,660		1,660		—		—		1,660
Interest rate swap	5,722		5,722		—		5,722		—
Fair value hedge	1,770		1,770		—		1,770
Accrued interest receivable	7,909		7,909		—		1,591		6,317
Bank-owned life insurance	35,374		35,374		—		35,374		—
Financial liabilities:
Deposits	$	1,265,042	$	1,249,135	$	—	$	1,249,135	$	—
Repurchase agreements	10,172		10,172		—		10,172		—
FHLB and other borrowings	222,885		222,891		—		222,891		—
Mortgage-backed security hedges	186		186		—		186		—
Interest rate swap	5,722		5,722		—		5,722		—
Fair value hedge	1,418		1,418		—		1,418		—
Accrued interest payable	1,060		1,060		—		1,060		—
Subordinated debt	4,124		4,124		—		4,124		—

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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, 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.

Note 9 – Stock Offerings

On August 12, 2019, the Board of Directors of the Company announced the approval of a stock repurchase program. Under the program, the Company is authorized to repurchase up to $5.0 million of its outstanding shares of common stock over the next 12 months or until the purchase is fully absorbed, whichever comes first on the open market or in privately negotiated transactions. The stock repurchase program does not require the Company to repurchase any specified number of shares of its common stock, and it may be discontinued, suspended, or restarted at any time at the Company's discretion.

In March 2020, the Company repurchased 16,300 shares of its outstanding common stock, with an average share price of $16.00.

In May 2020, the Company repurchased 100 shares of its outstanding common stock, with an average share price of $14.18.

In June 2020, the Company repurchased 29,200 shares of its outstanding common stock, with an average share price of $13.53.

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Note 10 – Net Income Per Common Share

The Company determines basic earnings per share by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding during the period. Diluted earnings per share 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 or restricted stock unit awards under the Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt if dilutive.

	Six Months Ended June 30				Three Months Ended June 30
(Dollars in thousands except shares and per share data)	2020		2019		2020		2019
Numerator for basic earnings per share:
Net income from continuing operations	$	19,082	$	18,123	$	18,034	$	14,931
Less: Dividends on preferred stock	229		243		115		122
Net income from continuing operations available to common shareholders - basic	18,853		17,880		17,919		14,809
Net income from discontinued operations available to common shareholders - basic and diluted	—		446		—		446
Net income available to common shareholders - basic	$	18,853	$	18,326	$	17,919	$	15,255
Numerator for diluted earnings per share:
Net income from continuing operations available to common shareholders - basic	$	18,853	$	17,880	$	17,919	$	14,809
Add: Dividends on convertible preferred stock	—		243		—		122
Add: Interest on subordinated debt (tax effected)	—		346		—		174
Net income from continuing operations available to common shareholders - diluted	$	18,853	$	18,469	$	17,919	$	15,105
Denominator:
Total average shares outstanding	11,948,790		11,625,903		11,954,813		11,644,061
Effect of dilutive convertible preferred stock	—		489,625		—		489,625
Effect of dilutive convertible subordinated debt	—		775,000		—		775,000
Effect of dilutive stock options and restricted stock units	207,424		249,084		57,032		246,616
Total diluted average shares outstanding	12,156,214		13,139,612		12,011,845		13,155,302
Earnings per share from continuing operations - basic	$	1.58	$	1.54	$	1.50	$	1.27
Earnings per share from discontinued operations - basic	$	—	$	0.04	$	—	$	0.04
Earnings per share - basic	$	1.58	$	1.58	$	1.50	$	1.31
Earnings per share from continuing operations - diluted	$	1.55	$	1.41	$	1.49	$	1.15
Earnings per share from discontinued operations - diluted	$	—	$	0.03	$	—	$	0.03
Earnings per share - diluted	$	1.55	$	1.44	$	1.49	$	1.18

For the three and six months ended June 30, 2020 and 2019, approximately 859 thousand and 386 thousand, respectively, options to purchase shares of common stock were not included in the computation of diluted earnings per share because the effect would be antidilutive.

For the three months ended June 30, 2020 and 2019, approximately 218 thousand and 142 thousand shares, respectively, of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.

For the six months ended June 30, 2020 and 2019, approximately 192 thousand and 142 thousand shares, respectively, of restricted stock units were not included in the computation of diluted earnings per share because the effect would be antidilutive.

