Document
Table of Contents

 
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[  X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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
(State or other jurisdiction of incorporation or organization)
20-0034461
(I.R.S. Employer Identification No.)
301 Virginia Avenue
Fairmont, West Virginia  26554-2777
(Address of principal executive offices)
304-363-4800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant has (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  [ X ]                         No  [    ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  [ X ]                         No  [    ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):
Large accelerated filer
Accelerated filer    [ X ]
Non-accelerated filer                            
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes  [     ]                         No  [ X ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of November 3, 2016, the Registrant had 8,083,500 shares of common stock outstanding with a par value of $1.00 per share. 
 

Table of Contents

MVB Financial Corp.
Table of Contents 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2
Table of Contents

Part I. Financial Information
Item 1. Financial Statements
MVB Financial Corp. and Subsidiary
Consolidated Balance Sheets  
(Unaudited) (Dollars in thousands)
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
(Note 1)
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
15,537

 
$
14,302

Interest bearing balances with banks
13,267

 
14,831

Total cash and cash equivalents
28,804

 
29,133

Certificates of deposit with other banks
7,174

 
13,150

Investment Securities:
 
 
 
Securities available-for-sale
152,171

 
70,256

Securities held-to-maturity (fair value of $0 for 2016 and $54,470 for 2015)
—

 
52,859

Loans held for sale
123,109

 
102,623

Loans:
1,076,073

 
1,032,170

Less: Allowance for loan losses
(9,150
)
 
(8,006
)
Net Loans
1,066,923

 
1,024,164

Premises and equipment
25,440

 
26,275

Bank owned life insurance
22,809

 
22,332

Accrued interest receivable and other assets
23,685

 
25,204

Goodwill
18,480

 
18,480

TOTAL ASSETS
$
1,468,595

 
$
1,384,476

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Deposits:
 
 
 
Noninterest bearing
$
105,799

 
$
80,423

Interest bearing
1,020,991

 
931,891

Total deposits
1,126,790

 
1,012,314

 
 
 
 
Accrued interest payable and other liabilities
19,600

 
13,291

Repurchase agreements
27,192

 
27,437

FHLB and other borrowings
136,112

 
183,198

Subordinated debt
33,524

 
33,524

Total liabilities
1,343,218

 
1,269,764

 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, par value $1,000; 20,000 authorized and 9,283 issued in 2016 and 2015, respectively (See Footnote 7)
16,334

 
16,334

Common stock, par value $1; 20,000,000 shares authorized; 8,134,577 and 8,112,998 issued; and 8,083,500 and 8,061,921 outstanding in 2016 and 2015, respectively
8,135

 
8,113

Additional paid-in capital
74,653

 
74,228

Retained earnings
29,361

 
20,054

Accumulated other comprehensive loss
(2,022
)
 
(2,933
)
Treasury Stock, 51,077 shares, at cost
(1,084
)
 
(1,084
)
Total stockholders’ equity
125,377

 
114,712

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,468,595

 
$
1,384,476

See accompanying notes to unaudited consolidated financial statements.

3
Table of Contents

MVB Financial Corp. and Subsidiary
Consolidated Statements of Income
(Unaudited) (Dollars in thousands except per share data)
 
Nine Months Ended
September 30,
 
Three Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME
 
 
 
 
 
 
 
Interest and fees on loans
$
37,502

 
$
29,187

 
$
12,484

 
$
10,584

Interest on deposits with other banks
251

 
198

 
81

 
71

Interest on investment securities - taxable
984

 
674

 
342

 
213

Interest on tax exempt loans and securities
1,748

 
1,689

 
616

 
548

Total interest income
40,485

 
31,748

 
13,523

 
11,416

 
 
 
 
 
 
 
 
INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
5,739

 
4,554

 
1,902

 
1,665

Interest on repurchase agreements
55

 
62

 
17

 
18

Interest on FHLB and other borrowings
861

 
493

 
316

 
159

Interest on subordinated debt
1,664

 
1,648

 
559

 
556

Total interest expense
8,319

 
6,757

 
2,794

 
2,398

 
 
 
 
 
 
 
 
NET INTEREST INCOME
32,166

 
24,991

 
10,729

 
9,018

Provision for loan losses
2,975

 
1,856

 
1,075

 
636

Net interest income after provision for loan losses
29,191

 
23,135

 
9,654

 
8,382

 
 
 
 
 
 
 
 
NONINTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
557

 
471

 
199

 
175

Income on bank owned life insurance
477

 
492

 
158

 
160

Visa debit card and interchange income
892

 
684

 
291

 
244

Mortgage fee income
26,850

 
23,881

 
10,668

 
8,955

Gain on sale of portfolio loans
838

 
1,119

 
238

 
319

Insurance and investment services income
303

 
276

 
128

 
98

Gain on sale of securities
1,082

 
130

 
479

 
4

Gain on derivatives
1,433

 
67

 
1

 
(2,039
)
Other operating income
707

 
752

 
364

 
537

Total noninterest income
33,139

 
27,872

 
12,526

 
8,453

 
 
 
 
 
 
 
 
NONINTEREST EXPENSES
 
 
 
 
 
 
 
Salary and employee benefits
34,427

 
27,424

 
12,383

 
9,284

Occupancy expense
2,737

 
2,455

 
898

 
833

Equipment depreciation and maintenance
1,781

 
1,482

 
635

 
543

Data processing and communications
3,815

 
2,866

 
1,434

 
1,047

Mortgage processing
2,456

 
2,310

 
802

 
774

Marketing, contributions and sponsorships
1,002

 
1,072

 
355

 
391

Professional fees
2,293

 
2,196

 
750

 
919

Printing, postage and supplies
586

 
552

 
169

 
205

Insurance, tax and assessment expense
1,106

 
1,202

 
374

 
393

Travel, entertainment, dues and subscriptions
1,212

 
1,147

 
393

 
451

Other operating expenses
980

 
477

 
546

 
(84
)
Total noninterest expense
52,395

 
43,183

 
18,739

 
14,756

Income from continuing operations, before income taxes
9,935

 
7,824

 
3,441

 
2,079

Income tax expense - continuing operations
3,265

 
2,475

 
1,131

 
569

Net Income from continuing operations
6,670

 
5,349

 
2,310

 
1,510

Income from discontinued operations, before income taxes
6,346

 
108

 
—

 
(167
)
Income tax expense - discontinued operations
2,411

 
43

 
—

 
(63
)
Net Income from discontinued operations
3,935

 
65

 
—

 
(104
)
Net Income
$
10,605

 
$
5,414

 
$
2,310

 
$
1,406

Preferred dividends
814

 
430

 
314

 
145

Net Income available to common shareholders
$
9,791

 
$
4,984

 
$
1,996

 
$
1,261

 
 
 
 
 
 
 
 
Earnings per share from continuing operations - basic
$
0.73

 
$
0.61

 
$
0.25

 
$
0.17

Earnings per share from discontinued operations - basic
$
0.49

 
$
0.01

 
$
—

 
$
(0.01
)
Earnings per common shareholder - basic
$
1.22

 
$
0.62

 
$
0.25

 
$
0.16

 
 
 
 
 
 
 
 
Earnings per share from continuing operations - diluted
$
0.68

 
$
0.60

 
$
0.24

 
$
0.17

Earnings per share from discontinued operations - diluted
$
0.40

 
$
—

 
$
—

 
$
(0.01
)
Earnings per common shareholder - diluted
$
1.08

 
$
0.60

 
$
0.24

 
$
0.16

 
 
 
 
 
 
 
 
Cash dividends declared
$
0.06

 
$
0.06

 
$
0.02

 
$
0.02

Weighted average shares outstanding - basic
8,073,644

 
7,998,203

 
8,080,690

 
8,023,549

Weighted average shares outstanding - diluted
9,935,209

 
9,961,233

 
10,434,344

 
8,176,304

See accompanying notes to unaudited consolidated financial statements.


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Table of Contents

MVB Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited) (Dollars in thousands)
 
Nine Months Ended
September 30,
 
Three Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net Income
$
10,605

 
$
5,414

 
$
2,310

 
$
1,406

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) during the year
1,492

 
549

 
(728
)
 
433

 
 
 
 
 
 
 
 
Unrealized holding gains during the year related to reclassified held-to-maturity securities
1,825

 
—

 
—

 
—

 
 
 
 
 
 
 
 
Income tax effect
(1,327
)
 
(220
)
 
291

 
(174
)
 
 
 
 
 
 
 
 
Reclassification adjustment for gain recognized in income
(813
)
 
(130
)
 
(479
)
 
(4
)
 
 
 
 
 
 
 
 
Reclassification adjustment for gain recognized in income related to reclassified held-to-maturity securities
(269
)
 
—

 
—

 
—

 
 
 
 
 
 
 
 
Income tax effect
433

 
52

 
192

 
2

 
 
 
 
