Note 9 – 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. 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 September 30, 2018 and September 30, 2017 are as follows:



Three Months Ended September 30, 2018	Commercial & Retail Banking		Mortgage Banking			Financial Holding Company			Intercompany Eliminations			Consolidated
(Dollars in thousands)	Commercial & Retail Banking		Mortgage Banking			Financial Holding Company			Intercompany Eliminations			Consolidated
Revenues:
Interest income	$	16,506	$	1,763		$	1		$	(94	)	$	18,176
Mortgage fee income	152		9,246			—			(390		)	9,008
Other income	2,203		(738		)	1,706			(1,668		)	1,503
Total operating income	18,861		10,271			1,707			(2,152		)	28,687
Expenses:
Interest expense	3,664		1,138			333			(483		)	4,652
Salaries and employee benefits	3,493		6,047			1,980			—			11,520
Provision for loan losses	1,025		44			—			—			1,069
Other expense	5,274		2,147			1,145			(1,669		)	6,897
Total operating expenses	13,456		9,376			3,458			(2,152		)	24,138
Income (loss) before income taxes	5,405		895			(1,751		)	—			4,549
Income tax expense (benefit)	1,121		229			(380		)	—			970
Net income (loss)	$	4,284	$	666		$	(1,371	)	$	—		$	3,579
Preferred stock dividends	—		—			123			—			123
Net income (loss) available to common shareholders	4,284		666			(1,494		)	—			3,456

Capital Expenditures for the three-month period ended September 30, 2018	$	808	$	128		$	65		$	—		$	1,001
Total Assets as of September 30, 2018	1,722,542		170,931			191,033			(361,402		)	1,723,104
Total Assets as of December 31, 2017	1,533,497		149,323			184,599			(333,117		)	1,534,302
Goodwill as of September 30, 2018	1,598		16,882			—			—			18,480
Goodwill as of December 31, 2017	1,598		16,882			—			—			18,480



Three Months Ended September 30, 2017	Commercial & Retail Banking		Mortgage Banking			Financial Holding Company			Intercompany Eliminations			Consolidated
(Dollars in thousands)	Commercial & Retail Banking		Mortgage Banking			Financial Holding Company			Intercompany Eliminations			Consolidated
Revenues:
Interest income	$	13,432	$	1,352		$	1		$	(155	)	$	14,630
Mortgage fee income	200		10,042			—			(224		)	10,018
Other income	1,466		(1,279		)	1,250			(1,297		)	140
Total operating income	15,098		10,115			1,251			(1,676		)	24,788
Expenses:
Interest expense	2,347		684			565			(380		)	3,216
Salaries and employee benefits	3,107		6,768			1,374			—			11,249
Provision for loan losses	—		96			—			—			96
Other expense	4,822		2,100			1,091			(1,296		)	6,717
Total operating expenses	10,276		9,648			3,030			(1,676		)	21,278
Income (loss) before income taxes	4,822		467			(1,779		)	—			3,510
Income tax expense (benefit)	1,605		191			(604		)	—			1,192
Net income (loss)	$	3,217	$	276		$	(1,175	)	$	—		$	2,318
Preferred stock dividends	—		—			123			—			123
Net income (loss) available to common shareholders	3,217		276			(1,298		)	—			2,195

Capital Expenditures for the three-month period ended September 30, 2017	$	109	$	129		$	151		$	—		$	389
Total Assets as of September 30, 2017	1,466,845		140,954			183,231			(319,440		)	1,471,590
Total Assets as of December 31, 2016	1,415,735		122,242			180,335			(299,508		)	1,418,804
Goodwill as of September 30, 2017	1,598		16,882			—			—			18,480
Goodwill as of December 31, 2016	1,598		16,882			—			—			18,480



Nine Months Ended September 30, 2018	Commercial & Retail Banking		Mortgage Banking		Financial Holding Company			Intercompany Eliminations			Consolidated
(Dollars in thousands)	Commercial & Retail Banking		Mortgage Banking		Financial Holding Company			Intercompany Eliminations			Consolidated
Revenues:
Interest income	$	45,772	$	4,870	$	3		$	(471	)	$	50,174
Mortgage fee income	444		25,071		—			(881		)	24,634
Other income	5,052		485		4,748			(4,574		)	5,711
Total operating income	51,268		30,426		4,751			(5,926		)	80,519
Expenses:
Interest expense	9,503		2,945		1,433			(1,351		)	12,530
Salaries and employee benefits	10,946		18,289		5,252			—			34,487
Provision for loan losses	2,067		81		—			—			2,148
Other expense	14,803		6,566		3,124			(4,575		)	19,918
Total operating expenses	37,319		27,881		9,809			(5,926		)	69,083
Income (loss) before income taxes	13,949		2,545		(5,058		)	—			11,436
Income tax expense (benefit)	2,932		654		(1,154		)	—			2,432
Net income (loss)	$	11,017	$	1,891	$	(3,904	)	$	—		$	9,004
Preferred stock dividends	—		—		366			—			366
Net income (loss) available to common shareholders	11,017		1,891		(4,270		)	—			8,638

