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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-K |
(Mark One) |
☒ ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202023 |
or |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________ |
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Commission file number 000-50567001-38314 |
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MVB Financial Corp. |
(Exact name of registrant as specified in its charter) |
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West Virginia | | | | 20-0034461 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
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301 Virginia Avenue, Fairmont, WV | | | | 26554 |
(Address of principal executive offices) | | | | (Zip Code) |
Registrant’s telephone number, including area code (304) 363-4800 |
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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 Per Share | | MVBF | | The Nasdaq Stock Market LLC (Nasdaq Capital Market) |
Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) Act. Yes ☐ No ☒
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 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
Based upon the closing price of the common shares of the registrant on June 30, 20202023 of $13.30$21.08 as reported on the Nasdaq Capital Market, the aggregate market value of the common shares of the registrant held by non-affiliates during that time was $137,985,864.$247.1 million. For this purpose, certain executive officers and directors are considered affiliates. This calculation does not reflect a determination that such persons are affiliates for any other purpose.
As of March 8, 2021,11, 2024, the registrant had 11,568,15612,837,383 shares of common stock outstanding with a par value of $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to the 20212023 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Forward-Looking Statements:
Statements in this Annual Report on Form 10-K that are based on factors other than historical data are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others, statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations and future financial condition, results of operations and performance of the Company and its subsidiaries (collectively, “we,” “our,” or “us”), including the MVB Bank, Inc. (the “Bank”), and statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” "target," “expect,” “intend,” “plan,” “projects,” “outlook,”“outlook” or the negative of those terms or similar expressions.
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing the Company'sour view as of any subsequent date. Forward-looking statements involve significant risks and uncertainties (both known and unknown) and actual results may differ materially from those presented, either expressed or implied, including, but not limited to, those presented in the Management’sItem 7 – Management's Discussion and Analysis section.of Financial Condition and Results of Operations. Factors that might cause such differences include, but are not limited to:
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l | the length, severity, magnitude and duration of the Coronavirus Disease (“COVID-19”) pandemicinterest rate fluctuations in response to economic conditions and the directpolicies of various governmental and indirect impacts of such pandemic, including its impact on the Company’s financial condition and business operations;regulatory agencies; |
l | changes in the economy, which could materially impact credit quality trends and the ability to generate loans and gather deposits, including the pace of recovery following the COVID-19 pandemic;deposits; |
l | ability to successfully execute business plans, manage risksindustry factors and achieve objectives, including strategies related to recent investments in Fintech; |
l | market,general economic operational, liquidity, credit and interest rate risks associated with the Company's business; |
l | changes in local, nationalpolitical conditions and international politicalevents, such as economic slowdowns or recessions, nationally and economic conditions, including without limitation changes in the political and economic climate, economic conditions and other major developments, including wars, natural disasters, epidemics and pandemics, military actions and terrorist attacks;markets in which we operate; |
l | changes in financial market conditions either internationally, nationally or locally in areas in which the Company conductswe conduct operations, including, without limitation, changes in deposit flows, the cost of funds, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices; |
l | evolving legislation and heightened regulatory scrutiny in emerging financial technology ("Fintech") and banking-as-a-service sectors; |
l | our ability to recruit, retain and train talented employees and executives with such knowledge, experience and industry expertise to understand and comply with evolving legislation and regulations and to successfully implement succession plans for such employees and executives; |
l | ability to adapt to technological change and to successfully execute business plans, manage risks and achieve objectives, including strategies related to investments in Fintech; |
l | market, economic, operational, liquidity, credit and interest rate risks associated with our business; |
l | changes, volatility and disruption in local, national and international political and economic conditions, including, without limitation, major developments such as wars, natural disasters, epidemics and pandemics, military actions, terrorist attacks and geopolitical conflict; |
l | climate change, severe weather and natural disasters which could have a material adverse effect on our business, financial condition and results of operations; |
l | unanticipated changes in the Company'sour liquidity position, including, but not limited to, changes in access to sources of liquidity and capital to address itsour liquidity needs; |
l | changes in interest rates;volume or composition of deposits, including certain concentrations with large customers and industries, such as banking-as-a-service and gaming; |
l | the quality and composition of theour loan and securities portfolios; |
l | ability to successfully conduct acquisitions and integrate acquired businesses and potential difficulties in expanding businesses in existing and new markets; |
l | ability to successfully manage credit risk and the sufficiency of allowance for credit losses; |
l | increases in the levels of losses, customer bankruptcies, bank failures, claims and assessments; |
l | changes in government legislation and accounting policies, including the Dodd-Frank Act and EGRRCPA;Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”); |
l | uncertainty about the discontinued use of LIBOR and the transition to an alternative rate; |
l | continuing competition and consolidation in the financial services industry; |
l | new legal claims against us, including litigation, arbitration and proceedings brought by governmental or self-regulatory agencies or changes in existing legal matters; |
l | success in gaining regulatory approvals, when required, including for proposed mergers or acquisitions; |
l | changes in consumer spending and savings habits, including demand for loan products and deposit flow; |
l | increased competitive challenges and expanding product and pricing pressures among financial institutions and non-bank financial companies; |
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l | operational risks or risk management failures by us, our customers or critical third parties, including without limitation, with respect to data processing, information systems, cyber-security, technological changes, vendor problems, business interruptions and fraud risk; |
l | increasing risk of continually evolving, sophisticated cybersecurity activities faced by financial institutions and others that could result in, among other things, theft, loss, misuse or disclosure of confidential client, customer or corporate information or assets and a disruption of computer, software or network systems and the potential impact from such risks, including reputational damage, regulatory penalties, loss of revenues, additional costs (including repair, remediation and other costs), exposure to litigation and other financial losses; |
l | risks, uncertainties and losses involved with the developing digital assets industry, including the evolving regulatory framework; |
l | failure or circumvention of internal controls; |
l | legislationlegislative or regulatory changes which adversely affect our operations or business, including the possibility of increased regulatory oversight due to changes to addressin the impactnature and complexity of COVID-19 through the CARES Act and other legislative and regulatory responses to the COVID-19 pandemic; andour business model; |
l | ability to comply with applicableincreased emphasis by regulators on federal and state consumer protection laws and regulations; that extensively govern customer relationships; |
l | changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (“FASB”) or regulatory agencies, including the impact of adoptionadopting the current expected credit losses (“CECL”) standard; |
l | risks and potential losses involved with uninsured deposits beyond Federal Deposit Insurance Corporation (“FDIC”) limitations; |
l | concentration risk in our deposit base, including risk of the new CECL standard;losing large clients and |
concentration in certain industries, such as gaming deposits; and
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l | costs of deposit insurance and changes with respect to FDIC insurance coverage levels. |
Certain risk factors that might cause actual results to differ materially from those presented are more fully described in this Annual Report on Form 10-K within Part I, Item 1A – Risk Factors, included elsewhere in this report and from time to time, in other filings with the Securities and Exchange Commission (“SEC”). Actual results may differ materially from those expressed in or implied by any forward-looking statement. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except to the extent required by law, the Companywe specifically disclaimsdisclaim any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.
REFERENCES
Unless the context otherwise requires, references in this report to “MVB Financial,” “MVB,” the “Company,” “we,” “us,” “our,” and “ours” refer to the registrant, MVB Financial Corp., and its subsidiaries consolidated for the purposes of its financial statements.
PART I
ITEM 1. BUSINESS
Corporate Overview
MVB Financial Corp. (“MVB” or the “Company”) is a financial holding company organized as a West Virginia corporation in 2003. MVB2003 that operates principally through its wholly-owned subsidiary, MVB Bank, Inc. (“MVB Bank” or the(the “Bank”). MVBThe Bank’s consolidated subsidiaries includeMVB Insurance,Edge Ventures, LLC a title insurance company (“MVB Insurance”Edge Ventures”), MVB Community Development Corporation (“MVB CDC”), ProCo Global, Inc. (“Chartwell,” which began doing business under the registered trade name Chartwell Compliance), Paladin Fraud, LLC (“Paladin Fraud”) and MVB Technology,Insurance, LLC, (“MVB Technology”Insurance”). The CompanyBank owns a controlling interest in Trabian Technology, Inc. (“Trabian”). Edge Ventures wholly-owns Victor Technologies, Inc. (“Victor”) and MVB Technology, LLC ("MVB Technology"). The Bank also owns a minority interestan equity method investment in Intercoastal Mortgage Company, LLC (“ICM”) and MVB Financial owns equity method investments in Warp Speed Holdings, LLC (“Warp Speed”) and Ayers Socure II, LLC (“Ayers Socure II”). MVB Financial's consolidated subsidiaries also includes SPE PR, LLC ("MVB PR").
MVB conductsThrough our professional services entities, which include Paladin Fraud and Trabian, we provide consulting solutions to assist Fintech and corporate clients in building digital products and meeting their fraud defense needs.
In February 2023, we completed the sale of the Bank’s wholly-owned subsidiary, ProCo Global, Inc. (“Chartwell,” which does business under the registered trade name Chartwell Compliance). In May 2023, we entered into an agreement with Flexia Payments, LLC ("Flexia"), in which Edge Ventures owned a controlling interest, to facilitate the divestiture of our interests in the ongoing business of Flexia.
Business Overview
We conduct a wide range of business activities through the Bank, primarily commercial and retail (“CoRe”) banking. The Company also continues to be involved in new innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in financial technology (“Fintech”) related companies,services, as further described below. MVB considerswell as Fintech companies as those entities that use technology to electronically move funds.banking.
Since the formation of the Bank, the Company has acquired a number of financial institutions and other financial services businesses. Future acquisitions and divestitures will be consistent with the Company’s strategic direction. The Company's most recent acquisition and divestiture activity includes the following:
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l | In September 2019, the Company acquired Chartwell, based from Bethesda, MD. Chartwell provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. Chartwell has expanded its services to both Fintech clients and banks, in coordination with MVB Bank’s current compliance officers, to help create and implement strategy and provide expert compliance resources with respect to new client due diligence. |
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l | In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc. (“Summit”), a subsidiary of Summit Financial Group, Inc., pursuant to which Summit purchased certain assets and assumed certain liabilities of three Bank branch locations in Berkeley County, WV, and one Bank branch location in Jefferson County, WV. The Company closed this transaction in April 2020. |
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l | In March 2020, the Bank entered into an Agreement with Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the Bank's mortgage origination services and Intercoastal. The transaction closed in July 2020. On the closing date, Intercoastal converted into a Virginia limited liability company and the Bank contributed certain of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of a new entity, ICM, representing 47% of the common interest of ICM, as well as $7.5 million in preferred units. The Company recognizes its ownership interest in ICM as an equity method investment. |
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l | In April 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (“FDIC”), as receiver for The First State Bank (“First State”), Barboursville, WV, providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In the Agreement, the Bank agreed to pay no deposit premium and to acquire the assets at a discount to book value. The Bank also acquired three branch locations in Barboursville, Teays Valley and Huntington, WV. |
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l | In April 2020, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC, a Washington limited liability company. |
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l | In August 2020, MVB Technology entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware corporation doing business as Grand. Pursuant to the Asset Purchase Agreement, MVB Technology acquired substantially all the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of MVB’s note with Invest Forward. |
Business Overview
Commercial and RetailCoRe Banking
The Company’s primary business activities, which are conducted through the Bank and its subsidiaries, are primarily CoRe banking. The Bank offers itsWe offer our customers a full range of products and services including:
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l | Various demand deposit accounts, savings accounts, money market accounts and certificates of deposit; |
l | Commercial, consumer and real estate mortgage loans and lines of credit; |
l | Debit cards; |
l | Cashier’s checks; |
l | Safe deposit rental facilities; and |
l | Non-deposit investment services offered through an association with a broker-dealer. |
Fintech Banking
In addition to its CoRe banking activities, the Company is also involved inWe provide innovative strategies to provide independent banking toand corporate clients throughout the United States by leveraging recent investments in Fintech. TheStates. Our dedicated Fintech sales team is based in Salt Lake City, UT, and specializes in providing banking services to corporate Fintech clients, with an overarching focusprimarily focusing on operational risk management and compliance. Managing banking relationships with clients in the payments, digital savings, cryptocurrency, crowd funding, lotteryassets, banking-as-a-service and gaming industries is complex, from both an operational and regulatory perspective. The Company holdsDue to this complexity, there are a strategic view that the complexitylimited number of banking institutions serving these industries, causes them to be underservedwhich can result in a lack of quality focus on these entities, providing us with quality banking services and provides the Company with a significantlyan expanded pool of potential customers. When serviced in a safeserved safely and efficient manner,efficiently, we believe these industries offer an excellentprovide a source of stable, low costlower-cost deposits and non-interestnoninterest, fee-based income. The Company analyzesWe thoroughly analyze each industry thoroughly,in which our customers operate, as well as any new products or services provided, from both from an operational and regulatory viewpoint. This business lineperspective.
Edge Ventures
Edge Ventures, a wholly-owned subsidiary of the Bank, acts as a holding company for Victor and MVB Technology.
Victor
Victor is a wholly-owned subsidiary of Edge Ventures. The team at Victor develops technology to make it faster and easier to launch and scale a broad spectrum of Fintech solutions for the gaming, payments, banking-as-a-service and digital asset sectors.
Within weeks, Fintech developers can build solutions to manage and move money with developer-friendly application programming interfaces. Banks can onboard and manage more programs with Victor’s tailored due diligence, risk assessment and oversight workflow tools. Recognizing the complexity of the Fintech ecosystem, Victor also supports seamless integration with a proven network of value-added technology and service providers.
Professional Services
Paladin Fraud
Paladin Fraud is a wholly-owned subsidiary of the Bank. Paladin Fraud provides an extensive and customizable suite of fraud prevention services for merchants, credit agencies, Fintech companies and other vendors to help clients and partners defend against threats.
Trabian
The Bank owns an 80.8% interest in Trabian. Trabian builds digital products and web and mobile applications for forward-thinking community banks, credit unions, digital banks and Fintech companies. Consistent with the Bank's mission to pursue technology to accelerate community finance, Trabian has created technology platforms that have been instrumental to the potential for fee income revenue as relationships grow.success of many of today’s leading Fintech companies.
Primary Market Areas and Customers
The Company considers itsOur primary market area for CoRe banking services to be comprised ofencompasses North Central West Virginia and Northern Virginia, where the Bankwe currently operates a totaloperate eight full-service branches, comprising of 13 full-service banking branches: tensix in West Virginia and threetwo in Virginia. Overall, 32.5% of the Bank's lending activity across all loan types occurs to borrowers outside of this region, mostly in loans to healthcare facilities secured by commercial real estate and for working capital lines of credit, as well as loans through SBA lending programs to borrowers across numerous industries. The Company considers itsBank also engages in both residential mortgage and mortgage construction lending in regions outside of the primary market, concentrated in the North Carolina and South Carolina markets. We consider our Fintech banking market to be customers located throughout the entire United States.
The Company believesWe believe that the current economic climate in itsour primary market areas reflect economic climates that are consistent with the general national economic climate. Unemployment in the United States was 6.5%3.5%, 3.4%3.3% and 3.7% for December 2020, 20192023, 2022 and 2018,2021, respectively.
COVID-19 Pandemic
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 continues to evolve. 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. Please refer to Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report.
Segment Reporting
The Company hasWe have identified three reportable segments: CoRe banking; mortgage banking;Banking, Mortgage Banking and Financial Holding Company. All other operating segments are summarized in an Other category.
Our CoRe Banking segment, which includes our Fintech division, represents banking products and services offered to customers by the financial holding company.Bank, primarily loans and deposits accounts. Revenue from CoRe banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. The Fintech division, Chartwell and Paladin Fraud reside in the CoRe banking segment.
Revenue from theour Mortgage Banking segment is primarily comprised of our share of net income or loss from mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage loan origination process. Prior to July 2020, the mortgage banking services were conducted by a subsidiary of the Bank, Potomac Mortgage Group (“PMG”). In July 2020, the Company announced the completion of PMG’s combination with Intercoastal to form ICM. The Company has recognized its ownership as anour equity method investment, initially recorded at fair value. Income related to this equity method investment is includedinvestments in the Mortgage Banking segment. Revenue from financial holding company activities isICM and Warp Speed.
Revenue from Financial Holding Company activities is mainly comprised of intercompany service income and dividends.
For more information about each of the Company’sour reportable segments, please refer to Note 2123 – Segment Reporting accompanying the consolidated financial statements included elsewhere in this report.
Commercial Loans
At December 31, 2020,2023, the Bank had $1.60 billion outstanding approximately $1.16 billion in commercial loans, including commercial and industrial, commercial real estate and financialconstruction loans. These loans represented approximately 80%69.2% of the total aggregate loan portfolio as of that date.
Commercial lending entails significant additional risks as compared withto residential and consumer lending (i.e., single-family residential mortgage lending and installment lending).lending. In addition, the payment experienceability of a borrower to make payments on commercial loans typically depends on adequate cash flow of a business and thus may be subject
to to a greater extent, adverse conditions in the general economy or in a specific industry.industry to a greater extent than consumer loans. Loan terms include amortization schedules commensurate with the purpose of each loan, the source of repayment and the risk involved. The primary analysis technique used in determining whether to grant a commercial loan is the review of a schedule of estimated cash flows to evaluate whether anticipated future cash flows will be adequate to service both interest and principal due. In addition, the Bank reviews collateral to determine its value in relation to the loan in the event of a foreclosure.
The Bank evaluates all new commercial loans and the Bank’s Credit Department facilitates an annual loan review process that ensures that a significant portion of the commercial loan portfolio, typically a minimum of 50%60%, is reviewed each year under a risk-based approach. The Bank also engages a third-party for an external loan review, which targets 40% to 45% of the commercial loan portfolio on an annual basis, also using a risk-based approach for loan selection. If deterioration in credit worthinesscreditworthiness has occurred, the Bank takes prompt action designed to assureensure repayment of the loan. Upon detection of the reduced ability of a borrower to meet original cash flow obligations, the loan is considered for possible downgrading, and may be considered classified and potentially placed on non-accrual status.
In addition to the review noted above, the commercial and credit teams performed an evaluation of the entire commercial loan portfolio for potential short- and long-term impacts of COVID-19. Through this process, the Company identified the industries and borrowers that were most significantly impacted by COVID-19, allowing it to implement immediate risk mitigation efforts and provide relief where necessary to support its clients. Management will continue to monitor the portfolio for any ongoing effects.
Residential Mortgage Loans
At December 31, 2020,2023, the Bank had approximately $288.0$687.1 million of residential real estate loans, home equity lines of credit and construction mortgages outstanding, representing 19.8%29.7% of total loans outstanding.
The Bank generally requires that thea residential real estate loan amount be no more than 80% of the purchase price or the appraised value of the real estate securing the loan unless the borrower obtains private mortgage insurance for the percentage exceeding 80%. Occasionally, the Bank may lend up to 100% of the appraised value of the real estate. Loans made in this lending category are generally oneone- to ten yearten-year adjustable rate, fully amortizing to maturity mortgages. MVBThe Bank also originates fixed ratefixed-rate real estate loans and generally sells these loans in the secondary market. Most real estate loans are secured by first mortgages with evidence of title in favor of the Bank in the form of an attorney’s opinion of the title or a title insurance policy. MVBThe Bank also requires proof of hazard insurance with the Bank named as the mortgagee and as the loss payee. FullThe Bank obtains full appraisals are obtained from licensed appraisers for the majority of loans secured by real estate. In addition, the Bank purchases residential real estate loans from ICM.
ConstructionLenders generally consider residential construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. RiskThe risk of loss on a construction loan is dependentdepends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost estimate proves to be inaccurate, MVBwe may advance funds beyond the amount originally committed to permit completion of the project. Also, note that, with respect to construction loans, the Bank generally makes loans to the homeowner, rather than to the builder. At December 31, 2020,2023, residential mortgage construction loans to individuals totaled approximately $119.4$53.3 million with an average remaining life of seven months andfive months. These loans are generally refinanced to a permanent loan upon completion of the construction.
At December 31, 2023, the Bank had $27.4 million of consumer loans, including installment loans and personal lines of credit, representing 1.2% of total loans outstanding. Consumer loans include installment loans used by clients to purchase automobiles, boats and recreational vehicles. Credit risk for consumer loans is similar to residential real estate loans described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.
Competition
The CompanyOur business experiences significant competition in attracting depositors and borrowers. Competition in lending activities comes principally from other commercial banks, savings associations, insurance companies, governmental agencies, credit unions, brokerage firms and pension funds. The primary factors in competing for loans are interest raterates, loan terms and overall lending services. Competition for deposits comes from other commercial banks, savings associations, money market funds and credit unions, as well as from insurance companies and brokerage firms. Competition for deposits also comes principally from other Fintech-focused banks and neobanks, which are online-only financial institutions. The primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience of office location, technology offerings and overall financial condition. The Company believes
Fintech companies also compete with us directly and in partnership with other banks and financial services providers in lending, deposits, contactless payment cards, digital wallets and mobile payments solutions, installment or other buy now pay later methods, real-time payment systems, peer-to-peer payments, card readers and other point of sale technologies, tools that itssimplify
merchant payments and other markets. We believe that our approach of integrating banking services with technology provides flexibility, which enables the Bank to offer an array of banking products and services. ICM facesand Warp Speed face significant competition from both traditional financial institutions, Fintech-focused banks and neobanks and other national and local mortgage banking operations.
The Company operatesWe operate under a “needs-based” selling approach that management believes has proven successful in serving the financial needs of most customers. It is not the Company’sour strategy to compete solely based on the basis of interest rates. Management believes that a focusfocusing on customer relationships and service will promote the Company'sour customers’ continued use of MVB'sour financial products and services and will lead to enhanced revenue opportunities. We are also involved in innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in Fintech companies.
Human Capital Resources
As of December 31, 2020, the Company had 344 employees, including 334 full-time employees, located in 28 states. The Company seeks2023, we employed 445 team members. We seek to attract, retain and develop the most talented employeesteam members possible, regardless of location, by promoting a strong, positive culture, offering competitive compensation, maintaining a safe and healthy workplace, investing in training and education and emphasizing open communication with management and investing in training and education.management.
Culture
The Company strivesWe remain committed to buildmaintaining and maintain a high-performinggrowing our culture where engaged, satisfied employees embody the Company'sby leveraging our purpose, values and associated behaviors. We have successfully operationalized our Culture Initiative by embedding these elements into our day-to-day operations. Examples of this can be found in our talent acquisition, onboarding, education and performance processes. We take time to be “Trusted Partners on the Financial Frontier, Committedlisten to Your Success.” This culture emphasizes the Company's core values of trust, commitment, respect, love, caring, teamwork and being adaptive. As part of the Company’s culture initiative, a personal and professional growth training program, called Thought Patterns for High Performance, was instituted in partnership with The Pacific Institute (“TPI”). All newour team members, complete this programto understand areas of opportunity and there are regular updates throughoutto provide support that enables us to execute on our core training programs.business strategy.
As part of the Company’s engagement with TPI, it launched a Culture BluePrint™ Survey in 2018. The results of that survey helped the Company set a baseline for areas of improvement, with a follow up survey conducted in November 2020. Management used the results of this most recent survey to obtain quantitativeDiversity, Equity and qualitative data about the Company's current culture, identify how our culture has changed in the last two years and consider how culture impacts the way it operates.Inclusion
COVID-19 ResponseOur goal is to create and sustain a visible commitment to diversity, equity and inclusion that is recognizable to current and future team members, clients and partners. We believe leveraging differences in thoughts, experiences, backgrounds and perspectives drives team member engagement, innovation and financial success.
Consistent withWe established a Diversity, Equity and Inclusion Team Member Resource Group, composed of company volunteers across the Company's core values, safety of itsorganization. We believe educating our team members has beenabout events and subjects related to diversity, equity and inclusion creates a top priority duringmore inclusive culture, enables leaders across the COVID-19 pandemic. In mid-March, 2020, more than 85% of Company team members across 28 statesorganization to develop diverse teams and two countries migrated to working remotely, including activities of the Board of Directors, related committeesfosters collaboration and other governance activities. The Company was able to make a relatively seamless transition to a remote working environment and attributes this to its strong focus on technology and culture of adherence to its core values. The Company's pandemic response team continues to meet daily to monitor team member travel and illness concerns and has also generated procedures for employees, vendors, visitors and clients, including providing signage and materials to Company locations, including washable and disposable masks, hand sanitizer stations, disinfectant, thermometers and glass shields. The Company enhanced the cleaning standards and frequency at all of its locations to ensure optimal safety for those team members who continue working on site.innovation.
Management continuesTotal Rewards
To attract and retain team members, we consistently assess the labor market and seek to adaptimprove our benefit and compensation programs. We offer a competitive salary structure with short-term and long-term performance incentives. We designed our total compensation programs to promote the changing environmentinterests of our team members and show flexibilityshareholders, while enabling us to attract and retain top-quality executive talent.
We aim to create a culture of wellness by educating, supporting and empowering team members and their dependents to improve and maintain their overall health and well-being through healthy lifestyle choices. We offer competitive benefits plans, wellness incentives, flexible work arrangements, parental leave and community service opportunities. We also support team members’ financial planning for employees who manage virtual school for their children or need other accommodations.the future by offering 401(k) plan matching, immediate vesting and access to retirement advisors.
Team MemberMembers Learning and Development
The Company remainsWe remain committed to education and development for itsour team members. The remote work environment has created additional opportunityopportunities for virtual and online learning. In 2020,2023 we assigned team members were assigned coursesposition-specific curricula designed to support ongoing compliance requirements and development within their individual positions. Team members experience on-the-job training, as well as other company organized opportunities. In 2023, we held 105 internal learning events that provided 173 total hours, or an average of 3.32 hours per week, of learning opportunities facilitated by our Learning & Development team.
We have a 40-hour annual education requirement for each team member as part of our annual performance evaluation process. This also includes additional courses/content team members experience outside of our Learning Management System.
compliance requirementsWe also offer team member education assistance and development.tuition reimbursement programs. The education assistance program provides support to team members wanting to acquire training outside of MVB in support of their position and/or annual certification requirements. Tracking these requests allows us to have visibility into the interests of team members. The tuition reimbursement program provides support to team members who wish to further their education with accredited institutions.
Communication, Recognition and Engagement
The Company'sWe believe it is important to provide our team members with open communication with management. Our internal communication structure includes various opportunities for team members to interact with its CEOour chief executive officer and other members of the executive leadership team members, including monthly all-hands town hall meetings. At the meetings, the CEOour chief executive officer and members of the executive leadership team members present informational topics in sessions open to all team members, and sessions where team members representing each of the Company’s locations ask questions directly of the Company’s CEO and executive leadership team.members.
Supervision and Regulation
The Company, the Bank and its subsidiariesWe are subject to extensive regulation under federal and state banking laws. The Company’sOur earnings are affected by general economic conditions, management policies, changes in state and federal laws and regulations and actions of various regulatory authorities, including those referred to in this section. The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies, financial holding companies, banks and bankstheir affiliates and contains specific information about the Company.us. Regulation of banks, bank holding companies, and financial holding companies and their affiliates is intended primarily for the protection of depositors, the insurance fund of the FDICFederal Deposit Insurance Corporation (“FDIC”) and the stability of the financial system, rather than for the protection of our shareholders and creditors.
In addition to banking laws, regulations and regulatory agencies, the Company iswe are subject to various other laws, regulations, supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Companyus and the Bank and the Company’sour ability to make distributions to shareholders. State and federal law govern the activities in which the Bank engages, the investments it makes, the aggregate amount of loans that may be granted to one borrower and other similar areas of the Bank's business. Various consumer and compliance laws and regulations also affect the Company’sus and the Bank's operations.
The following discussion is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described herein. Such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. The likelihood and timing of any changes and the impact such changes may have on the Companyus or the Bank is impossible to determine with any certainty. A change in statutes, regulations or regulatory policies applicable to the Companyus and itsour subsidiaries could have a material effect on itsour business, financial condition or results of operations.
Financial Regulatory Reform
During the past several years, there has been a significant increase in regulation and regulatory oversight for United States financial services firms such as the Company, primarily resulting from the enactment of thefirms. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) significantly restructured the financial regulatory regime in 2010.the United States and has had a broad impact on the financial services industry as a result of the significant regulatory and compliance changes required under the act. The Dodd-Frank Act is extensive, complicated and comprehensive legislation that impacts many aspects of a banking organization, representing a significant overhaul of many aspects of the regulation of the financial services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including banks, bank holding companies and financial holding companies, such as the Company. The Dodd-Frank Act imposesimposed prudential regulation on depository institutions and their holding companies.companies, which requires financial firms to control risks and hold adequate capital as defined by capital requirements and liquidity requirements and by the imposition of concentration risk limits. As such, the Company iswe are subject to more stringent standards and requirements with respect to: (i) bank and non-bank acquisitions and mergers; (ii) the “financial activities” in which it engageswe engage as a financial holding company; (iii) affiliate transactions; and (iv) proprietary trading and investing in private equity or hedge funds, among other provisions.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) was enacted, which repealed or modified certainThe EGRRCPA amended provisions of the Dodd-Frank Act and easesand eased regulations on all but the largest banks. These modifications, among other changes:changes, include: (i) exemptexempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) eliminateeliminating the requirement for appraisals for certain real estate transactions valued at less than $400,000 in rural areas; (iii) exemptexempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from the Home Mortgage Disclosure Act’s expanded data disclosures; (iv) clarifyclarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-depositbrokered deposit regulations; (v) raiseraising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (vi) simplifysimplifying capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that
upon the election of a bank would replace the risk-based capital requirements. In addition, the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) was required to raise the asset threshold under
its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant non-banking activities.
Certain provisions of the Dodd-Frank Act and other laws, such as the EGRRCPA, are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. New regulations and statutes are regularlyperiodically proposed and/or adopted that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating and doing business in the United States. Changes in leadership at various federal banking agencies, including the Federal Reserve Board, can also change the policy direction of these agencies. Certain of these recent proposals and changes are described below. The CompanyWe will continue to evaluate the impact of any new regulations so promulgated or under consideration, including changes in regulatory costs and fees, modifications to consumer products or disclosures required by the Consumer Financial Protection Bureau (“CFPB”) and the requirements of the enhanced supervision provisions, among others.
From time to time, both state and federal regulators turn their attention to certain specific targeted areas of potential regulatory reform. For example, during the liquidity crisis that occurred in the spring of 2023 with respect to the regional bank sector, there was considerable discussion at the federal level regarding the potential for reform of the level and features of FDIC insurance coverage. Increased attention may occur with respect to capital levels and credit quality due to the potential disruption in the credit markets relating to loans secured by office properties, which are expected to come under increasing stress in the near and mid-term. It is unclear whether the anticipated stress described above will actually occur or the effort that it might have on us or the Bank, if any.
Regulatory Agencies
The Company isWe are a legal entity separate and distinct from the Bank and the Bank’s wholly-owned subsidiaries. As a financial holding company and a bank holding company, the Company iswe are regulated under the Bank Holding Company Act of 1956, as amended (“BHCA”), and itwe and itsour non-bank subsidiaries are subject to inspection, examination and supervision by the Federal Reserve Board. The BHCA provides generally for “umbrella” regulation of financial holding companies such as the Companyus by the Federal Reserve Board and for functional regulation of banking activities by bank regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Company isWe are also under the jurisdiction of the SEC and isare subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), aseach administered by the SEC.
The Bank is a West Virginia state chartered bank. The Bank is not a member bank of the Federal Reserve System (“non-member bank”). Accordingly, the West Virginia Division of Financial Institutions and the FDIC are the primary regulators of the Bank and the Bank's subsidiaries.
Bank Holding Company Activities
In general, the BHCA limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board), without prior approval of the Federal Reserve Board.. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. Under current federal law, as a bank holding company, the Company haswe have elected and qualified to become a financial holding company.
Most of the financial activities that are permissible for financial holding companies also are permissible for a bank’s “financial subsidiary,” except for insurance underwriting, insurance company portfolio investments, real estate investments and development and merchant banking, which must be conducted by a financial holding company. In order for a financial subsidiary of a bank to engage in permissible financial activities, federal law requires, among other conditions, that the parent bank be well managed and have at least a satisfactory Community Reinvestment Act rating, and the parent bank and all of its bank affiliates must be well capitalized.
To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed” under applicable Federal Reserve Board regulations and the depository institution subsidiaries controlled by the financial holding company must have at least a satisfactory Community Reinvestment Act rating. A
depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the sections captioned Capital Requirements and Prompt Corrective Action included in this Item 1.item. A depository institution subsidiary is considered “well managed” if it received a composite rating of 1 or 2 and management rating of at least “satisfactory” in its most recent examination. If a financial holding company ceases to meet these capital and management requirements, the Federal Reserve Board’s regulations provide that the financial holding company must enter into an agreement with the Federal Reserve
Board to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance with such requirements, the Federal Reserve Board may impose limitations or conditions on the conduct of its activities, and the financial holding company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the Federal Reserve Board. If the financial holding company does not return to compliance with such requirements within 180 days, the Federal Reserve Board may require (i) divestiture of the holding company’s depository institutions or (ii) termination by the financial holding company of any activity that is not an activity that is permissible for bank holding companies under section 4(c)(8) of the BHCA. If a depository institution receives a rating of less than satisfactory under the Community Reinvestment Act, the financial holding company may not commence any additional financial activity or acquire a company engaged in financial activity, until the bank subsidiary has achieved at least a rating of satisfactory under the Community Reinvestment Act.
Please refer to the section captioned Community Reinvestment Act included elsewhere in this item.
The Federal Reserve Board has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve Board has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
As required by the EGRRCPA, in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Federal Reserve Board’s Small Bank Holding Company Policy Statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (i) is not engaged in significant non-banking activities; (ii) does not conduct significant off-balance sheet activities; and (iii) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding that are registered with the SEC. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve Board may exclude a company from the threshold increase. Management believes the Company meetswe meet the conditions of the Federal Reserve Board’s Small Bank Holding Company Policy Statement and isare therefore excluded from consolidated capital requirements and isare subject to specific debt to equity ratio requirements. To be considered well capitalized, a company subject to the Small Bank Holding Company Policy Statement must meet certain requirements, including having a debt-to-equity ratio of 1.0:1 or less. Further, qualification as a small bank holding company allows the Companyus to file more abbreviated, and less frequent, consolidated and holding company reports with the Federal Reserve. The Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
Federal Securities Regulation
The Company isWe are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Company isWe are subject to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which imposes numerous reporting, accounting, corporate governance and business practices on companies, as well as financial and other professionals who have involvement with the United States public markets. The Company isWe are generally subject to these requirements and applicable SEC rules and regulations.
Acquisitions
The BHCA, the Bank Merger Act, the Change in Bank Control Act (the “CIBCA”), West Virginia banking law, and other federal and state statutes regulate investments in and acquisitions of commercial banks and their parent holding companies. The BHCA requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the FDIC (in the case of a state chartered non-member bank) or other appropriate bank regulatory authority is required for a non-member bank to merge with another bank or purchase substantially all of the assets or assume any deposits of another bank. Under the CIBCA, a filing with the Federal Reserve Board is required under certain circumstances if an investor acquires more than 9.9% of any class of voting securities of a state member bank or a bank holding company. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position and managerial strength of the combined organization, the risks to the stability of the United States banking or financial system, the applicant’s performance record under the Community Reinvestment Act (please refer to the section captioned Community Reinvestment Act included elsewhere in this item) and its compliance with consumer protection laws and the effectiveness of the subject organizations in combating money laundering activities and other financial crimes.
Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation.
Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, subject to market share limitations and any state requirement that the target bank shall have been in existence and operating for a minimum period of time. Under the Dodd-Frank Act, national and state-chartered banks may open an initial branch in a state other than its home state by establishing a de novo branch at any location in such host state at which a bank chartered in such a host state could establish a branch. Applications to establish such branches must be filed with the appropriate bank regulators.
Other Safety and Soundness Regulations
The Federal Reserve Board has enforcement powers over bank holding companies and their non-banking subsidiaries. The Federal Reserve Board has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through the issuance of cease and desist orders, civil money penalties or other enforcement and remedial actions.
Federal and state banking regulators also have broad enforcement powers over the Bank, including the power to impose fines and other civil and criminal penalties and to appoint a receiver in order to conserve the assets of the Bank for the benefit of depositors and other creditors. The West Virginia Commissioner of Banking also has the authority to take possession of a West Virginia state bank in certain circumstances and to appoint the FDIC as receiver, including, among other things, when it appears necessary in order to protect or preserve the assets of that bank for the benefit of depositors and other creditors.
Anti-Money Laundering and the USA PATRIOT Act
A major focus of governmental policy on financial institution regulations in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The Patriot Act contains anti-money laundering measures affecting insured depository institutions and their affiliates, broker-dealers and certain other financial institutions. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. The Patriot Act includes the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which grants the Secretary of the United States Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. The United States Treasury has issued a number of regulations to implement the Patriot Act under this authority requiring financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for the institution, including imposing substantial money penalties and causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against
institutions found to be violating these obligations.
Office of Foreign Assets Control Regulation
The United States Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries, regimes and individuals, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. The Company isWe are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions to OFAC after their occurrence. Failure to comply with these sanctions could have serious legal, financial and reputational consequences, including the imposition of financial penalties, causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Incentive Compensation
As part of its regular, risk-focused examination process, the Federal Reserve Board reviews the incentive compensation arrangements of banking organizations that are not “large, complex banking organizations,” such as the Company.us. These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive
compensation arrangements. The findings of this supervisory initiative will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In June 2010, theThe Federal Reserve Board, Office of the Comptroller of the Currency, and FDIC have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
In June 2016, the Federal Reserve Board, other federal banking agencies, andOctober 2022, the SEC jointly publishedadopted a proposed rulemaking designed to strengthenfinal rule implementing the incentive-based compensation practices at covered institutions by better aligningrecovery (“clawback”) provisions of the financial rewards for covered persons with an institution’s long-term safetyDodd-Frank Act. The final rule directs national securities exchanges and soundness. The proposed rule uses a tiered approach that applies provisionsassociations, including NASDAQ, to covered financial institutions accordingrequire listed companies to three categories of average total consolidated assets: Level 1 ($250 billion or more), Level 2 ($50 billiondevelop and implement clawback policies to $250 billion) and Level 3 ($1 billion to $50 billion). For all covered institutions, the proposed rule would (i) prohibit types and features ofrecover erroneously awarded incentive-based compensation arrangements that encourage inappropriate risks because they are “excessive”from current or “could leadformer executive officers in the event of a required accounting restatement due to material noncompliance with any financial loss” atreporting requirement under the securities laws, and to disclose their clawback policies and any actions taken under these policies. We adopted a covered institution; (ii) require incentive-based compensation arrangements to adhere to three basic principles: (1) a balance between risk and reward; (2) effective risk management and controls; and (3) effective governance; and (iii) require appropriate board or directors (or committee) oversight and record keeping and disclosuresclawback policy pursuant to the appropriate agency. For Level 1 and Level 2 institutions, the proposed rule would (i) require the following: the deferral of awards for senior executive officers and significant risk takers; the subjecting of unpaid and unvested incentive compensation to the risk of downward adjustments or forfeiture; the subjecting of paid incentive compensation to the risk of “clawback;” establishing a board compensation committee; expanded risk-management and control standards; additional record keeping requirements for senior executive officers and significant risk takers; and detailed policies and procedures to ensure rule compliance; and (ii) prohibit certain inappropriate practices, including: the purchase of hedging instruments that offset decreasesNASDAQ listing standards in the value of incentive compensation; allowing a range of payouts that might encourage risk taking; and basing compensation solely on comparison to peer and volume-driven incentives without regard to transaction quality or compliance with sound risk management. The comment period ended in July 2016 and the agencies are evaluating the comments received.
If these or other regulations are adopted in a form similar to that initially proposed, they will impose limitations on the manner in which the Company may structure compensation for its executives.October 2023.
In addition, SEC regulations require public companies, like the Company,us, to provide various disclosures about executive compensation in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of executive compensation.
The scope and content of the United States banking regulators’ policies on incentive compensation and SEC rulemaking with respect to executive compensation are continuing to develop.
The Volcker Rule
The Volcker Rule implements section 619 of the Dodd-Frank Act and prohibits insured depository institutions and affiliated companies and foreign banks which engage in the banking business in the United States (together, “banking entities”) from engaging in proprietary trading of certain securities, derivatives and commodity futures and options on these instruments, for their own account and prohibits banking entities from investing in or sponsoring certain types of funds (“covered funds”) unless otherwise permitted by the Volcker Rule. EGRRCPA exempts from the Volcker Rule banking entities with $10 billion or less in total consolidated assets and have total trading assets and trading liabilities that are less than 5% of total consolidated assets. As of July 22, 2019, the effective date for the rulemaking implementing the EGRRCPA exemption, the Companyand December 31, 2023, we and the Bank are below these thresholds and thus exempt from the Volcker Rule.
Limit on Dividends
The Company isWe are a legal entity separate and distinct from the Bank and the Bank’s wholly-owned subsidiaries. The Company’sOur ability to obtain funds for the payment of dividends to itsour shareholders and for other cash requirements largely depends on the amount of dividends the Bank declares. However, the Federal Reserve Board expects the Companyus to serve as a source of financial and managerial strength to the Bank to reduce potential loss exposure to the Bank’s depositors and to the FDIC insurance fund in the event the Bank becomes insolvent or is in danger of becoming insolvent or is otherwise experiencing financial stress. Under this requirement, the Company iswe are expected to commit resources to support the Bank, including at times when the Companywe may not be in a financial position to provide such resources. Any capital loans by the Companyus to the Bank would be subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of the Company’s bankruptcy, any commitment by the Companyus to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Accordingly, the Federal Reserve Board may require the Companyus to retain capital for further investment in the Bank, rather than pay dividends to itsour shareholders. The Bank may not pay dividends to the Companyus if, after paying those dividends, the Bank would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. The Bank must have the approval from the West Virginia Division of Financial Institutions if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year’s net earnings and the retained earnings for the preceding two years, less required transfers to surplus. These provisions could limit the Company’sour ability to pay dividends on itsour outstanding common shares.