 
 
 
 
Change in defined benefit pension plan
(717
)
 
127

 
100

 
(400
)
 
 
 
 
 
 
 
 
Income tax effect
287

 
(51
)
 
(40
)
 
160

 
 
 
 
 
 
 
 
Total other comprehensive income
911

 
327

 
(664
)
 
17

 
 
 
 
 
 
 
 
Comprehensive income
$
11,516

 
$
5,741

 
$
1,646

 
$
1,423

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

MVB Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) (Dollars in thousands except per share data)
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)
 
Treasury
Stock
 
Total
Stockholders'
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
$
16,334

 
$
8,034

 
$
74,342

 
$
14,454

 
$
(2,642
)
 
$
(1,084
)
 
$
109,438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
—

 
—

 
—

 
5,414

 
—

 
—

 
5,414

Other comprehensive income
—

 
—

 
—

 
—

 
327

 
—

 
327

Cash dividends paid ($0.06 per share)
—

 
—

 
—

 
(480
)
 
—

 
—

 
(480
)
Dividends on preferred stock (See Footnote 7)
—

 
—

 
—

 
(430
)
 
—

 
—

 
(430
)
Stock based compensation
—

 
—

 
308

 
—

 
—

 
—

 
308

Common stock options exercised
—

 
79

 
(527
)
 
—

 
—

 
—

 
(448
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance September 30, 2015
$
16,334

 
$
8,113

 
$
74,123

 
$
18,958

 
$
(2,315
)
 
$
(1,084
)
 
$
114,129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2015
$
16,334

 
$
8,113

 
$
74,228

 
$
20,054

 
$
(2,933
)
 
$
(1,084
)
 
$
114,712

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
—

 
—

 
—

 
10,605

 
—

 
—

 
10,605

Other comprehensive income
—

 
—

 
—

 
—

 
911

 
—

 
911

Cash dividends paid ($0.06 per share)
—

 
—

 
—

 
(484
)
 
—

 
—

 
(484
)
Dividends on preferred stock (See Footnote 7)
—

 
—

 
—

 
(814
)
 
—

 
—

 
(814
)
Stock based compensation
—

 
—

 
415

 
—

 
—

 
—

 
415

Common stock options exercised
—

 
22

 
10

 
—

 
—

 
—

 
32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance September 30, 2016
$
16,334

 
$
8,135

 
$
74,653

 
$
29,361

 
$
(2,022
)
 
$
(1,084
)
 
$
125,377

See accompanying notes to unaudited consolidated financial statements.


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Table of Contents

MVB Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited) (Dollars in thousands)
 
 
Nine months ended
 
 
September 30,
2016
 
September 30,
2015
OPERATING ACTIVITIES
 
    
 
    
Net Income
 
$
10,605

 
$
5,414

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 

 
 

Net amortization and accretion of investments
 
689

 
586

Net amortization of deferred loan fees
 
33

 
(110
)
Provision for loan losses
 
2,975

 
1,856

Depreciation and amortization
 
2,547

 
1,437

Stock based compensation
 
415

 
308

Loans originated for sale
 
(1,205,986
)
 
(1,047,432
)
Proceeds of loans sold
 
1,212,350

 
1,067,793

Mortgage fee income
 
(26,850
)
 
(23,881
)
Gain on sale of securities
 
(1,084
)
 
(130
)
Loss on sale of securities
 
2

 
—

Gain on sale of portfolio loans
 
(838
)
 
(1,119
)
Gain on sale of subsidiary
 
(6,926
)
 
—

Income on bank owned life insurance
 
(477
)
 
(492
)
Deferred taxes
 
276

 
118

Other, net
 
3,741

 
799

Net cash (used in) provided by operating activities
 
(8,528
)
 
5,147

INVESTING ACTIVITIES
 
 

 
 

Purchases of investment securities available-for-sale
 
(95,497
)
 
(28,212
)
Maturities/paydowns of investment securities available-for-sale
 
13,478

 
15,601

Maturities/paydowns of investment securities held-to-maturity
 
400

 
865

Sales of investment securities available-for-sale
 
55,191

 
12,912

Sale of investment securities held to maturity
 
—

 
421

Purchases of premises and equipment
 
(1,435
)
 
(1,648
)
Disposals of premises and equipment from sale of subsidiary
 
581

 
—

Net increase in loans
 
(44,929
)
 
(177,798
)
Purchases of restricted bank stock
 
(18,064
)
 