Capital Expenditures for the nine-month period ended September 30, 2018	$	1,820	$	235	$	109		$	—		$	2,164
Total Assets as of September 30, 2018	1,722,542		170,931		191,033			(361,402		)	1,723,104
Total Assets as of December 31, 2017	1,533,497		149,323		184,599			(333,117		)	1,534,302
Goodwill as of September 30, 2018	1,598		16,882		—			—			18,480
Goodwill as of December 31, 2017	1,598		16,882		—			—			18,480



Nine Months Ended September 30, 2017	Commercial & Retail Banking		Mortgage Banking			Financial Holding Company			Intercompany Eliminations			Consolidated
(Dollars in thousands)	Commercial & Retail Banking		Mortgage Banking			Financial Holding Company			Intercompany Eliminations			Consolidated
Revenues:
Interest income	$	38,651	$	3,206		$	3		$	(348	)	$	41,512
Mortgage fee income	573		28,616			—			(585		)	28,604
Other income	4,074		(1,973		)	3,768			(3,924		)	1,945
Total operating income	43,298		29,849			3,771			(4,857		)	72,061
Expenses:
Interest expense	6,635		1,521			1,674			(932		)	8,898
Salaries and employee benefits	9,030		19,870			4,109			—			33,009
Provision for loan losses	966		171			—			—			1,137
Other expense	14,539		6,244			2,919			(3,925		)	19,777
Total operating expenses	31,170		27,806			8,702			(4,857		)	62,821
Income (loss) before income taxes	12,128		2,043			(4,931		)	—			9,240
Income tax expense (benefit)	3,931		827			(1,670		)	—			3,088
Net income (loss)	$	8,197	$	1,216		$	(3,261	)	$	—		$	6,152
Preferred stock dividends	—		—			374			—			374
Net income (loss) available to common shareholders	8,197		1,216			(3,635		)	—			5,778

Capital Expenditures for the nine-month period ended September 30, 2017	$	2,709	$	1,102		$	197		$	—		$	4,008
Total Assets as of September 30, 2017	1,466,845		140,954			183,231			(319,440		)	1,471,590
Total Assets as of December 31, 2016	1,415,735		122,242			180,335			(299,508		)	1,418,804
Goodwill as of September 30, 2017	1,598		16,882			—			—			18,480
Goodwill as of December 31, 2016	1,598		16,882			—			—			18,480

Commercial & Retail Banking

For the three months ended September 30, 2018, the Commercial & Retail Banking segment earned $4.3 million compared to $3.2 million in 2017. Net interest income increased by $1.8 million, primarily the result of an increase of $2.6 million in interest and fees on loans. This increase in interest income was partially offset by an increase of $1.0 million in interest on deposits. Noninterest income increased by $689 thousand which was the result of an increase of $369 thousand in income on bank owned life insurance and an increase of $624 thousand in holding gain on equity securities. These increases were partially offset by a decrease of $259 thousand in gain on sale of portfolio loans and a decrease of $102 thousand in gain on sale of securities. Noninterest expense increased by $838 thousand, primarily the result of an increase of $386 thousand in salaries and employee benefits expense, an increase of $392 thousand in other operating expenses, and an increase of $219 thousand in professional fees. These increases were partially offset by a decrease of $85 thousand in printing, postage, and supplies and a decrease of $16 thousand in data processing and communications expense. In addition, provision expense increased by $1.0 million due to increased loan volume in the third quarter of 2018 versus the same quarter in 2017, slightly reduced historical loan loss rates, increased specific loan loss allocations, and a lower level of charge-offs in the third quarter of 2018 versus 2017.

For the nine months ended September 30, 2018, the Commercial & Retail Banking segment earned $11.0 million compared to $8.2 million in 2017. Net interest income increased by $4.3 million, primarily the result of an increase of $5.5 million in interest and fees on loans, an increase of $770 thousand in interest on taxable investment securities, and an increase of $775 thousand in interest on tax exempt loans and securities. This increase in interest income was partially offset by an increase of $2.0 million in interest on deposits and an increase of $889 thousand in interest on FHLB and other borrowings. Noninterest income increased by $849 thousand which was the result of an increase of $505 thousand in income on bank owned life insurance, an increase of $265 thousand in the performance of the interest rate cap, an increase of $165 thousand in Visa debit card and interchange income, and an increase of $182 thousand in service charges on deposit accounts, which were partially offset by a decrease of $313 thousand in the gain on sale of securities. Noninterest expense increased by $2.2 million, primarily the result of an increase of $1.9 million in salaries and employee benefits expense and an increase of $771 thousand in other operating expenses. These increases were partially offset by a decrease of $431 thousand in data processing and communications expense. In addition, provision expense increased $1.1 million due to increased loan volume in the first nine months of 2018 versus the same time period in 2017, slightly reduced historical loan loss rates, increased specific loan loss allocations, and a lower level of charge-offs in the nine months ended September 30, 2018 versus the same time frame in 2017.