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Note 11 – Segment Reporting

The Company has identified three reportable segments: commercial and retail banking; mortgage banking; and financial holding company. Revenue from commercial and retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. The fintech division, Chartwell, and Paladin reside in the commercial and retail banking segment. 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.

Information about the reportable segments and reconciliation to the consolidated financial statements for the three and six-month periods ended June 30, 2020 and June 30, 2019 are as follows:

Three Months Ended June 30, 2020	Commercial & Retail Banking		Mortgage Banking		Financial Holding Company		Intercompany Eliminations		Consolidated
(Dollars in thousands)
Interest income	$	19,182	$	3,538	$	1	$	(947)	$	21,774
Interest expense	3,027		1,517		23		(1,251)		3,316
Net interest income	16,155		2,021		(22)		304		18,458
Provision for loan losses	6,598		(2)		—		—		6,596
Net interest income after provision for loan losses	9,557		2,023		(22)		304		11,862
Noninterest Income:
Mortgage fee income	40		15,208		—		(304)		14,944
Other income	17,792		13,354		1,679		(2,256)		30,569
Total noninterest income	17,832		28,562		1,679		(2,560)		45,513
Noninterest Expenses:
Salaries and employee benefits	6,170		13,584		2,905		—		22,659
Other expense	9,124		2,315		1,491		(2,256)		10,674
Total noninterest expenses	15,294		15,899		4,396		(2,256)		33,333
Income (loss) before income taxes	12,095		14,686		(2,739)		—		24,042
Income tax expense (benefit)	2,880		3,800		(672)		—		6,008
Net income (loss)	$	9,215	$	10,886	$	(2,067)	$	—	$	18,034
Preferred stock dividends	—		—		115		—		115
Net income (loss) available to common shareholders	$	9,215	$	10,886	$	(2,182)	$	—	$	17,919
Capital Expenditures for the three-month period ended June 30, 2020	$	1,105	$	30	$	—	$	—	$	1,135
Total Assets as of June 30, 2020	2,219,352		342,497		232,026		(578,718)		2,215,157
Total Assets as of December 31, 2019	1,953,975		248,382		216,411		(474,654)		1,944,114
Goodwill as of June 30, 2020	2,350		16,882		—		—		19,232
Goodwill as of December 31, 2019	2,748		16,882		—		—		19,630

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Three Months Ended June 30, 2019	Commercial & Retail Banking		Mortgage Banking		Financial Holding Company		Intercompany Eliminations		Consolidated
(Dollars in thousands)
Interest income	$	18,820	$	2,032	$	1	$	(383)	$	20,470
Interest expense	4,743		1,499		287		(588)		5,941
Net interest income	14,077		533		(286)		205		14,529
Provision for loan losses	625		(25)		—		—		600
Net interest income after provision for loan losses	13,452		558		(286)		205		13,929
Noninterest income:
Mortgage fee income	277		9,792		—		(205)		9,864
Other income	15,464		1,135		1,495		(1,571)		16,523
Total noninterest income	15,741		10,927		1,495		(1,776)		26,387
Noninterest Expense:
Salaries and employee benefits	4,220		7,038		2,022		—		13,280
Other expense	5,493		1,842		1,346		(1,571)		7,110
Total noninterest expenses	9,713		8,880		3,368		(1,571)		20,390
Income (loss) before income taxes	19,480		2,605		(2,159)		—		19,926
Income tax expense (benefit)	4,785		703		(493)		—		4,995
Net income (loss) from continuing operations	14,695		1,902		(1,666)		—		14,931
Income from discontinued operations, before income taxes	—		—		600		—		600
Income tax expense - discontinued operations	—		—		154		—		154
Net income from discontinued operations	—		—		446		—		446
Net income (loss)	$	14,695	$	1,902	$	(1,220)	$	—	$	15,377
Preferred stock dividends	—		—		122		—		122
Net income (loss) available to common shareholders	$	14,695	$	1,902	$	(1,342)	$	—	$	15,255
Capital Expenditures for the three-month period ended June 30, 2019	$	414	$	23	$	77	$	—	$	514
Total Assets as of June 30, 2019	1,831,419		225,012		217,217		(440,630)		1,833,018
Total Assets as of December 31, 2018	1,753,932		165,430		196,537		(364,930)		1,750,969
Goodwill as of June 30, 2019	1,598		16,882		—		—		18,480
Goodwill as of December 31, 2018	1,598