(17,431
)
Redemptions of restricted bank stock
 
19,489

 
16,977

Proceeds from sale of certificates of deposit with banks
 
6,472

 
248

Purchase of certificates of deposit with banks
 
(496
)
 
(1,491
)
Proceeds from sale of other real estate owned
 
83

 
1,132

Branch acquisition, net cash acquired
 
—

 
48,292

Proceeds from sale of subsidiary
 
7,047

 
—

Net cash used in investing activities
 
(57,680
)
 
(130,132
)
FINANCING ACTIVITIES
 
 

 
 

Net increase in deposits
 
114,476

 
126,331

Net decrease in repurchase agreements
 
(245
)
 
(6,111
)
Net change in short-term FHLB borrowings
 
(47,016
)
 
3,335

Principal payments on FHLB borrowings
 
(70
)
 
(2,154
)
Common stock options exercised
 
32

 
(448
)
Cash dividends paid on common stock
 
(484
)
 
(480
)
Cash dividends paid on preferred stock
 
(814
)
 
(430
)
Net cash provided by financing activities
 
65,879

 
120,043

(Decrease) in cash and cash equivalents
 
(329
)
 
(4,942
)
Cash and cash equivalents at beginning of period
 
29,133

 
30,077

Cash and cash equivalents at end of period
 
$
28,804

 
$
25,135

Supplemental disclosure of cash flow information:
 
    

 
    

Loans transferred to other real estate owned
 
$
127

 
$
174

Cashless stock options exercised
 
$
16

 
$
1,180

Cash payments for:
 
 

 
 

Interest on deposits, repurchase agreements and borrowings
 
$
8,084

 
$
8,278

Income taxes
 
$
4,382

 
$
2,400

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

MVB Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10‑Q.  Accordingly, they do not include all the information and footnotes required by GAAP for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. The consolidated balance sheet as of December 31, 2015 has been derived from audited financial statements included in the Company’s 2015 filing on Form 10-K.  Operating results for the nine and three months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
The accounting and reporting policies of MVB Financial Corp. (“the Company” or “MVB”) and its subsidiary (“Subsidiary”), MVB Bank, Inc. (the “Bank”), the Bank’s subsidiaries Potomac Mortgage Group, Inc., which does business as MVB Mortgage (“MVB Mortgage”) and MVB Insurance, LLC ("MVB Insurance"), conform to accounting principles generally accepted in the United States and practices in the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates, such as the allowance for loan losses, are based upon known facts and circumstances. Estimates are revised by management in the period such facts and circumstances change.  Actual results could differ from those estimates. All significant inter-company accounts and transactions have been eliminated in consolidation. 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company’s December 31, 2015, Form 10-K filed with the Securities and Exchange Commission.
In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Specifically, a portion of the prior periods’ interest income and interest expense was classified as gain on loans held for sale and has been reclassified in the current presentation.
All financial information is reported on a continuing operations basis, unless otherwise noted. See Note 12 to the consolidated financial statements for a discussion regarding discontinued operations.
Information is presented in these notes with dollars expressed in thousands, unless otherwise noted or specified.
Note 2 – Recent Accounting Pronouncements 
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. For public companies, this update will be effective for fiscal years beginning after December 15, 2017, including all interim periods within those fiscal years. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. This is in contrast to existing guidance whereby credit losses generally are not recognized until they are incurred. For public companies, this update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-

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based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net) (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The amendments in ASU 2016-08 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and have similar effective dates and transition requirements (i.e., effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein). The Company is currently evaluating the impact of adopting the new revenue recognition guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Accounting for Financial Instruments – Overall: Classification and Measurement (Subtopic 825-10) (“ASU 2016-01”). Amendments within ASU 2016-01 that relate to non-public entities have been excluded from this presentation. The amendments in this ASU 2016-01 address the following: 1) require equity investments to be measured at fair value with changes in fair value recognized in net income; 2) simplify the impairment assessment of equity investments without readily-determinable fair values by requiring a qualitative assessment to identify impairment; 3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) require separate presentation in other comprehensive income for the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; 6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and 7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the provisions of this amendment to determine the potential impact the new standard will have on the Company's consolidated financial statements as it relates to accounting for financial instruments.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date.  The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. As such, the adoption of ASU 2015-15 did not have a material impact on the Company’s consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-2”).  The amendments modify the evaluation reporting organizations must perform to determine if certain legal entities should be consolidated as VIEs. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance

9
Table of Contents

for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company has evaluated the provisions of ASU 2015-02 and determined the new standard has no impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-9”). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method that will be elected and the potential effects of the adoption of the ASU on our consolidated financial statements.
Note 3 – Investments
Prior to the final determination of Basel III, investments were recorded as held-to-maturity due to the uncertainty of the capital treatment of available-for-sale investments. Upon the issuance of the final ruling, the Company opted out of the Other Comprehensive Income treatment of available-for-sale investments permitted under Basel III. Due to the change in capital treatment under the final ruling of Basel III, the Company’s purpose of recording investments as held-to-maturity changed; therefore, during the period ended March 31, 2016, the Company reclassified $52.4 million, with unrealized holding gains of $1.8 million, of the remaining held-to-maturity investments into available-for-sale investments.
There were no investment securities held-to-maturity at September 30, 2016.
Amortized cost and fair values of investment securities held-to-maturity at December 31, 2015, including gross unrealized gains and losses, are summarized as follows:
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair
Value
Municipal securities
 
$
52,859

 
$
1,699

 
$
(88
)
 
$
54,470

Total investment securities held–to-maturity
 
$
52,859

 
$
1,699

 
$
(88
)
 
$
54,470

Amortized cost and fair values of investment securities available-for-sale at September 30, 2016 are summarized as follows:
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair
Value
U.S. Agency securities
 
$
19,931

 
$
5

 
$
(92
)
 
$
19,844

U.S. Sponsored Mortgage-backed securities
 
55,786

 
188

 
(310
)
 
55,664

Municipal securities
 
67,876

 
1,799

 
(125
)
 
69,550

Total debt securities
 
143,593

 
1,992

 
(527
)
 
145,058

Equity and other securities
 
6,948

 
165

 
—

 
7,113

Total investment securities available-for-sale
 
$
150,541

 
$
2,157

 
$
(527
)
 
$
152,171


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Table of Contents

Amortized cost and fair values of investment securities available-for-sale at December 31, 2015 are summarized as follows:
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair
Value
U.S. Agency securities
 
$
29,532

 
$
—

 
$
(181
)
 
$
29,351

U.S. Sponsored Mortgage-backed securities
 
34,246

 
1

 
(533
)
 
33,714

Municipal securities
 
1,775

 
23

 
—

 
1,798

Total debt securities
 
65,553

 
24

 
(714
)
 
64,863

Equity and other securities
 
5,309

 
95

 
(11
)
 
5,393

Total investment securities available-for-sale
 
$
70,862

 
$
119

 
$
(725
)
 
$
70,256

The following tables summarize amortized cost and fair values of debt securities by maturity at September 30, 2016:
 
Available for sale
(Dollars in thousands)
Amortized
Cost
 
Fair
Value
Within one year
$
1,287

 
$
1,294

After one year, but within five
5,278

 
5,416

After five years, but within ten
15,473

 
15,754

After ten years
121,555

 
122,594

Total
$
143,593

 
$
145,058

Investment securities with a carrying value of $97.5 million at September 30, 2016, 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 September 30, 2016, the details of which are included in the following table.  Although these securities, if sold at September 30, 2016 would result in a pretax loss of $527 thousand the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the ability to hold these securities until all principal has been recovered. It is not more likely than not the Company would sell any securities at a loss for liquidity purposes. 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 September 30, 2016, 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 market value.
The following table discloses investments in an unrealized loss position at September 30, 2016:
Description and number of positions
 
Less than 12 months
 
12 months or more
(Dollars in thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. Agency securities (9)
 
$
10,990

 
$
(92
)
 
$
—

 
$
—

U.S. Sponsored Mortgage-backed securities (17)
 
13,130

 
(62
)
 
17,733

 
(248
)
Municipal securities (23)
 
11,042

 
(125
)
 
—

 
—

Equity and other securities (0)
 
—

 
—

 
—

 
—

 
 
$
35,162

 
$
(279
)
 
$
17,733

 
$
(248
)

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Table of Contents

The following table discloses investments in an unrealized loss position at December 31, 2015:
Description and number of positions
 
Less than 12 months
 
12 months or more
(Dollars in thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
U.S. Agency securities (9)
 
$
28,351

 
$
(181
)
 
$
—

 
$
—

U.S. Sponsored Mortgage-backed securities (19)
 
20,647

 
(233
)
 
11,862

 
(300
)
Municipal securities (22)
 
3,827

 
(32
)
 
5,559

 
(56
)
Equity and other securities (1)
 
2,489

 
(11
)
 
—

 
—

 
 
$
55,314

 
$
(457
)
 