In addition, the Companywe and the Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums (please refer to the Capital Requirements section below). The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
Transactions with Affiliates
Transactions between the Bank and its subsidiaries, or the Company or any other subsidiary of the Company,with affiliates are regulated under federal banking law. The Federal Reserve Act, made applicable to the Bank by section 8(j) of the Federal Deposit Insurance Act (the “FDIA”), imposes quantitative and qualitative requirements and collateral requirements on “covered transactions” by the Bank with, or for the benefit of, its affiliates and generally requires those transactions to be on arm's length terms at least as favorable to the Bank as if the transaction were conducted with an unaffiliated third-party. Covered transactions are defined by the Federal Reserve Act to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure by a bank to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance or letter of credit on behalf or for the benefit of an affiliate. In general, any such transaction by the Bank or its subsidiaries must be limited to certain thresholds on an individual and aggregate basis and, for credit transactions with any affiliate, must be secured by designated amounts of specified collateral.
Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons individually and in the aggregate.
Capital Requirements
TheFederal regulations require FDIC-insured depository institutions, such as the Bank, is required to comply with applicable federal capital adequacy standards established by the FDIC (the “Capital Rules”). The Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement. State chartered banks, such as the Bank, are subject to similar capital
requirements adopted by their state regulators, which, in our case, is the West Virginia Division of Financial Institutions.
The Capital Rules among other things: (i) include a “Common Equity Tier 1” (“CET1”) measure; (ii)measure, specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii)requirements, define CET1 narrowly by requiring that most
deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.
Under the Capital Rules, the minimum capital ratios currently effective as of January 1, 2015 are:
| | | | | |
l | 4.5% CET1 to risk-weighted assets; |
l | 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; |
l | 8.0% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and |
l | 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). |
TheIn addition to establishing the minimum regulatory capital requirements, the Capital Rules also includelimit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer”, composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and increased by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019. The Capital Rules also provide for a “countercyclical capital buffer” that is only applicable to certain covered institutions and does not have any current applicability to the Company or the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer of 2.5% and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
Since fully phased in on January 1, 2019, the Capital Rules require the Bank to maintain an additional capital conservation buffer consisting of 2.5% of CET1, effectively resulting in minimum ratios of: (i) CET1 to risk-weighted assets of at least 7%; (ii) TierCET 1 capital to risk-weighted assets of at least 8.5%; (iii) aabove the amount necessary to meet its minimum ratio of Totalrisk-based capital to risk-weighted assets of at least 10.5%; and (iv) a minimum leverage ratio of 4%. The Capital Rules also provide for a number of deductions from and adjustments to CET1.requirements.
The Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for United States government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.
In September 2017, the Federal Reserve Board, along with other bank regulatory agencies, proposed amendments to its capital requirements to simplify certain aspects of the capital rules for community banks, including the Bank, in an attempt to reduce the regulatory burden for such smaller financial institutions. In July 2019, the bank regulatory agencies finalized the rule which applies to banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. The rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions and minority interest. The rule also allows bank holding companies to redeem common stock without prior approval unless otherwise required. Generally, the final rule is effective as of April 1, 2020; however, banking organizations are permitted to use this simpler regulatory capital requirements as of January 1, 2020.
In June 2016, the FASB issued an update to the accounting standards for credit losses that included the Current Expected Credit Losses (“CECL”) methodology, which replaces the existing incurred loss methodology for certain financial assets. CECL became effective for certain entities on January 1, 2020. In December 2018, the federal bank regulatory agencies approved a final rule providing an option to phase-in, over a period of three years, the day-one regulatory capital effects resulting from the implementation of CECL. This standard is effective for the Company in 2023.
Notwithstanding the foregoing, the EGRRCPA simplifies capital calculations by requiring regulators to establish for insured depository institutions under $10 billion in assets aoptional community bank leverage ratio (“CBLR”("CBLR") (tangible equityframework, which was issued through interagency guidance, provides a simple alternative measure of capital adequacy for electing qualifying depository institutions as directed under the EGRRCPA. Under the CBLR, if a qualifying depository institution elects to use such measure, such institution (i) will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets) atassets (i.e., leverage ratio) exceeds a percentage9% threshold, subject to a limited two quarter grace period, during which period the leverage ratio cannot go 100 basis points below the then applicable threshold and (ii) will not less than 8%be required to calculate and not greater than 10% that such institutions may elect to replace the general applicablereport risk-based capital requirements under the Capital Rules. Such institutions that meetratios. The bank elected to begin using the CBLR will automatically be deemed to be well-capitalized, although the regulators retain the flexibility to determine that the institution may not qualifyframework for the CBLR test based onfirst quarter of 2022 and intends to use this measure for the institution’s risk profile. In November 2019, the federal bank regulators issued a final rule onforeseeable future.
Eligibility criteria to utilize the CBLR settingincludes the minimum required CBLR at 9%. Depository institutions and depository institution holding companies that havefollowing:
● Total assets of less than $10 billion in totalbillion;
● Total trading assets plus liabilities of 5% or less of consolidated assetsassets;
● Total off-balance sheet exposures of 25% or less of consolidated assets;
● Cannot be an advanced approaches banking organization; and meet other qualifying criteria, including a leverage
● Leverage ratio
(equal to tier 1 capital divided by average total consolidated assets) of greater than 9%, will be eligible to opt into the CBLR framework. Banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be consideredor temporarily prescribed threshold established in response to COVID-19.
We have satisfied the generally applicable risk-basedpolicies and leverageprocedures in place to establish internal capital requirements in the regulators’levels and to monitor and stress-test such levels on a regular basis to ensure we remain above regulatory capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the FDIA.limits. The final ruleBank's CBLR at December 31, 2023 was effective on January 1, 2020 and the CBLR framework was available for banks to use beginning in their March 31, 2020 Call Report. The Bank did not elect to apply the CBLR framework in its March 31, 2020 Call Report, but plans to apply the framework in the March 31, 2021 Call Report.10.5%.
Prompt Corrective Action
The FDIA requires, among other things, that the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures, which reflect changes under the Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a CET1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded
to, or deemed to be within, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
As noted above, the EGRRCPA eliminated these risk-based capital requirements for banks with less than $10.0 billion in assets who elect to follow the CBLR.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital.capital to an acceptable level. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it will thereafter be treated as if it is “significantly undercapitalized” until such capital deficiency is corrected.
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in one or more unsafe or unsound practices. The appropriate agency is also permitted to require an
adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.
For further information regarding the capital ratios and leverage ratio of the Companyus and the Bank, please refer to the discussion under the section captioned Capital and Stockholders’ Equity included in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1516 – Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.
Safety and Soundness Standards
The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems, and internal audit systems, cybersecurity, liquidity, data protection, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to risk management, legal and regulatory compliance, internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits.benefits, among other subjects. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder.
In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. Please refer to the Prompt Corrective Action section above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties, and cease and desist orders.orders and other similar enforcement measures.
Deposit Insurance
The Bank’s deposits are insured by the FDIC up to the limits set forth under applicable law. The FDIC imposes a risk-based deposit premium assessment system that determines assessment rates for an insured depository institution based on an assessment rate calculator, which is based on a number of elements to measure the risk each insured depository institution poses to the FDIC insurance fund. The assessment rate is applied to total average assets, less tangible equity, as defined under the Dodd-Frank Act. The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Federal Home Loan Bank Membership
The Federal Home Loan Bank (“FHLB”) provides credit to its members in the form of advances. As a member of the FHLB of Pittsburgh, the Bank must maintain an investment in the capital stock of that FHLB in an amount equal to 0.10% of the calculated Member Asset Value (“MAV”), plus 4.0% of outstanding advances and 0.75% of outstanding letters of credit. The MAV is determined by taking line item values for various investment and loan classes and applying an FHLB haircut to each item.At December 31, 2020,2023, the Bank held capital stock of FHLB in the amount of $2.8$2.1 million.
Federal and State Consumer Laws
The Company and the BankWe are subject to a number of federal and state consumer protection laws that extensively govern the Company's relationship with itsrelationships between us, the Bank and the Bank's consumer customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act (“HMDA”), the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act and these federal laws’ respective state-law counterparts, as well as state usury laws and state and federal laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict our and the Company'sBank's ability to raise interest rates in certain respects and subject itus and the Bank to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which the Company operateswe operate and civil money penalties. Failure to comply with consumer protection requirements may also result in the Company'sour failure to obtain any required bank regulatory approval for merger or acquisition transactions itwe may wish to pursue or itsour prohibition from engaging in such transactions even if approval is not required.
The CFPB is a federal agency responsible for implementing federal consumer protection laws. The CFPB has broad rulemaking
authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations. The CFPB also has examination and enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates, which authority would not apply to the Companyus or the Bank. As the Bank’s principal federal regulator, the FDIC has examination and enforcement authority over the Bank.
The CFPB has concentrated muchcertain of its rulemaking efforts on a variety of home mortgage-related topics required under the Dodd-Frank Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending and servicing practices. The CFPB issued final rules changing the reporting requirements for lenders under the HMDA. The new rules expand the range of transactions subject to these requirements to include most securitized residential mortgage loans and credit lines. The rules also increase the overall amount of data required to be collected and submitted, including additional data points about the loans and borrowers. The expanded data is being collected as of January 1, 2018.
Financial Privacy
Federal law currently contains extensive customer privacy protection provisions, including substantial customer privacy protections provided under the Financial Services Modernization Act of 1999 (commonly known as the Gramm-Leach-Bliley Act). Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means. In December 2015, Congress amended the Gramm-Leach-Bliley Act privacy provisions to include an exception under which a financial institution is not required to provide annual privacy notices to customers if such financial institution meets certain conditions. In August 2018, the CFPB finalized a rule implementing this provision and that rule became effective September 17, 2018.
Automated Overdraft Payment Regulation
Federal regulators have adopted consumer protection regulations and guidance related to automated overdraft payment programs offered by financial institutions. Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Financial institutions must also provide consumers with a notice that explains the financial institution’s overdraft services, including the fees associated with the service and the consumer’s choices. In addition, FDIC-supervised institutions must monitor overdraft payment programs for “excessive or chronic” customer use and undertake “meaningful and effective” follow-up action with customers that overdraw their accounts more than six times during a rolling 12-month period. Financial institutions must also impose daily limits on overdraft charges, review and modify check-clearing procedures, prominently distinguish account balances from available overdraft coverage amounts and ensure board and management oversight regarding overdraft payment programs.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. The CRA requires the Bank’s primary federal bank regulatory agency, the FDIC, to assess the Bank’s record in meeting the credit needs of the communities served by the Bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: (i) “Outstanding,” (ii) “Satisfactory,” (iii) “Needs to Improve” or (iv) “Substantial Noncompliance.”
In order for a financial holding company to commence any new activity permitted by the BHCA, or to acquire any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “Satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering a request for an approval of a proposed transaction to consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office.
In the fall of 2023, the federal bank regulators issued a final rule that revised and supplemented the rules governing CRA compliance. The rule expanded the regulator's requirements (i) that encourage banks to expand access to credit in low and moderate income communities (including Native Land Areas), (ii) to evaluate bank lending outside of the customary branch channels to include an evaluation of bank lending through mobile banking, internet and branchless banking channels, (iii) to evaluate bank lending pursuant to the use of a more metrics based analysis based upon peer and demographic data and (iv) to evaluate banks with more focus on bank size and business models, with certain data collection related exemptions available to banks that have no more than $2 billion in assets.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack. If the Company failswe fail to observe the regulatory guidance, itwe could be subject to various regulatory sanctions, including financial penalties.
In the ordinary course of business, the Company relieswe rely on electronic communications and information systems to conduct itsour operations and to store sensitive data. The Company employsWe employ a variety of preventative and detective tools to monitor, block and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the Company'sour defensive measures, the threat from cyberattacks is continuous and severe, attacks are sophisticated and increasing in volume and attackers respond rapidly to changes in defensive measures. While to date the Company iswe are not aware of it having experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, itsour systems and those of itsour customers and third-party service providers are under constant threat and it is possible that itwe could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
New rules promulgated by the CompanySEC in the summer of 2023 will require us, as an Exchange Act reporting company, (i) to report to the SEC on an accelerated basis (i.e., within four business days) any "cybersecurity incident" which is deemed material, unless certain exceptions apply, and its customers. (ii) to disclose our process for assessing, identifying and maintaining material cybersecurity risks and threats.
For further discussion of risks related to cybersecurity, please refer to Item 1A – Risk Factors1C - Cybersecurity included elsewhere in this report.
Monetary Policy and Economic Conditions
The business of financial institutions is affected not only by general economic conditions, but also by the policies of various
governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions primarily through open market operations in United States government securities, changes in the discount rate on bank borrowings and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits and the interest rates charged on loans, as well as the interest rates paid on deposit accounts.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money markets, and the activities of monetary and fiscal authorities and in spite of the Companyrecent reports of a significant lessening in inflationary pressures, we cannot predict future changes in interest rates, credit availability or deposit levels.
Effect of Environmental Regulation
The Company’sOur primary exposure to environmental risk is through itsour lending activities. In cases when management believes environmental risk potentially exists, the Company mitigates itswe mitigate our environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral. With regard to residential real estate lending, management reviews those loans with inherent environmental risk on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit. The Company doesWe do not currently anticipate any material effect on anticipated capital expenditures, earnings or competitive position as a result of compliance with federal, state or local environmental protection laws or regulations. The recent focus on environmental, sustainable and governance and climate change considerations in the business community and among our and the Bank's other constituents may over time affect our and the Bank's approach to evaluating and addressing environmental risk and may increase the costs associated with monitoring and mitigating those risks.
Other Regulatory Matters
The Company isWe are subject to examinations and investigations by federal and state banking regulators, as well as the SEC, various taxing authorities and various state regulators. The CompanyWe periodically receivesreceive requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning the Company’sour business and accounting practices.practices and concerning other matters as to which we might be in possession of information which is responsive to such information requests. Such requests are considered incidental to the normal conduct of business.
Future Legislation and Regulation
From time to time, Congress may enact legislation that affects the regulation of the financial services industry and state legislatures may enact legislation affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their existing regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of theany proposed legislation could impact the regulatory structure under which the Company operateswe operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to the Company'sour business strategy or limit itsour ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Companyus or any of itsour subsidiaries could have a material, adverse effect on the Company'sour business, financial condition and results of operations.
Corporate and Available Information
The Company filesWe file reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any other filings required by the SEC. The Company makesWe make available through itsour website (http://www.mvbbanking.com), free of charge, itsour Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, as soon as reasonably practicable after itwe electronically filesfile such material with, or furnish it to, the SEC. The information on the Company'sour website is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document its fileswe file with the SEC.
The public may read and copy any materials the Company files with or furnishes to the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
ITEM 1A. RISK FACTORS
The following discussion sets forth somePlease carefully consider the risks described below, together with all other information included or incorporated by reference in this Annual Report on Form 10-K. If any of the more important risk factors that could materially affect the Company'sfollowing risks actually occur, our business, financial condition, results of operations business and prospects.cash flows could be materially adversely affected. In these circumstances, the market price of our common stock could decline significantly. Other factors that could affect the Company’sour financial condition and operations are discussed in the Forward-Looking Statements at the beginning of this report.
The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also affect the Company's business operations. You should carefully consider the risks and uncertainties described below together with all of the information included or incorporated by reference in this Annual Report on Form 10-K, which is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Company's business, financial condition and results of operations could be materially and adversely affected.
References to “we,” “us,” and “our” in this Risk Factors section refer to the Company and its subsidiaries, including the Bank, unless otherwise specified or unless the context otherwise requires.
Risks Related to Economic and Market Conditions
The Company may continue to face risks related to the COVID-19 pandemic.
The fullContinued elevated levels of inflation could adversely 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 the virus may result in a period of disruption, including the Company’s financial reporting capabilities and its operations, and could potentially impact the Company’s clients, providers and third parties. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel,our business and school shutdowns, reduction in overall business activity and financial transactions, supply chain disruptions and overall economic and financial market instability. In response to the pandemic, many states, including those where the Company primarily operates, have taken preventative and protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes and ordering temporary closures of businesses that have been deemed to be non-essential.
The COVID-19 pandemic had an impact on the Company’s operations during fiscal year 2020 and the Company expects that the pandemic may continue to materially affect the Company’s business, financial condition and results of operations during 2021. The extent to which the COVID-19 pandemic impacts the Company’s future operating results will depend on future developments, which are highly uncertain and cannot be predicted, including the efficacy and distribution of COVID-19 vaccines and governmental 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 ultimate effects of COVID-19 on the broader economy and the markets that the Company serves are not fully known, nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the federal funds rate, which may negatively affect the Company's interest income, and therefore, earnings, financial condition and results of operations.
In March 2020, the Company announced programs to support its customers during the COVID-19 pandemic. A number of borrowers have enrolled in programs to defer all loan payments for periods up to six months. These programs may negatively impact revenue and other results of operationsGeneral inflation in the near termUnited States has risen to levels not experienced in decades and ifthe Federal Reserve Board has raised certain benchmark interest rates in an effort to combat inflation in 2023. Specifically, the Federal Reserve increased benchmark interest rates multiple times in 2022 and 2023. While the Federal Reserve did not effectiveincrease benchmark interest rates at the June 2023 or September 2023 meeting, it indicated it may continue to raise benchmark interest rates in mitigating2024 in an effort to curb the effectupward inflationary pressure on the cost of COVID-19 to clients, may adversely affectgoods and services across the United States. Continued levels of inflation could have complex effects on our business and results of operations, more substantially over a longer periodsome of time.
The ongoing COVID-19 pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the COVID-19 pandemic, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which the Company operates. This could result in further decline in demand for banking products and services and could negatively impact, among other things, liquidity, regulatory capital and future growth. Any one or more of these developments could have a material adverse effect on the business, financial condition and results of operations.
The Company is taking precautions to protect the safety and well-being of its customers and employees. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can the Company predict the level of disruption which will occur to the Company's employees’ ability to provide the expected level of client support and service. If the Company is unable to recover from a business disruption on a timely basis, its business, financial condition and results of operations could be materially and adversely affected. The Company may also incur additional costsadverse. For example, as interest rates rise in response to, remedy damages caused
by such disruptions, which could further adversely affect the business, financial condition and results of operations.
The extent to which COVID-19 impacts the Company's business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. Even after COVID-19 has subsided, the Company may continue to experience materially adverse impacts to its business as a result of, elevated levels of inflation, the virus’ global economicvalue of our securities portfolio becomes negatively impacted. In addition, while we generally expect any inflation-related increases in our interest expense to be offset by increases in our interest revenue, inflation-driven increases in our levels of noninterest expense could negatively impact including the availabilityour results of credit, adverse impacts on liquidityoperations. Continued elevated levels of inflation could also cause increased volatility and any recession that has occurred or may occuruncertainty in the future.business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness. It is also possible that governmental responses to the current inflation environment could adversely affect our business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls. The duration and severity of the current inflationary period cannot be estimated with precision.
There are no comparable recent eventsFinancial challenges at other banking institutions could lead to depositor concerns that provide guidance as tospread within the effect the spread of COVID-19 as a global pandemic may havebanking industry causing disruptive deposit outflows and as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. The full extent is not yet known and the Company cannot predict the full extent of the impacts on its business, operations or the global economy as a whole.other destabilizing results.
The Company may beThroughout 2023, certain banking institutions with elevated concentrations of uninsured deposits experienced large deposit outflows, resulting in the institutions being placed into FDIC receiverships. In the aftermath, there has been substantial market disruption and indications that deposit concerns could spread within the banking industry, leading to deposit outflows and other destabilizing results. These market events could materially adversely affected by the emergency actions taken by the United States government to mitigate the impact of the COVID-19 pandemic on the United States economy.affect our business.
The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the United States economy. Among other steps taken, the Federal Reserve cut the federal funds rate in March 2020, and also lowered the interest rate on emergency lending at the Discount Window and lengthened the term of loans to 90 days. In March 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. Key provisions of the CARES Act include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants to certain businesses and temporary amendments to the Internal Revenue Code. The Small Business Administration (“SBA”) was tapped to lead the effort to loan funds to small businesses, in conjunction with banks. The Federal Reserve and the United States Treasury have also responded with lending programs under the CARES Act. Further, the Federal Reserve has intervened with a number of credit facilities intended to keep the capital markets liquid.
There can be no assurance that these interventions by the United States government will be successful in mitigating the impact of the COVID-19 pandemic and it is unclear what the cumulative effect of these extraordinary actions by the United States government will be on the economy as a whole and upon the financial condition and results of operations of the Company and its clients, both in the short- and long-term.
The Company'sOur business depends upon the general economic conditions and real estate markets of the State of West Virginia and the Commonwealth of Virginia, and may be adversely affected by downturns in these and the other local economies in which it operates.we operate.
The Company'sOur financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services it offers,we offer, is highly dependent upon the business environment in the markets where it operates,we operate, including the State of West Virginia, the Commonwealth of Virginia and the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
Continued economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Such conditions, combined with continued oil price volatility, could have a material adverse effect on the credit quality of the Company's loans and its business, financial condition and results of operations.
The Company's success depends primarily on the general economic conditions of West Virginia and Virginia and the specific local markets in which it operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provideswe provide banking and financial services primarily to customers across West Virginia and Virginia. The local economic conditions in these areas have a significant impact on the demand for the Company'sour products and services, as well as the ability of itsour customers to repay loans, the value of the collateral securing loans and the stability of itsour deposit funding sources. Moreover, approximately 29.2%27.2% of the securities in the Company'sour municipal securities portfolio were issued by political subdivisions or agencies within West Virginia and Virginia. A significant decline in general economic conditions in West Virginia or Virginia,
whether caused by recession, inflation, unemployment, changes in crude oil prices, changes in securities markets, acts of terrorism, outbreaks of any epidemics or pandemics, outbreak of hostilities or other international or domestic occurrences or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Company'sour business, financial condition and results of operations.
A significant portionAdditionally, 72.4% of the Company's loans are secured by real estate concentrated in the State of West Virginia and the Commonwealth of Virginia, which may adversely affect its earnings and capital if real estate values decline.
Nearly 68.5% of the Company'sour total loans are real estate interests (residential and non-residential, including both owner-occupied and investment real estate and construction and land development) mainly concentrated in the West Virginia, Virginia, North Carolina and Virginia, a relatively small geographic area.South Carolina markets. As a result, declining real estate values in these markets could negatively impact the value of the real
estate collateral securing such loans. If the Company iswe are required to liquidate a significant amount of collateral during a period of reduced real estate values in satisfaction of any non-performing or defaulted loans, itsour earnings and capital could be adversely affected.
Severe weather (including climate change) and natural disasters pandemics, epidemics, acts of war or terrorism or other external events could have significant effects on the Company'sour business.
Severe weather and natural disasters, including tornados, drought and floods, epidemics and pandemics, acts of war or terrorism or otherOur business is subject to risk from external climate-related events or the fear of such events could have a significant effect on the Company's ability to conduct business. Such eventsthat could affect the stability of itsour deposit base;base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause additional expenses. Although management has established disaster recovery and business continuity policies and procedures, the occurrence of any such event could have a material adverse effect on the Company's business, which, in turn, could have a material adverse effect on its financial condition and results of operations.
The COVID-19 pandemic, trade wars, tariffs and similar events and disputes, domestic and international, have adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Market interest rates have declined significantly. Such events also may adversely affect business and consumer confidence generally. The Company and its customers, and respective suppliers, vendors and processors may be adversely affected. Any such adverse changes may adversely affect the Company's profitability, growth, asset quality and financial condition.
The ongoing COVID-19 outbreak and its dynamic nature, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak and actions that may be taken by governmental authorities to contain the outbreak or to treat its impact has affected and will likely continue to affect the Company's business and results of operations. The COVID-19 pandemic has caused changes in the behavior of customers, businesses and their employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment and overall economic and financial market instability. The Federal Reserve stated in late February 2020 that it was closely monitoring COVID-19 developments and their effects on the economic outlook, and would act appropriately to support the economy. In March 2020, the Federal Reserve reduced the target federal funds rate by 150 basis points to between 0.0% to 0.25%. The Federal Reserve also announced it was purchasing Treasury bills until the economy reaches full employment and inflation stays at 2% and will continue to reinvest amounts of principal received by the Federal Reserve on its portfolio of treasury and agency debt and mortgage-backed securities. Lastly, the Federal Reserve also reduced the interest it pays on excess reserves from 1.10% to 0.10%. The Company expects that such reductions in interest rates will adversely affect its net interest income, margins and profitability.
Risks Related to the Company's Business
As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company is subject to additional risks of litigation from clients or other parties regarding its processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guarantees.
In March 2020, the CARES Act was signed into law and included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, which opened in April 2020, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. Because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. In mid-April, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Later in April 2020, an additional $310 billion of PPP
loan funding was authorized. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company may be exposed to the risk of litigation, from both clients and non-clients that contacted the Bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company and is not resolved in a favorable manner, it may result in significant financial liability or adversely affect the Company's reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on the Company'sour business, financial condition and results of operations.
The CompanyClimate change exposes us to physical risk as its effects may lead to more frequent and extreme shifts in weather patterns and more extreme weather events that could damage, destroy or otherwise impact the value or productivity of our properties and other assets; reduce the availability of insurance to cover losses; and/or disrupt our operations through prolonged outages. Such events and long-term shifts may also hashave a significant impact on our customers, which could amplify credit risk by diminishing borrowers’ repayment capacity or collateral values, and other businesses and counterparties with whom we transact, which could have a broader impact on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, ruleseconomy, supply chains and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.distribution networks.
The Company'sFurthermore, banking regulators and other supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that climate change could impose systemic risks upon the financial sector, we face regulatory risk of increasing focus on our resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs. Additionally, our reputation and ability to maintain client relationships and attract and retain employees may depend on the sufficiency of our policies and practices related to climate change, including our direct or indirect involvement in certain industries.
Risks Related to Our Business
Our non-residential real estate loans expose itus to greater risks of non-payment and loss than residential mortgage loans, which may cause itus to increase itsour allowance for loancredit losses, which would reduce net income.
At December 31, 2020, $1.172023, $1.63 billion, or approximately 80%70.3%, of the Company'sour loan portfolio consisted of non-residential real estate and other non-residential loans. Non-residential real estate and other non-residential loans generally expose a lender to greater risk of non-payment and loss than residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans expose the Companyus to additional risks because they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by collateral that may depreciate over time. These loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Because such loans generally entail greater risk than residential mortgage loans, the Companywe may need to increase itsour allowance for loancredit losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans, which would reduce net income. Also, many of the Company'sour non-residential real estate borrowers have more than one loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Companyus to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan.
The Company'sOur allowance for loancredit losses could become inadequate and reduce earnings and capital.
The Bank maintains an allowance for loancredit losses that it believes is adequate for absorbing the estimated future losses inherent in its loan portfolio. Management conducts a periodic review and consideration of the loan portfolio to determine the amount of the allowance for loancredit losses based upon general market conditions, credit quality of the loan portfolio and performance of the Bank’s clients relative to their financial obligations with it. However, the amount of future losses is susceptible to changes in economic and other market conditions, including changes in interest rates and collateral values, which are beyond the Bank’s control, and these future losses may exceed its current estimates. Management performs stress tests on the loan portfolios to estimate future loancredit losses, but additional provisions for loancredit losses could be required in the future, including as a result of changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy on a national basis or in the Bank’s market area or changes in the circumstances of particular borrowers. The CompanyWe cannot predict with
certainty the amount of losses or guarantee that the allowance for loancredit losses is adequate to absorb future losses in the loan portfolio. Excessive loancredit losses could have a material adverse effect on the Company’sour financial condition and results of operations.
The earnings from the Company's investmentour investments in ICM and Warp Speed will be significantly reduced if ICM isand Warp Speed are not able to sell mortgages.
The profitability of ICM dependsand Warp Speed depend in large part upon itstheir ability to originate a high volume of loans and to sell them in the secondary market. Thus, ICM isthey are dependent upon (i) the existence of an active secondary market and (ii) itstheir ability to sell loans into that market. Volatile interest rate environments could increase this risk initially. However, past performance supports the Company'sour ability to fund the increase in ICM's production.
ICM’sICM and Warp Speed’s ability to readily sell mortgage loans is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae, Freddie Mac and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Some of the largest participants in the secondary market, including Fannie Mae and Freddie Mac, are
government-sponsored enterprises with substantial market influence whose activities are governed by federal law. Any future changes in laws that significantly affect the activity of these government-sponsored enterprises and other institutional and non-institutional investors or any impairment of the ICM'stheir ability to participate in such programs could, in turn, adversely affect the Company'sour results of operations.
The Company'sOur largest source of revenue (net interest income) is subject to interest rate risk.
The Bank’s financial condition and results of operations are significantly affected by changes in interest rates. The Bank’s earnings depend primarily upon its net interest income, which is the difference between its interest income earned on its interest-earning assets, such as loans and investment securities, and its interest expense paid on its interest-bearing liabilities, consisting of deposits and borrowings. Moreover, the loans included in the Company'sour interest-earning assets are primarily comprised of variable and adjustable rate loans. Net interest income is subject to interest rate risk in the following ways:
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l | In general, for a given change in interest rates, the amount of change in value (positive or negative) is larger for assets and liabilities with longer remaining maturities. The shape of the yield curve may affect new loan yields, funding costs and investment income differently. |
l | The remaining maturity of various assets or liabilities may shorten or lengthen as payment behavior changes in response to changes in interest rates. For example, if interest rates decline sharply, loans may prepay, or pay down, faster than anticipated, thus reducing future cash flows and interest income. Conversely, if interest rates increase, depositors may cash in their certificates of deposit prior to maturity (notwithstanding any applicable early withdrawal penalties) or otherwise reduce their deposits to pursue higher yielding investment alternatives. |
l | Re-pricing frequencies and maturity profiles for assets and liabilities may occur at different times. For example, in a falling rate environment, if assets re-price faster than liabilities, there will be an initial decline in earnings. Moreover, if assets and liabilities re-price at the same time, they may not be by the same increment. For instance, if the federal funds rate increased 50 basis points, rates on demand deposits may rise by ten basis points; whereas rates on prime-based loans will instantly rise 50 basis points. |
Recently, there have been market indicators of a pronounced rise in inflation and the Federal Reserve Board has raised certain benchmark interest rates in an effort to combat inflation. Continued increases in market interest rates could have an adverse effect on our net interest income and profitability. Although the Federal Reserve acted with the goal of avoiding abrupt or unpredictable changes in economic or financial conditions which would disrupt the financial systems, also known as “shocks,” the continuing impact of these changes cannot be certain. Vulnerabilities in the financial system can amplify the impact of an initial shock following rate increases, potentially leading to unintended volatility, as well to disruptions in the provision of financial services, such as clearing payments, the provision of liquidity and the availability of credit. Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causesGiven the interconnectedness of the global financial system, these vulnerabilities could impact our business operations and financial condition. Furthermore, any asymmetry in the magnitude of changes to net interest income, net economic value and investment income resulting from the hypothetical increases and decreases in interest rates.rates could have an adverse effect on our results of operations. Interest rate risk is more fully described in Item 7A – Quantitative and Qualitative Disclosures About Market Riskincluded elsewhere in this report.
The CompanyOur gaming initiative has contributed significantly to an increase in our deposits and creates concentration risk in our deposit base.
Our gaming initiative has contributed significantly to an increase in our deposits, and has allowed us to generate attractive returns on lower risk assets through increased investments in securities and loan growth. On-balance sheet gaming deposits totaled $354.1 million as of December 31, 2023, compared to $652.1 million as of December 31, 2022. Off-balance sheet gaming deposits totaled $277.1 million as of December 31, 2023, compared to $141.2 million as of December 31, 2022. Of the gaming deposits, $292.7 million is with our three largest clients at December 31, 2023. Our future growth may be adversely impacted if we are unable to retain and grow this strong, low-cost deposit base. There may be competitive pressures to pay higher interest rates on deposits to our gaming customers, which could increase funding costs and compress net interest margins. Further, even if we are otherwise able to grow and maintain our gaming deposit base, our deposit balances may still decrease if our gaming customers are offered more attractive returns from our competitors. If our gaming customers withdraw deposits, we could lose a low cost source of funds which would likely increase our funding costs and reduce our net interest income and net interest margin. These factors could have a material adverse effect on our business, financial condition and results of operations.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company hasWe have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose the Companyus to credit risk in the event of a default by a counterparty or client. In addition, the Company'sour credit risk may be exacerbated when the collateral held cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could have a material adverse effect on the Company'sour business, financial condition and results of operations.
The Company operatesWe operate in a highly competitive industry and market area and failure to effectively compete could have a material adverse effect on itsour business, financial condition and results of operations.
The Company facesWe face substantial competition in all areas of itsour operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional and community banks within the various markets where the Company operates. The Companywe operate. We also facesface competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also, technology and other changes have lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Further, many of the Company's
our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services, as well as better pricing for those products and services than the Companywe can.
The Company'sOur ability to compete successfully depends on a number of factors, including, among other things:
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l | Ability to develop, maintain and build long-term customer relationships based on top quality service, high ethical standards and safe, sound assets; |
l | Ability to attract or retain senior management or other key customer-facing personnel; |
l | Ability to expand the Company'sour market position; |
l | Scope, relevance and pricing of products and services offered to meet customer needs and demands; |
l | Rate at which the Company introduceswe introduce new products and services relative to itsour competitors; |
l | Customer satisfaction with the Company'sour level of service; and |
l | Industry and general economic trends. |
Failure to perform in any of these areas could significantly weaken the Company'sour competitive position, which could adversely affect itsour growth and profitability, which, in turn, could have a material adverse effect on itsour business, financial condition and results of operations.
The value of the Company'sour goodwill and other intangible assets may decline in the future.
As of December 31, 2020, the Company2023, we had $4.8$3.2 million of goodwill and other intangible assets. A significant decline in the Company'sour expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of itsour common stock may necessitate taking charges in the future related to the impairment of itsour goodwill and other intangible assets. If the Companywe were to conclude that a future write-down of goodwill and other intangible assets is necessary, itwe would record the appropriate charge, which could have a material adverse effect on the Company'sour business, financial condition and results of operations.
Changes to the London Interbank Offered Rate (“LIBOR”) may adversely impact the value As of and the return on, the Company's financial instruments that are indexed to LIBOR.
The United Kingdom Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. In November 2020, the LIBOR administrator published a consultation regarding its intention to delay the date on which it will cease publication of United States dollar LIBOR from December 31, 2021 to June 30, 2023 for the most common tenorsour equity method investment ICM also had $15.3 million of United States dollar LIBOR, including the three-month LIBOR, but indicated no new contracts using United States dollar LIBOR should be entered into after December 31, 2021. Publicationgoodwill. A future write-down of non-United States dollar LIBOR would continue to cease after December 31, 2021. Notwithstanding the publicationgoodwill at ICM could have an adverse effect on our results of this consultation, there is no assuranceoperations based on our proportionate share of how long LIBOR of any currency or tenor will continue to be published. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published before December 31, 2021 or June 30, 2023, as applicable, or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Although the Alternative Reference Rates Committee has announced the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR, SOFR may not gain market acceptance or be widely used as a benchmark rate. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other similar reforms may adversely affect the value of, and the return on, the Company's financial instruments.equity method investment income.
New lines of business or new products and services, including Fintech investments and digital assets, may subject the Companyus to additional risks.
The Company isWe are focused on itsour long-term growth and have undertaken various new business initiatives, many of which involve activities that are new to it, or in some cases, are in the early stages of development. From time to time, the Companywe may develop, grow and/or acquire new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets for these products and services are not fully developed.
For example, the Company iswe are involved in new innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments and depositor relationships in Fintech. The Company also acquired Chartwell in September 2019, which provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk
management services that include consulting, outsourcing, testing and training solutions. Given the Company'sFintech industry. Our evolving business and product diversification, these new initiatives may subject itus to, among other risks, increased business, reputational and operational risk, as well as more complex legal, regulatory and compliance costs and risks. Furthermore, the Bank has several large depositor relationships that are concentrated in the Fintech industry and the loss of any relationship could force the Company to fund its business through more expensive and less stable sources. Also,Additionally, the Bank is engaged in relationships with clients in the payments, digital savings, cryptocurrency, crowd funding,digital assets, crowdfunding, lottery and gaming industries and any change in regulations could impact the Companyus from both an operational and regulatory perspective. As
Investing in these newer industries presents some risks. For example, earnings from our Fintech investments can be volatile and difficult to predict. Furthermore, we often invest in Fintech companies for strategic purposes. Where we are a minority shareholder, we may be unable to influence the activities of December 31, 2020, total gaming deposits represent approximately 18%these organizations, which could have an adverse impact on our ability to execute our strategic initiatives and successfully develop and implement the banking platform we are developing with these and other partners.
Similarly, digital asset markets and related stocks have been, and are expected to continue to be, volatile and may be influenced by a wide variety of factors, including speculative activity. This volatility may materially impact us if our clients experience significant losses. This volatility may also materially impact our financial statements and thus affect our common stock market price. The SEC and Treasury have continued to focus on registration for certain digital assets and reporting of transactions to the Company's total deposits.IRS. Any change in regulations could impact us from both an operational and regulatory perspective.
In addition to new lines of business, we have strategies to acquire and internally develop technologies in order to scale and diversify our banking capabilities. There may be significant costs to acquire and/or develop such technologies and there is no certainty as to the timing for these investments to become profitable, if at all.
In developing and marketing new lines of business and/or new products and services, the Companywe may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. For example, as we expand our banking-as-a-service business and consider entering into other services, there may be heightened regulatory scrutiny of consumer compliance, including clear and transparent account origination and servicing user experiences and disclosures, such as modifications to consumer products or disclosures required by the CFPB.
Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company'sour system of internal controls. All service offerings, including current offerings and those which may be provided in the future, may become more riskyriskier due to changes in economic, competitive and market conditions beyond the Company'sour control. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company'sour business, results of operations and financial condition.
The Company's investments in Fintech companies and initiatives subject it to material financial, reputational and strategic risks.
The Company's investments in various Fintech companies have had a significant impact on its results of operations, and it anticipates they will continue to have a significant impact on its results of operations in the future. Any investments where the Company has the ability to exercise significant influence, but not control over the operating and financial policies of the investee, are accounted for using the equity method of accounting. For investments accounted for under the equity method, the Company increases or decreases its investment by its proportionate share of the investee’s net income or loss. Any investments where the Company is not able to exercise significant influence over the investee are accounted for under Accounting Standards Update (“ASU”) 2016-01, where changes in fair value resulting from observable price changes arising from orderly transactions are recognized in net income. The Company also periodically evaluates its investments for impairment. Please refer to Note 1 – Summary of Significant Accounting Policies, accompanying the consolidated financial statements included elsewhere in this report for more information.
Any earnings from the Company's Fintech investments can be volatile and difficult to predict. Furthermore, the Company invests in many of these Fintech companies for strategic purposes. Where the Company is a minority shareholder, it may be unable to influence the activities of these organizations, which could have an adverse impact on its ability to execute its strategic initiatives and successfully develop and implement the banking platform it is developing with these and other partners.
Potential acquisitions may disrupt the Company'sour business and dilute stockholder value.
We generally seeksseek merger or acquisition partners that are culturally similar, have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:
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l | Potential exposure to unknown or contingent liabilities of the target company; |
l | Exposure to potential asset quality issues of the target company; |
l | Potential disruption to the Company'sour business; |
l | Potential diversion of management’s time and attention; |
l | Possible loss of key employees and customers of the target company; |
l | Difficulty in estimating the value of the target company; and |
l | Potential changes in banking or tax laws or regulations that may affect the target company. |
Acquisitions typically involve the payment of a premium over book and market values, and therefore, some dilution of the Company'sour tangible book value and net income per common share may occur in connection with any future transaction.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from an acquisition could have a material adverse effect on the Company'sour business, financial condition and results of operations.
The Company isWe are subject to liquidity risk, which could disrupt the ability to meet itsour financial obligations.
Liquidity refers to the ability of the Companyus to ensure sufficient levels of cash to fund operations, such as meeting deposit withdrawals, funding loan commitments, paying expenses and meeting periodic payment obligations under certain subordinated debentures issued by the Companyus in connection with the issuance of floating rate redeemable trust preferred securities. The source of the funds for the Company’sour debt obligations is dependent on the Bank.
Any significant restriction or disruption of the Company’sour ability to obtain funding from these or other sources could have a negative effect on the Company’sour ability to satisfy itsour current and future financial obligations, which could materially affect the Company’sour financial condition.
A deterioration in economic conditions or the loss of confidence in financial institutions may result in deposit base outflows and limit our access to some of our customary sources of liquidity, including, but not limited to, inter-bank borrowings and borrowings from the Federal Reserve and FHLB. In addition, account and deposit balances may decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return trade-off. Furthermore, the portion of our deposit portfolio that is comprised of large uninsured deposits may be more likely to be withdrawn rapidly under adverse economic conditions. If our clients move money out of bank deposits into investments or to other financial institutions, we could lose a relatively low-cost source of funds.
Limited availability of borrowings and liquidity from the FHLB system and other sources could negatively impact earnings.
The Bank is currently a member bank of the FHLB of Pittsburgh. Membership in this system of quasi-governmental, regional home loan orientedloan-oriented agency banks allows it to participate in various programs offered by the FHLB. The Bank borrows funds from the FHLB, which are secured by a blanket lien on certain residential and commercial mortgage loans, and if applicable, investment securities with collateral values in excess of the outstanding balances. Current and future earnings shortfalls and minimum capital requirements of the FHLB may impact the collateral necessary to secure borrowings and limit the borrowings extended to their member banks, as well as require additional capital contributions by member banks. Should this occur, the Bank's short-term liquidity needs could be negatively impacted. If the Bank were restricted from using FHLB advances due to weakness in the system or with the FHLB of Pittsburgh, it may be forced to find alternative funding sources. If the Bank is required to rely more heavily on higher cost funding sources, revenues may not increase proportionately to cover these costs, which would adversely affect results of operations and financial position.