Mortgage Banking

For the three months ended September 30, 2018, the Mortgage Banking segment earned $666 thousand compared to $276 thousand in 2017. Net interest income decreased $43 thousand, which was the result of an increase of $454 thousand in interest on FHLB and other borrowings due to an increase of $23.8 million in average borrowings and an increase in short-term borrowing rates, which was partially offset by an increase of $410 thousand in interest and fees on loans. Noninterest income decreased by $255 thousand, primarily the result of a decrease of $796 thousand in mortgage fee income, which was partially offset by an increase of $541 thousand in the gain on derivative. The decrease in mortgage fee income was driven by the decrease of mortgage production volume, which decreased by $26.3 million or 6.6% for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. This was offset by the gain on derivatives of $541 thousand, which was largely the result of an increase of $832 thousand in the valuation of the open trades used to hedge the derivative asset during the three months ended September 30, 2018 compared to a decrease of $437 thousand in the valuation of the open trades used to hedge the derivative asset during the three three months ended September 30, 2017. This was partially offset by a $1.2 million decrease in the derivative asset, as the locked pipeline related to the derivative asset decreased 19.6% in the third quarter of 2018 compared to a decrease of 20.1% in the third quarter of 2017. Noninterest expense decreased by $674 thousand, which was the result of a decrease of $721 thousand in salaries and employee benefits expense, which was partially offset by an increase of $50 thousand in mortgage processing expense. The decrease in salaries and employee benefits expense was primarily the result of a decrease in the overall contractual commissions to loan officers and management, as well as a decrease of $149 thousand in the earn out paid to management of the mortgage company related to the 2012 acquisition.

For the nine months ended September 30, 2018, the Mortgage Banking segment earned $1.9 million compared to $1.2 million in 2017. Net interest income increased by $240 thousand, primarily the result of an increase of $1.7 million in interest and fees on loans, offset by an increase of $1.4 million in interest on FHLB and other borrowings due to an increase of $37.5 million in average borrowings and an increase in short-term borrowing rates. Noninterest income decreased by $1.1 million, primarily the result of a decrease of $3.5 million in mortgage fee income, partially offset by an increase of $2.5 million in gain on derivatives. The decrease in mortgage fee income was driven by the decrease of mortgage production volume, which decreased by $60.5 million or 5.2% for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. This was offset by the increase in gain on derivatives of $2.5 million, which was largely the result of a 34.0% increase in the locked mortgage pipeline for the nine months ended September 30, 2018 compared to a 17.5% decrease in the locked mortgage pipeline for the nine months ended September 30, 2017. Noninterest expense decreased by $1.3 million, which was the result of a decrease of $1.6 million in salaries and employee benefits expense, which was partially offset by an increase of $296 thousand in mortgage processing expense. The decrease in salaries and employee benefits expense was primarily the result of lower commissions paid due to a 5.2% decrease in mortgage closed loan volume and a decrease of $479 thousand in the earn out paid to management of the mortgage company related to the 2012 acquisition.

Financial Holding Company

For the three months ended September 30, 2018, the Financial Holding Company segment lost $1.4 million compared to a loss of $1.2 million in 2017. Interest expense decreased $232 thousand, noninterest income increased $456 thousand, and noninterest expense increased $660 thousand. In addition, the income tax benefit decreased $224 thousand. The increase in noninterest income was primarily the result of an increase of $373 thousand in intercompany services income related to Regulation W and an increase of $84 thousand in other operating income. The increase in noninterest expense was primarily the result of an increase of $606 thousand in salaries and employee benefits expense and an increase of $150 thousand in travel, entertainment, dues, and subscriptions.

For the nine months ended September 30, 2018, the Financial Holding Company segment lost $3.9 million compared to a loss of $3.3 million in 2017. Interest expense decreased $241 thousand, noninterest income increased $980 thousand, and noninterest expense increased $1.3 million. In addition, the income tax benefit decreased $516 thousand. The increase in noninterest income was primarily the result of an increase of $651 thousand in intercompany services income related to Regulation W, an increase of $186 thousand in gain on sale of securities, an increase of $75 thousand in other operating income, and a $69 thousand holding gain on available-for-sale equity securities. The increase in noninterest expense was primarily the result of an increase of $1.1 million in salaries and employee benefits expense and an increase of $400 thousand in travel, entertainment, dues, and subscriptions, which were partially offset by a decrease of $115 thousand in professional fees.