$
17,421

 
$
(356
)
For the three month period ended September 30, 2016 and 2015, the Company sold investments available-for-sale of $15.7 million and $1.4 million, respectively, resulting in gross gains of $479 thousand and $4 thousand, respectively, and gross losses of $0 and $0, respectively.   
For the nine month period ended September 30, 2016 and 2015, the Company sold investments available-for-sale of $55.2 million and $12.9 million, respectively, resulting in gross gains of $1.1 million and $125 thousand, respectively, and gross losses of $2 thousand and $0, respectively.
The Company sold no held-to-maturity investments during the three month period ended September 30, 2016 and sold investments held-to maturity of $421 thousand, resulting in gross gains of $5 thousand and no gross losses, during the three month period ended September 30, 2015. The held-to-maturity investment was sold due to a credit downgrade.
Note 4 – Loans and Allowance for Loan Losses
All loan origination fees and direct loan origination costs are deferred and recognized over the life of the loan. As of September 30, 2016 and 2015, net deferred fees of $796 thousand and $1.2 million, respectively, were included in the carrying value of loans.
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.
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 as presented in this note, 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.
Company and Bank management have identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are:  national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volume and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint. The combination of historical charge-off and qualitative factors are then weighted for each risk grade. These weightings are determined internally based upon the likelihood of loss as a loan risk grading deteriorates.

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Table of Contents

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. The liability for unfunded commitments was $224 thousand and $194 thousand respectively as of September 30, 2016 and 2015.
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 allowance for loan losses is based on estimates, and actual losses will vary from current estimates.  Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an 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 September 30, 2016: 
(Dollars in thousands)
 
Commercial
 
Residential
 
Home
Equity
 
Consumer
 
Total
ALL balance June 30, 2016
 
$
6,956

 
$
1,011

 
$
758

 
$
366

 
$
9,091

Charge-offs
 
(768
)
 
—

 
—

 
(250
)
 
(1,018
)
Recoveries
 
1

 
1

 
—

 
—

 
2

Provision
 
967

 
11

 
2

 
95

 
1,075

ALL balance September 30, 2016
 
$
7,156

 
$
1,023

 
$
760

 
$
211

 
$
9,150

(Dollars in thousands)
 
Commercial
 
Residential
 
Home
Equity
 
Consumer
 
Total
ALL balance December 31, 2015
 
$
6,066

 
$
1,095

 
$
715

 
$
130

 
$
8,006

Charge-offs
 
(1,448
)
 
(124
)
 
—

 
(272
)
 
(1,844
)
Recoveries
 
3

 
2

 
7

 
1

 
13

Provision
 
2,535

 
50

 
38

 
352

 
2,975

ALL balance September 30, 2016
 
$
7,156

 
$
1,023

 
$
760

 
$
211

 
$
9,150

Individually evaluated for impairment
 
$
1,288

 
$
38

 
$
—

 
$
20

 
$
1,346

Collectively evaluated for impairment
 
$
5,868

 
$
985

 
$
760

 
$
191

 
$
7,804

The following table summarizes the primary segments of the Company loan portfolio as of September 30, 2016:
(Dollars in thousands)
 
Commercial
 
Residential
 
Home Equity
 
Consumer
 
Total
Individually evaluated for impairment
 
$
10,922

 
$
673

 
$
51

 
$
141

 
$
11,787

Collectively evaluated for impairment
 
739,122

 
242,814

 
67,788

 
14,562

 
1,064,286

Total Loans
 
$
750,044

 
$
243,487

 
$
67,839

 
$
14,703

 
$
1,076,073


13
Table of Contents

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 September 30, 2015:
(Dollars in thousands)
 
Commercial
 
Residential
 
Home
Equity
 
Consumer
 
Total
ALL balance June 30, 2015
 
$
5,201

 
$
1,018

 
$
632

 
$
196

 
$
7,047

Charge-offs
 
(299
)
 
—

 
—

 
(5
)
 
(304
)
Recoveries
 
—

 
—

 
—

 
9

 
9

Provision
 
515

 
101

 
78

 
(58
)
 
636

ALL balance September 30, 2015
 
$
5,417

 
$
1,119

 
$
710

 
$
142

 
$
7,388

(Dollars in thousands)
 
Commercial
 
Residential
 
Home
Equity
 
Consumer
 
Total
ALL balance December 31, 2014
 
$
4,363

 
$
962

 
$
691

 
$
207

 
$
6,223

Charge-offs
 
(708
)
 