Interruption to the Company'sour information systems or breaches in security, including as a result of cyberattacks or other cyber incidents, could adversely affect the itsour operations or otherwise harm itsour business.
The Company reliesWe rely on information systems and communications for operating and monitoring all major aspects of business, as well as internal management functions. Any failure, interruption, intrusion or breach in security of these systems could result in failures or disruptions in the customer relationship, management, general ledger, deposit, loan and other systems.
There have been several cyberattacks on websites of large financial services companies. Even if not directed at the Companyus specifically, attacks on other entities with whom it doeswe do business, or on whom itwe otherwise relies,rely, or attacks on financial or other institutions important to the overall functioning of the financial system could adversely affect, directly or indirectly, aspects of the Company'sour business.
Cyberattacks on third-party retailers or other business establishments that widely accept debit card or check payments could compromise sensitive Bank customer information, such as debit card and account numbers. Such an attack could result in significant costs to the Bank, such as costs to reimburse customers, reissue debit cards and open new customer accounts.
In addition, there have been efforts on the part of third parties to breach data security at financial institutions, including through the use of social engineering schemes such as “phishing.” The ability of customers to bank remotely, including online and through mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches. Because the techniques used to attack financial services company communications and information systems change frequently (and generally increase in sophistication), attacks are often not recognized until launched against a target and the Companywe may be unable to address these techniques in advance of attacks, including by implementing adequate preventative measures. The CompanyWe may also be unable to prevent attacks that are supported by foreign governments or other well-financed entities and that may originate from less regulated and remote areas of the world.
The occurrence of any such failure, disruption or security breach of the Company'sour information systems, particularly if widespread or resulting in financial losses to the Company'sour customers, could damage itsour reputation and itsour relationships with itsour partners and customers, result in a loss of customer business, subject the Companyus to additional regulatory scrutiny and expose itus to civil litigation and possible financial liability. These risks could have a material effect on the Company'sour business, results of
operations and financial condition.
The CompanyWe continually encountersencounter technological change and failure to continually adapt to such change could materially impact itsour financial condition and results of operations.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The Company'sThese new products and services may include applications or financial-related services that implement artificial intelligence, machine learning, robotics, blockchain, or new approaches to data mining. Our future success depends, in part, upon itsour ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Our success also depends on our ability to invest in cybersecurity protection systems that will adequately protect our customers as technology continues to evolve. Many of the Company'sour competitors have substantially greater resources to invest in technological improvements. The CompanyWe may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to itsour customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on the Company'sour business, financial condition and results of operations.
Consumers may decide not to use banks to complete their financial transactions, or deposit funds electronically with banks having no branches within the Company'sour market area, which could affect net income.
Technology and other changes allow parties to complete financial transactions without banks. For example, consumers can pay bills and transfer funds directly without banks. Consumers can also shop for higher deposit interest rates at banks across the country, which may offer higher rates because they have few or no physical branches and open deposit accounts electronically. This process could result in the loss of fee income, as well as the loss of client deposits and the income generated from those deposits, in addition to increasing funding costs.
The Company'sOur operations rely on certain external vendors who may not perform in a satisfactory manner.
The Company isWe are reliant upon certain external vendors to provide products and services necessary to maintain itsour day-to-day operations. Accordingly, itsour operations are exposed to risk that these vendors will not perform in accordance with applicable contractual arrangements or service level agreements. The Company maintainsWe maintain a system of policies and procedures designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure; (ii) changes in the vendor’s financial condition; and (iii) changes in the vendor’s support for existing products and services. The failure of an external vendor to perform in accordance with applicable contractual arrangements or the service level agreements could be disruptive to operations, which could have a material adverse impact on the Company'sour business, financial condition and results of operations.
The Company isWe are subject to environmental liability risk associated with lending activities.
A significant portion of the Company'sour loan portfolio is secured by real property. During the ordinary course of business, the Companywe may foreclose
on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Companywe may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Companyus to incur substantial expenses and may materially reduce the affected property’s value or limit itsour ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company'sour business, financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties which, if inaccurate, could have a material adverse impact on the Company'sour financial condition and results of operations.
In deciding whether to extend credit or enter into other transactions, the Companywe may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The CompanyWe may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company'sour business, financial condition and results of operations.
The Company isWe are at risk for an adverse impact on business due to damage to itsour reputation.
Our ability to compete effectively, to attract and retain customers and employees, and to grow our business is dependent on maintaining our reputation and having the trust of our customers and employees. Many types of developments, if publicized, can negatively impact a company’s reputation with adverse consequences to itsour business.
To an increasing extent, financial services companies, including the Company,us, may face criticism for engaging in business with specific customers or with customers in particular industries, where the customers’ activities, even if legal, are perceived as having harmful impacts on matters such as environment, consumer health and safety or society at large. Criticism can come in many forms, including for providing banking services to companies engaged in, for example, the gaming industry or cryptocurrency.digital assets. Many of these issues are divisive without broad agreement as to the appropriate steps a company should take and often with strong feelings on both sides. As a result, however we respond to such criticism, we expose ourselves to the risks that current or potential customers decline to do business with us or current or potential employees refuse to work for us. This can be true regardless of whether we are perceived by some as not having done enough to address concerns or by others as having inappropriately yielded to pressures. This pressure can also be a factor in decisions as to which business opportunities and customers we pursue, potentially resulting in foregone profit opportunities.
The CompanyWe may also face criticism in response to changes in overall strategic direction, the addition of new lines of business, the exit of current lines of business or with openings or closures of certain banking centers.
Changes in card network rules or standards could adversely affect our business.
We provide merchant services through the third-party business model in which we process credit and debit card transactions on behalf of merchants. In order to provide such merchant services, we are members of the Visa and MasterCard card brand networks. As such, we are subject to card network rules that could subject us or our merchants to a variety of fines or penalties that may be assessed on us and our merchants. The termination of our membership or any changes in card network rules or standards could increase the cost of operating our merchant servicer business or limit our ability to provide merchant services to or through our customers and could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to the Legal and Regulatory Environment
Changes in tax law may adversely affect the Company'sour performance and create the risk that itwe may need to adjust itsour accounting for these changes.
The Company isWe are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to the Company'sour taxes could have a material adverse effect on itsour performance. In addition, customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by customers may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for loans and deposit products. In addition,
such negative effects on customers could result in defaults on the loans and decrease the value of mortgage-backed securities in which the Company haswe have invested.
The Company isWe are subject to extensive government regulation and supervision and possible enforcement and other legal actions that could detrimentally affect itsour business.
The Company,We, primarily through the Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision, which vests a significant amount of discretion in the various regulatory authorities. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. These regulations and supervisory guidance affect the Company'sour lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes. Other changes to statutes, regulations or regulatory policies or supervisory guidance, including changes in interpretation or implementation of statutes, regulations, policies or supervisory guidance, could affect the Companyus in substantial and unpredictable ways. Such changes could subject itus to additional costs, limit the types of financial services and products the Companywe may offer, cause us to exit certain lines of business and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies or supervisory guidance could result in enforcement and other legal actions by Federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, the revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties and/or reputational damage. In this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures. Any of the foregoing could have a material adverse effect on the Company'sour business, financial condition and results of operations.
For further detail, please refer to the sections captioned Supervision and Regulation included in Item 1 – Business and Note 1516 – Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.
Failure to meet any of the various capital adequacy guidelines which the Company iswe are subject to could adversely affect itsour operations and could compromise itsour status as a financial holding company.
The CompanyWe and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements imposed by the Federal Reserve Board, the FDIC and the United States Department of Treasury. If the Companywe or the Bank failsfail to meet these minimum capital guidelines and other regulatory requirements, the Company'sour financial condition and results of operations would be materially and adversely affected and could compromise itsour status as a financial holding company. Please refer to the sections captioned Supervision and Regulation – Capital Requirements included in Item 1 – Business and Note 1516 – Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report, for detailed capital guidelines for bank holding companies and banks.
The Company isWe are a financial holding company and itsour sources of funds are limited.
The Company isWe are a financial holding company and itsour operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to shareholders of the Companyus is derived primarily from dividends paid by the Bank. As a result, the Company’sour ability to receive dividends or loans from itsthe Bank subsidiary is restricted. Under federal law, the payment of dividends by the Bank is subject to capital adequacy requirements. The Federal Reserve Board and/or the FDIC prohibit a dividend payment by the Companyus or the Bank that would constitute an unsafe or unsound practice. Please refer to the sections captioned Supervision and Regulation – Limit on Dividends included in Item 1 – Business and Note 1516 – Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.
The inability of the Bank to generate profits and pay such dividends to the Company,us, or regulator restrictions on the payment of such dividends to the Companyus even if earned, would have an adverse effect on theour financial condition and results of operations of the Company and the Company’sour ability to pay dividends to itsour shareholders.
In addition, since the Company iswe are a legal entity separate and distinct from the Bank, itsour right to participate in the distribution of assets of the Bank upon the Bank’s liquidation, reorganization or otherwise will be subject to the prior claims of the Bank’s creditors, which will generally take priority over the Bank’s shareholders.
Risks Associated With the Company'sRelated to Our Common Stock
The trading volume in the Company'sour common stock is less than that of other larger financial services companies.
Shares of the Company'sour common stock began tradingare traded on the Nasdaq Capital Market in December 2017 under the symbol “MVBF” and were previously traded on the OTC Bulletin Board.. There has been limited trading in itsour shares over the last 12 months. If limited trading in the Company'sour common stock continues, it may be difficult for investors to sell such shares in the public market at any given time at prevailing prices. Also, the sale of a large block of the Company'sour common stock could depress the market price of the common stock to a greater degree than a company that typically has a higher volume of trading of itsour securities.
If the Company iswe are unable to maintain compliance with Nasdaq listing requirements, itsour stock could be delisted, and the trading price, volume and marketability of the stock could be adversely affected.
There can be no assurances that the Companywe will be able to maintain compliance with Nasdaq’s present listing standards, or that Nasdaq will not implement additional listing standards with which itwe will be unable to comply. Failure to maintain compliance with Nasdaq listing requirements could result in the delisting of the Company'sour shares from trading on the Nasdaq system, which could have a material adverse effect on the trading price, volume and marketability of the common stock.
The Company'sOur stock price can be volatile.
Stock price volatility may make it more difficult for shareholders to resell their common stock when they want and at prices they find attractive. The Company'sOur stock price can fluctuate significantly in response to a variety of factors including, among other things:
| | | | | |
l | actual or anticipated variations in quarterly results of operations; |
l | recommendations by securities analysts; |
l | operating and stock price performance of other companies that investors deem comparable to the Company;us; |
| | | | | |
l | news reports relating to trends, concerns and other issues in the financial services industry; |
l | perceptions in the marketplace regarding the Companyus and/or itsour competitors; |
l | new technology used, or services offered, by competitors; |
l | significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Companyus or itsour competitors; |
l | failure to integrate acquisitions or realize anticipated benefits from acquisitions; |
l | changes in government regulations; and |
l | geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, including real or anticipated changes in the strength of the economies the Company serves;we serve; industry factors and general economic and political conditions and events, such as economic slowdowns or recessions; interest rate changes, crude oil price volatility or credit loss trends could also cause the Company'sour stock price to decrease, regardless of operating results.
The Company'sOur ability to pay dividends is not certain and itwe may be unable to pay future dividends. As a result, capital appreciation, if any, of The Company'sour common stock may be shareholders' sole opportunity for gains on their investment for the foreseeable future.
The Company'sOur ability to pay dividends in the future is not certain. Any future determination relating to dividend policy will be made at the discretion of itsour Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial condition, future prospects, regulatory restrictions and other factors that itsour Board of Directors may deem relevant. The holders of the Company'sour common stock are entitled to receive dividends when, and if declared by itsour Board of Directors out of funds legally available for that purpose. As part of itsour consideration of whether to pay cash dividends, the Company intendswe intend to retain adequate funds from future earnings to support the development and growth of itsour business. In addition, the Company'sour ability to pay dividends is restricted by federal policies and regulations and by the terms of itsour existing indebtedness. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. For further information, please refer to the section captioned Supervision and Regulation – Limit on Dividends in Item 1 – Business included elsewhere in this report.
General Risk Factors
We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002.
The Company isWe are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. At December 31, 2020, the Company has2023, we have no material weaknesses in itsour internal control over financial reporting; however, a material weakness could occur in the future. A “material weakness” is a control deficiency, or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If the Company failswe fail to maintain a system of internal control over financial reporting that meets the requirements of Section 404, itwe may be subject to sanctions or investigation by regulatory authorities. Additionally, failure to comply with Section 404 or the report by the Companywe provide of a material weakness may cause investors to lose confidence in itsour financial statements and itsour stock price may be adversely affected. If the Company failswe fail to remedy any material weakness, itsour financial statements may be inaccurate, itwe may not have access to the capital markets, and itsour stock price may be adversely affected.
The value of the securities in the Company'sour investment securities portfolio may be negatively affected by disruptions in securities markets.
Due to credit and liquidity risks and economic volatility, making the determination of the value of a securities portfolio is less certain. A decline in market value associated with these disruptions could result in other-than-temporary or permanent impairments of these assets, which would lead to accounting charges which could have a material negative effect on the Company'sour financial condition and results of operations.
The Company'sOur accounting policies and estimates are critical to how it reports itswe report our financial condition and results of operations, and any changes to such accounting policies and estimates could materially affect how the Company
reports itswe report our financial condition and results of operations.
Accounting policies and estimates are fundamental to how the Companyour records and reports itsour financial condition and results of operations. The Company'sOur management makes judgments and assumptions in selecting and adopting various accounting policies and in applying estimates so that such policies and estimates comply with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability or reducing a liability. Because of the uncertainty surrounding management's judgments and the estimates pertaining to these matters, actual outcomes may be materially different from amounts previously estimated. For example, because of the inherent uncertainty of estimates, the Bank could need to significantly increase its allowance for loancredit losses if actual losses are more than the amount reserved. Any increase in its allowance for loancredit losses or loan charge-offs could have a material adverse effect on the Company'sour financial condition and results of operations. In addition, the Companywe cannot guarantee that itwe will not be required to adjust accounting policies or restate prior financial statements. Please refer to the section captioned Allowance for LoanCredit Losses in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report for further discussion related to the Company'sour process for determining the appropriate level of the allowance for loancredit losses.
Further, from time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of the Company'sour financial statements. Recent economic conditions have resulted in continuing scrutiny of accounting standards by legislators and regulators, particularly as they relate to fair value accounting principles. In addition, ongoing efforts to achieve convergence between U.S. GAAP and International Financial Reporting Standards may result in changes to U.S. GAAP. These changes can be hard to predict and can materially impact how the Company recordswe record and reports itsour financial condition and results of operations. In some cases, the Companywe could be required to apply a new or revised standard retroactively, resulting in itus restating prior period financial statements or otherwise adversely affecting itsour financial condition or results of operations.
The Company'sOur accounting estimates and risk management processes rely on analytical and forecasting models which may prove to be inadequate or inaccurate which could result in unexpected losses, insufficient allowances for loancredit losses or unexpected fluctuations in the value of itsour financial instruments.
The processes the Company useswe use to estimate itsour inherent loancredit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on itsour financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be
accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models used for interest rate risk and asset-liability management are inadequate, the Companywe may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models the Company useswe use for determining itsour probable loancredit losses are inadequate, the allowance for loancredit losses may not be sufficient to support future charge-offs. If the models used to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Companywe could realize upon sale or settlement of such financial instruments. Any such failure in the Company'sour analytical or forecasting models could have a material adverse effect on itsour business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Risk Management and Strategy
Cybersecurity threats are inherent in the banking and financial services industry. To safeguard our customers' sensitive data, financial transactions, information systems and information assets, we have established a comprehensive cybersecurity risk management program that is part of our enterprise risk management strategy. Our risk management team oversees the program and regularly collaborates with our information security function, led by our Chief Security Officer, to gather insights for identifying, assessing and managing cybersecurity threat risks, their severity, and potential mitigations.
As part of our strategy, we also leverage reputable third-party service providers to implement and maintain processes and controls to manage identified risks. We perform rigorous due diligence before onboarding and engage in ongoing monitoring of all third parties with access to our information assets to ensure such parties maintain adequate security controls. Our security practices also include continuous threat monitoring and detection services as well as vulnerability and patch management process to ensure systems are hardened to further protect our critical information assets.
Furthermore, we are consistently broadening our scope of training and awareness practices to alleviate potential risks associated with human error, including mandatory computer-based training, internal communications, and frequent phishing awareness campaigns.
Apart from the measures implemented to decrease the possibility of a material cyberattack being successful, we have created clear incident response protocols to deal with any cyber events that may arise. Our program provides for the coordination of different corporate functions and serves as a framework for the execution of responsibilities across businesses and operational roles. Our incident response plan includes processes to triage, assess severity for, escalate, contain, investigate, and remediate any incidents. Testing, training and exercising of our incident response capabilities are carried out routinely and After Actions Reports are prepared to continuously improve these practices. We also have processes to evaluate potential disclosure, comply with applicable legal obligations, and mitigate reputational damage.
Based on the information we have as of the date of this Annual Report on Form 10-K, we do not believe any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations or financial condition.
Governance
Oversight of cybersecurity matters is the responsibility of the Risk & Compliance Committee, which is a board committee, with oversight from the Board of Directors.
The Risk & Compliance Committee receives regular updates on cybersecurity risks and incidents and the cybersecurity risk management program through direct interaction with the Chief Information Officer and provides periodic updates regarding cybersecurity risks and the cybersecurity risk management program to the full Board of Directors. Our Chief Information Officer has significant experience in various roles involving managing information security, developing cybersecurity strategy, implementing effective information and cybersecurity programs and managing compliance environments.
ITEM 2. PROPERTIES
The Company,We, through the Bank, owns itsown our main office located at 301 Virginia Avenue in Fairmont, WV. The Company’sOur subsidiaries own or lease various other offices in the counties and cities in which they operate. As of December 31, 2020, the Company2023, we operated 13eight full-service banking branches including three full servicefor our CoRe banking branches acquired from First State in April 2020,reportable segment in the locations further described in Item 1 – Business included elsewhere in this report. SevenFour of the 13eight full-service banking branches are owned and the remaining sixfour are leased.
In January 2020, the Company closed one branch location in Morgantown, WV. In April 2020, the Company sold three Bank
branch locations in Berkeley County, WV, and one Bank branch location in Jefferson County, WV, pursuant to a Purchase and Assumption Agreement with Summit.
No one facility is material to the Company.us. Management believes that the facilities are generally in good condition and suitable for the operations for which they are used.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Companywe and itsour subsidiaries may be subject to claims, asserted or unasserted or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation, in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty, andespecially in the case of more complex legal proceedings, the results can be difficult to predict. The Company isproceedings. We are not aware of any material pending legal proceedings to which the Companywe or any of itsour subsidiaries is a party or of which any of their property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’sOur common stock is traded on the Nasdaq Capital Market under the symbol “MVBF.”
As of March 8, 2021, MVB Financial Corp.11, 2024, we had approximately 920821 stockholders of record.
In 2020 20192023, 2022 and 2018, the Company2021, we paid dividends totaling $0.36, $0.195$0.68, $0.68 and $0.11,$0.51, respectively, per share and currently expectsexpect that comparable dividends will continue to be paid in the future.
The following five-year performance graph compares the cumulative total shareholder return (assuming reinvestment of dividends) on the Company’sour common stock to the KBW Bank Index and the Russell 2000 Index. The stock performance graph assumes $100 was invested on December 31, 2015,2018 and the cumulative return is measured as of each subsequent fiscal year end.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Index | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 |
MVB Financial Corp. | | $ | 100.00 | | | $ | 98.32 | | | $ | 154.81 | | | $ | 139.92 | | | $ | 193.93 | | | $ | 179.58 | |
KBW Bank Index | | 100.00 | | | 125.60 | | | 146.02 | | | 117.39 | | | 155.12 | | | 133.98 | |
Russell 2000 | | 100.00 | | | 119.48 | | | 135.18 | | | 118.72 | | | 146.89 | | | 173.86 | |
![770](/files/10-K/0001277902-24-000014/mvbf-20231231_g2.jpg)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Index | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 | | 12/31/2023 |
MVB Financial Corp. | | $ | 100.00 | | | $ | 139.17 | | | $ | 128.75 | | | $ | 235.95 | | | $ | 131.69 | | | $ | 138.45 | |
KBW Bank Index | | 100.00 | | | 132.14 | | | 114.13 | | | 154.12 | | | 117.55 | | | 111.92 | |
Russell 2000 | | 100.00 | | | 123.72 | | | 146.44 | | | 166.49 | | | 130.60 | | | 150.31 | |
Equity Compensation Plan Information
Information about the Company’sour equity compensation plan is disclosed below under Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,Matters, in Part III of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
In April 2020, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin. The purchase price of the
transaction consisted of 19,278 unregistered shares of MVB common stock and an undisclosed amount of cash.None.
Purchases of Equity Securities by Issuer and Affiliated Purchasers
Details of theThere were no repurchases of the common stock during the three months ended December 31, 2020, are included in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs |
October 1 - October 31, 2020 | | 130,400 | | $ | 17.00 | | | 130,400 | | | $ | 1,582,679 | |
November 1 - November 30, 2020 | | 1,500 | | $ | 16.37 | | | 1,500 | | | $ | 1,558,121 | |
December 1 - December 31, 2020 | | 536,490 | | $ | 20.25 | | | 536,490 | | | $ | 31,866,000 | |
Total | | 668,390 | | | | | 668,390 | | | |
2023.
Please refer to Note 13 – Stock Offerings accompanying the consolidated financial statements included elsewhere in this report.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated summary sets forth the Company’s selected financial data that has been derived from its audited consolidated financial statements for each of the periods and at the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
(Dollars in thousands except per share data) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Balance Sheet Data: | | | | | | | | | | |
Assets | | $ | 2,331,476 | | | $ | 1,944,114 | | | $ | 1,750,969 | | | $ | 1,534,302 | | | $ | 1,418,804 | |
Investment securities | | 438,209 | | | 254,335 | | | 231,213 | | | 231,507 | | | 162,368 | |
Loans receivable, net | | 1,427,900 | | | 1,362,766 | | | 1,293,427 | | | 1,096,063 | | | 1,043,764 | |
Loans held-for-sale | | 1,062 | | | 109,788 | | | 75,807 | | | 66,794 | | | 90,174 | |
Deposits | | 1,982,389 | | | 1,265,042 | | | 1,309,154 | | | 1,159,580 | | | 1,107,017 | |
Subordinated debt | | 43,407 | | | 4,124 | | | 17,524 | | | 33,524 | | | 33,524 | |
Stockholders’ equity | | 239,483 | | | 211,936 | | | 176,773 | | | 150,192 | | | 145,625 | |
Weighted-average shares outstanding - basic | | 11,821,574 | | | 11,713,885 | | | 11,030,984 | | | 10,308,738 | | | 8,212,021 | |
Weighted-average shares outstanding - diluted | | 12,088,106 | | | 12,044,667 | | | 12,722,003 | | | 10,440,228 | | | 10,068,733 | |
Income Statement Data: | | | | | | | | | | |
Interest income | | $ | 80,453 | | | $ | 82,361 | | | $ | 69,760 | | | $ | 56,598 | | | $ | 54,123 | |
Interest expense | | 11,627 | | | 22,961 | | | 17,706 | | | 12,301 | | | 11,132 | |
Net interest income | | 68,826 | | | 59,400 | | | 52,054 | | | 44,297 | | | 42,991 | |
Provision for loan loss | | 16,579 | | | 1,789 | | | 2,440 | | | 2,173 | | | 3,632 | |
Net interest income after provision for loan loss | | 52,247 | | | 57,611 | | | 49,614 | | | 42,124 | | | 39,359 | |
Noninterest income | | 91,837 | | | 64,604 | | | 38,640 | | | 40,706 | | | 43,205 | |
Noninterest expense | | 97,141 | | | 87,201 | | | 72,878 | | | 70,500 | | | 69,209 | |
Income from continuing operations, before income taxes | | 46,943 | | | 35,014 | | | 15,376 | | | 12,330 | | | 13,355 | |
Income tax expense - continuing operations | | 9,532 | | | 8,450 | | | 3,373 | | | 4,755 | | | 4,378 | |
Net income from continuing operations | | 37,411 | | | 26,564 | | | 12,003 | | | 7,575 | | | 8,977 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net income from discontinued operations | | — | | | 427 | | | — | | | — | | | 3,935 | |
Net income | | 37,411 | | | 26,991 | | | 12,003 | | | 7,575 | | | 12,912 | |
Preferred dividends | | 461 | | | 479 | | | 489 | | | 498 | | | 1,128 | |
Net income available to common shareholders | | 36,950 | | | 26,512 | | | 11,514 | | | 7,077 | | | 11,784 | |
Per Share Data: | | | | | | | | | | |
Earnings per share from continuing operations - basic | | $ | 3.13 | | | $ | 2.22 | | | $ | 1.04 | | | $ | 0.69 | | | $ | 0.96 | |
Earnings per share from discontinued operations - basic | | — | | | 0.04 | | | — | | | — | | | 0.48 | |
Earnings per share per common share - basic | | 3.13 | | | 2.26 | | | 1.04 | | | 0.69 | | | 1.44 | |
Earnings per share from continuing operations - diluted | | 3.06 | | | 2.16 | | | 1.00 | | | 0.68 | | | 0.92 | |
Earnings per share from discontinued operations - diluted | | — | | | 0.04 | | | — | | | — | | | 0.39 | |
Earnings per share per common share - diluted | | 3.06 | | | 2.20 | | | 1.00 | | | 0.68 | | | 1.31 | |
Cash dividends | | 0.36 | | | 0.195 | | | 0.11 | | | 0.10 | | | 0.08 | |
Book value | | 20.14 | | | 17.13 | | | 14.55 | | | 13.63 | | | 12.93 | |
Tangible book value 1 | | 19.73 | | | 15.20 | | | 12.92 | | | 11.80 | | | 11.01 | |
Asset Quality Ratios: | | | | | | | | | | |
Nonperforming loans to total loans | | 0.9 | % | | 0.4 | % | | 0.5 | % | | 0.9 | % | | 0.6 | % |
Nonperforming assets to total assets | | 0.8 | | | 0.3 | | | 0.5 | | | 0.7 | | | 0.5 | |
Net charge-offs to total loans | | 0.1 | | | 0.1 | | | 0.1 | | | 0.1 | | | 0.2 | |
Allowance for loan losses to total loans | | 1.8 | | | 0.9 | | | 0.8 | | | 0.9 | | | 0.9 | |
Selected Ratios: | | | | | | | | | | |
Return on average assets - continuing operations | | 1.7 | % | | 1.4 | % | | 0.7 | % | | 0.5 | % | | 0.6 | % |
| | | | | | | | | | |
Return on average equity - continuing operations | | 16.7 | | | 13.6 | | | 7.5 | | | 5.2 | | | 7.3 | |
| | | | | | | | | | |
Dividend payout | | 11.4 | | | 8.5 | | | 10.2 | | | 13.6 | | | 5.0 | |
Efficiency | | 60.5 | | | 70.3 | | | 80.4 | | | 82.9 | | | 80.3 | |
Equity to assets | | 10.3 | | | 10.9 | | | 10.1 | | | 9.8 | | | 10.3 | |
Bank common equity tier 1 capital | | 14.6 | | | 12.1 | | | 12.5 | | | 13.3 | | | 13.6 | |
Bank tier 1 risk-based capital | | 14.6 | | | 12.1 | | | 12.5 | | | 13.3 | | | 13.6 | |
Bank total risk-based capital | | 15.8 | | | 12.9 | | | 13.3 | | | 14.2 | | | 14.5 | |
Bank leverage | | 11.0 | | | 9.9 | | | 10.2 | | | 10.7 | | | 10.9 | |
1 This is a non-U.S. GAAP measure that the Company believes is helpful to interpreting financial results. For a reconciliation to the most directly comparable U.S. GAAP financial measure, please refer to the “Non-U.S. GAAP Financial Measure Reconciliation” below.ITEM 6. [RESERVED]
Non-U.S. GAAP Financial Measure Reconciliation
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended/As of December 31, |
(Dollars and shares in thousands, except per share data) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Goodwill | | $ | 2,350 | | | $ | 19,630 | | | $ | 18,480 | | | $ | 18,480 | | | $ | 18,480 | |
Intangibles | | 2,400 | | | 3,473 | | | 550 | | | 646 | | | 744 | |
Total intangibles | | 4,750 | | | 23,103 | | | 19,030 | | | 19,126 | | | 19,224 | |
| | | | | | | | | | |
Total Equity | | $ | 239,483 | | | $ | 211,936 | | | $ | 176,773 | | | $ | 150,192 | | | $ | 145,625 | |
Less: Preferred equity | | (7,334) | | | (7,334) | | | (7,834) | | | (7,834) | | | (16,334) | |
Less: Total intangibles | | (4,750) | | | (23,103) | | | (19,030) | | | (19,126) | | | (19,224) | |
Tangible common equity | | 227,399 | | | 181,499 | | | 149,909 | | | 123,232 | | | 110,067 | |
| | | | | | | | | | |
Tangible common equity | | $ | 227,399 | | | $ | 181,499 | | | $ | 149,909 | | | $ | 123,232 | | | $ | 110,067 | |
Common shares outstanding | | 11,526 | | | 11,944 | | | 11,607 | | | 10,445 | | | 9,997 | |
Tangible book value per common share | | $ | 19.73 | | | $ | 15.20 | | | $ | 12.92 | | | $ | 11.80 | | | $ | 11.01 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management believes is necessary to understand our financial condition, results of operations and cash flows for the year ended December 31, 2023 as compared to 2022. This information should be read in conjunction with the Company'sour consolidated financial statements and related notes thereto included elsewhere in this report. A discussion of changes in the Company'sour results of operations from 20182021 to 2019 has been omitted from this report, but2022 may be found in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations, of itsour Annual Report on Form 10-K for the year ended December 31, 2019,2022, filed with the SEC on March 13, 2020.16, 2023. Further, the Company encourageswe encourage you to revisit the Forward-Looking Statements at the beginning of this report.
Executive Summary
Financial ResultsWe continue to adapt our business model due to challenging market conditions, primarily brought on by an environment of increasing interest rates, a slowing economy and multiple high-profile bank failures that occurred during the first half of 2023. We remain committed to our key Fintech industries of gaming and payments. We continue to expand the Bank's treasury services function to support the banking needs of financial and emerging technology companies, which we believe will further enhance core deposits, notably through the expansion of deposit acquisition and fee income strategies through the Fintech division. Additionally, we have expanded our compliance and risk management team to support the growth in these lines of business.
Total assets increased $387.4 million to $2.33 billion at December 31, 2020 from $1.94 billion at December 31, 2019. Earning assets increased $388.8 million to $2.15 billion at December 31, 2020 from $1.76 billion at December 31, 2019. This increase of $388.8 million in earning assets was primarily driven by the $235.2 million increase in interest-bearing deposits with other banks due to increased deposit growth. Deposits increased $717.3 million to $1.98 billion at December 31, 2020, from $1.27 billion at December 31, 2019. The overall cost of interest-bearing liabilities for the Company was 0.85% in 2020 compared to 1.68% in 2019. This cost of interest-bearing liabilities, combined with the earning asset yield, resulted in a net interest margin (tax-equivalent) of 3.57% in 2020 compared to 3.53% in 2019.Financial Results
Net interest income increased $9.4$11.5 million to $123.3 million, noninterest income increased $27.2decreased $7.9 million to $19.7 million and noninterest expensesexpense increased by $9.9$7.5 million to $117.6 million during 20202023 compared to 2019. The Company’s2022. Our yield on earning assets (tax-equivalent) in 20202023 was 4.17%6.20% compared to 4.87%4.54% in 2019.2022. Total loans increaseddecreased by $79.2$77.6 million to $1.45$2.32 billion atas of December 31, 2020.2023 from $2.40 billion as of December 31, 2022. Our overall cost of interest-bearing liabilities was 3.38% in 2023 compared to 1.03% in 2022. The increase in earning assets yield was partially offset by the increase in the cost of interest-bearing liabilities, which resulted in our net interest margin (tax-equivalent) remaining at 4.04% in 2023 and 2022.
The Company earned $37.4Net income in 2023 totaled $31.2 million, compared to $15.0 million in 2020 compared to $27.0 million in 2019,2022, an increase of $10.4$16.2 million. The 20202023 earnings equated to a return on average assets of 1.7%0.9% and a return on average equity of 16.7%11.4%, compared to 20192022 results of 1.4%0.5% and 13.6%5.9%, respectively. Basic and diluted earnings per share were $3.13$2.46 and $2.40, respectively, in 20202023 compared to $2.26$1.23 and $1.17, respectively, in 2019. Diluted earnings per share were $3.06 in 2020 compared to $2.20 in 2019.
COVID-19 Pandemic
The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy, as well as financial markets. The full impact of COVID-19 is unknown and continues to evolve. Financial markets adjusted dramatically to the reduced economic activity and the pace of recovery is uncertain. The financial market benchmark most relevant to the Company’s current and future profitability is the United States Government Treasury yield curve. The United States Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits and other fixed income yield curves. The United States Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset-sensitive position, management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the United States Government Treasury curve will experience some degree of an upward shift over time.
Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. The Company actively participated in the PPP, is evaluating other programs available to assist its clients and is providing consumer deferrals consistent with government-sponsored enterprise (“GSE”) guidelines. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.
There was considerable demand for the PPP implemented by the CARES Act to combat the economic slowdown brought on by the COVID-19 pandemic. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production as a result of the COVID-19 pandemic. The intended use of this funding is to pay employees who may be temporarily unable to work. The original tranche of PPP funding of $349 billion ran out 13 days after the program's implementation. The second tranche of PPP funding of $310 billion had funds available as of the program's closure date. On July 2, 2020, additional legislation was passed that allowed small businesses to apply for loans through August 8, 2020. On January 8, 2021, the SBA announced that the PPP program would reopen on January 11, 2021 for new borrowers and certain existing PPP
borrowers. During the latest round, funds totaling $284 billion were authorized through March 31, 2021.
As of December 31, 2020, commercial loans totaling $34.7 million and mortgage loans totaling $13.5 million were approved for modifications, such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings in reliance on guidance issued by banking regulators titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” The Company originated 455 PPP loans with original balances of $92.8 million and outstanding balances of $82.0 million as of December 31, 2020 are included on the Company's balance sheet.2022.
Net Interest Income and Net Interest Margin (Average Balance Schedules)
The following tables present, for the periods indicated, information about (1) average balances, the total dollar amount of interest income from interest earninginterest-earning assets and the resultant average yields; (2) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (3) the interest rate spread; (4) net interest income and margin; and (5) net interest income and margin (on a tax-equivalent basis). The average balances presented are derived from daily average balances.