(14
)
 
—

 
(5
)
 
(727
)
Recoveries
 
21

 
1

 
1

 
13

 
36

Provision
 
1,741

 
170

 
18

 
(73
)
 
1,856

ALL balance September 30, 2015
 
$
5,417

 
$
1,119

 
$
710

 
$
142

 
$
7,388

Individually evaluated for impairment
 
$
595

 
$
301

 
$
28

 
$
6

 
$
930

Collectively evaluated for impairment
 
$
4,822

 
$
818

 
$
682

 
$
136

 
$
6,458

The following table summarizes the primary segments of the Company loan portfolio as of September 30, 2015:
(Dollars in thousands)
 
Commercial
 
Residential
 
Equity
 
Consumer
 
Total
Individually evaluated for impairment
 
$
12,036

 
$
849

 
$
28

 
$
6

 
$
12,919

Collectively evaluated for impairment
 
687,623

 
210,997

 
65,617

 
17,677

 
981,914

Total Loans
 
$
699,659

 
$
211,846

 
$
65,645

 
$
17,683

 
$
994,833

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 current risk grade payment status and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The Company also separately evaluates individual consumer loans for impairment. The Chief Credit Officer identifies these loans individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow Management to evaluate the significance of the payment delays and the circumstances surrounding the loan and the borrower.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods:  (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs.  The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method.  The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.
During December 2013, the Bank purchased $74.3 million in performing commercial real estate secured loans in the northern Virginia area. At the time of acquisition, none of these loans were considered impaired. They were acquired at a premium of roughly 1.024 or $1.8 million, which is being amortized in accordance with ASC 310-20. These loans are collectively evaluated for impairment under ASC 450. The loans continue to be individually monitored for payoff activity, and any necessary adjustments to the premium are made accordingly. As of September 30, 2016 and December 31, 2015, these balances totaled $25.8 million and $46.8 million, respectively. Of the $48.5 million decrease since originally purchased, MVB refinanced $19.6 million, sold participations totaling $7.5 million and sold $9.7 million back to the institution from which the loans were originally purchased in December 2013. The remainder of the decrease was the result of principal paydowns. The weighted average yield on the remaining portfolio is 5.91%.

14
Table of Contents

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 September 30, 2016 and December 31, 2015 (Dollars in thousands):
 
 
Impaired Loans with
Specific Allowance
 
Impaired
Loans with
No Specific
Allowance
 
Total Impaired Loans
September 30, 2016
 
Recorded
Investment
 
Related
Allowance
 
Recorded
Investment
 
Recorded
Investment
 
Unpaid
Principal
Balance
Commercial
 
 
 
 
 
 
 
 
 