Average Balances and Analysis of Net Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
(Dollars in thousands) | | Average Balance | | Interest Income/Expense | | Yield/Cost | | Average Balance | | Interest Income/Expense | | Yield/Cost | | Average Balance | | Interest Income/Expense | | Yield/Cost |
Assets | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits in banks | | $ | 125,259 | | | $ | 191 | | | 0.15 | % | | $ | 9,264 | | | $ | 209 | | | 2.26 | % | | $ | 5,176 | | | $ | 108 | | | 2.09 | % |
CDs with banks | | 12,484 | | | 246 | | | 1.97 | | | 14,097 | | | 280 | | | 1.99 | | | 14,778 | | | 295 | | | 2.00 | |
Investment securities: | | | | | | | | | | | | | | | | | | |
Taxable | | 121,607 | | | 2,448 | | | 2.01 | | | 129,486 | | | 3,055 | | | 2.36 | | | 150,134 | | | 3,580 | | | 2.38 | |
Tax-exempt 2 | | 144,389 | | | 5,361 | | | 3.71 | | | 103,235 | | | 4,456 | | | 4.32 | | | 79,161 | | | 3,557 | | | 4.49 | |
Loans and loans held-for-sale: 1 3 | | | | | | | | | | | | | | | | | | |
Commercial | | 1,136,858 | | | 54,434 | | | 4.79 | | | 987,674 | | | 53,087 | | | 5.37 | | | 854,108 | | | 43,099 | | | 5.05 | |
Tax-exempt 2 | | 8,966 | | | 422 | | | 4.70 | | | 12,549 | | | 561 | | | 4.47 | | | 14,352 | | | 632 | | | 4.40 | |
Real estate | | 403,166 | | | 18,100 | | | 4.49 | | | 447,891 | | | 21,220 | | | 4.74 | | | 395,302 | | | 18,794 | | | 4.75 | |
Consumer | | 6,973 | | | 465 | | | 6.67 | | | 8,948 | | | 547 | | | 6.11 | | | 11,349 | | | 575 | | | 5.07 | |
Total loans | | 1,555,963 | | | 73,421 | | | 4.72 | | | 1,457,062 | | | 75,415 | | | 5.18 | | | 1,275,111 | | | 63,100 | | | 4.95 | |
Total earning assets | | 1,959,702 | | | 81,667 | | | 4.17 | | | 1,713,144 | | | 83,415 | | | 4.87 | | | 1,524,360 | | | 70,640 | | | 4.63 | |
Less: Allowance for loan losses | | (18,079) | | | | | | | (11,318) | | | | | | | (10,530) | | | | | |
Cash and due from banks | | 26,460 | | | | | | | 17,625 | | | | | | | 16,828 | | | | | |
Other assets | | 181,439 | | | | | | | 131,370 | | | | | | | 106,600 | | | | | |
Total assets | | $ | 2,149,522 | | | | | | | $ | 1,850,821 | | | | | | | $ | 1,637,258 | | | | | |
| | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | |
Negotiable order of withdrawal | | $ | 408,110 | | | $ | 2,521 | | | 0.62 | | | $ | 381,092 | | | $ | 3,586 | | | 0.94 | | | $ | 432,789 | | | $ | 3,246 | | | 0.75 | |
Money market checking | | 458,606 | | | 2,680 | | | 0.58 | | | 331,636 | | | 5,144 | | | 1.55 | | | 245,008 | | | 2,455 | | | 1.00 | |
Savings | | 45,420 | | | 6 | | | 0.01 | | | 38,324 | | | 4 | | | 0.01 | | | 44,049 | | | 29 | | | 0.07 | |
IRAs | | 13,691 | | | 218 | | | 1.59 | | | 17,415 | | | 329 | | | 1.89 | | | 17,894 | | | 285 | | | 1.59 | |
CDs | | 349,787 | | | 4,869 | | | 1.39 | | | 387,660 | | | 8,376 | | | 2.16 | | | 319,720 | | | 5,620 | | | 1.76 | |
Repurchase agreements and federal funds sold | | 9,856 | | | 23 | | | 0.23 | | | 11,252 | | | 48 | | | 0.43 | | | 18,536 | | | 56 | | | 0.30 | |
FHLB and other borrowings | | 68,407 | | | 1,049 | | | 1.53 | | | 183,812 | | | 4,704 | | | 2.56 | | | 190,686 | | | 4,259 | | | 2.23 | |
Subordinated debt | | 7,568 | | | 261 | | | 3.45 | | | 12,124 | | | 770 | | | 6.35 | | | 25,774 | | | 1,756 | | | 6.81 | |
Total interest-bearing liabilities | | 1,361,445 | | | 11,627 | | | 0.85 | | | 1,363,315 | | | 22,961 | | | 1.68 | | | 1,294,456 | | | 17,706 | | | 1.37 | |
Noninterest-bearing demand deposits | | 502,457 | | | | | | | 258,546 | | | | | | | 171,631 | | | | | |
Other liabilities | | 61,169 | | | | | | | 33,810 | | | | | | | 10,304 | | | | | |
Total liabilities | | 1,925,071 | | | | | | | 1,655,671 | | | | | | | 1,476,391 | | | | | |
| | | | | | | | | | | | | | | | | | |
Stockholders’ equity | | | | | | | | | | | | | | | | | | |
Preferred stock | | 7,334 | | | | | | | 7,660 | | | | | | | 7,834 | | | | | |
Common stock | | 12,047 | | | | | | | 11,762 | | | | | | | 11,082 | | | | | |
Additional paid-in capital | | 130,314 | | | | | | | 118,837 | | | | | | | 107,669 | | | | | |
Treasury stock | | (2,638) | | | | | | | (1,084) | | | | | | | (1,084) | | | | | |
Retained earnings | | 77,043 | | | | | | | 61,712 | | | | | | | 42,509 | | | | | |
Accumulated other comprehensive income (loss) | | 351 | | | | | | | (3,737) | | | | | | | (7,143) | | | | | |
Total stockholders’ equity | | 224,451 | | | | | | | 195,150 | | | | | | | 160,867 | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,149,522 | | | | | | | $ | 1,850,821 | | | | | | | $ | 1,637,258 | | | | | |
| | | | | | | | | | | | | | | | | | |
Net interest spread (tax-equivalent) | | | | | | 3.32 | | | | | | | 3.19 | | | | | | | 3.26 | |
Net interest income and margin (tax-equivalent) 2 | | $ | 70,040 | | | 3.57 | % | | | | $ | 60,454 | | | 3.53 | % | | | | $ | 52,934 | | | 3.47 | % |
Less: Tax-equivalent adjustments | | | | (1,214) | | | | | | | (1,054) | | | | | | | (880) | | | |
Net interest spread | | | | | | 3.25 | | | | | | | 3.13 | | | | | | | 3.21 | |
Net interest income and margin | | | | $ | 68,826 | | | 3.51 | % | | | | $ | 59,400 | | | 3.47 | % | | | | $ | 52,054 | | | 3.41 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
(Dollars in thousands) | | Average Balance | | Interest Income/Expense | | Yield/Cost | | Average Balance | | Interest Income/Expense | | Yield/Cost | | Average Balance | | Interest Income/Expense | | Yield/Cost |
Assets | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits in banks | | $ | 414,466 | | | $ | 21,043 | | | 5.08 | % | | $ | 232,935 | | | $ | 1,613 | | | 0.69 | % | | $ | 249,801 | | | $ | 305 | | | 0.12 | % |
CDs with banks | | — | | | — | | | — | | | 1,033 | | | 24 | | | 2.32 | | | 10,406 | | | 201 | | | 1.93 | |
Investment securities: | | | | | | | | | | | | | | | | | | |
Taxable | | 221,395 | | | 5,576 | | | 2.52 | | | $ | 236,344 | | | 3,496 | | | 1.48 | | | 231,450 | | | 2,405 | | | 1.04 | |
Tax-exempt 2 | | 116,680 | | | 4,347 | | | 3.73 | | | 139,353 | | | 5,166 | | | 3.71 | | | 201,532 | | | 6,328 | | | 3.14 | |
Loans and loans held-for-sale: 1 3 | | | | | | | | | | | | | | | | | | |
Commercial | | 1,621,299 | | | 124,078 | | | 7.65 | | | 1,594,069 | | | 87,845 | | | 5.51 | | | $ | 1,387,273 | | | 63,551 | | | 4.58 | |
Tax-exempt 2 | | 3,732 | | | 163 | | | 4.37 | | | 4,661 | | | 203 | | | 4.36 | | | $ | 6,646 | | | 300 | | | 4.51 | |
Real estate | | 591,157 | | | 24,764 | | | 4.19 | | | 487,044 | | | 15,721 | | | 3.23 | | | $ | 307,829 | | | 9,662 | | | 3.14 | |
Consumer | | 108,988 | | | 10,793 | | | 9.90 | | | 103,345 | | | 13,017 | | | 12.60 | | | 15,890 | | | 2,069 | | | 13.02 | |
Total loans | | 2,325,176 | | | 159,798 | | | 6.87 | | | 2,189,119 | | | 116,786 | | | 5.33 | | | 1,717,638 | | | 75,582 | | | 4.40 | |
Total earning assets | | 3,077,717 | | | 190,764 | | | 6.20 | | | 2,798,784 | | | 127,085 | | | 4.54 | | | 2,410,827 | | | 84,821 | | | 3.52 | |
Allowance for credit losses | | (29,746) | | | | | | | (22,248) | | | | | | | (25,682) | | | | | |
Cash and due from banks | | 6,659 | | | | | | | 5,670 | | | | | | | 13,874 | | | | | |
Other assets | | 302,036 | | | | | | | 244,861 | | | | | | | 201,904 | | | | | |
Total assets | | $ | 3,356,666 | | | | | | | $ | 3,027,067 | | | | | | | $ | 2,600,923 | | | | | |
| | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | |
NOW | | $ | 697,266 | | | $ | 19,851 | | | 2.85 | % | | $ | 707,282 | | | $ | 4,724 | | | 0.67 | % | | $ | 673,547 | | | $ | 1,612 | | | 0.24 | % |
Money market checking | | 504,730 | | | 10,352 | | | 2.05 | | | 330,208 | | | 1,449 | | | 0.44 | | | 469,010 | | | 883 | | | 0.19 | |
Savings | | 76,908 | | | 1,871 | | | 2.43 | | | 56,697 | | | 418 | | | 0.74 | | | 42,800 | | | 5 | | | 0.01 | |
IRAs | | 6,662 | | | 194 | | | 2.91 | | | 6,216 | | | 71 | | | 1.14 | | | 9,674 | | | 121 | | | 1.25 | |
CDs | | 576,726 | | | 29,392 | | | 5.10 | | | 170,648 | | | 3,814 | | | 2.24 | | | 134,250 | | | 1,355 | | | 1.01 | |
Repurchase agreements | | 5,662 | | | 1 | | | 0.02 | | | 10,987 | | | 6 | | | 0.05 | | | 10,821 | | | 13 | | | 0.12 | |
FHLB and other borrowings | | 17,542 | | | 889 | | | 5.07 | | | 15,494 | | | 437 | | | 2.82 | | | 25,275 | | | 93 | | | 0.37 | |
Senior term loan | | 9,007 | | | 766 | | | 8.50 | | | 2,328 | | | 163 | | | 7.00 | | | — | | | — | | | — | |
Subordinated debt | | 73,415 | | | 3,219 | | | 4.38 | | | 73,159 | | | 3,072 | | | 4.20 | | | 51,149 | | | 2,188 | | | 4.28 | |
Total interest-bearing liabilities | | 1,967,918 | | | 66,535 | | | 3.38 | | | 1,373,019 | | | 14,154 | | | 1.03 | | | 1,416,526 | | | 6,270 | | | 0.44 | |
Noninterest-bearing demand deposits | | 1,074,292 | | | | | | | 1,357,426 | | | | | | | 895,024 | | | | | |
Other liabilities | | 40,435 | | | | | | | 41,098 | | | | | | | 38,100 | | | | | |
Total liabilities | | 3,082,645 | | | | | | | 2,771,543 | | | | | | | 2,349,650 | | | | | |
| | | | | | | | | | | | | | | | | | |
Stockholders’ equity | | | | | | | | | | | | | | | | | | |
Preferred stock | | — | | | | | | | — | | | | | | | 730 | | | | | |
Common stock | | 13,541 | | | | | | | 13,320 | | | | | | | 12,614 | | | | | |
Additional paid-in capital | | 159,523 | | | | | | | 147,728 | | | | | | | 140,610 | | | | | |
Treasury stock | | (16,741) | | | | | | | (16,741) | | | | | | | (16,741) | | | | | |
Retained earnings | | 154,041 | | | | | | | 137,498 | | | | | | | 112,842 | | | | | |
Accumulated other comprehensive income (loss) | | (36,419) | | | | | | | (26,918) | | | | | | | 534 | | | | | |
Total stockholders' equity attributable to parent | | 273,945 | | | | | | | 254,887 | | | | | | | 250,589 | | | | | |
Noncontrolling interest | | 76 | | | | | | | 637 | | | | | | | 683 | | | | | |
Total stockholders' equity | | 274,021 | | | | | | | 255,524 | | | | | | | 251,272 | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,356,666 | | | | | | | $ | 3,027,067 | | | | | | | $ | 2,600,922 | | | | | |
| | | | | | | | | | | | | | | | | | |
Net interest spread (tax-equivalent) | | | | | | 2.82 | | | | | | | 3.51 | | | | | | | 3.08 | |
Net interest income and margin (tax-equivalent) 2 | | $ | 124,229 | | | 4.04 | % | | | | $ | 112,931 | | | 4.04 | % | | | | $ | 78,551 | | | 3.26 | % |
Less: Tax-equivalent adjustments | | | | (946) | | | | | | | (1,128) | | | | | | | (1,392) | | | |
Net interest spread | | | | | | 2.79 | | | | | | | 3.47 | | | | | | | 3.02 | |
Net interest income and margin | | | | $ | 123,283 | | | 4.01 | % | | | | $ | 111,803 | | | 3.99 | % | | | | $ | 77,159 | | | 3.20 | % |
1 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
2 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment
securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the twelve months ended December 31, 2020, 20192023, 2022 and 2018,2021, which is a non-U.S. GAAP financial measure. Please refer to the reconciliation of this non-U.S. GAAP financial measure to its most directly comparable U.S. GAAP financial measure following this table.
3 The Company’sOur PPP loans, totaling $82.0$2.7 million, $13.6 million and $131.7 million at December 31, 2020,2023, 2022 and2021, respectively, are included in this amount for the twelve monthsyears ended December 31, 2020.2023, 2022 and 2021, respectively.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 |
Net interest margin - U.S. GAAP basis | | | | | | |
Net interest income | | $ | 68,826 | | | $ | 59,400 | | | $ | 52,054 | |
Average interest-earning assets | | 1,959,702 | | | 1,713,144 | | | 1,524,360 | |
Net interest margin | | 3.51 | % | | 3.47 | % | | 3.41 | % |
| | | | | | |
Net interest margin - non-U.S. GAAP basis | | | | | | |
Net interest income | | $ | 68,826 | | | $ | 59,400 | | | $ | 52,054 | |
Plus: Impact of fully tax-equivalent adjustment | | 1,214 | | | 1,054 | | | 880 | |
Net interest income on a fully-tax equivalent basis | | 70,040 | | | 60,454 | | | 52,934 | |
Average interest-earning assets | | $ | 1,959,702 | | | $ | 1,713,144 | | | $ | 1,524,360 | |
Net interest margin on a fully tax-equivalent basis | | 3.57 | % | | 3.53 | % | | 3.47 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 |
Net interest margin - U.S. GAAP basis | | | | | | |
Net interest income | | $ | 123,283 | | | $ | 111,803 | | | $ | 77,159 | |
Average interest-earning assets | | 3,077,717 | | | 2,798,784 | | | 2,410,827 | |
Net interest margin | | 4.01 | % | | 3.99 | % | | 3.20 | % |
| | | | | | |
Net interest margin - non-U.S. GAAP basis | | | | | | |
Net interest income | | $ | 123,283 | | | $ | 111,803 | | | $ | 77,159 | |
Plus: Impact of fully tax-equivalent adjustment | | 946 | | | 1,128 | | | 1,392 | |
Net interest income on a fully-tax equivalent basis | | $ | 124,229 | | | $ | 112,931 | | | $ | 78,551 | |
Average interest-earning assets | | $ | 3,077,717 | | | $ | 2,798,784 | | | $ | 2,410,827 | |
Net interest margin on a fully tax-equivalent basis | | 4.04 | % | | 4.04 | % | | 3.26 | % |
Rate Volume Calculation
The year over year change in raterates and change in volume from 2022 to 2020 from 20192023 is as follows:
| (Dollars in thousands) | (Dollars in thousands) | | Change in Volume | | Change in Rate | | Change in Both Rate & Volume | | Total Change | (Dollars in thousands) | | Change in Volume | | Change in Rate | | Total Change |
Earning Assets | Earning Assets | | | | | | | | |
Loans | |
Loans: | |
Loans: | |
Loans: | |
Commercial | |
Commercial | |
Commercial | Commercial | | $ | 8,018 | | | $ | (5,796) | | | $ | (875) | | | $ | 1,347 | |
Tax-exempt | Tax-exempt | | (160) | | | 29 | | | (8) | | | (139) | |
Real estate | Real estate | | (2,119) | | | (1,112) | | | 111 | | | (3,120) | |
Consumer | Consumer | | (121) | | | 50 | | | (11) | | | (82) | |
Investment securities: | Investment securities: | |
Taxable | |
Taxable | |
Taxable | Taxable | | (186) | | | (448) | | | 27 | | | (607) | |
Tax-exempt | Tax-exempt | | 1,776 | | | (623) | | | (248) | | | 905 | |
Interest-bearing deposits in banks | Interest-bearing deposits in banks | | 2,617 | | | (195) | | | (2,440) | | | (18) | |
CDs with banks | CDs with banks | | (32) | | | (2) | | | — | | | (34) | |
Total earning assets | Total earning assets | | $ | 9,793 | | | $ | (8,097) | | | $ | (3,444) | | | $ | (1,748) | |
| Interest-bearing liabilities | Interest-bearing liabilities | |
Interest-bearing liabilities | |
Interest-bearing liabilities | |
Negotiable order of withdrawal | |
Negotiable order of withdrawal | |
Negotiable order of withdrawal | Negotiable order of withdrawal | | $ | 254 | | | $ | (1,232) | | | $ | (87) | | | $ | (1,065) | |
Money market checking | Money market checking | | 1,969 | | | (3,206) | | | (1,227) | | | (2,464) | |
Savings | Savings | | 1 | | | 1 | | | — | | | 2 | |
IRAs | IRAs | | (70) | | | (52) | | | 11 | | | (111) | |
CDs | CDs | | (818) | | | (2,980) | | | 291 | | | (3,507) | |
Repurchase agreements and federal funds sold | | (6) | | | (22) | | | 3 | | | (25) | |
Repurchase agreements | |
FHLB and other borrowings | FHLB and other borrowings | | (2,954) | | | (1,885) | | | 1,184 | | | (3,655) | |
Senior term loan | |
Subordinated debt | Subordinated debt | | (289) | | | (352) | | | 132 | | | (509) | |
Total interest-bearing liabilities | Total interest-bearing liabilities | | $ | (1,913) | | | $ | (9,728) | | | $ | 307 | | | $ | (11,334) | |
Total | Total | | $ | 11,706 | | | $ | 1,631 | | | $ | (3,751) | | | $ | 9,586 | |
Key Metrics
| | | | | | | | |
| Year ended December 31, |
(Dollars in thousands, except per share data) | 2023 | 2022 |
Book value per common share | $ | 22.68 | | $ | 20.69 | |
Tangible book value per common share 4 | $ | 22.43 | | $ | 20.25 | |
Efficiency ratio 1 4 | 82.3 | % | 78.2 | % |
Overhead ratio 2 4 | 3.5 | % | 3.9 | % |
Net loan charge-offs to total loans receivable 3 | 0.4 | % | 0.4 | % |
Allowance for credit losses to total loans receivable | 0.95 | % | 1.00 | % |
Nonperforming loans | $ | 8,267 | | $ | 11,165 | |
Nonperforming loans to total loans receivable | 0.4 | % | 0.5 | % |
Equity to assets | 8.7 | % | 8.5 | % |
Community Bank Leverage Ratio | 10.5 | % | 9.8 | % |
1 Noninterest expense as a percentage of net interest income and noninterest income
2 Noninterest expense as a percentage of average assets
3 Charge-offs less recoveries
4 Non-U.S. GAAP metric
Tangible book value ("TBV") per common share was $22.43 and $20.25 as of December 31, 2023 and 2022, respectively. TBV per common share is a non-U.S. GAAP measure that we believe is helpful to interpreting financial results. A reconciliation of TBV per common share is included below.
| | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
Goodwill1 | | $ | 2,838 | | | $ | 3,988 | |
Intangibles2 | | 352 | | | 1,631 | |
Total intangibles | | $ | 3,190 | | | $ | 5,619 | |
| | | | |
Total equity attributable to parent | | $ | 289,384 | | | $ | 261,084 | |
| | | | |
Less: Total intangibles | | (3,190) | | | (5,619) | |
Tangible common equity | | $ | 286,194 | | | $ | 255,465 | |
| | | | |
Tangible common equity | | $ | 286,194 | | | $ | 255,465 | |
Common shares outstanding (000s) | | 12,758 | | | 12,618 | |
Tangible book value per common share | | $ | 22.43 | | | $ | 20.25 | |
1 Includes $1.2 million of goodwill included under assets from discontinued operations on the balance sheet as of December 31, 2022.
2 Includes $1.1 million of intangibles included under assets from discontinued operations on the balance sheet as of December 31, 2022.
Net Interest Income
Net interest income is the amount by which interest income on earning assets exceeds interest expense incurred on interest-bearing liabilities. Interest-earning assets include loans, investment securities and certificates of deposit ininterest-bearing balances with banks. Interest-bearing liabilities include interest-bearing deposits and borrowed funds such as sweep accounts, repurchase agreements, subordinated debt and repurchase agreements.the senior term loan. Net interest income, which is the primary source of revenue for the Bank, is also impacted by changes in market interest rates as well asand the mix of interest-earning assets and interest-bearing liabilities. Net interest income is impacted favorably by increases in noninterest bearing demand deposits and equity.
Net interest margin is calculated by dividing net interest income by average interest-earning assets and serves as a measurement ofmeasures the net revenue stream generated by the Bank’s balance sheet. Net interest margin (tax equivalent)on a tax-equivalent basis was 3.57%consistent at 4.04% in 2020 compared to 3.53% in 2019. The net interest margin continues to face considerable pressure due to falling interest rates2023 and competitive pricing of loans and deposits in the Bank’s markets. During 2020,2022.
In 2023, the Federal Reserve loweredraised its key interest rate from a range of 1.50%4.25% to 1.75%4.50% to a range of 0.00%5.25% to 0.25%.5.50% as of
December 31, 2023. We continue to analyze methods to deploy assets into an earning asset mix to result in a stronger net interest margin. Management’s estimate of the impact of future changes in market interest rates is shown in the section captioned Interest Rate Risk, in Item 7A – Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.
Net interest spread is calculated by taking the difference between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest, income while maintaining an appropriate level of interest rate risk. Net interest spread (tax-equivalent)on a tax-equivalent basis was 3.32%2.82% in 20202023 compared to 3.19% and 3.26%3.51% in 2019 and 2018, respectively.2022. The difference between the net interest margin (tax-equivalent)on a tax-equivalent basis and net interest spread (tax-equivalent)on a tax-equivalent basis was 25122 basis points in 20202023 compared to 3453 basis points in 2019.2022. This was due to andriven by the 235 basis point increase of $243.9 million in average noninterest bearing demand deposits.
Company management continues to analyze methods to deploy assets into an earning asset mix which will result in a stronger net interest margin. Loan growth continues to be strong and management anticipates that loan activity will remain strong in the near-term future.
During 2020, net interest income increased by $9.4 million, or 15.9%, to $68.8 million from $59.4 million in 2019. This increase is largely due to the decrease in the cost of interest-bearing liabilities of 83 basis points outpacing the decrease in yield on earning assets of 70166 basis points. Also impacting the yield were the Summit sale, First State accretion and amortization of PPP fees. Average total earning assets was $1.96 billion in 2020 compared to $1.71 billion in 2019. Although there was anpoint increase in average total earning assets, total interest income decreased by $1.9 million, or 2.3%, to $80.5 million in 2020 from $82.4 million in 2019. This decrease in total interest income was driven by the effect of the Federal Reserve lowering its key interest rates, which resulted in the decrease in yield on earning assets of 70 basis points. Average total loans and loans held-for-sale increased to $1.56 billion in 2020 from $1.46 billion in 2019, primarily as the result of a $149.2 million increase in average commercial loans; however, PPP loans with an outstanding balance of $82.0 million accounted for a portion of the increase and carried just a 1% yield, outside of origination fee accretion. Yield on total loans and loans held-for-sale decreased 46 basis points. Changes in the balance sheet related to the Summit and First State transactions also impacted yield on earning assets.
During 2023, net interest income increased $11.5 million, or 10.3%, driven largely by higher average earning asset balances of $278.9 million and the increase in the yield on earning assets, partially offset by the higher funding costs. Total interest income increased $63.9 million, or 50.7%, in 2023 driven by higher yields from new loan production at favorable interest rates and the repricing of variable rate loans.Average investment securitiestotal loans increased $33.3$136.1 million in 2023, primarily as the result of a $41.2$104.1 million increase in average real estate loans and a $27.2 million increase in average commercial loans. The yield on loans increased 154 basis points.
Average investment securities decreased $37.6 million in 2023, or 10.0%, as the result of a$22.7 million decrease in tax-exempt investments partially offset byand a $7.9$14.9 million decrease in taxable investments. YieldThe yield increased two basis points and 104 basis points on tax-exempt securities decreased 61 basis points and taxable securities, yield decreased 35 basis points.respectively.
Average interest-bearing liabilities decreasedincreased $594.9 million, or 43.3%, in 2020 by $1.9 million. The decrease was2023 primarily the result of decreasesa $406.1 million increase in certificates of $115.4deposit and a $174.5 million increase in the average balance of FHLB and other borrowings and $37.9 million in the average balance of certificates of deposit, partially offset by increases of $127.0 million in money market checking accounts and $27.0 million in the average balance of negotiable order of withdrawal accounts.
Average interest-bearing deposits grew to $1.28 billionincreased $591.2 million in 2020 from $1.16 billion in 2019.2023. Total interest expense decreasedincreased by $11.3$52.4 million, caused primarily bydue to a $7.1$51.2 million decreaseincrease in deposit interest and a $3.7 million decrease in interest on FHLB and other borrowings.interest. The result was a 83-basis235 basis point decreaseincrease in the cost of interest-bearing liabilities, primarily from increases in interest bearing liabilities from 2019 to 2020.
The Company’s average earning assets increased $246.6 million and net interest income increased by $9.4 million during 2020. The net interest margin continues to be pressured by falling rates, and increased competition for high quality loan growth.
The Bank’s yield on earning assets declined during 2020 due to decreases in the loan portfolio yielda migration out of 46 basis points,NIB deposits driven by the addition of PPP loans originatedhighly-competitive deposit environment and liquidity actions taken during 2023 in the second quarter of 2020, and the investment portfolio yield of 29 basis points, while the cost of interest bearing liabilities decreased by 83 basis points.response to market conditions.
The cost of interest-bearinginterest bearing liabilities decreasedincreased to 0.85%3.38% in 20202023 from 1.68%1.03% in 2019. 2022.This decreaseincrease is primarily the result of decreasesan increase of 103249 basis point in the cost of deposits and 225 basis points in the cost of FHLB and other borrowings and a 70 basis point decrease in the cost of deposits.borrowings. Further discussion on borrowings is included in Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.
Provision for LoanCredit Losses
The Company’sOur release of allowance for credit losses for 2023 was $1.9 million compared to a provision for loan losses of $14.2 million for 2020, 20192022. In January 2023, we adopted CECL for calculating the allowance for credit losses ("ACL") and 2018 was $16.6required an adjustment to the allowance of $8.9 million $1.8 million and $2.4 million, respectively.
to make the allowance adequate under the new methodology. The provision for loancredit losses, which is a product of management’s quarterlymanagement's analysis, is recorded in response to inherentforecasted losses over the remaining life of the loan portfolio. Further discussion on the provision for credit losses is included in Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report. The decrease in the loan portfolio.
Substantially all of the increase in loan loss provision for credit losses is primarily the result of the changes to the qualitative adjustment factors in response to the COVID-19 pandemic, enhancements to the qualitative adjustment factor framework itself and adjustments to the risk grading of significant loans within the portfolio, as well as changes in the outstanding balances of the loan portfolios, including a decrease in our consumer loan segment, forecasted loss rates, as well as the level of recognized charge-offs and the resulting historical loss rates.
Determining the appropriate provision for loan losses requires considerable management judgment. In exercising this judgment, management considers numerous internal and external factors including, but not limited to, portfolio growth, national and local economic conditions, trends in the markets served and guidance from the Bank’s primary regulators.
Management has continued to evaluate the qualitative factor framework within the allowance for loan loss methodology in order to assess how well the framework can appropriately respond to the unprecedented risk presented by the COVID-19 pandemic. As a result, the framework was significantly enhanced to consider a much greater degree of risk than when the framework was originally designed. The framework has consistently generated an adequate allowance for loan loss within a generally stable economic environment, but the onset of the pandemic made it apparent that the framework required modifications to consider this greater degree of risk. These enhancements resulted in the need for $12.8 million in additional loan loss provision in 2020. While the ultimate timing and severity of impacts to the economic and business conditions in which we operate are not yet fully known, it is clear that the impacts will continue to be significant and it is likely that the impacts will evolve over time as businesses and individuals learn to adapt. The breadth of the worldwide COVID-19 pandemic and impacts impact on virtually all industries has created additional risk within the loan portfolios, despite there being no change to the nature of those portfolios. Furthermore, as a result of the ongoing analysis of the loan portfolios, a significant number of borrowers are experiencing a strain on their operations, and as a result present an greater risk of default. Additionally, consumer sentiment has been impacted.
portfolio.
Other significant factors include the increasingly volatile social atmosphere, the evolving political climate in the United States and the distribution and acceptance of a COVID-19 vaccine. The unprecedented initiatives of the United States government to provide support to the economy through new loan programs has simultaneously served to temporarily mitigate some of the impacts to the economy and the Company's borrowers, while also adding some degree of increased risk to lending policies and procedures as a result of the pace and manner in which these programs have been developed and made available to the public. As a result, quantifiable evidence of the impacts to the Company's loan portfolios has not yet been fully realized in terms of delinquent loans or deterioration in collateral values. Meanwhile, as of December 31, 2020, management had not made any significant changes to lending strategies that would impact the concentrations of credit risk within those portfolios. Additionally, the risk grade adjustment of significant loans within the portfolio in response to increased risk presented by the COVID-19 pandemic resulted in the need for roughly $3.8 million in additional loan loss provision.
Meanwhile, total loan receivable balances excluding purchased credit impaired (“PCI”) loans, increased $41.1decreased $55.0 million in 20202023 versus an increase of $69.7$502.8 million in 2019.2022. The commercial loan portfolio increaseddecreased by $77.3$9.2 million in 2020,2023, in comparison to an increase of $122.8$116.5 million in 2019,2022, while the consumer loan portfolio decreased by $104.2 million in 2023, in comparison to an increase of $87.7 million in 2022. Additionally, the residential mortgage loan portfolio decreasedincreased by $31.3$63.0 million and $23.3$299.0 million in 20202023 and 2019,2022, respectively. Included in the commercial and total loan volume increases are PPP loans totaling $82.0 million as of December 31, 2020. Also, netNet charge-offs in 20202023 totaled $2.1$9.3 million, in comparison to net charge-offs of $1.0$8.6 million in 2019.2022. Lastly, the provision for credit losses was impacted by a $0.7$0.1 million increase in the specific loancredit loss allocations in 2020,2023, relative to a $0.5$1.3 million decreaseincrease in 2019.provision for such loan losses in 2022.
Noninterest Income
Payment card and service charge income, mortgage fee income, consulting compliance income, and gains on equity securities generate the core of the Company’s noninterest income. During 2020, equity method investment income or loss and gains on sale of loans generally account for the majority of our noninterest income. From time to time, we also recognize gains or losses on
acquisition and divestiture activity, have generated additional noninterest income.sales of assets or our investment portfolio. Total of noninterest income for 2020, 20192023, 2022 and 20182021 was $91.8$19.7 million, $64.6$27.6 million and $38.6$55.9 million, respectively.
The increasedecrease in noninterest income for 20202023 compared to 20192022 was primarily the result of increasesa decrease of $24.2 million in income from ICM, $17.6 million in gains on acquisition and divestiture activity, $3.5 million in compliance consulting income and $3.5$2.4 million in gain on sale of loans, a decrease of $2.2 million in investment portfolio gains, an increase of $1.8 million in equity securities.method investment losses and a loss on divestiture activity of $1.0 million. Additionally, there was a $1.9 million holding gain on equity method investments and a $5.0 million gain on sale of assets in 2022 without corresponding gains in 2023. These increasesdecreases were partially offset by decreasesincreases of $13.4$4.2 million in other operating income and $2.1 million in payment card and service charge income.
Gain on sale of portfolio loans decreased $2.4 million primarily driven by losses on the sale of $44.4 million of subprime automobile loans during 2023 as we reduced that portfolio. Investment portfolio gains decreased $2.2 million primarily driven by losses on the sale of securities as a result of repositioning our investment portfolio during the first quarter of2023. The $1.8 million increase in equity method investment losses was due to lower mortgage banking revenue driven by market conditions. The $1.9 million holding gain on equity securities and $7.6 millionmethod investments in mortgage fee income.
Equitythe prior year reflected an in substance sale of an equity method investment incomefrom our portfolio during the third quarter of $24.22022. The $1.0 million loss on divestiture activity was dueprimarily related to the ICM combination in July 2020. Prior to this combination, income from the Company's mortgage activities was recognized through mortgage fee income. Mortgage fee income decreased
$7.6 million from $41.0 million in 2019 to $33.4 million in 2020 due to the ICM combination in July 2020. Prior to this combination, income from the Company's mortgage activities was recognized through mortgage fee income.
Gains on acquisition and divestiture activity of $17.6 million was primarily due to gains of $9.6 millionloss on the divestiture of four branch locations and $4.7 million on the acquisition of branch locations from First State.
Compliance consulting income increased $3.5 million from $0.9 million in 2019 to $4.4 million in 2020, driven by the Chartwell acquisition in September 2019.
Gain on sale of equity securities of $3.5 million was primarily driven by a gain on sale from the Company's Fintech investment portfolio in the fourth quarter of 2020.
Holding gain on equity securities decreased $13.4 million from $13.8 million in 2019 to $0.4 million in 2020, primarily due to an increase in the valuation of the Company’s Fintech investment portfolioFlexia during the second quarter of 2019.2023. For more information regarding the Flexia transaction, see Note 26 - Acquisition and Divestiture Activity. Payment card and service charge income increased by $2.1 million, which primarily reflects an increase in payment relationships and fee income on Fintech deposits.
Noninterest Expense
Noninterest expense was $97.1$117.6 million, $87.2$110.1 million and $72.9$91.8 million in 2020, 20192023, 2022 and 2018,2021, respectively. Approximately, 63%54%, 64%57% and 63%58% of noninterest expense for 2020, 20192023, 2022 and 2018, 2021,respectively, related to personnel costs. Personnel costs are a significant part of the Company'sour noninterest expense as such costs are critical to services organizations. Salaries and benefits increased by $5.5 million in 2020, primarily as a result of the build-out of Company administration, the Fintech team and the additional team members acquired as a result of the Chartwell acquisition in September 2019.
ProfessionalThe increase of noninterest expense relative to the year ended December 31, 2022 primarily reflects an increase of professional fees increased by $3.5of $2.7 million attributable to actions taken in 2020,response to the market events in March 2023 to further enhance risk management and compliance-related infrastructure, and an increase of insurance, tax, and assessment expense of $1.8 million, primarily the result of deal costs related to the acquisitions of First State and Paladin,a market wide increase in FDIC insurance costs.
Discontinued Operations
In February 2023, we completed the sale of the Eastern Panhandle banking centers and the ICM combination.
Data processing and communications increased $1.4Chartwell for total consideration of $14.4 million in 2020, primarily asthe form of a result of data conversion costs relatedloan issued to the acquisition of First State, the acquisition of Paladin, LLC, thebuyer, resulting in a gain on sale of $11.8 million. To facilitate a transition of the Eastern Panhandle banking centers,Chartwell services and support the ICM combination.
Other operating expense increased $1.7 million in 2020, mainly driven by increased loan expenseonboarding and real estate expense relatedconversion of systems, we entered into a 60 day Employee Lease and Service Agreement, whereby we provided the purchaser with finance and accounting, human capital, information technology, marketing and record/data retention services. In addition, we entered into a contract with the purchaser for Chartwell to continue to provide services and support for three years following the First State acquisition.sale.
Income Taxes
The CompanyWe incurred income tax expense of $9.5$8.1 million, $8.6$4.1 million and $3.4$9.9 million in 2020, 20192023, 2022 and 2018,2021, respectively.
The Company’s Our effective tax rate was 20%21%, 24%22% and 20% in 2020, 20192023, 2022 and 2018,2021, respectively. The decrease in effective tax rate from 2019 to 2020 was primarily driven by increased investment in tax-free municipal investments and a reduction in the net state tax rate. The Company’sOur effective tax rate is affected by certain permanent tax differences caused by statutory requirements in the tax code. The largest permanent difference relates to tax-exempt interest income related to municipal investments and loans held by the Company.us. Other, smaller permanent differences arise from income derived from life insurance purchased on certain key employees and directors and meals and entertainment expenses. For 2023, we expect to file tax returns in 29 states.
ReturnsReturn on Assets and Equity
Assets
The Company’sOur return on average assets was 1.7%0.9% in 2020,2023, compared to 1.4%0.5% in 2019.2022. The increased return in 20202023 is a result of a $10.4$16.2 million, or 108.0%, increase in earnings, whilewhich was offset by an increase in average total assets increased by $298.7of $329.6 million, or 10.9%, as compared to 2022. The increase in average total assets was mainly as thea result of a $116.0$136.1 million, or 6.2%, increase in average total loans and a $57.1 million, or 23.3%, increase in other assets. The increase in average total loans and other assets were partially offset by a $181.6 million, or 78.0%, increase in average interest-bearing depositscash balances with banks and a $98.9$37.6 million, increase
or 10.0%, decrease in average total loans.investment securities.
Equity
The Company’sOur return on average stockholders’ equity was 16.7%11.4% in 2020,2023, compared to 13.6%5.9% in 2019.2022. The increased return in 20202023 is a result of a $10.4$16.2 million, or 108.0%, increase in earnings compared to 2022, while average equity increased by $29.3$19.1 million to $273.9 million.
Statement of Financial Condition
Cash and Cash Equivalents
Cash and cash equivalents totaled $263.9$398.2 million at December 31, 2020,2023, compared to $28.0$40.3 million at December 31, 2019.
Management believes2022. The increase in cash and cash equivalents reflects actions taken in 2023 to ensure liquidity in response to recent conditions in the banking industry. We believe the current balance of cash and cash equivalents adequately serves the Company’sour liquidity and performance needs. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable the Company to meet cash obligations as they come due. Due to the increase in liquidity driven by growth in noninterest-bearing deposits, management has elected to maintain a higher cash and cash equivalents balance to provide flexibility during the COVID-19 pandemic.
Investment Securities
Investment securities totaled $438.2$386.4 million at December 31, 2020,2023, compared to $254.3$418.6 millionat December 31, 2019.2022.
The following table sets forth a summary of the investment securities portfolio as of the dates indicated. The available-for-sale securities are reported at estimated fair value.
| December 31, (Dollars in thousands) | December 31, (Dollars in thousands) | | 2020 | | 2019 | December 31, (Dollars in thousands) | | 2023 | | 2022 |
Available-for-sale securities: | Available-for-sale securities: | | | | |
United States government agency securities | United States government agency securities | | $ | 56,992 | | | $ | 51,996 | |
United States government agency securities | |
United States government agency securities | |
United States sponsored mortgage-backed securities | United States sponsored mortgage-backed securities | | 95,769 | | | 58,312 | |
United States treasury securities | |
Municipal securities | Municipal securities | | 231,887 | | | 113,092 | |
Corporate debt securities | |
Other debt securities | Other debt securities | | 7,500 | | | — | |
Other securities | Other securities | | 18,476 | | | 12,421 | |
Total investment securities available-for-sale | Total investment securities available-for-sale | | $ | 410,624 | | | $ | 235,821 | |
| Equity securities | Equity securities | | $ | 27,585 | | | $ | 18,514 | |
Equity securities | |
Equity securities | |
At December 31, 2020,2023, all investment securities are available-for-sale or equity securities. Management believes the available-for-sale classification provides flexibility in terms of managing the portfolio for liquidity, yield enhancement and interest rate risk management opportunities. Due to the increase in liquidity driven by growth in noninterest-bearing deposits, management has elected to increase balancesThe decrease in investment securities to generate additional interest income. balances during 2023was primarily driven by sales and maturities of available-for-sale securities.At December 31, 2020,2023, the amortized cost of available-for-sale investment securities totaled $400.7$377.8 million, resulting in a net unrealized gainloss in the investment portfolio of $9.9$32.5 million. Management has the intent and ability to hold the investments to maturity and they are all high quality investments with no other than temporarycredit impairment. The municipal securities continue to give the Companyus the ability to pledge and to decrease the effective tax rate.
At December 31, 2020,2023, equity securities primarily consist of the Company'sour Fintech investment portfolio and are comprised of investments in six10 companies with a carrying value of $23.1$36.4 million. TheseInvestments in our top four equity securities represented $34.1 million, or 93.7%, of our total Fintech investment portfolio at December 31, 2023. The Fintech equity securities do not have readily determinable fair values; therefore, they are classified as equity securitiesvalues and are recorded at cost and adjusted for observable price changes for underlying transactions for identical or similar investments.
The following table shows the maturities for the available-for-sale investment securities portfolio at December 31, 2020:2023:
| | Within one year | | After one year, but within five | | After five years, but within ten | | After ten years | | Total investment securities |
| | Within one year | | | | Within one year | | After one year, but within five | | After five years, but within ten | | After ten years | | Total investment securities |
(Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Weighted-Avg. Yield | | Amortized Cost | | Fair Value |
United States government agency securities | United States government agency securities | | $ | — | | | — | % | | $ | 6,029 | | | 2.06 | % | | $ | 19,536 | | | 1.32 | % | | $ | 30,642 | | | 1.36 | % | | $ | 56,207 | | | $ | 56,992 | |
United States sponsored mortgage-backed securities | United States sponsored mortgage-backed securities | | — | | | — | | | — | | | — | | | 2,241 | | | 0.81 | | | 92,727 | | | 1.69 | | | 94,968 | | | 95,769 | |
United States treasury securities | |
Municipal securities | Municipal securities | | — | | | — | | | 2,790 | | | 3.22 | | | 13,821 | | | 2.93 | | | 207,031 | | | 2.51 | | | 223,642 | | | 231,887 | |
Corporate debt securities | |
Other debt securities | Other debt securities | | — | | | — | | | — | | | — | | | — | | | — | | | 7,500 | | | — | | | 7,500 | | | 7,500 | |
Other securities | Other securities | | — | | | — | | | 1,955 | | | 4.23 | | | 23,946 | | | 5.71 | | | — | | | — | | | 25,901 | | | 18,476 | |
Total | Total | | $ | — | | | — | % | | $ | 10,774 | | | 2.75 | % | | $ | 59,544 | | | 3.44 | % | | $ | 330,400 | | | 2.17 | % | | $ | 408,218 | | | $ | 410,624 | |
Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur.
Management monitors the earnings performance and liquidity of the investment portfolio on a regular basis through the Asset and Liability Committee (“ALCO”) meetings. The ALCO also monitors net interest income and assists in the management of interest rate risk for the Company.us. Through active balance sheet management and analysis of the investment securities portfolio, sufficient liquidity is maintained to satisfy depositor requirements and the various credit needs of itsour customers. Management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.
Management continually evaluates hedging strategies that are available to manage interest rate risk. We enter into interest rate swap contracts designated as hedging instruments to manage the interest rate risk associated with certain fixed rate available for sale securities. In 2023 we entered into a portfolio layer method interest rate swap with a notional amount of $50.0 million and a swap liability fair value of $1.6 million at December 31, 2023. The swap is designated as a hedging instrument over a closed portfolio of municipal securities with an amortized cost basis of $59.3 million at December 31, 2023, which includes a $1.6 million basis adjustment. At December 31, 2022 we had an interest rate swap with a notional amount of $10.9 million designated as a hedging instrument over a closed portfolio of municipal securities with an amortized cost basis of $11.1 million, which includes a $0.2 million basis adjustment. This hedging relationship was discontinued during the first quarter of 2023.
Loans
The Company’sOur primary market areas are North Central West Virginia, Northern Virginia, North Carolina and Northern Virginia. TheSouth Carolina. Our loan portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages, home equity lines of credit and consumer lending. Loans receivable totaled $1.45$2.32 billion as of December 31, 2020, an increase2023, a decrease of $79.2 $55.1
million from $1.37$2.37 billion as of December 31, 2019. As of December 31, 2019, the balance of loans classified as held-for-sale as a result of the sale of four branch locations to Summit during 2020 was $42.9 million.2022.
Major classification of loans held for investment including PCI loans, at December 31, are as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 |
Commercial and non-residential real estate | | $ | 1,162,122 | | | $ | 1,063,828 | |
Residential real estate and home equity | | 288,035 | | | 306,710 | |
Consumer and other | | 4,644 | | | 3,697 | |
Total Loans | | $ | 1,454,801 | | | $ | 1,374,235 | |
Deferred loan origination fees and costs, net | | $ | (1,057) | | | $ | 306 | |
Loans receivable | | $ | 1,453,744 | | | $ | 1,374,541 | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 |
Business | | $ | 797,100 | | | $ | 851,072 | |
Real estate | | 670,584 | | | 632,839 | |
Acquisition, development and construction | | 134,004 | | | 126,999 | |
Commercial | | $ | 1,601,688 | | | $ | 1,610,910 | |
Residential | | 672,547 | | | 609,452 | |
Home equity lines of credit | | 14,531 | | | 18,734 | |
Consumer | | 27,408 | | | 131,566 | |
Total loans | | $ | 2,316,174 | | | $ | 2,370,662 | |
Deferred loan origination fees and costs, net | | 1,420 | | | 1,983 | |
Loans receivable | | $ | 2,317,594 | | | $ | 2,372,645 | |
At December 31, 2020,2023, commercial and non-residential real estate loans, including PCI loans represented the largest portion of the portfolio at 79.9%69.2%. Commercial and non-residential real estate loans totaled $1.16$1.60 billion at December 31, 2020,2023, compared to $1.06$1.61 billion at December 31, 2019.2022. Management willexpects to continue to focus on the enhancement and growth of the commercial loan portfolio while maintaining appropriate underwriting standards and risk/price balance. PPPPaycheck Protection Program (“PPP”) loans are included in the totals above and have outstanding balances of $82.0$2.7 million and $13.6 million as of December 31, 20202023 and are the primary driver of the increase.2022, respectively.
Residential real estate loans to retail customers including home equity lines of credit and PCI loans, account for the second largest portion of the loan portfolio, comprising 19.8%29.0%. Residential real estate and home equity loans totaled $288.0$672.5 million at December 31, 2020,2023, compared to $306.7$609.5 million at December 31, 2019. Included in residential real estate loans are home equity credit lines totaling $30.8 million at December 31, 2020, compared to $35.1 million at December 31, 2019.2022. Management believes the home equity loans are competitive products with an acceptable return on investment after risk considerations. Residentialresidential real estate lending continues to represent a primary focus due to the lower risk factors associated with this type of loan and the opportunity to provide service to both those in the primary North Central West Virginia and NortherNorthern Virginia markets.markets, as well as those in the surrounding areas as management deems appropriate.
For discussion relatedConsumer loans totaled $27.4 million at December 31, 2023, compared to $131.6 million at December 31, 2022. This decrease was concentrated in automotive loans originated by a third-party, which decreased from $84.5 million at December 31, 2022 to $27.3 million at December 31, 2023, primarily the result of the sale of $44.4 million of subprime automobile loans during 2023. In addition, $46.9 million in consumer loans were reclassified as other loan types during the transition to CECL, with $45.2 million moving to the PCI loans acquired in the First State acquisition and their related allowance for loan losses, please refer to Purchased Credit Impaired Loans in Note 3 – Loans and Allowance for Loan Losses accompanying the consolidated financial statements included elsewhere in this report.Residential category.
At December 31, 2020, loans identified by management as potential problem2023, Special Mention loans amounted to $59.1$83.8 million. The balance is comprised of 1653 loans, which include $33.5seven loans totaling $26.1 million in seven commercial real estate office/retail loans to two relationships, an $8.6 million residential real estate development loan, $7.7 million in three related loans to a single borrower for retail commercial real estate corporation,projects, $18.9 million to finance two multifamily housing construction projects to two related borrowers, a $4.7$8.0 million commercial real estate loan to a senior care facility $3.0and a $11.2 million commercial real estate loan to finance two related hospitality properties and $1.6an office building. In addition, there are 42 loans to various unrelated borrowers totaling $19.6 million in two loans to finance a multifamily property.commercial, home equity line of credit ("HELOC"), installment and mortgage loans. These are loans for which information about the borrowers’ possible credit problems causes management to have doubts as to the borrowers’ ability to comply with the loan repayment terms in the future. However, these loans were all also significantly impacted by the pandemic and as a result have qualified for government financial support and/or debt service relief from the Bank. These loans are being monitored closely, but were not considered impaired loans at December 31, 2020.
There were thirteen34 additional loans to five relationships that management identified as problemSubstandard loans, totaling $42.0$34.0 million as of December 31, 2020. 2023.These loans include $32.5$18.4 million in fivethree loans to finance hospitality properties to two unrelatedthree related borrowers, $5.2a $3.8 million in three loansloan to a single borrower to finance movie theaters and a multifamily real estate property a $2.2and two loans totaling $3.1 million loan secured by leases. In addition, there are 28 loans to finance a Montessori school and $2.1various unrelated borrowers totaling $8.7 million in three loans to a borrower in the energy industry.commercial, HELOC, installment and mortgage loans. These are loans where known information about the borrowers’ credit problems causes management to have serious doubts, relative to the sixteen34 loans discussed above, as to the borrowers’ ability to comply with the loan repayment terms in the future. However, these loans were all significantly impacted by the pandemic and as a result have qualified for government financial support and/or debt service relief from the Bank. These loans are being monitored closely, but as of year-end were not considered impaired loans.
The following table provides loan maturities at December 31, 2020:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | One Year or Less | | One Through Five Years | | Due After Five Years | | Total |
Commercial and non-residential real estate | | $ | 282,821 | | | $ | 574,496 | | | $ | 304,805 | | | $ | 1,162,122 | |
Residential real estate and home equity | | 32,338 | | | 76,758 | | | 178,939 | | | 288,035 | |
Consumer and other | | 1,386 | | | 2,486 | | | 772 | | | 4,644 | |
Total Loans | | $ | 316,545 | | | $ | 653,740 | | | $ | 484,516 | | | $ | 1,454,801 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | One Year or Less | | One Through Five Years | | Five Through Fifteen Years | | Due After Fifteen Years | | Total |
Commercial | | $ | 374,609 | | | $ | 953,200 | | | $ | 256,369 | | | $ | 17,510 | | | $ | 1,601,688 | |
Residential | | 77,462 | | | 30,929 | | | 16,565 | | | 547,591 | | | 672,547 | |
Home equity lines of credit | | 877 | | | 147 | | | 461 | | | 13,046 | | | 14,531 | |
Consumer | | 49 | | | 15,831 | | | 11,528 | | | — | | | 27,408 | |
Total loans | | $ | 452,997 | | | $ | 1,000,107 | | | $ | 284,923 | | | $ | 578,147 | | | $ | 2,316,174 | |
The preceding data has been compiled based upon the earlier of either contractual maturity or next repricing date.
The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 20202023 that mature after one year:
| (Dollars in thousands) | (Dollars in thousands) | | Commercial and Non-Residential Real Estate | | Residential Real Estate and Home Equity | | Consumer and Other | | Total | (Dollars in thousands) | | Commercial and non-residential real estate | | Residential | | Home equity lines of credit | | Consumer | | Total |
Predetermined fixed interest rate | Predetermined fixed interest rate | | $ | 160,257 | | | $ | 116,717 | | | $ | 2,051 | | | $ | 279,025 | |
Floating or adjustable interest rate | Floating or adjustable interest rate | | 719,044 | | | 138,980 | | | 1,207 | | | 859,231 | |
Total as of December 31, 2020 | | $ | 879,301 | | | $ | 255,697 | | | $ | 3,258 | | | $ | 1,138,256 | |
Total as of December 31, 2023 | |
Loan Concentration
At December 31, 2020,2023, commercial and non-residential real estate loans comprised the largest component of the loan portfolio. Healthcare loans are a significant component of commercial and non-residential real estate loans and comprise 23.4% of total loans receivable at December 31, 2023. A large portion of commercial loans are secured by real estate and they are diverse with respect to geographical location and industry. Loans that are not secured by real estate are typically secured by accounts receivable, mortgages or equipment. While the loan concentration is in commercial loans, the commercial portfolio is comprised of loans to many different borrowers, in numerous different industries, primarily located in the Company'sour market areas.
Lending operations of commercial banks may be subject to enhanced scrutiny by federal banking regulators based on a bank’s concentration of commercial real estate (“CRE”) loans. The federal banking regulators have issued guidance to remind financial institutions of the risk posed by CRE lending concentrations. CRE loans generally include land development, construction loans, and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for bank examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:
| | | | | |
l | Total reported loans for construction, land development, and other land represent 100 percent or more of the institution’s total capital; or |
l | Total CRE loans as defined in the CRE guidance represent 300 percent or more of the institution’s total capital, and the outstanding balance of the institution’s CRE loan portfolio has increased by 50 percent or more during the prior 36 months. |
As of December 31, 2023, the Bank's concentration of loans for construction, land development, and other land as a percentage of capital totaled 36.0% and the Bank's CRE concentration, excluding owner-occupied loans, as a percentage of capital totaled 234.1%.
Allowance for LoanCredit Losses
Management continually monitors the risk in the loan portfolio through the review of the monthly delinquency reports and the Loan Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the allowance for loan losses (“ALL”).ACL. This analysis involves both experience of the portfolio to date and the makeup of the overall portfolio. Specific loss estimates are derived for individual loans based on specific criteria such as current delinquent status, related deposit account activity, where applicable and changes in the local and national economy. When appropriate, managementwe also considersconsider public
knowledge and/orand verifiable information from the local market to assess risks to specific loans and the loan portfolios as a whole.
The result of the evaluation of the adequacy at each period presented herein indicated that the ALLACL was considered by management to be adequate to absorb forecasted losses inherent inover the remaining life of the loan portfolio.
At December 31, 20202023 and 2019, impaired2022, individually analyzed loans totaled $15.4$11.8 million and $9.5$18.2 million, respectively. A portion of the ALLACL of $1.3$1.9 million and $0.6$1.7 million was allocated to cover any loss in these loans at December 31, 20202023 and 2019,2022, respectively. Loans past due more than 30 days were $10.6$14.0 million and $9.3$15.5 million, respectively, at December 31, 20202023 and 2019.2022.
| | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 | | |
Loans past due more than 30 days to gross loans | | 1.2 | % | | 0.7 | % | | |
Loans past due more than 90 days to gross loans | | 0.6 | % | | 0.1 | % | | |
Net charge-offs of $2.1 million in 2020 and $1.0 million in 2019 were incurred. The provision for loan losses was $16.6 million in 2020 and $1.8 million in 2019. Net charge-offs represented 0.1% and 0.1% in 2020 and 2019, respectively, compared to gross loans for the indicated period. | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 | | |
Loans past due more than 30 days to gross loans | | 0.6 | % | | 0.7 | % | | |
Loans past due more than 90 days to gross loans | | 0.2 | % | | 0.1 | % | | |
For tables reflecting the allocation of the ALL,ACL, please refer to Note 3 – Loans and Allowance for LoanCredit Losses accompanying the consolidated financial statements included elsewhere in this report.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 |
December 31, | | Amount | | % of loans in each category to total loans | | Amount | | % of loans in each category to total loans |
Commercial and non-residential real estate | | $ | 24,033 | | | 80 | % | | $ | 10,098 | | | 78 | % |
Residential real estate and home equity | | 2,030 | | | 20 | | | 1,599 | | | 22 | |
Consumer and other | | 51 | | | — | | | 78 | | | — | |
Total | | $ | 26,114 | | | 100 | % | | $ | 11,775 | | | 100 | % |
The following table summarizes the primary segments of the ACL as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 |
December 31, | | Amount | | % of loans in each category to total loans | | Amount | | % of loans in each category to total loans |
Commercial and non-residential real estate | | $ | 12,536 | | | 69 | % | | $ | 15,539 | | | 68 | % |
Residential | | 6,412 | | | 29 | | | 2,880 | | | 26 | |
Home equity lines of credit | | 97 | | | 1 | | | 131 | | | 1 | |
Consumer and other | | 3,079 | | | 1 | | | 5,287 | | | 5 | |
Total | | $ | 22,124 | | | 100 | % | | $ | 23,837 | | | 100 | % |
The ACL decrease in the consumer and other loan segment was driven by a $44.4 million sale of subprime automobile loans during 2023. This segment realizes elevated charge offs, and therefore is allocated against a much higher rate than commercial, residential or home equity. We continue to monitor this segment closely.
Non-performing assets consist of loans that are no longer accruing interest loans that have been renegotiated to below market rates based upon financial difficulties of the borrower and real estate acquired through foreclosure. When interest accruals are suspended, accrued interest income is reversed with current year accrualsand charged to earnings and prior year amounts generally charged off as a credit loss.earnings. When, in management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes and collectability is no longer in doubt, whichwhich is evident by the receipt of six consecutive months of regular, on-time payments, the loan is eligible to be returned to accrual status. Interest income on loans would have increased by approximately $0.6$0.8 million, $0.6$0.5 million and $0.8$0.4 million for 2020, 20192023, 2022 and 2018,2021, respectively, if loans had performed in accordance with their terms.
Non-performing assets and past due loans as of December 31, are as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 |
Non-accrual loans | | | | |
Commercial | | $ | 12,079 | | | $ | 3,533 | |
Real estate and home equity | | 1,629 | | | 1,556 | |
Consumer and other | | 5 | | | 34 | |
Total non-accrual loans | | 13,713 | | | 5,123 | |
Accruing loan past due 90 days or more | | — | | | — | |
Total non-performing loans | | 13,713 | | | 5,123 | |
Other real estate, net | | 5,730 | | | 1,397 | |
Total non-performing assets | | $ | 19,443 | | | $ | 6,520 | |
| | | | |
Allowance for loan losses | | $ | 25,844 | | | $ | 11,775 | |
| | | | |
Non-performing loans to gross loans | | 0.9% | | 0.4% |
Allowance for loan losses to non-performing loans | | 188.5% | | 229.8% |
Non-performing assets to total assets | | 0.8% | | 0.3% |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 |
Non-accrual loans | | | | |
Commercial | | $ | 7,680 | | $ | 7,528 |
Real estate and home equity | | 243 | | 2,286 |
Consumer and other | | 344 | | 1,351 |
Total non-accrual loans | | 8,267 | | 11,165 |
Accruing loan past due 90 days or more | | — | | — |
Total non-performing loans | | 8,267 | | 11,165 |
Other real estate, net | | 825 | | 1,194 |
Total non-performing assets | | $ | 9,092 | | $ | 12,359 |
| | | | |
Allowance for credit losses | | $ | 22,124 | | $ | 23,837 |
Non-performing loans to gross loans | | 0.4 | % | | 0.5 | % |
Allowance for credit losses to total loans | | 0.95 | % | | 1.00 | % |
Allowance for credit losses to non-performing loans | | 267.6 | % | | 213.5 | % |
Non-performing assets to total assets | | 0.3 | % | | 0.4 | % |
ImpairedIndividually analyzed loans have increaseddecreased by $5.9$6.4 million, or 62.3%35.2%, during 2020.2023. This change is the net effect of multiple factors, primarily the reclassification of $2.0 million of previously reported individually analyzed loans to performing loans, the
identification of $7.1$4.8 million of recently impairedindividually analyzed loans, principal curtailments/payoffs of $3.0$3.8 million, the acquisition of $2.5 million in impaired loans obtained through the acquisition of First State, normal loan amortization of $0.5$3.0 million and the reclassification of $0.1$2.4 million of previously reported impaired loans to performing loans.in charge offs.
The $7.1$4.8 million of recently impairedindividually analyzed loans were concentrated in twonine commercial relationships representing $6.1loans with government guarantees totaling $3.6 million, or 86%75%, of the recently impairedidentified loans and a single development note secured by residential lots totaling $0.8 million, or 17%, of the recently identified loans. One relationshipThe loans with government guarantees are to eight separate borrowers and are various stages of $5.2 millioneither forbearance agreement or liquidation. The development note is currently paying under a forbearance agreement and paying as agreed. The remaining relationship is secured by a borrowing base.agreement.
The $3.0$3.8 million of principal curtailments/payoffs were concentrated in twoa single commercial relationshipsrelationship, in which the notes were refinanced outnote was curtailed through the sale of collateral of $1.5 million, or 39%, of the bank by outside lenders. These two relationships represented $2.7total principal curtailments, and through the sale of 12 non-performing consumer mortgage notes representing $1.8 million, or 88%47%, of the total principal curtailments.
The $2.5$2.4 million of purchased impairedcharged off loans were concentrated in twoone commercial relationshipsrelationship representing $2.2$0.9 million, or 88%38%, of the purchased impaired loans. One relationship of $1.5 million is secured by residential lots for development and the second relationship of $0.7 million ischarge offs. This note was secured by a single-family homegovernment lease that is partially constructed.was not renewed. The subprime auto segment also saw a net change of $1.0 million, which has been attributed to charge offs. These charge offs were to various individual loans secured by automobiles and comprised 42% of the total charge offs.
Loans classified as Special Mention totaled $67.9$83.8 million and $25.2$31.3 million as of December 31, 20202023 and December 31, 2019,2022, respectively. The increase of $42.7$52.5 million, or 169.4%167.7%, was concentrated in the commercial loan portfolio. This increase is primarily the result of the risk grade downgrade of 1624 loans to eight separate loan16 relationships, totaling $63.5$68.9 million. In addition, there was one loan that originated in 2023 classified as Special Mention at year end, totaling $1.0 million, offseta commercial note secured by the payoff of six existing loans totaling $15.0 million, the risk grade upgrade of a $1.5 million loan and the charge-off of two loans totaling $1.9 million.owner occupied real estate. Of the 1624 loans recently classified as Special Mention, there were seven commercial loans to one relationship for $26.1 million, one commercial multifamily real estate office/retail loansfor $14.6 million, two commercial office real estate to two separate relationships each centered around a single guarantor totaled $33.5borrower totaling $11.7 million, one residential real estate development loan totaled $8.6 million, three related loans to a retail commercial real estate corporation totaled $7.7 million, a commercial real estate loan to a senior care facility totaled $4.7 million, two related hospitality loans totaled $3.0 million and two loans to a multifamily property totaled $1.6 million. The operations of all these borrowers were significantly impacted by the COVID-19 pandemic. The $15.0 million in payoffs included an $8.3 million note secured by subordinate bonds related to a sales tax increment financing district, which had not been refinanced as timely as anticipated due to delays in the reissuance of senior position bonds. Two unrelated loans, a $3.4 million loan secured by a senior carehealthcare facility for $8.0 million, and 11 commercial loans with government guarantees to nine borrowers for $6.6 million. Offsetting this increase was the upgrading of three notes to two separate borrowers, two secured by commercial hotel real estate totaling $11.9 million and a $2.8small commercial note of immaterial balance. There were also nine Special Mention notes that were paid off during the year totaling $4.3 million. These included eight commercial notes and one HELOC. These included a $2.0 million loan secured bycommercial PPP note, and a $1.4 million commercial construction note for multifamily rental property, were refinanced outside of the Company.housing.
Loans classified as Substandard totaled $58.3$34.0 million and $18.6$35.3 million as of December 31, 20202023 and December 31, 2019,2022, respectively. The increasedecrease of $39.7$1.3 million, or 214%3.7%, was concentrated in the commercial loan portfolio. The increasedecrease is primarily the result ofdue the risk grade downgradeupgrade of 13three loans to six separate commercial loan relationships totaling $42.7$1.9 million, the payoff of 13 mortgage loans totaling $0.9 million and the continued curtailment of the loans that remained within the portfolio. This decease is offset by the payoffdowngrade to Substandard of two existing loansnine commercial notes totaling $3.6$5.4 million, and the $0.9 million, or 15%, curtailment of three related equipment loans. Of the 13two loans recently classified as Substandard, five loans totaling $32.5 million were provided to two borrowers to finance hospitality properties. Four of the recently classified loans, totaling $5.2 million were provided to a single loan relationship to finance two movie cinemas and an outdoor recreation oriented multifamily rental property. Additionally, the recently classified loans include a $2.2 million loan to finance a Montessori school and three loans totaling $2.1 million to finance equipment for a borrower in the energy industry. The operations of all these borrowers were significantly impacted by the COVID-19 pandemic. The $3.6 million in payoffs included a $2.0 million line of credit secured by the account receivables of senior care facility that has struggled to collect its receivables and government reimbursements in a timely manner, which had placed considerable strain on operating performance. The remaining $1.6 million was a loan that had been classified since the financial difficulties caused by the Great Recession.residential real estate totaling $1.1 million.
Loans classified as Doubtful totaled $4.0$4.6 million and $0.1$4.7 million as of December 31, 20202023 and December 31, 2019,2022, respectively. The increasedecrease of $3.9$0.1 million, or 2.1%, was concentrated in the commercial loan portfolio and is the result of the risk grade downgradeimplementation of fourthe workout of these loans to three unrelated borrowersresulting in principal reduction from paydowns, loan sales and the acquisitionforeclosures of fivevarious loans to unrelated borrowers, both MVB legacy and those obtained as part of the First State acquisition.acquisition, as well as two charge offs of commercial loans totaling $1.0 million secured by a government lease and accounts receivable. As of December 31, 2020, a loan2022, there is $0.6 million in calculated credit loss reserve allocation against seven legacy MVB loans totaling $4.0 million. There is a single Doubtful purchased loan remaining, with an immaterial balance.
Interest Rate Risk
Management continually evaluates hedging strategies that are available to manage interest rate risk. We enter into interest rate swap contracts designated as hedging instruments to manage the interest rate risk associated with certain fixed rate loans. In 2023 we entered into four portfolio layer method interest rate swaps designated as hedging instruments over a closed portfolio of $0.7fixed-rate mortgage loans. At December 31, 2023 the interest rate swaps had a notional amount of $390.3 million, has been recognized on the largestwhich includes a $9.7 million amortization adjustment related to one of the swaps which is amortizing, and swap liability fair value of $4.5 million. The amortized cost basis of the closed portfolio of fixed-rate loans which hadwas $491.0 million, including a balance$4.1 million basis adjustment, at December 31, 2023. There were no interest rate swaps designated as hedging instruments over fixed-rate loans at December 31, 2022.
Management also enters into interest rate swap contracts not designated as hedging instruments to help a small number of $0.9 million. Three loans totaling $0.4 million arecommercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allows them to convert floating-rate loan payments to fixed rate loan payments. When we enter into an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a "mirror" swap contract with a third-party who exchanges the balances that remain after partial charge offs totaling $0.07borrower's fixed-rate payments for floating-rate loan payments. At December 31, 2023 the fair value and notional amount of the interest rate swap agreements were $6.2 million and are subject$126.5 million, respectively, as compared to ongoing workout plans. The largest of purchased loans had a balance of $1.5 million, while the remaining three loans had balances of $0.7 million, $0.2$8.4 million and $0.09 million.$137.7 million at December 31, 2022.
Funding Sources
The Bank considers a number of alternatives, including but not limited to deposits, short-term borrowings and long-term borrowings when evaluating funding sources. Traditional depositsDeposits continue to be the most significant source of funds, totaling
$1.982.90 billion,or 97.4%97.1% of funding sources, at December 31, 2020. This same information2023, versus$2.57 billion, or 92.9% of such funding sources, at December 31, 2019 reflected $1.27 billion in2022. Of these amounts, gaming deposits representing 84.2%totaled $354.1 million and $652.1 million at December 31, 2023 and 2022, respectively. Borrowings, consisting of such funding sources.subordinated debt, senior term loan and FHLB and other borrowings and subordinated debt represented 14.8% 2.7%of funding sources at December 31, 2019. There were no FHLB and other borrowings2023, versus6.7% at December 31, 2020. Subordinated debt totaled $43.4 million at December 31, 2020.2022. Repurchase agreements, which are available to large corporate customers, represented 0.5%0.2% and 0.7%0.4% of funding sources at December 31, 20202023 and 2019,2022, respectively.
Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source for the Company.us. At December 31, 2020,2023, noninterest-bearing balances totaled $715.8 million,$1.20 billion, compared to $278.5 million at December 31, 2019, or 36.1% and 22.0% of total deposits, respectively. Interest-bearing deposits totaled $1.27$1.23 billion at December 31, 2020, compared to $986.5 million 2022, or41.3% and 47.9%, respectively, of total deposits. Interest-bearing deposits totaled$1.70 billionat December 31, 2019,2023, compared to $1.34 billion at December 31, 2022, or 63.9% 58.7%and 78.0%52.1%, respectively, of total deposits, respectively. The main driver of deposit growth has been the increase in Fintech deposits through adding new relationships and continuing to grow current relationships. This growth in Fintech deposits is primarily due to the increasing in gaming deposits, primarily as a result of the increasing number of states legalizing sports gaming. The Company currently expects its Fintech banking to continue to grow.deposits.
The following table sets forth the balance of each of the deposit categories for the years ended December 31, 20202023 and 2019:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 |
Demand deposits of individuals, partnerships and corporations | | | | |
Noninterest-bearing demand | | $ | 715,791 | | | $ | 278,547 | |
Interest-bearing demand | | 496,502 | | | 351,435 | |
Savings and money markets | | 545,501 | | | 363,026 | |
Time deposits including CDs and IRAs | | 224,595 | | | 272,034 | |
Total deposits | | $ | 1,982,389 | | | $ | 1,265,042 | |
| | | | |
Time deposits that meet or exceed the FDIC insurance limit | | $ | 16,955 | | | $ | 8,955 | |
2022: | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 |
Demand deposits of individuals, partnerships and corporations | | | | |
Noninterest-bearing demand | | $ | 1,197,272 | | | $ | 1,231,544 | |
NOW | | 538,444 | | | 720,062 | |
Savings and money markets | | 571,299 | | | 284,459 | |
Time deposits, including CDs and IRAs | | 594,461 | | | 334,417 | |
Total deposits | | $ | 2,901,476 | | | $ | 2,570,482 | |
| | | | |
Time deposits that meet or exceed the FDIC insurance limit | | $ | 3,150 | | | $ | 4,386 | |
Average interest-bearing deposits totaled $1.28$1.86 billionduring 20202023 compared to $1.16$1.27 billionduring 2019.2022. Average noninterest bearing deposits totaled $502.5$1.07 billion during 2023 compared to$1.36 billionduring 2022.
We utilize a custodial deposit transference structure for certain deposit programs whereby we, acting as custodian of account holder funds, place a portion of such account holder funds that are not needed to support near term settlement at one or more third-party banks insured by the FDIC (each, a program bank). Accounts opened at program banks are established in our name as custodian, for the benefit of our account holders. We remain the issuer of all accounts under the applicable account holder agreements and have sole custodial control and transaction authority over the accounts opened at program banks. We maintain the records of each account holders' deposits maintained at program banks. Program banks undergo robust due diligence prior to becoming a program bank and are also subject to continuous monitoring. These off-balance sheet deposits totaled $1.1 billion at December 31, 2023and $724.0 million during 2020 compared to $258.5 million during 2019. Amounts for 2019 include noninterest bearing deposits at branches classified as held-for-sale.December 31, 2022and represent gaming, banking-as-a-service and digital asset clients.
Maturities of time deposits including time deposits at branches held-for-sale, that met or exceeded the FDIC insurance limit as of December 31, 2020:2023:
| | | | | | | | |
(Dollars in thousands) | | 20202023 |
Under three months | | $ | 3,942283 | |
Over three to 12 months | | 2,5981,075 | |
Over one to three years | | 10,1611,520 | |
Over three years | | 254272 | |
Total | | $ | 16,9553,150 | |
Total uninsured deposits were $1.2 billion, or 42.5% of total deposits, as of December 31, 2023. Of these uninsured deposits, $236.2 million represents collateralized public fund deposits. Further, at December 31, 2023, we had available liquidity of $398.2 million of cash and cash equivalents on hand and $699.8 million remaining borrowing capacity with the FHLB.
Along with traditional deposits, the Bank has access to both short-term borrowings from FHLB and overnight repurchase agreements to fund its operations and investments. For details on the Company'sour borrowings, please refer to Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.
Capital and Stockholders’ EquityResources
During the year ended December 31, 2020,2023, stockholders’ equity increased approximately $27.5$28.0 million to $239.5$289.3 million from $261.4 million.This increase consists of net income for the year of $37.4$31.0 million, other comprehensive income of $8.9 million, stock-based compensation of $2.7 million and common stock options exercised totaling $4.5$0.6 million a $3.5partially offset by cash dividends paid of $8.6 million, increase in accumulated other comprehensive income, stock-based compensationthe impact to retained earnings of $2.4adopting ASC 326, Measurement of Credit Losses on Financial Instruments ("ASC 326") of $6.6 million and commonminimum tax withholding on restricted stock units issued related to the Paladin acquisition totaling $0.2of $0.8 million. These changes were offset by common stock repurchased totaling $15.7 million, primarily from the Company's December 2020 tender offer, and dividends paid totaling $4.7 million.
With the stockholders’ equity increasing as noted above and with the growth in assets of $245.0 million, the equity to assets ratio decreasedincreased from 10.9%8.5% at December 31, 2022 to 10.3% due to equity growth outpacing the $387.4 million increase in total assets during 2020. The Company8.7% at December 31, 2023. We paid dividends to common shareholders of $4.3$8.6 million in 20202023 and $2.3$8.4 million in 20192022, compared to earnings of $37.4$31.2 million in 20202023 versus $27.0$15.0 million in 2019,2022, resulting in an decrease in the dividend payout ratio increasingto 27.7% in 2023 from 8.5%55.5% in 2019 to 11.4% in 2020. 2022.
The CompanyWe and the Bank are also subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Company’sour consolidated financial statements. The Bank is required to comply with applicable capital adequacy standards established by the FDIC. The Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement.federal banking agencies. West Virginia state chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions. Bank regulators have established “risk-based” capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets companies hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, 100% or 150% (highest risk assets) is assigned to each asset on the balance sheet. Detailed information concerning the Company’sour risk-based capital ratios can be found in Supervision and Regulation in Item 1 – Business and Note 1516 – Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.
At December 31, 2020,The optional CBLR framework, which is issued through interagency guidance, intends to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions as directed under the Bank’sEGRRCPA. Under the CBLR, if a qualifying depository institution elects to use such measure, such institutions will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios were aboveratios.
The Bank elected to begin using the minimum standardsCBLR for a well-capitalized institution. the first quarter of 2021 and intends to utilize this measure for the foreseeable
future. Eligibility criteria to utilize the CBLR includes the following:
● Total assets of less than $10 billion;
● Total trading assets plus liabilities of 5% or less of consolidated assets;
● Total off-balance sheet exposures of 25% or less of consolidated assets;
● Cannot be an advanced approaches banking organization; and
● Leverage ratio greater than 9% or temporarily prescribed threshold established in response to COVID-19.
The total risk-based capital ratio of 15.8%Bank's CBLR at December 31, 20202023 was 10.5%, which is above the well capitalizedwell-capitalized standard of 10%. The Tier 1 risk-based capital ratio of 14.6% at December 31, 2020 also exceeded the well capitalized minimum of 8%. The common equity Tier 1 capital ratio of 14.6% at December 31, 2020 is above the well capitalized standard of 6.5%. The leverage ratio at December 31, 2020 was 11.0% and was also above the well capitalized standard of 5%9%. Management currently believes that capital continues to provide a strong base for profitable growth.
Liquidity
Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated operating cash needs, loan demand and deposit withdrawals without incurring a sustained negative impact on net interest income. It is the Company’sour policy to manageoptimize the funding of the balance sheet, continually balancing the stability and cost factors of various funding sources. We believe liquidity soneeds are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources and the portions of the investment and loan portfolios that there is no needmature within one year. Our liquid assets totaled $504.3 million and $354.4 million of December 31, 2023 and 2022, respectively. We believe that these sources of funds would enable us to make unplanned sales of assets or to borrow funds under emergency conditions.meet cash obligations as they come due.
TheOur main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from investment maturities, principal payments from loans and income from loans and investment securities. During the year ended December 31, 2020,2023, cash provided byflows from operating, investing and financing activities totaled $417.8$58.2 million, while$88.2 million and $211.5 million, respectively. Cash flows from operating, investing and financing activities during the year ended December 31, 2022 totaled $7.4 million, ($571.1) million and $296.6 million, respectively. Significant changes in cash flows during the year ended December 31, 2023 include inflows from the net increase in deposits of $331.0 million, net maturities/paydowns of available-for-sale investment securities of $76.6 million and sales of available-for-sale investment securities of $54.5 million, partially offset by cash outflows from investing activity totaled $294.1 million.of $102.3 million to pay down FHLB and other borrowings and $89.5 million to purchase available-for-sale investment securities. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from the FHLB, national market certificate of deposit issuance programs, the Federal Reserve discount window, brokered deposits and Certificate of Deposit Account Registry Services. Additionally, on March 12, 2023, the Federal Reserve implemented the Bank Term Funding Program to support federally-insured depository institutions in response to prevailing market uncertainty about the banking industry resulting from the insolvencies of certain regional depository institutions. These external sources often provide attractive interest rates and flexible maturity dates that enable the Bank to match funding with contractual maturity dates of assets. Securities in the investment portfolio are classified as available-for-sale and can be utilized as an additional source of liquidity.
The Company hasWe have an effective shelf registration covering $75 million of debt and equity securities, all of which is available, subject to authorization from the Board of Directors and market conditions, to issue debt or equity securities at the Company'sour discretion. While the Company seekswe seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit itus to sell securities on acceptable terms, or at all.
With the changes in the industry related to COVID-19, the Company has focused on maintaining greater liquidity. Management believes liquidity needs could be greater during this volatile time within the industry
Critical Accounting Policies and markets. Based upon this volatility, the Company has adjusted the balance sheet to maintain a greater balance of cash and cash equivalents than has typically been used to maintain liquidity.
Contractual Obligations
The following table reflects the contractual maturities of the Company's term liabilities as of December 31, 2020. The amounts shown do not reflect contractual interest, early withdrawal or prepayment assumptions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Less than one year | | One to three years | | Three to five years | | More than five years | | Total |
Certificates of deposit and individual retirement accounts 1 | | $ | 126,863 | | | $ | 83,697 | | | $ | 14,035 | | | $ | — | | | $ | 224,595 | |
Securities sold under agreement to repurchase | | 10,266 | | | — | | | — | | | — | | | 10,266 | |
Operating leases | | 1,779 | | | 3,448 | | | 3,488 | | | 14,280 | | | 22,995 | |
Finance leases | | 68 | | | 100 | | | 10 | | | 4 | | | 182 | |
Subordinated debt | | — | | | — | | | — | | | 43,407 | | 43,407 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | $ | 138,976 | | | $ | 87,245 | | | $ | 17,533 | | | $ | 57,691 | | | $ | 301,445 | |
1 Certificates of deposit give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal.
Off-Balance Sheet ArrangementsEstimates
The Bank has entered into certain agreements that represent off-balance sheet arrangements that could have a significant impact on thediscussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, and couldwhich have abeen prepared in accordance with U.S. GAAP. Our significant impact in future periods. Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits. Further discussion of these agreements, including the amounts outstanding at December 31, 2020, is included in Note 8 – Commitments and Contingent Liabilities, accompanying the consolidated financial statements included elsewhere in this report.
Commitments to extend credit, including loan commitments, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.
Future Outlook
The Company has invested in the infrastructure to support anticipated future growth in each key area, including personnel, technology and processes to meet the growing compliance requirements in the industry. The Company believes it is well positioned in some of the finest markets in West Virginia and Virginia and will continue to focus on margin improvement; leveraging capital; organic portfolio loan growth; and operating efficiency. The key challenge for the Company in the future is to attract core deposits to fund growth in new markets through continued delivery of outstanding client service coupled with high-quality products and technology. The Company is expanding the treasury services function to support the banking needs of financial and emerging technology companies, which will further enhance core deposits, notably through its expansion of deposit acquisition and fee income strategies through the Fintech division. During 2020, the Company entered into agreements for card acquiring sponsorships and debit card program sponsorship to further enhance fee income and noninterest income.
Critical Accounting Policies
Significant accounting policies followed by the Company are presenteddescribed in Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report. These policies, along withThe preparation of these statements requires us to make certain assumptions, judgments and estimates that affect the disclosures presented inreported amounts of assets, liabilities, revenues and expenses, as well as the other financial statement notes and in this Management’s Discussion and Analysis, provide information on how significantdisclosure of contingent assets and liabilities are valuedand commitments as of the date of our financial statements. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates. We have identified the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amountsfollowing estimate as critical to the methods, assumptionsunderstanding of our financial position and estimates underlying those amounts, management has identifiedresults of operations and which require the determinationapplication of the allowance for loan losses to be the accounting area that requires the most subjective or complex judgments and as such could be most subject to revision as new information becomes available.significant judgment by management.
Allowance for Credit Losses
Since the implementation of CECL in January 2023, the ACL represents management’s current estimate of credit losses for the
Allowance for Loan Losses
The ALL represents management’s estimateremaining estimated life of probable credit losses inherent in thefinancial instruments, primarily to loans and unfunded loan portfolio. Determiningcommitments on our balance sheet. Estimating the amount of the ALL is considered a critical accounting estimate because itACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the amount and timingvalue of collateral on collateral-dependent loans. Credit losses inherent in classificationsare charged against the allowance, while recoveries of homogeneous loansamounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the Bank’s historical loss experiencefactors previously mentioned, as well as other pertinent factors.
We estimate the general component of the ACL based on a forecasting model and consideration of current economic trendsqualitative factors, both internal and conditions,external, all of which may be susceptible to significant change. Non-homogeneous
Through a loss driver analysis performed by a third-party vendor, a forecasting model that correlates specific economic factors with credit quality of each loan segment was developed. Peer bank data was identified and used in this process, as we did not have adequate quarterly loan data to analyze over the look-back period to 2007. After the third-party analyzed both historical peer loan data and various economic factors over the same look-back period, two economic variables, national GDP and national unemployment rate, were identified as showing the most correlation to the performance of the loans within each of the pooled segments. Within each loan segment forecast, these two economic variables are specifically evaluatedforecasted based on expected trends over a 12-month period, before reverting to the long-term average quarterly rate of each variable over the next 12-month period, then maintains this quarterly average for the life of the loan segment. The third-party vendor uses these variables to produce an estimated probability of default for each quarter period and, through a proprietary model, also calculates a loss given default factor to estimate overall losses. The vendor also prepares benchmark studies for prepayment and curtailment rate estimates for each loan segment, as well as recovery lag estimates. With all these factors combined, a forecasted allocation rate is produced for each loan segment.
The qualitative factors include items such as the nature and volume of the portfolio; the volume and severity of problem credits; collateral values; portfolio concentrations; economic and business conditions; lending policies and procedures; experience of lending management and staff; and quality of the loan review system. Each of these environmental factors has been analyzed by management and each has been assigned a risk modifier on a 4-point scale (No Change, Minor, Moderate, and Major) as a measure of the risk that factor creates to the Bank’s loan portfolio. Each environmental factor has also been weighted to reflect how it relates to the different portfolio segments (i.e., various Commercial, Residential, Consumer, and HELOC). Individual risk grade factors are then calculated by applying the individual weightings to the individual risk grades. The total of those factors provides an overall risk grade for each portfolio segment, which is then applied to a basis point scale to calculate an actual loss rate adjustment. This process is applied to each of the Bank’s portfolio segments. As of December 31, 2023, the "economic and business conditions" factor was generally the highest weighted qualitative factor, with a weighting of 10% to 20%, and given a risk rating of “Minor” for eight of the fourteen portfolio segments. Increasing the risk rating by one for all segments would have resulted in an additional allowance of $2.1 million at December 31, 2023 and decreasing the risk grade by one would have resulted in a reduction to the allowance of $1.9 million.
In addition to the above judgments and estimates, the specific reserves on impaired loans is an important input to the ACL due to the increased risks inherent in those loans. The loan portfolio also represents the largest asset type in the consolidated balance sheet. Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report describes the methodology usedThis evaluation requires significant judgment and estimates related to determine the ALL and a discussion of the factors driving changes in the amount and timing of expected future cash flows and collateral values. To the ALL.extent actual outcomes differ from our estimates, we may need additional provisions for credit losses. Any such additional provisions for credit losses will be a direct charge to our earnings.
Investment Securities
Investment securities at the time of purchase are classified as either available-for-sale securities or equity securities. The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security. Securities are periodically reviewed for other-than-temporary impairment. For debt securities, management considers whether the present value of future cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statement of income. Please refer Note 2 – Investment Securities accompanying the consolidated financial statements included elsewhere in this report for the Company’s policy regarding the other than temporary impairment of investment securities.
Business Combinations
We account for acquisitions under FASB Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
PCI loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, such as lines of credit (consumer and commercial) and loans for which there was no discount attributable to credit are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
For more information regarding the Company's business combinations, please see Note 24 – Acquisitions and Divestitures accompanying the consolidated financial statements included elsewhere in this report.
For more information on the Company's PCI loans, please see the Purchased Credit Impaired Loans section in Note 3 – Loans and Allowance for Loan Losses accompanying the consolidated financial statements included elsewhere in this report.
Recent Accounting Pronouncements and Developments
Recent accounting pronouncements and developments applicable to the Companyus are described further in Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’sMarket risk refers to potential losses arising from, amongst other items, changes in interest rates, foreign exchange rates, equity prices and commodity prices. Our market risk is composed primarily of interest rate risk. The ALCO is responsible for reviewing the interest rate sensitivity position and establishes policies to monitor and coordinate the Company’sour sources, uses and pricing of funds.
Interest Rate Risk
The objective of the asset/liability management function is to structure the balance sheet in ways that maintain consistent growth in net interest income and minimize exposure to market risks within itsour policy guidelines. This objective is accomplished through management of balance sheet liquidity and interest rate risk exposure based on changes in economic conditions, interest rate levels and customer preferences. The Company managesWe manage balance sheet liquidity through the investment portfolio, sales of commercial and residential real estate loans and through the utilization of diversified funding sources, including retail deposits, a variety of wholesale funding sources and borrowings through the FHLB. Interest rate risk is managed through the use of interest rate caps, commercial loan swap transactions and interest rate lock commitments on mortgage loans held-for-sale, as well as the structuring of loan terms that provide cash flows to be consistently re-invested along the rate cycle.
The Company'sOur primary market risk is interest rate fluctuation. Interest rate risk results from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic conditions, financial conditions, movements in interest rates and consumer preferences affect the difference between interest earned on assets and interest paid on liabilities. The Company’sOur interest rate risk represents the levels of exposure itsour income and market values have to fluctuations in interest rates. Interest rate risk is measured as the change in earnings and the theoretical market value of equity that results from changes in interest rates. The ALCO oversees the management of interest rate risk and itsour objective is to maximize stockholder value, enhance profitability and increase capital, serve customer and community needs and protect the Companyus from any material financial consequences associated with changes in interest rates.
Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); changing rate relationships across yield curves that affect bank activities (basis risk); changing rate relationships across the spectrum of maturities (yield curve risk); and interest rate related options embedded in certain bank products (option risk). Changes in interest rates may also affect a bank’s underlying economic value. The values of a bank’s assets, liabilities and interest-rate related, off-balance sheet contracts are affected by changes in rates because the present values of future cash flows, and in some cases the cash flows themselves, are changed when discounting by different rates.
The Company believesWe believe that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. Management and theour Board of Directors have chosen an interest rate risk profile that is consistent with the Company'sour strategic business plan. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to decrease any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.
The Company’sOur Board of Directors has established a comprehensive interest rate risk management policy, which is administered by the ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE”(“EVE”) at risk) resulting from a hypothetical change in interest rates. The Company measuresWe measure the potential adverse impacts that changing interest rates may have on short-term earnings, long-term value and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors, such as call features and interest rate caps and floors embedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology employed. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts or the impact of rate changes on demand for loan and deposit products.
A base case forecast is prepared using market consensus rate forecasts and alternative simulations reflecting more and less extreme behavior of rates each quarter. The analysis is presented to the ALCO and the Board of Directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain, when other business conditions so dictate, or when necessary to model potential balance sheet changes.
The balance sheet is subject to quarterly testing for interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, 300 and 400 basis points (“bp”). The goal is to structure the balance sheet so
that net interest earningsinterest-earnings at risk over a twelve-month period12-month and 24-month periods and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.levels and scenarios.