 
Commercial Business
 
$
—

 
$
—

 
$
3,756

 
$
3,756

 
$
4,521

Commercial Real Estate
 
3,712

 
1,154

 
384

 
4,096

 
4,719

Acquisition & Development
 
535

 
134

 
2,535

 
3,070

 
4,547

Total Commercial
 
4,247

 
1,288

 
6,675

 
10,922

 
13,787

Residential
 
480

 
38

 
193

 
673

 
678

Home Equity
 
—

 
—

 
51

 
51

 
51

Consumer
 
20

 
20

 
121

 
141

 
388

Total impaired loans
 
$
4,747

 
$
1,346

 
$
7,040

 
$
11,787

 
$
14,904

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
Commercial Business
 
$
574

 
$
4

 
$
3,260

 
$
3,834

 
$
3,834

Commercial Real Estate
 
7,587

 
513

 
—

 
7,587

 
7,587

Acquisition & Development
 
1,800

 
191

 
956

 
2,756

 
4,131

Total Commercial
 
9,961

 
708

 
4,216

 
14,177

 
15,552

Residential
 
1,045

 
276

 
22

 
1,067

 
1,067

Home Equity
 
28

 
28

 
—

 
28

 
28

Consumer
 
103

 
1

 
—

 
103

 
103

Total impaired loans
 
$
11,137

 
$
1,013

 
$
4,238

 
$
15,375

 
$
16,750

Impaired loans have decreased by $3.6 million, or 23% during the first nine months of 2016, primarily the result of the net impact of four commercial loans. A $5.0 million loan to finance commercial real estate property in the Northern Virginia market, which had as primary tenants, government contractors that have vacated the premises as a result of losing significant contracts with the United States government, was purchased from another financial institution in late 2013. In the first quarter of 2016, this $5.0 million loan was repurchased by the selling financial institution thereby decreasing total impaired loans by $5.0 million. In contrast, a $1.8 million commercial real estate loan (net of a $619 thousand participation) was identified as impaired in the first quarter of 2016 as a result of an extended stabilization and interest only period, as well as a lack of project specific cash flows. A charge-off of $535 thousand was incurred on this loan in the second quarter of 2016. The remaining two loans that caused the most significant change to total impaired loans in 2016, which are related commercial loans within a single relationship, totaled $1.0 million and were identified as impaired in the second quarter of 2016 as a result of a decline in the coal industry. In the third quarter of 2016, these two loans, along with a third related loan that was previous impaired, required orderly liquidation of the related collateral, resulting in $435 thousand in principal curtailment and a total of partial charge offs in the amount of $679 thousand. The net effect of these three significant impairment items was $4.0 million. The remaining $400 thousand of the decrease in impaired loans since December 31, 2015 was the net effect of multiple other factors, including the identification of ten impaired commercial loans with a total balance of $855 thousand, the identification of two impaired installment loans with a total balance of $368 thousand,  the identification of one impaired home equity line of credit with a balance of $23 thousand, a total of $630 thousand in partial charge-offs related to these various loans, the foreclosure upon a $127 thousand impaired residential real estate loan, and normal loan amortization.




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The following tables present the average recorded investment in impaired loans and related interest income recognized for the periods indicated (Dollars in thousands):
 
Nine Months Ended
September 30, 2016
 
Three Months Ended
September 30, 2016
 
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
$
4,296

 
$
116

 
$
104

 
$
4,730

 
$
39

 
$
40

Commercial Real Estate
5,008

 
84

 
75

 
6,864

 
28

 
25

Acquisition & Development
1,927

 
7

 
9

 
2,958

 
2

 
3

Total Commercial
11,231

 
207

 
188

 
14,552

 
69

 
68

Residential
885

 
15

 
22

 
731

 
5

 
8

Home Equity
30

 
1

 
1

 
35

 
—

 
—

Consumer
284

 
—

 
—

 
286

 
—

 
—

Total
$
12,430

 
$
223

 
$
211

 
$
15,604

 
$
74

 
$
76

 
Nine Months Ended
September 30, 2015
 
Three Months Ended
September 30, 2015
 
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
$
3,228

 
$
117

 
$
114

 
$
2,945

 
$
39

 
$
39

Commercial Real Estate
6,533

 
44

 
37

 
6,525

 
15

 
12

Acquisition & Development
3,210

 
7

 
7

 
2,957

 
2

 
2

Total Commercial
12,971

 
168

 
158

 
12,427

 
56

 
53

Residential
935

 
15

 
11

 
909

 
5

 
7

Home Equity
28

 
1

 
1

 
28

 
—

 
—

Consumer
1

 
—

 
—

 
1

 
—

 
—

Total
$
13,935

 
$
184

 
$
170

 
$
13,365

 
$
61

 
$
60

As of September 30, 2016, the Bank held two foreclosed residential real estate properties representing $158 thousand, or 66%, of the total balance of other real estate owned. There are five additional consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure. The total recorded investment in these loans was $529 thousand as of September 30, 2016.
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,

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repossession, or death occurs to raise awareness of a possible credit event.  The Bank’s Chief Credit Officer is responsible for the timely and accurate risk rating of the loans in the portfolio at origination and on an ongoing basis.  The Credit Department ensures that a review of all commercial relationships of one million dollars or greater is performed annually.
Review of the appropriate risk grade is included in both the internal and external loan review process, and on an ongoing basis.  The Bank has an experienced Credit Department that continually reviews and assesses loans within the portfolio.  The Bank engages an external consultant to conduct independent loan reviews on at least an annual basis.  Generally, the external consultant reviews larger commercial relationships or criticized relationships.  The Bank’s Credit Department compiles detailed reviews, including plans for resolution, on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
The following table represents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of September 30, 2016 and December 31, 2015 (Dollars in thousands):
September 30, 2016
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
Commercial
 
 
 
 
 
 
 
 
 
 
Commercial Business
 
$
327,404

 
$
3,170

 
$
7,242

 
$
488

 
$
338,304

Commercial Real Estate
 
290,791

 
5,014

 
4,809

 
1,447

 
302,061

Acquisition & Development
 
103,633

 
2,976

 
1,527

 
1,543

 
109,679

Total Commercial
 
721,828

 
11,160

 
13,578

 
3,478

 
750,044

Residential
 
241,028

 
1,476