At December 31, 2020, the Company is2023, we are shown in an asset sensitive position for the first year after rate shocks. Management continuously strives to reduce higher costing fixed rate funding instruments, while increasing assets that are more fluid in their repricing. Theoretically, an asset sensitive position is more favorable in a rising rate environment, since more assets than liabilities will reprice in a given time frame as interest rates rise. Similarly, a liability sensitive position is theoretically favorable in a declining interest rate environment, since more liabilities than assets will reprice in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.
| Estimated Changes in Net Interest Income | Estimated Changes in Net Interest Income | Estimated Changes in Net Interest Income |
Change in interest rates | Change in interest rates | | +400 bp | | +300 bp | | +200 bp | | +100 bp | | -100 bp | | -200 bp | | -300 bp | | -400 bp | Change in interest rates | | +400 bp | | +300 bp | | +200 bp | | +100 bp | | -100 bp | | -200 bp | | -300 bp | | -400 bp |
Policy Limit | Policy Limit | | 25.0 | % | | 20.0 | % | | 15.0 | % | | 10.0 | % | | 10.0 | % | | 15.0 | % | | 20.0 | % | | 25.0 | % | Policy Limit | | (25.0) | % | | (20.0) | % | | (15.0) | % | | (10.0) | % | | (10.0) | % | | (15.0) | % | | (20.0) | % | | (25.0) | % |
December 31, 2020 | | 42.7 | % | | 30.7 | % | | 19.3 | % | | 9.6 | % | | (6.6) | % | | (9.6) | % | | (12.4) | % | | (12.9) | % |
December 31, 2019 | | 5.7 | % | | 3.5 | % | | 1.3 | % | | 0.3 | % | | (6.9) | % | | (18.4) | % | | (26.8) | % | | (32.5) | % |
December 31, 2023 | | December 31, 2023 | | 51.8 | % | | 39.7 | % | | 27.6 | % | | 16.1 | % | | (7.6) | % | | (20.2) | % | | (33.4) | % | | (44.8) | % |
December 31, 2022 | | December 31, 2022 | | 30.0 | % | | 21.3 | % | | 12.5 | % | | 4.1 | % | | (13.3) | % | | (22.7) | % | | (31.7) | % | | (38.7) | % |
As shown above, measures of netNet interest income at risk inis first compared to the Global Insight Rate Forecast that we received from a risingthird-party banking solution. This establishes an expectation of interest rate environment were more favorablemovement over the next two years. Then, the shocks are applied based on the rate expectation. In comparing the expectations as of each of December 31, 2022 and December 31, 2023, at December 31, 2020 versus2022 the expectation was that rates would see little movement in 2023. As such, the projected impact at year-end 2022 is smaller than the current report. That is also why the shock is less in the down-rate environment, which would be closer to a flat rate environment, rather than a true down-rate environment. At December 31, 20192023, the expectation is for rates to drop throughout the next year, then hit a steady point in year two, and less favorablemoving forward. There is impact in a fallingdown-rate environment as the bank deals heavily in variable rate environment for the same time periods. One factor explaining this year-over-year difference is the general level of market interest rates. A parallel downward interest rate shock would further compress the yields on assetsloans and liabilities, while a parallel upward interest rate shock would widen the spread between yields on assets and liabilities.deposits.
Net interest income at risk exceeded policy limits in the -100 bp, -200 bp, -300 bp and -400 bp parallel instantaneous interest rate shock scenarios. The policy violations in these scenarios are driven largely by the general level or market interest rates described in the preceding paragraphabove, as well as the Company'sour cost of funding. The Company'sOur deposit costs are low and have little room to reprice to a lower interest rate in a falling rate environment. However, the Company'sour floating rate assets are exposed to the full effect of repricing to a lower interest rate in a falling rate environment.
The paragraphdiscussion above discussesassumes net interest income at risk in various shock scenarios; scenarios in which interest rates immediately move by a large margin. The Company'sOur net interest income profile exhibits declining net interest income when rates fall gradually, butgradually; however, the impact is not as extreme as is suggested in a shock scenario. Essentially, aA gradual interest rate decline scenario smooths the impact of falling rates over a 12 or 24 month period. The Company'sOur expectation is that over any given one to two year period, interest rates will likely move at a gradual pace.
As interest rates fall, mortgage companies experience a higher volume of loan originations and refinance activity. This benefit is not reflected in measures of net interest income at risk, as origination and refinance activity wasare classified as fee income prior to the combination with ICM.from an equity method investment. This increase in feeequity method investment income represents a benefit to net income that offsets the losses to net interest income experienced in a falling rate environment. After the ICM combination, the income related to loan originations and refinance activity is reflected as income from an equity method investment.
The measures of equity value at risk indicate the ongoing economic value of the Companyus by considering the effects of changes in interest rates on all of the Company’sour cash flows and by discounting the cash flows to estimate the present value of assets and liabilities.The difference between these discounted values of the assets and liabilities is the economic value of equity, which theoretically approximates the fair value of the Company’sour net assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Estimated Changes in Economic Value of Equity (EVE) |
Change in interest rates | | +400 bp | | +300 bp | | +200 bp | | +100 bp | | -100 bp | | -200 bp | | -300 bp | | -400 bp |
Policy Limit | | 35.0 | % | | 25.0 | % | | 17.0 | % | | 12.0 | % | | 12.0 | % | | 17.0 | % | | 25.0 | % | | 35.0 | % |
December 31, 2020 | | 2.7 | % | | 3.8 | % | | 5.0 | % | | 3.0 | % | | (3.1) | % | | 4.1 | % | | 14.8 | % | | 20.0 | % |
December 31, 2019 | | 10.6 | % | | 8.6 | % | | 6.7 | % | | 5.0 | % | | (15.1) | % | | (36.8) | % | | (44.1) | % | | (32.5) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Estimated Changes in EVE |
Change in interest rates | | +400 bp | | +300 bp | | +200 bp | | +100 bp | | -100 bp | | -200 bp | | -300 bp | | -400 bp |
Policy Limit | | (35.0) | % | | (25.0) | % | | (17.0) | % | | (12.0) | % | | (12.0) | % | | (17.0) | % | | (25.0) | % | | (35.0) | % |
December 31, 2023 | | (2.3) | % | | (1.9) | % | | (1.3) | % | | (0.6) | % | | 0.7 | % | | (0.7) | % | | (3.5) | % | | (6.0) | % |
December 31, 2022 | | 14.7 | % | | 11.4 | % | | 8.0 | % | | 3.9 | % | | (4.6) | % | | (11.4) | % | | (19.9) | % | | (29.3) | % |
The EVE at riskis much more stable across rate changing scenarios for 2023. The Fed Funds Rate increased significantly during 2022, and the effect of this rate movement was not fully realized in down rate scenarios increased at December 31, 2020, when compared to December 31, 2019. The increasethe deposit portfolio until 2023. Interest-bearing deposits were repriced throughout 2023 in economic value of equity inthe rising rate environments is largely attributableenvironment leading to the effect that an increase in interest rates has on the present value of non-interest-bearing deposits. The discount rate for non-interest-bearing deposits rises as interest rates rise; however, these deposits pay a rate of zero. Theincreased cost of these liabilities does not increase as interestfunds. The significant change in rates rise, but the discount ratealso
applied to the expected future cash flows of these liabilities increases with interest rates. Any increase in the market rates used to discount the cash flows of these liabilities reduces the present value of these liabilities. The decrease in present value of these liabilities results in a net increase to economic value of equity. A falling rate environment would result in a higher net present value for these liabilities and would lead to a net decrease to economic value of equity.
Additionally,drove previously non-interest-bearing deposits into new interest-bearing deposits contributeaccount types, which impacted the cost of interest-bearing liabilities. This impact drove the cost of interest-bearing liabilities up, allowing the cost to behave similar to the large declinesdiscount rate applied to cash flows. These changes in economic value of equityrates took place in falling2023, despite only being projected at year-end 2022. The EVE impact in changing rate environments as a resulthas stabilized due to our understanding of their low cost. Interest-bearing deposit costs are modeled with a floorthe impact of zero, meaning that the interest rates paid on deposits cannot be negative. In the event of a large downward interestprevious rate shock, deposit costs would not move below zero. However, the discount rates appliedchanges to the expected future cash flows of these deposits could sustain a large decline in interest rates before reaching zero. This has the effect of increasing the present value of the interest-bearing-deposit liability and ultimately decreasing economic value of equity.
The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy as well as financial markets. The extent and magnitude of the economic slowdown occurring as a result of the COVID-19 pandemic is still unknown. Financial markets adjusted dramatically to the reduced economic activityportfolio and the pace of recovery is uncertain. The financial market benchmark most relevant to the Company’s current and future profitability is the United States Government Treasury yield curve. The United States Government Treasury yield curve is used as a basis for the pricing of most bonds, loans, borrowings, deposits and other fixed income yield curves. The United States Government Treasury yield curve has experienced a large, relatively parallel, downward shift. Given the Company’s asset sensitive position, management expects that net interest income will decline. As the outlook for the COVID-19 pandemic improves, management expects that the United States Government Treasury curve will experience some degree of an upward shift over time.small rate changes projected in 2023.
Credit Risk
The Company hasWe have counter-party risk which may arise from the possible inability of third-party investors to meet the terms of their forward sales contracts. The Company workscontracts, including derivative contracts such as interest rate swaps and fair value hedges. We work with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. The Company monitorsWe monitor the financial condition of these third parties on an annual basis and the Company doeswe do not currently expect these third parties to fail to meet their obligations.
Management expects that some clients will be unable to meet their financial obligations in the near-term as a result of the decreased economic activity brought on by the COVID-19 pandemic. However, management does not expect that these credit concerns will perpetuate indefinitely. Many clients may be eligible to defer loan payments to a later date. Management is working to incorporate scenarios that reflect decreased loan cash flows in the short term into the Company’s interest rate risk models.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP, which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike industrial companies, the Company's assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the
Board of Directors of and Stockholders
MVB Financial Corp. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of MVB Financial Corp. and Subsidiaries (the "Company"“Company”) as of December 31, 20202023 and 2019,2022, the related consolidated statements of income, comprehensive income, changes in stockholders'stockholders’ equity, and cash flows for each of the three years in the three-year period ended December 31, 2020,2023, and the related notes (collectively referred to as the "financial statements"“consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20202023, and 2019,2022, and the results of theirits operations and theirits cash flows for each of the three years in the three-year period ended December 31, 2020,2023, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"(“PCAOB”), the Company'sCompany’s internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 202112, 2024, expressed an unqualified opinion thereon.thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s consolidated financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedinclude examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Notes 1 and 3 to the consolidated financial statements, effective January 1, 2023, the Company changed its method of accounting for credit losses due to the adoption of Accounting Standards
Codification Topic 326, Financial Instruments – Credit Losses.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current periodcurrent-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for LoanCredit Losses - Loans
As described in NotesNote 1 and 3 to the consolidated financial statements the Company’s allowance for loancredit losses on loans (“allowance”ACL-Loans”) balance was $25.8$22.1 million on gross loans of $1.45 billion as of December 31, 2020,2023. The Company determines the current expected credit losses using relevant available information, from internal and consisted primarilyexternal sources, related to past events, current conditions, and reasonable and supportable forecasts. Adjustments to modeled loss estimates may be made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, such as changes in economic conditions, property values or other relevant factors. The allowance consists of specific and general components. The specific component relates to loans that are impaired.individually analyzed using either collateral based or cash flow-based valuation methodology. The general component covers all loans that are not impairedindividually analyzed. These loans are measured on a collective basis and is based uponare pooled with other loans that share similar characteristics. Management has determined there to be several different portfolio segments sharing similar risk characteristics within the loan portfolio. Factors considered in this process include general loan terms, collateral, and availability of historical loss experience adjusted for qualitative factors. The amount ofdata to support the allowance isanalysis, with the initial segmentation based on management’s continuing evaluation of the risk characteristics and credit quality ofCall Codes.
The ACL-Loans is calculated for each segment primarily using a discounted cash flow methodology at the loan portfolio, assessment of current economic conditions, diversificationlevel, with loss rates, prepayment assumptions and size of the portfolio, adequacy ofcurtailment assumptions driven by each loan’s collateral past and anticipated loss experience and the amount of non-performing loans type.
Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. The allowance evaluation s inherently subjective as it requires estimates thatforecasting models. These factors are susceptiblethen added to significant revision as more information becomes available.the forecasted allocation percentages to get the adjusted factor to be applied to the pooled loans on a weighted basis.
We identified the Company’s estimate of the allowancequalitative factor adjustments applied in the calculation of the ACL-Loans as a critical audit matter. The principal considerations for our determination included the high degree of judgment and subjectivity related to management’s determination of the allowance asqualitative factor assumptions used in the calculation of the ACL-Loans. Due to the lack of observable data to support the qualitative factor allocations, a critical audit matter included thehigh degree of subjectivityauditor effort and judgment required to audit management’s identification of impaired loans and quantification of the related allowance, as well as management’s selection of assumptions for the general component of the allowance. This was particularly true for the assumptions that management utilized in determining and applying the qualitative factors in the allowance model, as well as the level assigned by management for each qualitative factor.significant auditor judgement is required.
The primary audit procedures we performed to address this critical audit matter included:
| | | | | | | | | | | | | | |
•l | We obtained an understanding of the Company’s process for establishing the allowance, including understanding any changes that occurred within the model during 2020. |
• | We evaluatedEvaluated the design and tested the operating effectiveness of key controls relating to the Company’s allowance,ACL-Loans, including controls over: |
| m | The identification of impaired loans and resulting specific allowance, if necessary: |
| m | Theover the determination of the application of qualitative factors;factor adjustments and |
| m | Management’s the precision of management’s review and approval of the allowance model and resulting estimate, includingand testing of the qualitative components.model’s performance. |
•l | We evaluatedAssessed the reasonableness of each qualitative factor adjustment, including evaluating management’s estimates and judgments relatedas to which factors impacted the qualitative factorsadjustments for each loan pool. |
l | Evaluated and tested the resulting allocation to the allowance. This included evaluating the appropriatenessreasonableness and relevance of the methodologies used by management to estimatedata utilized in the qualitative factor componentsadjustments, including considering the data’s completeness and accuracy and testing the mathematical accuracy of the allowance, including evaluating the appropriateness and completeness of risk factors used in determining the qualitative factors.calculations. |
•l | We performed analytical procedures onUtilized the overall level and various componentsassistance of the allowance, including historical reserves,firm’s internal specialists to test the mathematical operation of the model. |
l | Analyzed the total qualitative reserves and specific reserves, as well as credit qualityfactor adjustment applied to ensure movementeach loan pool, in a directionally consistent manner relativecomparison to credit quality indicators and changes in the Company’s quantitatively driven expected credit losses and loan portfolio. |
• | We testedpools and evaluated the completeness of impaired loans, including testing the modification for potential troubled debt restructurings, substandard or worse rated loans, non-accrual loans,appropriateness and past due loans. |
• | We tested the calculation of losses on a sample of impaired loans, including assessing the reasonablenesslevel of the significant assumptions including any adjustments made to appraisals for discounts, selling costs, and other unobservable adjustments.total qualitative factor adjustment applied in the overall ACL-Loans. |
Business Combinations – Fair Value of Acquired Loans
As described in Note 24, in April 2020 the Company completed its acquisition of certain assets and the assumption of certain liabilities of The First State Bank, resulting in a bargain purchase gain of $4.7 million. The Company accounted for this acquisition under the acquisition method of accounting, whereby the assets acquired and liabilities assumed were recorded by the Company at fair value. Management made significant estimates and
exercised significant judgement in accounting for the acquisition of The First State Bank. In determining the fair value of loans acquired, management segmented the loan portfolio based on whether or not acquired loans have evidence of credit deterioration at acquisition (purchased credit impaired loans and purchased performing loans). The valuation of the loans included an independent third party and took into consideration the loans' underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan to value ratios, loss exposures and remaining balances.
We identified the Company’s estimate of the acquisition date fair value of acquired loans as a critical audit matter. The principal considerations for that determination is the high degree of auditor judgement involved in evaluating the probability of default and loss given default for loans identified with credit deterioration and the need for specialized skill in development and application of subjective assumptions in estimated cash flows.
The primary audit procedures we performed to address this critical audit matter included the following:
| | | | | | | | |
• | We evaluated the design and tested the operating effectiveness of controls relating the valuation of acquired loans, including controls over: |
| m | The Company’s assumptions regarding specific credit losses of the acquired portfolio provided to the independent third party; |
| m | Management’s review and approval of the significant assumptions utilized by the independent third party; and |
| m | Management’s review of the results of valuations provided by the independent third party. |
• | We tested the completeness and accuracy of loans determined to have credit deterioration at acquisition and evaluated the reasonableness of the criteria utilized by management in the determination. |
• | We evaluated the significant assumptions and methods utilized in developing the fair value of the loan portfolio, including assessment of significant assumptions, and evaluated whether the assumptions used were reasonable. |
• | We involved the firm’s valuation specialists to assist in testing the Company’s calculation of fair value of the loan portfolio acquired and certain significant assumptions, including among other assumptions, discount rates, prepayment speeds, probability of defaults and loss given default, and foreclosure lags. |
• | We tested the completeness and accuracy of the data utilized in the fair value determination by the independent third-party, including reconciling the loan portfolio to the loan trial balance, confirming a sample of loans with the customer, and tracing select attributes from the loan system for a sample of loans to the loan data utilized in the independent third-party valuation. |
/s/ DIXON HUGHES GOODMANFORVIS, LLP
We have served as the Company'sCompany’s auditor since 2014.
Tampa, Florida
March 9, 202112, 2024
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of and Stockholders
MVB Financial Corp. and Subsidiaries
Opinion on the Internal Control Overover Financial Reporting
We have audited MVB Financial Corp. and SubsidiariesSubsidiaries’ (the “Company”)’s internal control overfinancial reporting as of December 31, 2020,2023, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 20202023, and 2019,2022, and for each of the three years in the period ended December 31, 2020,2023, and our report dated March 9, 2021,12, 2024, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
As described in Management’s Annual Report on
Definitions and Limitations of Internal Control over Financial Reporting the scope of management’s assessment of internal control over financial reporting as of December 31, 2020 has excluded The First State Bank acquired on April 3, 2020. We have also excluded The First State Bank from the scope of our audit of internal control over financial reporting. The First State Bank represented five percent of consolidated revenues for the year ended December 31, 2020, and two percent of consolidated total assets as of December 31, 2020.
Definition and Limitations of Internal Control Over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DIXON HUGHES GOODMANFORVIS, LLP
Tampa, Florida
March 9, 202112, 2024
MVB Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except per share data)
December 31, 20202023 and 2019
| | | | | | | | | | | |
| 2020 | | 2019 |
ASSETS | | | |
Cash and cash equivalents: | | | |
Cash and due from banks | $ | 19,110 | | | $ | 18,430 | |
Interest-bearing balances with banks | 244,783 | | | 9,572 | |
Total cash and cash equivalents | 263,893 | | | 28,002 | |
Certificates of deposit with banks | 11,803 | | | 12,549 | |
Investment securities available-for-sale | 410,624 | | | 235,821 | |
Equity securities | 27,585 | | | 18,514 | |
Loans held-for-sale | 1,062 | | | 109,788 | |
| | | |
Loans receivable | 1,453,744 | | | 1,374,541 | |
Allowance for loan losses | (25,844) | | | (11,775) | |
Loans receivable, net | 1,427,900 | | | 1,362,766 | |
Premises and equipment, net | 26,203 | | | 21,974 | |
Bank-owned life insurance | 41,262 | | | 35,374 | |
Equity method investment | 46,494 | | | 0 | |
Accrued interest receivable and other assets | 72,300 | | | 53,142 | |
Assets of branches held-for-sale | 0 | | | 46,554 | |
Goodwill | 2,350 | | | 19,630 | |
TOTAL ASSETS | $ | 2,331,476 | | | $ | 1,944,114 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Deposits: | | | |
Noninterest-bearing | $ | 715,791 | | | $ | 278,547 | |
Interest-bearing | 1,266,598 | | | 986,495 | |
Total deposits | 1,982,389 | | | 1,265,042 | |
Deposits of branches held-for-sale | 0 | | | 188,270 | |
Accrued interest payable and other liabilities | 55,931 | | | 41,685 | |
Repurchase agreements | 10,266 | | | 10,172 | |
FHLB and other borrowings | 0 | | | 222,885 | |
Subordinated debt | 43,407 | | | 4,124 | |
Total liabilities | 2,091,993 | | | 1,732,178 | |
| | | |
STOCKHOLDERS’ EQUITY | | | |
Preferred stock - par value $1,000; 20,000 shares authorized; 733 shares issued and outstanding as of December 31, 2020 and December 31, 2019 | 7,334 | | | 7,334 | |
Common stock - par value $1; 20,000,000 shares authorized; 12,374,322 and 11,526,306 shares issued and outstanding, respectively, as of December 31, 2020 and 11,995,366 and 11,944,289 shares issued and outstanding, respectively, as of December 31, 2019 | 12,374 | | | 11,995 | |
Additional paid-in capital | 129,119 | | | 122,516 | |
Retained earnings | 105,171 | | | 72,496 | |
Accumulated other comprehensive income (loss) | 2,226 | | | (1,321) | |
Treasury stock - 848,016 and 51,077 shares as of December 31, 2020 and December 31, 2019, respectively, at cost | (16,741) | | | (1,084) | |
Total stockholders’ equity | 239,483 | | | 211,936 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,331,476 | | | $ | 1,944,114 | |
2022 | | | | | | | | | | | |
| 2023 | | 2022 |
ASSETS | | | |
Cash and cash equivalents: | | | |
Cash and due from banks | $ | 6,564 | | | $ | 5,290 | |
Interest-bearing balances with banks | 391,665 | | | 34,990 | |
Total cash and cash equivalents | 398,229 | | | 40,280 | |
| | | |
Investment securities available-for-sale | 345,275 | | | 379,814 | |
Equity securities | 41,086 | | | 38,744 | |
Loans held-for-sale | 629 | | | 23,126 | |
Loans receivable | 2,317,594 | | | 2,372,645 | |
Allowance for credit losses | (22,124) | | | (23,837) | |
Loans receivable, net | 2,295,470 | | | 2,348,808 | |
Premises and equipment, net | 20,928 | | | 23,630 | |
Bank-owned life insurance | 44,287 | | | 43,239 | |
Equity method investments | 75,754 | | | 76,223 | |
Accrued interest receivable and other assets | 89,386 | | | 87,833 | |
Assets from discontinued operations | — | | | 4,315 | |
Goodwill | 2,838 | | | 2,838 | |
TOTAL ASSETS | $ | 3,313,882 | | | $ | 3,068,850 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Deposits: | | | |
Noninterest-bearing | $ | 1,197,272 | | | $ | 1,231,544 | |
Interest-bearing | 1,704,204 | | | 1,338,938 | |
Total deposits | 2,901,476 | | | 2,570,482 | |
| | | |
Accrued interest payable and other liabilities | 37,917 | | | 36,112 | |
Repurchase agreements | 4,821 | | | 10,037 | |
FHLB and other borrowings | — | | | 102,333 | |
Subordinated debt | 73,540 | | | 73,286 | |
Senior term loan | 6,786 | | | 9,765 | |
Liabilities from discontinued operations | — | | | 5,444 | |
Total liabilities | 3,024,540 | | | 2,807,459 | |
| | | |
STOCKHOLDERS’ EQUITY | | | |
| | | |
Common stock - par value $1; 40,000,000 shares authorized; 13,606,399 and 12,758,383 shares issued and outstanding, respectively, as of December 31, 2023 and 13,466,281 and 12,618,265 shares issued and outstanding, respectively, as of December 31, 2022 | 13,606 | | | 13,466 | |
Additional paid-in capital | 160,488 | | | 157,152 | |
Retained earnings | 160,862 | | | 144,911 | |
Accumulated other comprehensive loss | (28,831) | | | (37,704) | |
Treasury stock - 848,016 shares as of December 31, 2023 and December 31, 2022, at cost | (16,741) | | | (16,741) | |
Total equity attributable to parent | 289,384 | | | 261,084 | |
Noncontrolling interest | (42) | | | 307 | |
Total stockholders' equity | 289,342 | | | 261,391 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,313,882 | | | $ | 3,068,850 | |
See Notes to Consolidated Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share data)
Years ended December 31, 2020, 20192023, 2022 and 20182021
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
INTEREST INCOME | | | | | |
Interest and fees on loans | $ | 72,999 | | | $ | 74,854 | | | $ | 62,468 | |
Interest on deposits with banks | 437 | | | 489 | | | 403 | |
Interest on investment securities | 2,448 | | | 3,055 | | | 3,580 | |
Interest on tax-exempt loans and securities | 4,569 | | | 3,963 | | | 3,309 | |
Total interest income | 80,453 | | | 82,361 | | | 69,760 | |
| | | | | |
INTEREST EXPENSE | | | | | |
Interest on deposits | 10,294 | | | 17,439 | | | 11,635 | |
Interest on short-term borrowings | 1,072 | | | 4,752 | | | 4,315 | |
Interest on subordinated debt | 261 | | | 770 | | | 1,756 | |
Total interest expense | 11,627 | | | 22,961 | | | 17,706 | |
| | | | | |
NET INTEREST INCOME | 68,826 | | | 59,400 | | | 52,054 | |
Provision for loan losses | 16,579 | | | 1,789 | | | 2,440 | |
Net interest income after provision for loan losses | 52,247 | | | 57,611 | | | 49,614 | |
| | | | | |
NONINTEREST INCOME | | | | | |
Mortgage fee income | 33,427 | | | 41,045 | | | 32,337 | |
Payment card and service charge income | 2,821 | | | 1,980 | | | 1,680 | |
Insurance and investment services income | 872 | | | 727 | | | 716 | |
Gain (loss) on sale of available-for-sale securities, net | 914 | | | (166) | | | 327 | |
Gain (loss) on sale of equity securities, net | 3,501 | | | (7) | | | 0 | |
Gain (loss) on derivatives, net | 2,341 | | | 1,253 | | | (278) | |
Holding gain on equity securities | 374 | | | 13,767 | | | 590 | |
Compliance consulting income | 4,436 | | | 921 | | | 0 | |
Equity method investment income | 24,174 | | | 0 | | | 0 | |
Gains on acquisition and divestiture activity | 17,640 | | | 0 | | | 0 | |
Other operating income | 1,337 | | | 5,084 | | | 3,268 | |
Total noninterest income | 91,837 | | | 64,604 | | | 38,640 | |
| | | | | |
NONINTEREST EXPENSES | | | | | |
Salaries and employee benefits | 61,629 | | | 56,175 | | | 46,224 | |
Occupancy expense | 4,599 | | | 4,816 | | | 4,234 | |
Equipment depreciation and maintenance | 3,672 | | | 3,640 | | | 3,239 | |
Data processing and communications | 5,375 | | | 4,025 | | | 3,741 | |
Mortgage processing | 1,744 | | | 3,041 | | | 3,551 | |
Marketing, contributions and sponsorships | 1,096 | | | 1,290 | | | 1,141 | |
Professional fees | 8,453 | | | 4,999 | | | 3,559 | |
Insurance, tax and assessment expense | 2,090 | | | 1,663 | | | 1,846 | |
Travel, entertainment, dues and subscriptions | 3,390 | | | 4,151 | | | 2,808 | |
Other operating expenses | 5,093 | | | 3,401 | | | 2,535 | |
Total noninterest expense | 97,141 | | | 87,201 | | | 72,878 | |
Income from continuing operations, before income taxes | 46,943 | | | 35,014 | | | 15,376 | |
Income tax expense - continuing operations | 9,532 | | | 8,450 | | | 3,373 | |
Net income from continuing operations | 37,411 | | | 26,564 | | | 12,003 | |
Income from discontinued operations, before income taxes | 0 | | | 575 | | | 0 | |
Income tax expense - discontinued operations | 0 | | | 148 | | | 0 | |
Net income from discontinued operations | 0 | | | 427 | | | 0 | |
Net income | $ | 37,411 | | | $ | 26,991 | | | $ | 12,003 | |
Preferred dividends | 461 | | | 479 | | | 489 | |
Net income available to common shareholders | $ | 36,950 | | | $ | 26,512 | | | $ | 11,514 | |
| | | | | |
Earnings per share from continuing operations - basic | $ | 3.13 | | | $ | 2.22 | | | $ | 1.04 | |
Earnings per share from discontinued operations - basic | $ | 0 | | | $ | 0.04 | | | $ | 0 | |
Earnings per common share - basic | $ | 3.13 | | | $ | 2.26 | | | $ | 1.04 | |
| | | | | |
Earnings per share from continuing operations - diluted | $ | 3.06 | | | $ | 2.16 | | | $ | 1.00 | |
Earnings per share from discontinued operations - diluted | $ | 0 | | | $ | 0.04 | | | $ | 0 | |
Earnings per common share - diluted | $ | 3.06 | | | $ | 2.20 | | | $ | 1.00 | |
| | | | | |
Weighted-average shares outstanding - basic | 11,821,574 | | | 11,713,885 | | | 11,030,984 | |
Weighted-average shares outstanding - diluted | 12,088,106 | | | 12,044,667 | | | 12,722,003 | |
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
INTEREST INCOME | | | | | |
Interest and fees on loans | $ | 159,635 | | | $ | 116,583 | | | $ | 75,282 | |
Interest on deposits with banks | 21,043 | | | 1,637 | | | 506 | |
Interest on investment securities | 5,576 | | | 3,496 | | | 2,405 | |
Interest on tax-exempt loans and securities | 3,564 | | | 4,241 | | | 5,236 | |
Total interest income | 189,818 | | | 125,957 | | | 83,429 | |
| | | | | |
INTEREST EXPENSE | | | | | |
Interest on deposits | 61,660 | | | 10,476 | | | 3,977 | |
Interest on short-term borrowings | 890 | | | 443 | | | 105 | |
Interest on subordinated debt | 3,219 | | | 3,072 | | | 2,188 | |
Interest on senior term loan | 766 | | | 163 | | | — | |
Total interest expense | 66,535 | | | 14,154 | | | 6,270 | |
| | | | | |
NET INTEREST INCOME | 123,283 | | | 111,803 | | | 77,159 | |
Provision (release of allowance) for credit losses | (1,921) | | | 14,194 | | | (6,275) | |
Net interest income after provision (release of allowance) for credit losses | 125,204 | | | 97,609 | | | 83,434 | |
| | | | | |
NONINTEREST INCOME | | | | | |
Payment card and service charge income | 13,776 | | | 11,648 | | | 7,524 | |
| | | | | |
Insurance and investment services income | 335 | | | 849 | | | 1,003 | |
Gain (loss) on sale of available-for-sale securities, net | (1,536) | | | 650 | | | 3,875 | |
Gain (loss) on sale of equity securities, net | (269) | | | (56) | | | 5 | |
Loss on derivatives, net | (659) | | | — | | | — | |
Gain (loss) on sale of loans, net | (744) | | | 1,655 | | | 4,178 | |
Holding gain (loss) on equity securities | 146 | | | (1,543) | | | 3,776 | |
Compliance and consulting income | 4,312 | | | 4,598 | | | 2,557 | |
Equity method investments income (loss) | (2,499) | | | (713) | | | 17,428 | |
Equity method investment gain | — | | | 1,874 | | | — | |
Gain (loss) on acquisition and divestiture activity | (986) | | | — | | | 10,783 | |
Gain on sale of assets | — | | | 4,978 | | | — | |
Other operating income | 7,839 | | | 3,625 | | | 4,724 | |
Total noninterest income | 19,715 | | | 27,565 | | | 55,853 | |
| | | | | |
NONINTEREST EXPENSES | | | | | |
Salaries and employee benefits | 63,371 | | | 62,534 | | | 52,965 | |
Occupancy expense | 3,701 | | | 4,051 | | | 4,347 | |
Equipment depreciation and maintenance | 5,558 | | | 5,496 | | | 4,598 | |
Data processing and communications | 4,878 | | | 4,198 | | | 4,431 | |
| | | | | |
| | | | | |
Professional fees | 18,344 | | | 15,661 | | | 13,726 | |
Insurance, tax and assessment expense | 4,436 | | | 2,605 | | | 2,032 | |
Travel, entertainment, dues and subscriptions | 6,825 | | | 6,836 | | | 4,617 | |
Other operating expenses | 10,512 | | | 8,765 | | | 5,092 | |
Total noninterest expense | 117,625 | | | 110,146 | | | 91,808 | |
Income from continuing operations, before income taxes | 27,294 | | | 15,028 | | | 47,479 | |
Income taxes | 5,070 | | | 3,294 | | | 9,641 | |
Net income from continuing operations | 22,224 | | | 11,734 | | | 37,838 | |
Income from discontinued operations, before income taxes | 11,831 | | | 3,487 | | | 1,099 | |
Income taxes | 3,049 | | | 834 | | | 241 | |
Net income from discontinued operations | 8,782 | | | 2,653 | | | 858 | |
Net income | 31,006 | | | 14,387 | | | 38,696 | |
Net loss attributable to noncontrolling interest | 226 | | | 660 | | | 425 | |
Net income attributable to parent | $ | 31,232 | | | $ | 15,047 | | | $ | 39,121 | |
Preferred dividends | — | | | — | | | 35 | |
Net income available to common shareholders | $ | 31,232 | | | $ | 15,047 | | | $ | 39,086 | |
| | | | | |
Earnings per share from continuing operations - basic | $ | 1.77 | | | $ | 1.01 | | | $ | 3.25 | |
Earnings per share from discontinued operations - basic | $ | 0.69 | | | $ | 0.22 | | | $ | 0.07 | |
Earnings per common share - basic | $ | 2.46 | | | $ | 1.23 | | | $ | 3.32 | |
Earnings per share from continuing operations - diluted | $ | 1.72 | | | $ | 0.96 | | | $ | 3.03 | |
Earnings per share from discontinued operations - diluted | $ | 0.68 | | | $ | 0.21 | | | $ | 0.07 | |
Earnings per common share - diluted | $ | 2.40 | | | $ | 1.17 | | | $ | 3.10 | |
Weighted-average shares outstanding - basic | 12,694,206 | | | 12,279,462 | | | 11,778,557 | |
Weighted-average shares outstanding - diluted | 12,997,332 | | | 12,870,734 | | | 12,613,620 | |
See Notes to Consolidated Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Years ended December 31, 2020, 20192023, 2022 and 20182021
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
Net income | $ | 37,411 | | | $ | 26,991 | | | $ | 12,003 | |
| | | | | |
Other comprehensive income (loss): | | | | | |
| | | | | |
Unrealized holding gains (losses) on securities available-for-sale | 6,979 | | | 8,498 | | | (4,167) | |
Income tax effect | (1,635) | | | (2,294) | | | 1,125 | |
| | | | | |
Reclassification adjustment for (gain) loss recognized in income | (914) | | | 166 | | | (327) | |
Income tax effect | 214 | | | (44) | | | 88 | |
| | | | | |
Change in defined benefit pension plan | (1,403) | | | (1,467) | | | (22) | |
Income tax effect | 329 | | | 396 | | | 6 | |
| | | | | |
Reclassification adjustment for amortization of net actuarial loss recognized in income | 420 | | | 271 | | | 306 | |
Income tax effect | (98) | | | (73) | | | (83) | |
| | | | | |
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income | (473) | | | 44 | | | 0 | |
Income tax effect | 128 | | | (12) | | | 0 | |
| | | | | |
Total other comprehensive income (loss) | 3,547 | | | 5,485 | | | (3,074) | |
| | | | | |
Comprehensive income | $ | 40,958 | | | $ | 32,476 | | | $ | 8,929 | |
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
Net income before noncontrolling interest | $ | 31,006 | | | $ | 14,387 | | | $ | 38,696 | |
| | | | | |
Other comprehensive income (loss): | | | | | |
Unrealized holding gains (losses) on securities available-for-sale | 10,257 | | | (45,730) | | | (5,839) | |
Reclassification adjustment for (gain) loss recognized in income | 1,536 | | | (650) | | | (3,875) | |
Change in defined benefit pension plan | 61 | | | 815 | | | 770 | |
Reclassification adjustment for amortization of net actuarial loss recognized in income | 117 | | | 429 | | | 507 | |
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income | (289) | | | (83) | | | 862 | |
Other comprehensive income (loss), before tax | 11,682 | | | (45,219) | | | (7,575) | |
| | | | | |
Income taxes related to items of other comprehensive income (loss): | | | | | |
Unrealized holding gains (losses) on securities available-for-sale | (2,466) | | | 11,252 | | | 1,367 | |
Reclassification adjustment for (gain) loss recognized in income | (369) | | | 152 | | | 908 | |
Change in defined benefit pension plan | (15) | | | (201) | | | (180) | |
Reclassification adjustment for amortization of net actuarial loss recognized in income | (28) | | | (103) | | | (119) | |
Reclassification adjustment for carrying value adjustment - investment hedge recognized in income | 69 | | | 21 | | | (233) | |
Income taxes related to items of other comprehensive income (loss): | (2,809) | | | 11,121 | | | 1,743 | |
| | | | | |
Total other comprehensive income (loss), net of tax | 8,873 | | | (34,098) | | | (5,832) | |
| | | | | |
Comprehensive loss attributable to noncontrolling interest | 226 | | | 660 | | | 425 | |
| | | | | |
Comprehensive income (loss) | $ | 40,105 | | | $ | (19,051) | | | $ | 33,289 | |
| | | | | |
See Notes to Consolidated Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands except per share data)
Years ended December 31, 2020, 20192023, 2022 and 20182021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total stockholders' equity |
| | Shares | Amount | | Shares | Amount | | | | | Shares | Amount | |
Balance as of January 1, 2018 | | 783 | | $ | 7,834 | | | 10,495,704 | | $ | 10,496 | | | $ | 98,698 | | | $ | 37,236 | | | $ | (2,988) | | | 51,077 | | $ | (1,084) | | | $ | 150,192 | |
| | | | | | | | | | | | | | | | | |
Net income | | — | | — | | | — | | — | | | — | | | 12,003 | | | — | | | — | | — | | | 12,003 | |
Other comprehensive loss | | — | | — | | | — | | — | | | — | | | — | | | (3,074) | | | — | | — | | | (3,074) | |
Cash dividends paid ($0.11 per share) | | — | | — | | | — | | — | | | — | | | (1,220) | | | — | | | — | | — | | | (1,220) | |
Dividends on preferred stock | | — | | — | | | — | | — | | | — | | | (489) | | | — | | | — | | — | | | (489) | |
Stock-based compensation | | — | | — | | | — | | — | | | 1,267 | | | — | | | — | | | — | | — | | | 1,267 | |
Common stock options exercised | | — | | — | | | 162,666 | | 161 | | | 1,968 | | | — | | | — | | | — | | — | | | 2,129 | |
Restricted stock units vested | | — | | — | | | — | | 1 | | | (1) | | | — | | | — | | | — | | — | | | — | |
Stranded AOCI | | — | | — | | | — | | — | | | — | | | 646 | | | (646) | | | — | | — | | | — | |
Mark-to-market on equity positions | | — | | — | | | — | | — | | | — | | | 98 | | | (98) | | | — | | — | | | — | |
Common stock issued from subordinated debt conversion, net of costs | | — | | — | | | 1,000,000 | | 1,000 | | | 14,965 | | | — | | | — | | | — | | — | | | 15,965 | |
| | | | | | | | | | | | | | | | | |
Balance as of December 31, 2018 | | 783 | | 7,834 | | | 11,658,370 | | 11,658 | | | 116,897 | | | 48,274 | | | (6,806) | | | 51,077 | | (1,084) | | | 176,773 | |
| | | | | | | | | | | | | | | | | |
Net income | | — | | — | | | — | | — | | | — | | | 26,991 | | | — | | | — | | — | | | 26,991 | |
Other comprehensive income | | — | | — | | | — | | — | | | — | | | — | | | 5,485 | | | — | | — | | | 5,485 | |
Cash dividends paid ($0.195 per share) | | — | | — | | | — | | — | | | — | | | (2,290) | | | — | | | — | | — | | | (2,290) | |
Dividends on preferred stock | | — | | — | | | — | | — | | | — | | | (479) | | | — | | | — | | — | | | (479) | |
Stock-based compensation | | — | | — | | | — | | — | | | 1,759 | | | — | | | — | | | — | | — | | | 1,759 | |
Common stock options exercised | | — | | — | | | 210,050 | | 210 | | | 1,954 | | | — | | | — | | | — | | — | | | 2,164 | |
Restricted stock units vested | | — | | — | | | 9,576 | | 10 | | | (10) | | | — | | | — | | | — | | — | | | — | |
Common stock issued from subordinated debt conversion, net of costs | | — | | — | | | 62,500 | | 62 | | | 938 | | | — | | | — | | | — | | — | | | 1,000 | |
Common stock issued related to Chartwell acquisition | | — | | — | | | 54,870 | | 55 | | | 978 | | | — | | | — | | | — | | — | | | 1,033 | |
Redemption of preferred stock | | (50) | | (500) | | | — | | — | | | — | | | — | | | — | | | — | | — | | | (500) | |
| | | | | | | | | | | | | | | | | |
Balance as of December 31, 2019 | | 733 | | 7,334 | | | 11,995,366 | | 11,995 | | | 122,516 | | | 72,496 | | | (1,321) | | | 51,077 | | (1,084) | | | 211,936 | |
| | | | | | | | | | | | | | | | | |
Net income | | — | | — | | | — | | — | | | — | | | 37,411 | | | — | | | — | | — | | | 37,411 | |
Other comprehensive income | | — | | — | | | — | | — | | | — | | | — | | | 3,547 | | | — | | — | | | 3,547 | |
Cash dividends paid ($0.36 per share) | | — | | — | | | — | | — | | | — | | | (4,275) | | | — | | | — | | — | | | (4,275) | |
Dividends on preferred stock | | — | | — | | | — | | — | | | — | | | (461) | | | — | | | — | | — | | | (461) | |
Stock-based compensation | | — | | — | | | — | | — | | | 2,353 | | | — | | | — | | | — | | — | | | 2,353 | |
Common stock options exercised | | — | | — | | | 305,697 | | 306 | | | 4,153 | | | — | | | — | | | — | | — | | | 4,459 | |
Restricted stock units vested | | — | | — | | | 53,981 | | 54 | | | (124) | | | — | | | — | | | 525 | | (7) | | | (77) | |
Common stock repurchased | | — | | — | | | — | | — | | | — | | | — | | | — | | | 796,414 | | (15,650) | | | (15,650) | |
Common stock issued related to Paladin acquisition | | — | | — | | | 19,278 | | 19 | | | 221 | | | — | | | — | | | — | | — | | | 240 | |
| | | | | | | | | | | | | | | | | |
Balance as of December 31, 2020 | | 733 | | $ | 7,334 | | | 12,374,322 | | $ | 12,374 | | | $ | 129,119 | | | $ | 105,171 | | | $ | 2,226 | | | 848,016 | | $ | (16,741) | | | $ | 239,483 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total stockholders' equity attributable to parent | | Noncontrolling interest | | Total stockholders' equity |
| | Shares | Amount | | Shares | Amount | | | | | Shares | Amount | | | |
Balance as of January 1, 2021 | | 733 | | $ | 7,334 | | | 12,374,322 | | $ | 12,374 | | | $ | 129,119 | | | $ | 105,171 | | | $ | 2,226 | | | 848,016 | | $ | (16,741) | | | $ | 239,483 | | | $ | — | | | $ | 239,483 | |
Net income | | — | | — | | | — | | — | | | — | | | 39,121 | | | — | | | — | | — | | | 39,121 | | | (425) | | | 38,696 | |
Other comprehensive loss | | — | | — | | | — | | — | | | — | | | — | | | (5,832) | | | — | | — | | | (5,832) | | | — | | | (5,832) | |
Cash dividends paid ($0.51 per share) | | — | | — | | | — | | — | | | — | | | (6,038) | | | — | | | — | | — | | | (6,038) | | | — | | | (6,038) | |
Dividends on preferred stock | | — | | — | | | — | | — | | | — | | | (35) | | | — | | | — | | — | | | (35) | | | — | | | (35) | |
Stock-based compensation | | — | | — | | | — | | — | | | 2,634 | | | — | | | — | | | — | | — | | | 2,634 | | | — | | | 2,634 | |
Stock-based compensation related to equity method investment | | — | | — | | | — | | — | | | 574 | | | — | | | — | | | — | | — | | | 574 | | | — | | | 574 | |
Common stock options exercised | | — | | — | | | 316,682 | | 317 | | | 4,613 | | | — | | | — | | | — | | — | | | 4,930 | | | — | | | 4,930 | |
Restricted stock units issued | | — | | — | | | 77,050 | | 77 | | | (77) | | | — | | | — | | | — | | — | | | — | | | — | | | — | |
Minimum tax withholding on restricted stock units issued | | — | | — | | | (6,579) | | (7) | | | (242) | | | — | | | — | | | — | | — | | | (249) | | | — | | | (249) | |
Noncontrolling interests due to acquisition | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | — | | | — | | | 900 | | | 900 | |
Common stock issued related to contingent consideration | | — | | — | | | 47,966 | | 48 | | | 1,952 | | | — | | | — | | | — | | — | | | 2,000 | | | — | | | 2,000 | |
Common stock issued related to Trabian acquisition | | — | | — | | | 17,597 | | 18 | | | 582 | | | — | | | — | | | — | | — | | | 600 | | | — | | | 600 | |
Common stock issued related to Interchecks investment | | — | | — | | | 107,928 | | 108 | | | 4,366 | | | — | | | — | | | — | | — | | | 4,474 | | | — | | | 4,474 | |
MVB Technology membership units issued | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | — | | | — | | | 500 | | | 500 | |
Redemption of preferred stock | | (733) | | (7,334) | | | — | | — | | | — | | | — | | | — | | | — | | — | | | (7,334) | | | — | | | (7,334) | |
Balance as of December 31, 2021 | | — | | — | | | 12,934,966 | | 12,935 | | | 143,521 | | | 138,219 | | | (3,606) | | | 848,016 | | (16,741) | | | 274,328 | | | 975 | | | 275,303 | |
| | | | | | | | | | | | | | | | | | | | | |
Net income | | — | | — | | | — | | — | | | — | | | 15,047 | | | — | | | — | | — | | | 15,047 | | | (660) | | | 14,387 | |
Other comprehensive loss | | — | | — | | | — | | — | | | — | | | — | | | (34,098) | | | — | | — | | | (34,098) | | | — | | | (34,098) | |
Cash dividends paid ($0.68 per share) | | — | | — | | | — | | — | | | — | | | (8,355) | | | — | | | — | | — | | | (8,355) | | | — | | | (8,355) | |
Stock-based compensation | | — | | — | | | — | | — | | | 2,800 | | | — | | | — | | | — | | — | | | 2,800 | | | — | | | 2,800 | |
Stock-based compensation related to equity method investment | | — | | — | | | — | | — | | | 417 | | | — | | | — | | | — | | — | | | 417 | | | — | | | 417 | |
Common stock options exercised | | — | | — | | | 160,527 | | 161 | | | 1,908 | | | — | | | — | | | — | | — | | | 2,069 | | | — | | | 2,069 | |
Restricted stock units issued | | — | | — | | | 75,354 | | 75 | | | (75) | | | — | | | — | | | — | | — | | | — | | | — | | | — | |
Minimum tax withholding on restricted stock units issued | | — | | — | | | (17,596) | | (18) | | | (652) | | | — | | | — | | | — | | — | | | (670) | | | — | | | (670) | |
Common stock issued related to Warp Speed acquisition | | — | | — | | | 313,030 | | 313 | | | 9,266 | | | — | | | — | | | — | | — | | | 9,579 | | | — | | | 9,579 | |
Stock purchase from noncontrolling interest | | — | | — | | | — | | — | | | (33) | | | — | | | — | | | — | | — | | | (33) | | | (8) | | | (41) | |
Balance as of December 31, 2022 | | — | | — | | | 13,466,281 | | 13,466 | | | 157,152 | | | 144,911 | | | (37,704) | | | 848,016 | | (16,741) | | | 261,084 | | | 307 | | | 261,391 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred stock | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total stockholders' equity attributable to parent | | Noncontrolling interest | | Total stockholders' equity |
| | Shares | Amount | | Shares | Amount | | | | | Shares | Amount | | | |
Net income | | — | | — | | | — | | — | | | — | | | 31,232 | | | — | | | — | | — | | | 31,232 | | | (226) | | | 31,006 | |
Other comprehensive income | | — | | — | | | — | | — | | | — | | | — | | | 8,873 | | | — | | — | | | 8,873 | | | — | | | 8,873 | |
Cash dividends paid ($0.68 per share) | | — | | — | | | — | | — | | | — | | | (8,639) | | | — | | | — | | — | | | (8,639) | | | — | | | (8,639) | |
Impact of adopting ASC 326, net of tax | | — | | — | | | — | | — | | | — | | | (6,642) | | | — | | | — | | — | | | (6,642) | | | — | | | (6,642) | |
Stock-based compensation | | — | | — | | | — | | — | | | 2,658 | | | — | | | — | | | — | | — | | | 2,658 | | | — | | | 2,658 | |
Stock-based compensation related to equity method investment | | — | | — | | | — | | — | | | 734 | | | — | | | — | | | — | | — | | | 734 | | | — | | | 734 | |
Common stock options exercised | | — | | — | | | 107,500 | | 108 | | | 529 | | | — | | | — | | | — | | — | | | 637 | | | — | | | 637 | |
Restricted stock units issued | | — | | — | | | 130,402 | | 130 | | | (130) | | | — | | | — | | | — | | — | | | — | | | — | | | — | |
Minimum tax withholding on restricted stock and stock options | | — | | — | | | (97,784) | | (98) | | | (749) | | | — | | | — | | | — | | — | | | (847) | | | — | | | (847) | |
Redemption of noncontrolling interest | | — | | — | | | — | | — | | | 294 | | | — | | | — | | | — | | — | | | 294 | | | (123) | | | 171 | |
| | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2023 | | — | | $ | — | | | 13,606,399 | | $ | 13,606 | | | $ | 160,488 | | | $ | 160,862 | | | $ | (28,831) | | | 848,016 | | $ | (16,741) | | | $ | 289,384 | | | $ | (42) | | | $ | 289,342 | |
| | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements
MVB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 2020, 20192023, 2022 and 20182021
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
OPERATING ACTIVITIES | | | | | |
Net income | $ | 37,411 | | | $ | 26,991 | | | $ | 12,003 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | |
Net amortization and accretion of investments | 1,892 | | | 1,258 | | | 1,293 | |
Net amortization of deferred loan (fees) costs | 1,692 | | | (448) | | | (324) | |
Provision for loan losses | 16,579 | | | 1,789 | | | 2,440 | |
Depreciation and amortization | 3,292 | | | 3,260 | | | 2,938 | |
Stock-based compensation | 2,353 | | | 1,759 | | | 1,267 | |
Loans originated for sale | (1,334,910) | | | (1,604,825) | | | (1,214,078) | |
Proceeds of loans sold | 1,477,063 | | | 1,611,889 | | | 1,237,402 | |
Holding gain on equity securities | (374) | | | (13,767) | | | (590) | |
Mortgage fee income | (33,427) | | | (41,045) | | | (32,337) | |
Gain on sale of available-for-sale securities | (948) | | | (105) | | | (352) | |
Loss on sale of available-for-sale securities | 34 | | | 271 | | | 25 | |
Gain on sale of equity securities | (3,501) | | | 0 | | | 0 | |
Loss on sale of equity securities | 0 | | | 7 | | | 0 | |
Gain on sale of portfolio loans | (332) | | | (520) | | | (198) | |
Gains on acquisition and divestiture activity | (17,640) | | | 0 | | | 0 | |
Income on bank-owned life insurance, including death benefit proceeds in excess of cash surrender value | (888) | | | (1,197) | | | (1,182) | |
Deferred taxes | (3,386) | | | (3,953) | | | 139 | |
Amortization of operating lease right-of-use asset | 86 | | | 10 | | | 0 | |
Equity method investment income | (27,574) | | | 0 | | | 0 | |
Return on equity method investment | 3,400 | | | 0 | | | 0 | |
Other assets | (27,286) | | | (14,753) | | | (3,013) | |
Other liabilities | 18,699 | | | 25,317 | | | 1,261 | |
Net cash from operating activities | 112,235 | | | (8,062) | | | 6,694 | |
INVESTING ACTIVITIES | | | | | |
Purchases of investment securities available-for-sale | (269,790) | | | (70,984) | | | (31,068) | |
Maturities/paydowns of investment securities available-for-sale | 64,493 | | | 33,583 | | | 25,748 | |
Sales of investment securities available-for-sale | 54,023 | | | 31,220 | | | 2,743 | |
Purchases of premises and equipment, including premises and equipment included in assets of branches held-for-sale | (6,615) | | | (2,042) | | | (2,693) | |
Disposals of premises and equipment | 1,687 | | | 0 | | | 0 | |
Net increase in loans and loans included in assets of branches held-for-sale | (70,186) | | | (113,076) | | | (199,282) | |
Purchases of restricted bank stock | (25,831) | | | (49,600) | | | (29,370) | |
Redemptions of restricted bank stock | 38,048 | | | 45,853 | | | 25,681 | |
Proceeds from sale of certificates of deposit with banks | 1,739 | | | 2,229 | | | 0 | |
Purchases of certificates of deposit with banks | (993) | | | 0 | | | 0 | |
Proceeds from sale of other real estate owned | 8,309 | | | 731 | | | 707 | |
Purchase of bank-owned life insurance | (5,000) | | | (574) | | | (1,149) | |
Proceeds from death benefit of bank-owned life insurance policies | 0 | | | 688 | | | 706 | |
Purchase of equity securities | (9,918) | | | (1,400) | | | (2,000) | |
Sales of equity securities | 4,622 | | | 5,968 | | | 0 | |
Proceeds from divestitures | (136,005) | | | 0 | | | 0 | |
Cash paid for acquisitions | 57,306 | | | (2,651) | | | 0 | |
Net cash from investing activities | (294,111) | | | (120,055) | | | (209,977) | |
FINANCING ACTIVITIES | | | | | |
Net increase in deposits and deposits in branches held-for-sale | 574,691 | | | 144,158 | | | 149,574 | |
Net change in repurchase agreements | 94 | | | (4,753) | | | (7,478) | |
Net change in FHLB and other borrowings | (180,283) | | | 7,998 | | | 62,718 | |
Subordinated debt issuance (redemption) | 40,000 | | | (12,400) | | | 0 | |
Subordinated debt issuance and conversion costs | (717) | | | 0 | | | (35) | |
Common stock repurchased | (15,746) | | | 0 | | | 0 | |
Preferred stock redemption | 0 | | | (500) | | | 0 | |
Common stock options exercised | 4,464 | | | 2,164 | | | 2,129 | |
Cash dividends paid on common stock | (4,275) | | | (2,290) | | | (1,220) | |
Cash dividends paid on preferred stock | (461) | | | (479) | | | (489) | |
Net cash from financing activities | 417,767 | | | 133,898 | | | 205,199 | |
Net change in cash and cash equivalents | 235,891 | | | 5,781 | | | 1,916 | |
Cash and cash equivalents at beginning of period | 28,002 | | | 22,221 | | | 20,305 | |
Cash and cash equivalents at end of period | $ | 263,893 | | | $ | 28,002 | | | $ | 22,221 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
OPERATING ACTIVITIES | | | | | |
Net income before noncontrolling interest | 31,006 | | | 14,387 | | | $ | 38,696 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | |
| | | | | |
Net amortization and accretion of investments | 2,072 | | | 2,596 | | | 4,054 | |
Net amortization of deferred loan costs | 1,347 | | | 2,526 | | | 2,969 | |
Provision (release of allowance) for credit losses | (1,921) | | | 14,194 | | | (6,275) | |
Depreciation and amortization | 5,003 | | | 5,322 | | | 4,198 | |
Stock-based compensation | 2,658 | | | 2,800 | | | 2,634 | |
Stock-based compensation related to equity method investments | 734 | | | 417 | | | 574 | |
Loans originated for sale | (1,804) | | | (101,382) | | | (30,033) | |
Proceeds of loans held-for-sale sold | 30,725 | | | 79,602 | | | 22,024 | |
Holding (gain) loss on equity securities | (146) | | | 1,543 | | | (3,776) | |
| | | | | |
(Gain) loss on sale of available-for-sale securities, net | 1,536 | | | (650) | | | (3,875) | |
(Gain) loss on sale of equity securities, net | 269 | | | 56 | | | (5) | |
Gain on sale of loans held-for-sale | (1,065) | | | (5,487) | | | (4,178) | |
Loss on sale of loans held for investment | 1,809 | | | 3,832 | | | — | |
Gain on sale of discontinued operations | (11,800) | | | — | | | — | |
(Gain) loss on acquisition and divestiture activity | 986 | | | — | | | (10,783) | |
| | | | | |
Gain on sale of other real estate owned | (170) | | | (47) | | | (1,396) | |
Income on bank-owned life insurance | (1,048) | | | (975) | | | (995) | |
Deferred income taxes | 97 | | | (3,631) | | | 6,129 | |
| | | | | |
Equity method investments (income) loss | 2,499 | | | 713 | | | (17,428) | |
Equity method investment gain | — | | | (1,874) | | | — | |
Return on equity method investments | 714 | | | 8,275 | | | 31,032 | |
Other assets | (6,925) | | | (2,438) | | | (1,440) | |
Other liabilities | 1,657 | | | (12,426) | | | 2,689 | |
Net cash from operating activities | 58,233 | | | 7,353 | | | 34,815 | |
INVESTING ACTIVITIES | | | | | |
Purchases of available-for-sale investment securities | (89,522) | | | (89,600) | | | (216,621) | |
Maturities/paydowns of available-for-sale investment securities | 76,631 | | | 20,973 | | | 49,248 | |
Sales of available-for-sale investment securities | 54,531 | | | 60,635 | | | 146,011 | |
Purchases of premises and equipment | (1,915) | | | (3,041) | | | (4,865) | |
Disposals of premises and equipment | 425 | | | 49 | | | 300 | |
Net change in loans | 39,092 | | | (576,303) | | | (460,672) | |
Proceeds of loans held for investment sold | 14,934 | | | 61,659 | | | — | |
Purchases of restricted bank stock | — | | | (61,245) | | | (1,410) | |
Redemptions of restricted bank stock | — | | | 53,048 | | | 2,364 | |
Proceeds from maturities of certificates of deposit with banks | — | | | 2,719 | | | 9,084 | |
| | | | | |
Proceeds from sale of other real estate owned | 539 | | | 1,482 | | | 3,818 | |
Purchase of bank-owned life insurance | — | | | (7) | | | — | |
| | | | | |
Purchase of equity method investments | — | | | (38,400) | | | (500) | |
Investment in equity method investments | (2,744) | | | — | | | — | |
Purchase of equity securities | (345) | | | (4,452) | | | (2,982) | |
Proceeds from sale of equity securities | 566 | | | 1,356 | | | 543 | |
Net cash transferred for sale of discontinued operations | (3,935) | | | — | | | — | |
Net cash transferred in divestiture activity | (8) | | | — | | | — | |
Net cash transferred for banking center sale | — | | | — | | | (95,500) | |
Cash paid for acquisitions, net of cash acquired | — | | | — | | | (772) | |
Net cash from investing activities | 88,249 | | | (571,127) | | | (571,954) | |
FINANCING ACTIVITIES | | | | | |
Net increase in deposits | 330,994 | | | 192,877 | | | 558,342 | |
Net change in repurchase agreements | (5,216) | | | (1,348) | | | 1,119 | |
Net change in FHLB and other borrowings | (102,333) | | | 102,333 | | | — | |
| | | | | |
Issuance of subordinated debt | — | | | — | | | 30,000 | |
Payment of subordinated debt issuance costs | — | | | — | | | (552) | |
Issuance of senior term loan | — | | | 10,000 | | | — | |
| | 2023 | | | 2023 | | 2022 | | 2021 |
Payment of senior debt issuance costs | |
Principal payments on senior term loan | |
Preferred stock redemption | |
| Common stock options exercised | |
Common stock options exercised | |
Common stock options exercised | |
Withholding cash issued in lieu of restricted stock | |
Cash dividends paid on common stock | |
Cash dividends paid on preferred stock | |
Redemption of noncontrolling interest | |
Issuance of subsidiary membership units | |
Stock purchase from noncontrolling interest | |
Net cash from financing activities | |
| Net change in cash and cash equivalents | |
Net change in cash and cash equivalents | |
Net change in cash and cash equivalents | |
Cash and cash equivalents, beginning of period | |
Cash and cash equivalents, end of period | |
| Cash payments for: | |
Cash payments for: | |
Cash payments for: | |
Interest on deposits, repurchase agreements and borrowings | |
Interest on deposits, repurchase agreements and borrowings | |
Interest on deposits, repurchase agreements and borrowings | |
Income taxes | |
| Business combination non-cash disclosures: | Business combination non-cash disclosures: | |
Assets acquired in business combinations (net of cash received) | $ | 87,722 | | | $ | 3,389 | | | $ | 0 | |
Business combination non-cash disclosures: | |
Business combination non-cash disclosures: | |
Assets acquired in business combination, net of cash acquired | |
Assets acquired in business combination, net of cash acquired | |
Assets acquired in business combination, net of cash acquired | |
Liabilities assumed in business combination | Liabilities assumed in business combination | 148,731 | | | 855 | | | 0 | |
| Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | |
Supplemental disclosure of cash flow information: | |
Supplemental disclosure of cash flow information: | |
Fair value of noncontrolling interests at acquisition date | |
Fair value of noncontrolling interests at acquisition date | |
Fair value of noncontrolling interests at acquisition date | |
Loans transferred to other real estate owned | Loans transferred to other real estate owned | $ | 800 | | | $ | 115 | | | $ | 1,369 | |
Employee stock-based compensation tax withholding obligations | 35 | | | 57 | | | 161 | |
Change in unrealized holding gains (losses) on securities available-for-sale | |
Restricted stock units vested | Restricted stock units vested | 49 | | | 10 | | | 1 | |
Common stock converted from subordinated debt | 0 | | | 1,000 | | | 15,965 | |
Initial recognition of operating lease right-of-use assets | 0 | | | 12,935 | | | 0 | |
Initial recognition of operating lease liabilities | 0 | | | 15,659 | | | 0 | |
Common stock issued related to Paladin acquisition | 240 | | | 0 | | | 0 | |
Cash payments for: | |
Interest on deposits, repurchase agreements and borrowings | $ | 12,271 | | | $ | 22,970 | | | $ | 17,277 | |
Income taxes | 11,966 | | | 3,962 | | | 191 | |
Tax withholding obligations on restricted stock units issued | |
Creation of servicing assets from loan sales | |
Loans transferred to loans held-for-sale | |
Common stock issued related to acquisitions | |
Impact of adopting ASC 326, net of tax | |
See Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Business and Organization
The CompanyMVB Financial Corp. is a financial holding company and was organized in 2003 as a West Virginia corporation in 2003. MVBthat operates principally through its wholly-owned subsidiary, the Bank.MVB Bank, Inc. (the “Bank”). The Bank’s consolidated subsidiaries include MVB Edge Ventures, LLC (“Edge Ventures”), Paladin Fraud, LLC (“Paladin Fraud”) and MVB Insurance, LLC, (“MVB CDC, Chartwell,Insurance”). The Bank owns a controlling interest in Trabian Technology, Inc. (“Trabian”). Edge Ventures wholly-owns Victor Technologies, Inc. (“Victor”) and MVB Technology, LLC ("MVB Technology"). The Bank also owns an equity method investment in Intercoastal Mortgage Company, LLC (“ICM”) and MVB Financial Corp. owns equity method investments in Warp Speed Holdings, LLC (“Warp Speed”) and Ayers Socure II, LLC (“Ayers Socure II”). MVB Financial's consolidated subsidiaries also includes SPE PR, LLC ("MVB-PR").
Through our professional services entities, which include Paladin Fraud and MVB Technology.Trabian, we provide consulting solutions to assist Fintech and corporate clients in building digital products and meeting their fraud defense needs.
MVB conductsIn February 2023, we completed the sale of the Bank’s wholly-owned subsidiary, ProCo Global, Inc. (“Chartwell,” which does business under the registered trade name Chartwell Compliance). In May 2023, we entered into an agreement with Flexia Payments, LLC ("Flexia," in which Edge Ventures owned a controlling interest), to facilitate the divestiture of our interests in the ongoing business of Flexia. Refer to Note 25 – Acquisitions and Divestitures.
We conduct a wide range of business activities through the Bank, primarily CoRecommercial and retail (“CoRe”) banking services, as well as Fintech banking. The Company also continues to be involved in new innovative strategies to provide independent banking to corporate clients throughout the United States by leveraging recent investments in Fintech. MVB considers Fintech companies as those entities that use technology to electronically move funds.
Since the formation of the Bank, the Company has acquired a number of financial institutions and other financial services businesses. Future acquisitions and divestitures will be consistent with the Company’s strategic direction. The Company's most recent acquisition and divestiture activity includes the following:
| | | | | |
l | In September 2019, the Company acquired Chartwell, based from Bethesda, MD. Chartwell provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions. Chartwell has expanded its services to both Fintech clients and banks, in coordination with MVB Bank’s current compliance officers, to help create and implement strategy and provide expert compliance resources with respect to new client due diligence. |
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l | In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit Community Bank, Inc. (“Summit”), a subsidiary of Summit Financial Group, Inc., pursuant to which Summit purchased certain assets and assumed certain liabilities of 3 Bank branch locations in Berkeley County, WV, and 1 Bank branch location in Jefferson County, WV. The Company closed this transaction in April 2020. |
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l | In March 2020, the Bank entered into an Agreement with Intercoastal Mortgage Company, a Virginia corporation (“Intercoastal”), and each of H. Edward Dean, III, Tom Pyne and Peter Cameron, providing for the combination of the Bank's mortgage origination services and Intercoastal. The transaction closed in July 2020. On the closing date, Intercoastal converted into a Virginia limited liability company and the Bank contributed certain of its assets and liabilities associated with its mortgage operations to Intercoastal as a capital contribution, in exchange for common units of a new entity, ICM, representing 47% of the common interest of ICM, as well as $7.5 million in preferred units. The Company recognizes its ownership interest in ICM as an equity method investment. |
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l | In April 2020, the Bank entered into a Purchase and Assumption Agreement with the Federal Deposit Insurance Corporation (“FDIC”), as receiver for The First State Bank, Barboursville, WV, providing for the assumption by the Bank of certain liabilities and the purchase by the Bank of certain assets of First State. First State depositors automatically became depositors of the Bank and, subject to the insurance limitations, deposits will continue to be insured by the FDIC without interruption. In the Agreement, the Bank agreed to pay no deposit premium and to acquire the assets at a discount to book value. The Bank also acquired 3 branch locations in Barboursville, Teays Valley and Huntington, WV. |
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l | In April 2020, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin, LLC, a Washington limited liability company. |
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l | In August 2020, MVB Technology entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware corporation doing business as Grand. Pursuant to the Asset Purchase Agreement, MVB Technology acquired substantially all the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of MVB’s note with Invest Forward. |
Business Overview
Commercial and RetailCoRe Banking
The Company’s primary business activities, which are conducted through the Bank and its subsidiaries, are primarily CoRe banking. The Bank offers itsWe offer our customers a full range of products and services including:
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l | Various demand deposit accounts, savings accounts, money market accounts and certificates of deposit; |
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l | Commercial, consumer and real estate mortgage loans and lines of credit; |
l | Debit cards; |
l | Cashier’s checks; |
l | Safe deposit rental facilities; and |
l | Non-deposit investment services offered through an association with a broker-dealer.broker-dealer; and |
l | Insurance and investment services. |
Fintech Banking
In addition to its CoRe banking activities, the Company is also involved inWe provide innovative strategies to provide independent banking toand corporate clients throughout the United States by leveraging recent investments in Fintech. TheStates. Our dedicated Fintech sales team specializes in providing banking services to corporate Fintech clients, with an overarchinga primary focus on operational risk management and compliance. Managing banking relationships with clients in the payments, digital savings, cryptocurrency,digital assets, crowd funding, lottery and gaming industries is complex, from both an operational and regulatory perspective. We believe that the complexity of serving these industries causes them to be underserved with quality banking services and provides us with a significantly expanded pool of potential customers. When serviced in a safe and efficient manner, we believe these industries provide a source of stable, lower cost deposits and noninterest, fee-based income. We thoroughly analyze each industry in which our customers operate, as well as any new products or services provided, from both an operational and regulatory perspective.
COVID-19 PandemicEdge Ventures
During 2020, economies throughoutEdge Ventures, a wholly-owned subsidiary of the worldBank, was created as a management company to provide oversight, alignment and structure for our Fintech companies and allocate resources to help incubate venture businesses and technologies acquired and developed by us.
Victor
Victor is a wholly-owned subsidiary of Edge Ventures. Victor was formed to develop technology to make it faster and easier to launch and scale a broad spectrum of Fintech solutions for the gaming, payments, banking-as-a-service and digital asset sectors.
Within a matter of weeks, Fintech developers can build solutions to manage and move money with developer-friendly application programming interfaces. Banks can onboard and manage more programs with Victor’s tailored due diligence, risk assessment and oversight workflow tools. Recognizing the complexity of the Fintech ecosystem, Victor also supports seamless integration with a proven network of value-added technology and service providers.
Professional Services
Paladin Fraud
Paladin Fraud is a wholly-owned subsidiary of the Bank. Paladin Fraud provides an extensive and customizable suite of fraud prevention services for merchants, credit agencies, Fintech companies and other vendors to help clients and partners defend against threats.
Trabian
The Bank owns an 80.8% interest in Trabian. Trabian builds digital products and web and mobile applications for forward-thinking community banks, credit unions, digital banks and Fintech companies. Consistent with the Bank's mission to pursue technology to accelerate community finance, Trabian has created technology platforms that have been severely disrupted as a resultinstrumental to the success of the outbreakmany of COVID-19. 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. The extent to which the COVID-19 pandemic impacts the Company’s future operating results will depend on future developments, which are highly uncertain and cannot be predicted.today’s leading Fintech companies.
Basis of Presentation
The financial statements are consolidated to include the accounts of the Company,MVB and its subsidiary, MVBsubsidiaries, including the Bank and the Bank’s wholly-owned subsidiaries. TheseIn our opinion, the accompanying consolidated financial statements have been preparedcontain all normal recurring adjustments necessary for a fair presentation of our financial statements for interim periods in accordance with U.S. GAAP and practicesaccounting principles generally accepted in the banking industry.United States of America (“U.S. GAAP”) as presented through the Financial Accounting Statement Board's ("FASB") Accounting Standards Codification ("ASC") and with rules and interpretive guidance of the Security and Exchange Commission ("SEC"). All significant inter-companyintercompany accounts and transactions have been eliminated in the consolidated financial statements.
In preparingWholly-owned investments or investments in which we have a controlling financial interest, whether majority owned or in certain circumstances a minority interest, are required to be consolidated into our financial statements. We evaluate investments in entities on an ongoing basis to determine the need to consolidate.
The Bank owns an 80.8% interest in Trabian, which grants us a controlling interest. Accordingly, we are required to consolidate 100% of Trabian within the consolidated financial statements, management makes estimates and assumptions that affect the reported amountsstatements. The remaining interests of assets and liabilities and disclosure of contingent assets and liabilities at the date of theTrabian are accounted for separately as noncontrolling interest within our consolidated financial statementsstatements. Noncontrolling interest represents the portion of ownership and profit or loss that is attributable to the reported amountsminority owners of revenues and expenses for the period. Estimates are based on known facts and circumstances and actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to determination of the allowance for loan losses, purchased credit impaired loans, derivative instruments, goodwill and deferred tax assets and liabilities.these entities.
Unconsolidated investments where the Company haswe have the ability to exercise significant influence over the operating and financial policies of the respective investee are accounted for using the equity method of accounting; thoseaccounting. Those investments that are not consolidated or accounted for using the equity method of accounting are accounted for under cost or fair value accounting. For these investments accounted for under the equity method, the Company records itswe record our investment in non-consolidated affiliates and the portion of income or loss in equity in earnings of non-consolidated affiliates. The CompanyWe periodically evaluatesevaluate these investments for impairment. As of December 31, 2020, the Company holds 12023, we hold three equity method investment.investments. See Note 5 – Equity Method Investments for further information.
CertainPreparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the 2019consolidated financial statements and 2018accompanying notes. These estimates are based upon the best available information and actual results could differ from those estimates. An estimate that is particularly significant to the consolidated financial statements relates to the determination of the allowance for credit losses (“ACL”).
In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the 2020 financial statement presentation and there was no change to net income.current presentation.
The Company hasWe have evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.
Cash and Cash Equivalents
Cash equivalents include cash on hand, non-interest and interest-bearing deposits in banks and interest-earning deposits. Interest-earningwith banks. Interest-bearing deposits with original maturities of 90 days or less are considered cash equivalents. Net cash flows are reported in the consolidated statement of cash flows for loans, deposits and short-term borrowing transactions. As of December 31, 2023 and December 31, 2022 there was no restricted cash.
Investment Securities
Investment securities at the time of purchase are classified as one of the following:
Available-for-Sale Securities - Includes debt that will be held for indefinite periods of time. These securities may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and yield of alternative investments. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated income tax effect. The income tax effect is released when the securities are sold.
Equity Securities - Includes equity securities that are adjusted to fair value on a monthly basis, with the change in value recorded directly on the income statement. The Company hasWe have elected to measure the equity securities without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for underlying transactions for identical or similar investments of new issues.
The amortized cost of investment in debt securities is adjusted for amortization of premiums and accretion of discounts, computed by a method that results in a level yield. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security.
SecuritiesOur investment portfolio includes securities that are periodically reviewed for other-than-temporary impairment. Forin an unrealized loss position as of December 31, 2023. We evaluate available-for-sale debt securities management considersto determine whether the presentunrealized loss is due to credit-related factors or non-credit-related factors. When determining the ACL on securities, we consider 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, our ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, of future cash flows expected to be collected are less thanwhether or not the security’s amortized cost basis (the difference defined assecurity has been downgraded by a rating agency and whether or not the credit loss), the magnitude and durationfinancial condition of the decline, the reasons underlying the decline and the Company’s intentsecurity issuer has severely deteriorated.
When debt securities are in an unrealized loss position, we first assess whether we intend to sell, the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more-likely-than-not that it will not be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. Debt securities that do not meet the chargeaforementioned criteria are evaluated to earningsdetermine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is limitedless than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that an ACL exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount of credit loss. Any remaining difference betweenthat the fair value andis less than the amortized cost (the difference defined as the non-credit portion)basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of applicable taxes. A declineincome. Changes in value that is considered to be other-than-temporary isthe allowance are recorded as aprovision for, or reversal of, credit loss within noninterest incomeexpense. Losses are charged against the ACL when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Securities are charged-off against the ACL or, in the consolidated statementabsence of income.any ACL, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
The Bank is a member of the FHLBFederal Home Loan Bank (“FHLB”) of Pittsburgh, and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of December 31, 20202023 and 2019,2022, the Bank holds $2.8$2.1 million and $15.0$10.0 million of stock, respectively, which is included in accrued interest receivable and other assets. The stock is bought from and sold to the FHLB based upon its $100 per share par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated by management.management for impairment. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a)(i) a significant decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted; (b)(ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c)(iii) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d)(iv) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.
Management considered that the FHLB’s regulatory capital ratios have improved in the most recent quarters, no issues of liquidity appears adequate,are evident, new shares of FHLB stock continue to exchange handstrade at the $100 per share par value and the FHLB has repurchased shares of excess capital stock from its members during 20202023 and 2019.2022.
Loans and Allowance for LoanCredit Losses
Beginning January 2023, our methodology for determining the ACL is based on the requirements of ASC 326. Loans are stated at the amount of unpaid principalamortized cost basis reduced by an allowance for loan losses.ACL. Loans are considered non-accrual when scheduled principal or interest payments are 90 days past due. Interest income on loans is recognized on an accrual basis. The allowance for loan lossesACL is maintained at a level deemed adequate to absorb probableforecasted losses inherent inover the remaining life of each loan within the portfolio. The CompanyWe consistently appliesapply a quarterly loan review process to continually evaluate loans for changes in credit risk. This process serves as the primary means by which the Company evaluateswe evaluate the adequacy of the allowance for loan losses,ACL, and is based upon periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are impaired.individually analyzed using either collateral based or cash flow based valuation methodology. The
general component covers all loans that are not impaired,individually analyzed. These loans are measured on a collective basis and is based upon historical loss experience adjusted for qualitative factors.
The Company allocates the allowance based on the factors described below, which conform to the Company’s loan classification policy. In reviewing risk within the loan portfolio, managementare pooled with other loans that share similar characteristics. Management has determined there to be several different portfolio segments sharing similar risk categoriescharacteristics within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) residential real estate loans; (ii) commercial and commercial real estate secured loans; (iii) home equity loans; and (iv) consumer and other loans. Factors considered in this process include general loan terms, collateral and availability of historical data to support the analysis. Historicalanalysis, with the initial segmentation based on Call Codes.
The ACL is calculated for each segment using a discounted cash flow methodology at the loan level, with loss percentagesrates, prepayment assumptions and curtailment assumptions driven by each loan’s collateral type. The sub-prime automobile loan segment uses a remaining life methodology using straight-line amortization over the remaining life of the portfolio, due to unique characteristics of this pool. Through a loss driver analysis performed by a third-party vendor, a forecasting model that correlates specific economic factors with credit quality of each loan segment was developed. Peer bank data was identified and used in this process, as we did not have adequate quarterly loan data to analyze over the look-back period to 2007. After the third-party analyzed both historical peer loan data and various economic factors over the same look-back period, two economic variables, national GDP and national unemployment rate, were identified as showing the most correlation to the performance of the loans within each of the pooled segments. Within each loan segment forecast, these two economic variables are forecasted based on expected trends over a 12-month period, before reverting to the long-term average quarterly rate of each variable over the next 12-month period, then maintains this quarterly average for the life of the loan segment. The third-party vendor uses these variables to produce an estimated probability of default for each quarter period and, through a proprietary model, also calculates a loss given default factor to estimate overall losses. The vendor also prepares benchmark studies for prepayment and curtailment rate estimates for each loan category are calculated and usedsegment, as the basiswell as recovery lag estimates. With all these factors combined, a forecasted allocation rate is produced for calculating allowance allocations. each loan segment.
Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages.forecasting models. These factors are then added to the historicalforecasted allocation percentages to get the adjusted factor to be applied to non-classifiedthe pooled loans on a weighted basis, by risk grade.basis. The following qualitative factors are analyzed:
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l | Lending policies and procedures |
l | Nature and volume of the portfolio |
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l | Experience and ability of lending management and staff |
l | Volume and severity of problem credits |
l | Quality of the loan review system |
l | Conclusions of loan reviews, audits and exams |
l | National, state, regional and local economic trends and business conditions |
l | General economic conditions |
l | Unemployment rates |
l | Inflation / Consumer Price Index |
l | Value of the underlying collateral |
l | ExistenceConcentrations of credit and effectchanges in the levels of any creditsuch concentrations |
l | ConsumerEconomic and business conditions & consumer sentiment |
l | Other external factors |
The Company analyzes itsWe analyze our loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.our ACL.
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 Special Assets Review Committee (“SARC”), 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 offreversed against interest income 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 payments due. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or SARC.
Loans are consideredmoved to be impairedindividual analysis 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,no longer exhibits similar risk characteristics as its pool, and we analyze the loan individually on a collateral value and the probability of collecting scheduled principal and interest payments when due.or cash flow basis. 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 CompanyWe also separately evaluates individualevaluate consumer loans for impairment.individual analysis. Loans are identified individually by monitoring the delinquency status of the Bank’s portfolio. Once identified, the Bank’s ongoing communications with the borrower allow evaluation of the significance of the payment delays and the circumstances surrounding the loan and the borrower. When Bank management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
To estimate the liability for off-balance sheet credit exposures, management analyzes the portfolios of unfunded commitments based on the same segmentation used for the ACL calculation. The estimated funding rate for each segment was derived from a funding rate study created by a third-party vendor, which analyzed funding of various loan types over time to develop industry benchmarks at the call report code level. Once the estimated future advances were calculated, the allocation rate applicable to that portfolio segment was applied in the same manner as those used for the ACL 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.
Once the determination has been made that a loan is impaired,to be individually analyzed, the amount of the impairmentpotential credit loss is measured using one of 3two valuation methods: (a)(i) 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)(ii) 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 impairmentindividual analysis status is made on a quarterly basis.
The Company defersWe defer loan origination and commitment fees and direct loan origination costs and the net amount is amortized as an adjustment of the related loan’s yield.
Purchased Credit Impaired Loans Held-for-Sale
The Company may purchase individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These PCI loans are recorded at the amount paid, such that there is no carryover of the seller's allowance for loan losses.
After acquisition, lossesLoans originated or purchased with the intent to sell are recognizeddesignated as held-for-sale. Loans held-for-sale are carried at fair value, which is determined using quoted secondary market prices or investor commitments when possible. 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 an increase inother market participants. If the allowance forfair value at the reporting date exceeds the amortized cost of a loan, losses. Such PCI loansthe loan is reported at amortized cost. Loans are accounted for individually or aggregated into pools of loansoccasionally transferred between the held-for-sale and held-for-investment classifications based on common risk characteristics, such as credit score, loan typemanagement’s intent 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.
Troubled Debt Restructurings
A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. The determination of whether a concession has been granted includes an evaluation of the debtor’s ability to access funds at ahold or sell loan, which may be impacted by secondary market rate for debt with similar risk characteristics and amongconditions, loan credit quality or other things, the significance of the modification relative to unpaid principal or collateral value of the debt and/or the significance of a delay in the timing of payments relative to the frequency of payments, original maturity date or the expected duration of the loan. The most common concessions granted generally include one or more modifications to the terms of the debt such as a reduction in the interest rate for the remaining life of the debt, an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reduction of the unpaid principal or interest. All TDRs are considered impaired loans.factors.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation, while land is carried at cost. Depreciation expense is computed for financial reporting by the straight-line-method based on the estimated useful lives of assets, which range from seven to 40 years onfor buildings, three to ten10 years onfor furniture, fixtures and equipment, three years for software and lesser of useful life or lease term for leasehold improvements.
Software Development
Software that we develop for internal use may be capitalized when costs are incurred after the preliminary project stage has ended and the application development stage begins. The application development stage includes designing, coding, installing and testing the software. Once the software has been implemented, costs for training and maintenance are expensed as incurred. Capitalized internal use software development costs are included in premises and equipment in the accompanying consolidated balance sheets.
Bank-Owned Life Insurance
Bank-owned life insurance represents life insurance on the lives of certain Companyof our employees who have provided positive consent allowing the Companyus to be the beneficiary of such policies. These policies are recorded at their cash surrender value or the amount that can be realized upon surrender of the policy. Income from these policies is not subject to income taxes and is recorded as noninterest income.
Equity Method InvestmentInvestments
Investments in companies in which the Company haswe have significant influence over the operating and financing decisions are accounted for using the equity method of accounting. Determining if we have significant influence requires judgement based on the facts and circumstances of each investment including level of ownership, legal structure and other qualitative factors which impact our ability to influence the investee's operations, and we review the facts and circumstances each reporting period to determine if we still have significant influence. Equity method investments are recorded initially at cost including costs to acquire the investment. These investments are included in the equity method investmentinvestments line item on the consolidated balance sheets. The Company recognizes itsWe recognize our proportionate share of the investee's profits and losses in the equity method investmentinvestments income line item with corresponding adjustmentsitem. At the time of investment, we may make a one-time election to record our proportionate share of earnings of the investee on a lag of no more than three months. This election may be made on an investment by investment basis. We review equity method investments for impairment if there are events or changes in circumstances which indicate the carrying amount of the investment line item.
might not be recoverable.
Intangible Assets and Goodwill
Goodwill is the purchase premium after adjusting for the fair value of net assets acquired. Goodwill is not amortized but is reviewed for potential impairment at least annually at the reporting unit level. In addition to theon an annual impairment evaluation, the Company evaluates for impairmentbasis, or when events or circumstances indicate that it is more likely than not ana potential impairment, loss has occurred.at the related reporting unit level. The Company performs its annual impairment test during the fourth quarter. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test discussed below. The Company assesses qualitative factors to determine whether it is more likely than not thatinvolves comparing the fair value of athe reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is less than itsconsidered not impaired; however, if the carrying amount, including goodwill. Examples of qualitative factors include: economic conditions; industry and market considerations; increases in labor or other costs; overall financial performance such as negative or declining cash flows; relevant entity-specific events such as changes in management, key personnel, strategy or customers; and regulatory or political developments.
The Company early adopted ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Topic 350, Intangibles—Goodwill and Other (Topic 350) and did so for the period ended December 31, 2020. This guidance simplified the accounting for goodwill impairment for all entities by requiring impairment charges to be based on Step 1value of the previous accounting guidance’s two-step impairment test under ASC Topic 350. Under the new guidance, if a reporting unit’s carrying amountunit exceeds its fair value, the entity will record an impairment charge based on that difference. Themust be recorded. An impairment charge will be limited toloss recognized cannot exceed the amount of goodwill allocatedassigned to thata reporting unit. TheAn impairment loss establishes a new standard eliminatesbasis in the requirement to calculate agoodwill and subsequent reversals of goodwill impairment charge using Step 2, which involved calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The standard doeslosses are not change the guidance on completing Step 1 of the goodwill impairment test. Entities are still be able to perform optional qualitative goodwill impairment assessment before determining whether to proceed to the quantitative step of determining whether the reporting unit’s carrying amount exceeds it fair value.permitted under applicable accounting guidance.
For intangible assets subject to amortization, the recoverability test is performed when a triggering event occurs and an impairment loss is recognized if the carrying value of the intangible asset exceeds fair value and is not recoverable. The carrying value of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result
from the use of the asset. Intangible assets deemed to have indefinite useful lives are not subject to amortization. An impairment loss is recognized if the carrying value of the intangible asset with an indefinite life exceeds its fair value.
Derivative Instruments
Interest Rate Lock Commitments and Hedges
The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 days to 120 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. The correlation between the rate lock commitments and hedges is very high due to their similarity. As a result of these strategies, the Company limits the exposure of losses with these arrangements and will not realize significant gains related to its rate lock commitments due to changes in interest rates. For loans not originated on a best effort basis, the Company also uses mortgage-backed security hedges and pair-offs to mitigate interest rate risk by entering into securities and mortgage-backed securities trades with brokers.
The fair value of rate lock commitments and hedges is not readily ascertainable with precision because rate lock commitments and hedges are not actively traded in stand-alone-markets. The Company determines the fair value of rate lock commitments and hedges by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. Fair value changes are recorded in noninterest income in the Company’s consolidated statement of income. At December 31, 2020 and 2019, the balance of interest rate lock commitments was $0 and $1.7 million, respectively. There were 0 forward sales commitments as of December 31, 2020 and 2019.
Interest Rate Swaps
Beginning in 2015, the CompanyWe entered into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking clients. The Company mitigatesWe mitigate this risk by entering into equal and offsetting interest rate swap agreements with highly rated third-party financial institutions. The interest rate swap agreements are free-standing derivatives and
are recorded at fair value on the Company’sour consolidated balance sheet. Fair value changes are recorded in noninterest income in the Company’sour consolidated net income statement. At December 31, 2020 and 2019, the fair value of interest rate swap agreements was $13.8 million and $5.7 million, respectively.
Fair Value HedgeHedges
The CompanyWe entered into an interest rate swapportfolio layer method fair value swaps, designated as a fair value hedgehedging instruments, to mitigate the effect of changing interest rates on the fair values of certain designated fixed-rate loans and available for saleavailable-for-sale securities. This involves the receipt of variable amounts from a counterparty in exchange for the Companyus making fixed payments over the life of the agreements without the exchange of the underlying notional amount. The gain or loss onUnder the derivative as well as the offsetting gain or loss onportfolio layer method, the hedged item attributable to the hedged riskitems are recognized in earnings. The Company entered into a pay-fixed/receive-variable interest rate swap in January 2019 with a notional amount of $23.0 million and $30.0 million at December 31, 2020 and 2019, respectively, which was designated as a hedged layer of closed portfolios of financial loans and municipal bonds that are anticipated to remain outstanding for the designated hedged periods. Adjustments are made to record the swaps at fair value hedge associatedon the consolidated balance sheets, with the Company’s fixed-rate loan program and certain available for sale securities. At December 31, 2020 and 2019,changes in fair value recognized in interest income. The carrying values of the fair value ofswaps on the consolidated balance sheets are also adjusted through interest rate swap hedge was $0.1 millionincome and $0.4 million, respectively.other comprehensive income, based on changes in fair value attributable to changes in the hedged risk.
Mortgage Servicing RightsEmbedded Derivatives
Mortgage servicing rights (“MSRs”)We enter into various contracts through the normal course of business and occasionally a contract may include terms and conditions that create an embedded derivative. An embedded derivative may occur even though the purpose of the contract is not intended to be a derivative contract. Components of a contract should be assessed to determine if they meet the definition of a derivative. If it does, we must then assess whether the embedded derivative is clearly and closely related to its host instrument. If the derivative is not clearly and closely related to the host contract, the embedded derivative must be separated from the host instrument and accounted for as a separate derivative.
Servicing Assets
Servicing assets are recorded when the Bank sells mortgage loans and retains the servicing on those loans. On a monthly basis, MVB trackswe track the amount of mortgage loans that are sold with servicing retained. A valuation is done toWe determine the MSRsservicing rights value, which is then recorded as an asset and amortized over the period of estimated net servicing revenues. The balance of MSRs isservicing assets are evaluated for impairment quarterly, and was determined not to be impaired at December 31, 2020 or 2019.quarterly. Servicing loans for others generally consists of collecting mortgage payments from borrowers, maintaining escrow accounts, remitting payments to third party investors and, when necessary, foreclosure processing. Serviced loans are not included in the Consolidated Balance Sheets.consolidated balance sheets. At December 31, 20202023 and 2019,2022, the value of MSRsservicing assets was $2.9$1.8 million and $0.3$1.6 million, respectively.respectively, and is included in accrued interest receivable and other assets in the consolidated balance sheets.
We have the ability to sell the guaranteed portion of loans originated through the SBA's 7(a) program. All SBA loan sales are executed on a servicing retained basis. We are required to retain a minimum of 10% of the principal balance in accordance with SBA regulations. Any gain on sale recognized as income is the sum of the premium on the guaranteed portion of the loan and the fair value of the servicing assets recognized, less the discount recorded on the unguaranteed portion of the loan that is retained. The remaining unguaranteed portion of the loan is presented net of the discount, which is recognized as interest income over the underlying loan's remaining term, using the effective interest method.
Foreclosed Assets Held for Resale
Foreclosed assets held for resale acquired in satisfaction of mortgage obligations and in foreclosure proceedings are recorded at fair value less estimated selling costs at the time of foreclosure, establishing a new cost basis, with any valuation adjustments charged to the allowance for loan losses.ACL. In subsequent periods, foreclosed assets are recorded at the lower of cost or fair value less any costs to sell. Costs relating to improvement of the property are capitalized, while holding costs of the property are charged to other loan origination and maintenance expense in the period incurred. Subsequent declines in fair value and gains or losses on sale are
recorded in other noninterest expense. At December 31, 2020expense and 2019,included in accrued interest receivable and other assets in the Company held other real estate of $5.7 million and $1.4 million, respectively. These amounts include the foreclosed assets that were acquired from our acquisition of First State.consolidated balance sheet.
Fair Value Measurements
Accounting standards require that the Companywe 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.
The following summarizes the methods and significant assumptions used by the Companywe use in estimating itsour fair value disclosures for financial instruments.
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Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
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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. |
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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. |
Transfers of assets and liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs.
Revenue Recognition
The Company recordsWe record revenue from contracts with customers in accordance with ASU 2014-09,ASC 606, Revenue from Contracts with Customers (“TopicASC 606”). Under TopicASC 606, the Companywe must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the Company satisfieswe satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’sOur primary sources of revenue are derived from interest and fees earned on loans, investment securities and other financial instruments that are not within the scope of TopicASC 606. The Company hasWe have evaluated the nature of itsour contracts with customers and determined that further disaggregation ofour revenue from contracts with customers into more granular categories beyond what is presentedappropriately disaggregated in the Consolidated Statementsour consolidated statement of Incomeincome is not currently necessary. The CompanyWe generally fully satisfies itssatisfy our performance obligations on itsour contracts with customers as services are rendered and the transaction prices are typically fixed within each contract, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying TopicASC 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Payment Card and Service Charge Income
Payment card and service charge income are comprised of service charges on accounts and interchange and debit card transaction fees. Service charges on accounts consist of account analysis fees, monthly service fees, check orders and other account related fees. The Company’sOur performance obligation for account analysis fees and monthly service fees is generally satisfied and the related revenue recognized, over the period in which the service is provided. Check orders and other account related fees are largely transactional based and therefore, the Company’sour performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Interchange and debit card transaction fees are primarily comprised of interchange fees earned whenever the Bank’s debit and credit cards are processed through card payment networks, such as Visa.networks. The Bank’s performance obligation for debit card and interchange income is generally satisfied, and the related revenue recognized, on a transactional basis. Payment is typically received immediately or in the following month. The CompanyWe also entersenter into interchange arrangements with minimum commitment fees. Minimum commitment fees are recognized ratably, until such time that minimum commitment fees are exceeded or expected to be
exceeded.
Compliance and Consulting Income
Compliance and consulting income is comprised of consulting revenue generated by ChartwellPaladin Fraud and Paladin Fraud. Chartwell provides integrated regulatory compliance, state licensing, financial crimes prevention and enterprise risk management services that include consulting, outsourcing, testing and training solutions.Trabian. Paladin Fraud provides an extensive and customizable suite of fraud prevention services for merchants, credit agencies, Fintech companies and other vendors to help clients and partners defend against threats. ChartwellTrabian provides consulting for the development of online and mobile banking platforms and digital products for Fintech companies. Paladin Fraud and Trabian account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The services promised are then evaluated in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. Both ChartwellPaladin Fraud and Paladin Fraud'sTrabian's services included in itsour contracts are distinct from one another. The transaction price for each contract is determined based upon the consideration expected to be received for the distinct services being provided under the contract. Revenue is recognized as performance obligations are satisfied and the customer obtains control of the goods or services provided. In determining when performance obligations are satisfied, factors considered include contract terms, payment terms and whether there is an alternative future use of the product or service. Consulting engagements may vary in length and scope, but will generally include the review and/or preparation of regulatory filings, business plans, financial models and other risk management services to customers within financial industries. Revenue from consulting services is recognized on a pro rata basis based upon completion of deliverablesactual labor hours completed as outlined incompared to budgeted labor hours for the consulting agreement.deliverable.
Other Operating Income
Other operating income is primarily comprised of ATM fees, wire transfer fees, travelers check fees, revenue streams such as safe deposit box rental fees and other miscellaneous service charges. ATM fees, wire transfer fees and travelers check fees are primarily generated when a Bank’s cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Bank determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks and other services. The Bank’s performance obligations for fees and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.rendered. Payment is typically received immediately or in the following month. The Bank’s performance obligation for the gains and losses on sales of other real estate owned is satisfied, and the related revenue recognized, after each sale of other real estate owned is closed.
Marketing Costs
Marketing costs are expensed as incurred. Marketing expense was $1.1 million, $1.3 million and $1.1 million for 2020, 2019 and 2018, respectively.
Stock-Based Compensation
Compensation cost is recognized for stock options, performance-based restricted stock units ("PRSUs") and restricted stock units (“RSUs”) issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Earnings Per 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 under the Company’s 2003 and 2013 Stock Incentive Plans and the conversion of preferred stock and subordinated debt, if dilutive.
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| | For the years ended |
| | December 31, |
(Dollars in thousands except shares and per share data) | | 2020 | | 2019 | | 2018 |
Numerator for basic earnings per share: | | | | | | |
Net income from continuing operations | | $ | 37,411 | | | $ | 26,564 | | | $ | 12,003 | |
Less: Dividends on preferred stock | | 461 | | | 479 | | | 489 | |
Net income from continuing operations available to common shareholders - basic | | 36,950 | | | 26,085 | | | 11,514 | |
Net income from discontinued operations available to common shareholders - basic and diluted | | 0 | | | 427 | | | 0 | |
Net income available to common shareholders | | $ | 36,950 | | | $ | 26,512 | | | $ | 11,514 | |
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Numerator for diluted earnings per share: | | | | | | |
Net income from continuing operations available to common shareholders - basic | | $ | 36,950 | | | $ | 26,085 | | | $ | 11,514 | |
Add: Dividends on preferred stock | | 0 | | | 0 | | | 489 | |
Add: Interest on subordinated debt (tax effected) | | 0 | | | 0 | | | 753 | |
Net income available to common shareholders from continuing operations - diluted | | $ | 36,950 | | | $ | 26,085 | | | $ | 12,756 | |
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Denominator: | | | | | | |
Total average shares outstanding | | 11,821,574 | | | 11,713,885 | | | 11,030,984 | |
Effect of dilutive convertible preferred stock | | 0 | | | 0 | | | 489,625 | |
Effect of dilutive convertible subordinated debt | | 0 | | | 0 | | | 837,500 | |
Effect of dilutive stock options and restricted stock units | | 266,532 | | | 330,782 | | | 363,894 | |
Total diluted average shares outstanding | | 12,088,106 | | | 12,044,667 | | | 12,722,003 | |
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Earnings per share from continuing operations - basic | | $ | 3.13 | | | $ | 2.22 | | | $ | 1.04 | |
Earnings per share from discontinued operations - basic | | $ | 0 | | | $ | 0.04 | | | $ | 0 | |
Earnings per common share - basic | | $ | 3.13 | | | $ | 2.26 | | | $ | 1.04 | |
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Earnings per share from continuing operations - diluted | | $ | 3.06 | | | $ | 2.16 | | | $ | 1.00 | |
Earnings per share from discontinued operations - diluted | | $ | 0 | | | $ | 0.04 | | | $ | 0 | |
Earnings per common share - diluted | | $ | 3.06 | | | $ | 2.20 | | | $ | 1.00 | |
For the years ended December 31, 2020, 2019, and 2018, approximately 0.5 million, 0.4 million and 0.3 million options to purchase shares of common stock, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, and minimum pension liability and investment hedges, are reported as a separate component of the equity section of the Consolidated Balance Sheet,consolidated balance sheets, such items, along with net income, are components of comprehensive income.
In 2018, the Company was required to perform a reclassification from AOCI to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Reform Act. The Tax Reform Act included a reduction to the corporate income tax rate from 34 percent to 21 percent effective January 1, 2018. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate, which resulted in a decrease of $0.6 million.
Income Taxes
The amount reflected as income taxes represents federal and state income taxes on financial statement income. Certain items of income and expense, primarily the provision for possible loancredit losses, allowance for losses on foreclosed assets held for resale, depreciation and accretion of discounts on investment securities are reported in different accounting periods for income tax purposes. The CompanyWe and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement basis and income tax bases of assets and liabilities using the
enacted marginal tax rates. Deferred income tax expenses or benefits are based on the changes in the net deferred tax asset or liability from period to period. Deferred tax assets and liabilities are the result of timing differences in recognition of revenue and expense for income tax and financial statement purposes. NaNNo deferred income tax valuation allowance is provided since it is more likely than not that
realization of the deferred income tax asset will occur in future years.
The Company prescribesWe prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be reversed in the first subsequent financial reporting period in which that threshold is no longer met. There is currently 0no liability for uncertain tax positions and 0no known unrecognized tax benefits. With limited exception, the Company’sour federal and state income tax returns for taxable years through 20162019 have been closed for purposes of examination by the federal and state taxing jurisdictions.
Operating Segments
An operating segment is defined as a component of an enterprise that engages in business activities that generates revenue and incurs expense, and the operating results of which are reviewed by the chief operating decision maker in the determination of resource allocation and performance. While the Company’sour chief decision makers monitor the revenue streams of theour various Company’s products and services, operations are managed and financial performance is evaluated on a Company-widecompany-wide basis. The Company hasWe have identified 3three reportable segments: CoRe banking; mortgage banking;Banking, Mortgage Banking and financial holding company.
Business Combinations
U.S. GAAP requires that the acquisition method of accounting, formerly referred to as the purchase method, be used for all business combinations that an acquirer is identified for each business combination. Under U.S. 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. U.S. 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.Financial Holding Company.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered whenwhen: (i) the assets have been isolated from the Company,us, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (iii) the Company doeswe do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
RecentRecently Issued Accounting Pronouncements and Developments
In August 2018, the FASB issued 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 and addition 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 is effective for public business entities for fiscal years ending after December 15, 2020. As ASU 2018-14 only revises disclosure requirements, it did not have a material impact on the Company's 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. Adoption of this standard did not have a material impact on the Company's 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 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 U.S. 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 collected by using an allowance for credit losses. PCI 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. 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. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In that regard, the Company has formed a cross-functional implementation team. The team is working to develop an implementation plan which will include assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. The Company is also in the process of implementing a third-party vendor solution to assist it in the application of this standard. The adoption of this standard could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, it expects that the impact of adoption will be significantly influenced by the composition, characteristics and quality of its loan portfolio, as well as the prevailing economic conditions and forecasts as of the adoption date.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments and certain derivatives, including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments will be effective for the Company on January 1, 2021. The Company does not expect this standard to have a material effect on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. The amendments represent clarification and improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material effect on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional expedients and exceptions for certain contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform. The guidance is effective fromIn December 2022, the FASB issued ASC 2022-06, Deferral of the Sunset Date of Topic 848, which extends the sunset date of issuance untilTopic 848 from December 31, 2022.2022, to December 31, 2024. The guidance permits entities to not apply modification accounting or remeasure lease payments in lease contracts if the changes to the contract are related to the discontinuation of the reference rate. If certain criteria are met, the amendments also allow exceptions to the de-designation criteria of the hedging relationship and the assessment of hedge effectiveness during the transition period. In January 2021, ASU 2021-01 was issued by the FASB and clarifies that certain exceptions in reference rate reform apply to derivatives that are affected by the discounting transition. As of December 31, 2023, all loans and other relevant financial instruments that referenced LIBOR have been transitioned to the SOFR.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The Companyamendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security, and therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot recognize and measure a contractual sale restriction as a separate unit of account and require additional disclosures related to equity securities with contractual sale restrictions. The amendment is effective for fiscal years beginning after December 15, 2023. We do not currently expect these amendments to have a material impact our consolidated financial statements.
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structure Using the Proportional Amortization Method. The amendments allow registrants the option to apply the proportional amortization method to account for all types of investments in tax credit structures if certain conditions are met. Prior to these amendments, the option to use the proportional amortization method was limited to only investments in low-income-housing tax credit structures. Under the proportional amortization method, entities amortize the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognize the net amortization and income tax credits and other benefits in the income statement as a component of income tax expense or benefit. The amendment is
effective for fiscal years beginning after December 15, 2023. We do not currently expect these amendments to have a material impact on our consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segments Disclosures. The amendments are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments clarify circumstances in which an entity can disclose multiple segment measures of profit or loss and provide new segment disclosure requirements for entities with a single reportable segment. The amendments are effective for fiscal years beginning after December 15, 2023. We are currently evaluating the impact these changes may have on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments require disaggregated information about a reporting entity's effect tax rate reconciliation as well as information on income taxes paid. Public business entities will be required to disclose additional information in specified categories with respect to the reconciliation of the effective tax rat to the statutory rate for federal, state, and foreign income taxes. The amendments also require greater detail about individual reconciling items in the rate reconciliation to the extent that the impact of those items exceeds a specified threshold. The amendments are effective for fiscal years beginning after December 15, 2024. We are currently evaluating the impact these changes may have on our consolidated financial statements.
Recently Adopted Accounting Pronouncement
In January 2023, we adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses and ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures all of which clarify codification and correct unintended application of the guidance. Collectively, upon adoption, these updates comprise Accounting Standards Codification Topic 326 Financial Instruments - Credit Losses ("ASC 326"). The new guidance replaces the incurred loss impairment methodology in current U.S. 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 collected by using an ACL. Purchased credit deteriorated (“PCD”) 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 ACL, with such allowance limited to the amount by which fair value is below amortized cost. We formed a cross-functional implementation team. This cross-functional team has completed testing the model and has executed the implementation plan, which included assessment and documentation of processes, internal controls and data sources; model testing and documentation; and system configuration, among other things. We completed the process of implementing a third-party vendor solution to assist us in the application of this standard. Adoption of this pronouncement resulted in an increase in the ACL as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio.
In January 2023, we adopted ASC 326 using the modified retrospective method for loans, leases and off-balance sheet credit exposures. Adoption of this guidance resulted in a $10.0 million increase in the ACL, comprised of increases in the ACL for loans of $8.9 million and the ACL for unfunded commitments of $1.1 million, with $1.2 million of the increase reclassified from the amortized cost basis of PCD financial assets. This increase was offset by $2.1 million related to tax effect, resulting in a cumulative adjustment to retained earnings of $6.6 million. Results for reporting periods beginning January 2023 are presented under ASC 326 while prior period amounts continue to assessbe reported in accordance with the impactincurred loss model. See Note 3 – Loans and Allowance for Credit Losses for further information.
The ACL for the majority of the Bank's loans was calculated using a discounted cash flow methodology applied at a loan level with a one-year reasonable and supportable forecast period and a one-year straight-line reversion period. The Bank’s current ACL fluctuates over time due to macroeconomic conditions and forecasts as well as the referencesize and composition of the loan portfolios.
We adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired (“PCI”). In accordance with the pronouncement, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. As mentioned above, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $1.2 million to the ACL. The remaining noncredit discount (based on the adjusted amortized cost basis) is being
accreted into interest income at a rate transition occurs overthat approximates the next two years.effective interest rate beginning in January 2023. With regard to PCD assets, because we elected to disaggregate the former PCI pools and no longer consider these pools to be the unit of account, contractually delinquent PCD loans are now being reported as nonaccrual loans using the same criteria as other loans.
In August 2020, the SEC issued a final rule that modernizes the disclosure requirements in Regulation S-K relatingaddition to the descriptionaforementioned elections, we made the following elections at adoption:
| | | | | |
l | to not measure an ACL for accrued interest receivable and instead elected to reverse interest income on those loans that are 90 days past due; |
l | to exclude accrued interest receivable from the amortized cost basis of financial instruments subject to ASC 326 and to separately state the balance of accrued interest receivable and other assets on the consolidated balance sheet; |
l | as a practical expedient, elected to use the fair value of collateral when determining the ACL for loans if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty (collateral-dependent loans); and |
l | to update our troubled debt restructuring ("TDR") disclosures in accordance with ASU 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, which eliminated the accounting guidance for TDRs for creditors. |
In June 2023, we adopted ASU 2022-01, Fair Value Hedging – Portfolio Layer Method, upon entering into an interest rate swap to hedge the fair value of fixed rate mortgages included in a closed portfolio for changes in the daily secured overnight financing rate ("SOFR") benchmark interest rate component of the business, legal proceedings,mortgages. This ASU amends the guidance in ASU 2017-12 and risk factors, which are requiredexpands what it now calls the portfolio layer method (previously the last-of-layer method) to allow entities to hedge multiple layers of a closed portfolio of assets. It also allows for the use of an amortizing notional swap when entering into a portfolio layer method hedge. Thus, an interest rate swap is considered a hedge of a single layer of the closed portfolio of fixed rate loans. We applied this ASU to the derivatives we entered into during 2023 as further described in many SEC filings, including Form 10-K and registration statements. The final rule was effective in November 2020, 30 days after its date of publication in the Federal Register. The Company adopted the amendments in preparing this report.Note 20 – Derivatives.
Note 2 – Investment Securities
Amortized cost and fair values of investment securities available-for-sale at December 31, 20202023 are summarized as follows:
| (Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
United States government agency securities | United States government agency securities | | $ | 56,207 | | | $ | 995 | | | $ | (210) | | | $ | 56,992 | |
United States sponsored mortgage-backed securities | United States sponsored mortgage-backed securities | | 94,968 | | | 972 | | | (171) | | | 95,769 | |
United States treasury securities | |
Municipal securities | Municipal securities | | 223,642 | | | 8,327 | | | (82) | | | 231,887 | |
Corporate debt securities | |
Other debt securities | Other debt securities | | 7,500 | | | 0 | | | 0 | | | 7,500 | |
Total debt securities | Total debt securities | | 382,317 | | | 10,294 | | | (463) | | | 392,148 | |
Other securities | Other securities | | 18,401 | | | 146 | | | (71) | | | 18,476 | |
Total investment securities available-for-sale | Total investment securities available-for-sale | | $ | 400,718 | | | $ | 10,440 | | | $ | (534) | | | $ | 410,624 | |
Amortized cost and fair values of investment securities available-for-sale at December 31, 20192022 are summarized as follows:
| (Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
United States government agency securities | United States government agency securities | | $ | 52,046 | | | $ | 199 | | | $ | (249) | | | $ | 51,996 | |
United States sponsored mortgage-backed securities | United States sponsored mortgage-backed securities | | 58,748 | | | 188 | | | (624) | | | 58,312 | |
United States treasury securities | |
Municipal securities | Municipal securities | | 108,750 | | | 4,399 | | | (57) | | | 113,092 | |
Corporate debt securities | |
Other debt securities | |
Total debt securities | Total debt securities | | 219,544 | | | 4,786 | | | (930) | | | 223,400 | |
Other securities | Other securities | | 12,247 | | | 181 | | | (7) | | | 12,421 | |
Total investment securities available-for-sale | Total investment securities available-for-sale | | $ | 231,791 | | | $ | 4,967 | | | $ | (937) | | | $ | 235,821 | |
The following table summarizes amortized cost and fair values of debt securities by maturity:
| | December 31, 2020 |
| Available for sale |
| | December 31, 2023 | | | | December 31, 2023 |
| | Available for sale | | | | Available for sale |
(Dollars in thousands) | (Dollars in thousands) | | Amortized Cost | | Fair Value | (Dollars in thousands) | | Amortized Cost | | Fair Value |
Within one year | Within one year | | $ | 0 | | | $ | 0 | |
After one year, but within five years | After one year, but within five years | | 9,254 | | | 9,629 | |
After five years, but within ten years | After five years, but within ten years | | 36,097 | | | 36,863 | |
After ten years | After ten years | | 336,966 | | | 345,656 | |
Total | Total | | $ | 382,317 | | | $ | 392,148 | |
The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled.
Investment securities with a carrying value of $229.4$223.4 millionand $68.0$91.3 million at December 31, 20202023 and 2019,2022, respectively, were pledged to secure public funds, repurchase agreements and potential borrowings at the Federal Reserve discount window.
The Company’sOur investment portfolio includes securities that are in an unrealized loss position as of December 31, 2020,2023, the details of which are included in the following table. Although theseWe evaluate available-for-sale debt securities if sold at December 31, 2020 would result in a pretaxto determine whether the unrealized loss of $0.5 million, the Company has no intentis due 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 more likely than not that the Company will not, for liquidity purposes, sell any securities at a loss. 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.credit-related factors or non-credit-related factors. When determining other-than-temporary impairmentthe ACL on securities, the Company considerswe consider 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’sour 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
Although these securities, if sold at December 31, 2023 would result in a pretax loss of $33.5 million, we have no intent to sell the applicable securities at such fair values, and maintain that we have the ability to hold these securities until all principal has been recovered. It is more likely than not that we will not, for liquidity purposes, sell any securities at a loss. 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, rather than credit-related conditions. Therefore, we have no ACL as of December 31, 2020, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe the Company will sustain material realized losses as a result of the current temporary decline in fair value.2023.
The following table discloses the length of time that investments have remainedtables show available-for-sale debt securities in an unrealized loss position atfor which an ACL has not been recorded as of December 31, 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 |
United States government agency securities (27) | | $ | 19,021 | | | $ | (68) | | | $ | 12,574 | | | $ | (142) | |
United States sponsored mortgage-backed securities (9) | | 15,331 | | | (155) | | | 3,349 | | | (16) | |
Municipal securities (14) | | 11,856 | | | (82) | | | 0 | | | 0 | |
Other securities (5) | | 3,947 | | | (71) | | | 0 | | | 0 | |
| | $ | 50,155 | | | $ | (376) | | | $ | 15,923 | | | $ | (158) | |
The following table discloses the2023 and December 31, 2022, aggregated by investment category and length of time that investmentsthe individual securities have remainedbeen in an unrealizeda continuous loss position at December 31, 2019:position:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Less than 12 months | | 12 months or more |
Description and number of positions | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
United States government agency securities (26) | | $ | 8,160 | | | $ | (59) | | | $ | 15,399 | | | $ | (190) | |
United States 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) | | | 0 | | | 0 | |
| | $ | 31,931 | | | $ | (276) | | | $ | 43,725 | | | $ | (661) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Less than 12 months | | 12 months or more |
Description and number of positions | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
United States government agency securities (25) | | $ | 316 | | | $ | — | | | $ | 34,619 | | | $ | (5,603) | |
United States sponsored mortgage-backed securities (47) | | — | | | — | | | 50,345 | | | (10,549) | |
United States treasury securities (23) | | — | | | — | | | 100,354 | | | (6,045) | |
Municipal securities (216) | | 847 | | | (10) | | | 106,060 | | | (11,148) | |
Corporate debt securities (7) | | 2,009 | | | (67) | | | 1,933 | | | (67) | |
| | | | | | | | |
| | $ | 3,172 | | | $ | (77) | | | $ | 293,311 | | | $ | (33,412) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Less than 12 months | | 12 months or more |
Description and number of positions | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
United States government agency securities (32) | | $ | 21,287 | | | $ | (1,937) | | | $ | 19,423 | | | $ | (4,700) | |
United States sponsored mortgage-backed securities (51) | | 6,953 | | | (852) | | | 49,618 | | | (10,844) | |
United States treasury securities (29) | | 11,936 | | | (130) | | | 102,092 | | | (9,698) | |
Municipal securities (173) | | 65,930 | | | (7,507) | | | 41,184 | | | (14,111) | |
Corporate securities (3) | | 2,380 | | | (20) | | | — | | | — | |
| | | | | | | | |
| | $ | 108,486 | | | $ | (10,446) | | | $ | 212,317 | | | $ | (39,353) | |
The following table summarizes the investment sales and related gains and losses in 2020, 20192023, 2022 and 2018:2021:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 |
Sales of available-for-sale investments | | $ | 54,023 | | | $ | 31,220 | | | $ | 2,743 | |
Gross gains | | 948 | | | 105 | | | 352 | |
| | | | | | |
Gross losses | | 34 | | | 271 | | | 25 | |
| | | | | | |
Sales of equity investments | | $ | 4,622 | | | $ | 5,968 | | | $ | 0 | |
Gross gains | | 3,501 | | | 0 | | | 0 | |
Gross losses | | 0 | | | 7 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 |
Proceeds from sales of available-for-sale securities | | $ | 54,531 | | | $ | 60,635 | | | $ | 146,011 | |
Gains, gross | | — | | | 717 | | | 3,944 | |
Losses, gross | | (1,536) | | | (67) | | | (69) | |
| | | | | | |
| | | | | | |
Proceeds from sales of equity securities | | $ | 566 | | | $ | 1,356 | | | $ | 543 | |
Gains, gross | | 25 | | | 158 | | | 5 | |
Losses, gross | | (294) | | | (214) | | | — | |
| | | | | | |
Unrealized holding gains (losses) on equity securities | | $ | 146 | | | $ | (1,543) | | | $ | 3,776 | |
The Company recognized unrealized holding gains on equity securities of $0.4 million, $13.8 million and $0.6 million in 2020, 2019 and 2018, respectively, and these were recorded in noninterest income. A majority of the 2019 unrealized holding gains on equity securities was the result of the Company recognizing a $13.5 million pre-tax gain after a valuation on its Fintech investment portfolio in the second quarter of 2019.
There were 0 held-to-maturity securities at December 31, 2020 or December 31, 2019 and the Company sold 0 held-to-maturity investments during the years of 2020, 2019 or 2018.
Note 3 – Loans and Allowance for LoanCredit Losses
Prior to the ICM transaction, the Company routinely generated one to four family mortgages for sale into the secondary market. During 2020, 2019 and 2018, the Company recognized sales proceeds of $1.48 billion, $1.61 billion and $1.24 billion, resulting in mortgage fee income of $33.4 million, $41.0 million and $32.3 million, respectively.
The components of loans in the Consolidated Balance Sheet at December 31, were as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 |
Commercial and non-residential real estate | | $ | 1,141,114 | | | $ | 1,063,828 | |
Residential | | 240,264 | | | 271,604 | |
Home equity | | 30,828 | | | 35,106 | |
Consumer | | 3,156 | | | 3,697 | |
PCI loans: | | | | |
Commercial and non-residential real estate | | 21,008 | | | 0 | |
Residential | | 16,943 | | | 0 | |
| | | | |
Consumer | | 1,488 | | | 0 | |
Total loans | | 1,454,801 | | | 1,374,235 | |
Deferred loan origination costs and (fees), net | | (1,057) | | | 306 | |
Loans receivable | | $ | 1,453,744 | | | $ | 1,374,541 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | | | | | |
Commercial: | | | | | | | | | | |
Business | | $ | 797,100 | | | $ | 851,072 | | | | | | | |
Real estate | | 670,584 | | | 632,839 | | | | | | | |
Acquisition, development and construction | | 134,004 | | | 126,999 | | | | | | | |
Total commercial | | $ | 1,601,688 | | | $ | 1,610,910 | | | | | | | |
Residential real estate | | 672,547 | | | 606,970 | | | | | | | |
Home equity lines of credit | | 14,531 | | | 18,734 | | | | | | | |
Consumer | | 27,408 | | | 131,566 | | | | | | | |
Total loans, excluding PCI | | 2,316,174 | | | 2,368,180 | | | | | | | |
Purchased credit impaired loans: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Residential real estate | | — | | | 2,482 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total purchased credit impaired loans | | $ | — | | | $ | 2,482 | | | | | | | |
| | | | | | | | | | |
Total loans | | 2,316,174 | | | 2,370,662 | | | | | | | |
Deferred loan origination costs, net of fees | | 1,420 | | | 1,983 | | | | | | | |
Loans receivable | | $ | 2,317,594 | | | $ | 2,372,645 | | | | | | | |
Loans serviced for others are not included in the accompanying consolidated balance sheet. The following table summarizes the primary segmentsamortized cost basis of the loan portfolio, excluding PCI loans asserviced for others requiring recognition of a servicing asset were $184.3 million and $164.1 million at December 31, 20202023 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial | | Residential | | Home Equity | | Consumer | | Total |
December 31, 2020 | | | | | | | | | | |
Individually evaluated for impairment | | $ | 13,334 | | | $ | 1,960 | | | $ | 95 | | | $ | 5 | | | $ | 15,394 | |
Collectively evaluated for impairment | | 1,127,780 | | | 238,304 | | | 30,733 | | | 3,151 | | | 1,399,968 | |
Total Loans | | $ | 1,141,114 | | | $ | 240,264 | | | $ | 30,828 | | | $ | 3,156 | | | $ | 1,415,362 | |
December 31, 2019 | | | | | | | | | | |
Individually evaluated for impairment | | $ | 7,401 | | | $ | 1,953 | | | $ | 95 | | | $ | 34 | | | $ | 9,483 | |
Collectively evaluated for impairment | | 1,056,427 | | | 269,651 | | | 35,011 | | | 3,663 | | | 1,364,752 | |
Total Loans | | $ | 1,063,828 | | | $ | 271,604 | | | $ | 35,106 | | | $ | 3,697 | | | $ | 1,374,235 | |
2022, respectively.
The CompanyWe currently manages itsmanage our loan portfolios and the respective exposure to credit losses (credit risk) by the following specific portfolio segmentssegments. With the adoption of ASC 326 in January 2023, we modified our loan portfolio segmentation to be based primarily on call report codes, which are levels at which the Company developswe develop and documents itsdocument our systematic methodology to
determine the allowance for credit lossesACL attributable to each respective portfolio segment. TheseThe ACL portfolio segments are aggregated into broader segments in order to present informative yet concise disclosures within this document, as follows:
Commercial business loans– Commercial business loans are made to provide funds for equipment and general corporate needs, as well as to finance owner occupiedowner-occupied real estate, and to finance future cash flows of Federal Governmentgovernment lease contracts. Repayment of these loans primarily uses the funds obtained from the operation of the borrower’s business. Commercial business 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 companyinternally 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 companyinternally 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 PPP loans –This segment includes the loan originated through the recently created SBA PPP 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 loansreal estate – This residential real estate subsegment contains permanent and construction mortgage loans principally to consumers, but also includes loans to residential real estate developers, secured by residential real estate.estate, which we previously presented under commercial acquisitions, development and construction loans under the incurred loss model. Residential real estate loans to consumers 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,builder’s, continuing financial stability, which can be adversely impacted by job loss, divorce, illness or personal bankruptcy, among other factors. Residential real estate secured loans to developers 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. 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 subsegmentsubsegments for senior lien and subordinate lien lines of credit. Credit risk is similar to residential real estate loans described 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 described above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan. This segment primarily includes loans purchased from a third-party originator that originates loans in order to finance the purchase of personal automotive vehicles for sub-prime borrowers. Credit risk is unique in comparison to the Consumer segment as this segment includes only those loans provided to consumers that cannot typically obtain financing through traditional lenders. As such, these loans are subject to a higher risk of default than the typical consumer loan.
85Results for reporting periods beginning January 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with the incurred loss model.
The following table presents impaired loans by class excluding PCI loans, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2020 and 2019:the periods shown:
| | | | Impaired Loans with Specific Allowance | | Impaired Loans with No Specific Allowance | | Total Impaired Loans | | | Impaired Loans with Specific Allowance | | Impaired Loans with No Specific Allowance | | Total Impaired Loans |
(Dollars in thousands) | (Dollars in thousands) | | Recorded Investment | | Related Allowance | | Recorded Investment | | Recorded Investment | | Unpaid Principal Balance | (Dollars in thousands) | | Recorded Investment | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance |
December 31, 2020 | | | | | | | | | | |
| December 31, 2022 | |
| December 31, 2022 | |
| December 31, 2022 | |
Commercial: | Commercial: | |
Commercial business | | $ | 3,431 | | | $ | 1,032 | | | $ | 5,653 | | | $ | 9,084 | | | $ | 10,440 | |
Commercial real estate | | 772 | | | 264 | | | 944 | | | 1,716 | | | 1,864 | |
Acquisition and development | | 0 | | | 0 | | | 2,534 | | | 2,534 | | | 3,939 | |
Commercial: | |
Commercial: | |
Business | |
Business | |
Business | |
Real estate | |
Acquisition, development and construction | |
Total commercial | Total commercial | | 4,203 | | | 1,296 | | | 9,131 | | | 13,334 | | | 16,243 | |
Residential | Residential | | 0 | | | 0 | | | 1,960 | | | 1,960 | | | 2,232 | |
Home equity | | 0 | | | 0 | | | 95 | | | 95 | | | 95 | |
Home equity lines of credit | |
Consumer | Consumer | | 0 | | | 0 | | | 5 | | | 5 | | | 5 | |
Total impaired loans | Total impaired loans | | $ | 4,203 | | | $ | 1,296 | | | $ | 11,191 | | | $ | 15,394 | | | $ | 18,575 | |
| 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 and development | | 0 | | | 0 | | | 2,070 | | | 2,070 | | | 3,467 | |
Total commercial | | 4,392 | | | 574 | | | 3,009 | | | 7,401 | | | 9,946 | |
Residential | | 0 | | | 0 | | | 1,953 | | | 1,953 | | | 2,045 | |
Home equity | | 0 | | | 0 | | | 95 | | | 95 | | | 100 | |
Consumer | | 0 | | | 0 | | | 34 | | | 34 | | | 35 | |
Total impaired loans | | $ | 4,392 | | | $ | 574 | | | $ | 5,091 | | | $ | 9,483 | | | $ | 12,126 | |
The following table presents the average recorded investment in impaired loans excluding PCI loans, and related interest income recognized for the years ended:
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | | | December 31, 2022 | |
| | | | December 31, 2022 | |
| | | | December 31, 2022 | | | December 31, 2021 |
(Dollars in thousands) | (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 | | Average Investment in Impaired Loans | | Interest Income Recognized on Accrual Basis | | Interest Income Recognized on Cash Basis | (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: | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | 6,066 | | | $ | 0 | | | $ | 0 | | | $ | 3,202 | | | $ | 0 | | | $ | 0 | | | $ | 4,052 | | | $ | 51 | | | $ | 106 | |
Commercial real estate | | 3,057 | | | 97 | | | 104 | | | 3,220 | | | 162 | | | 140 | | | 6,416 | | | 159 | | | 94 | |
Acquisition and development | | 1,207 | | | 67 | | | 73 | | | 2,151 | | | 123 | | | 131 | | | 1,367 | | | 106 | | | 8 | |
Business | |
Business | |
Business | |
Real estate | |
Acquisition, development and construction | |
Total commercial | Total commercial | | 10,330 | | | 164 | | | 177 | | | 8,573 | | | 285 | | | 271 | | | 11,835 | | | 316 | | | 208 | |
Residential | Residential | | 2,541 | | | 19 | | | 19 | | | 2,719 | | | 16 | | | 16 | | | 2,569 | | | 20 | | | 14 | |
Home equity | | 87 | | | 0 | | | 0 | | | 154 | | | 2 | | | 2 | | | 100 | | | 2 | | | 1 | |
Home equity lines of credit | |
Consumer | Consumer | | 7 | | | 0 | | | 0 | | | 45 | | | 0 | | | 0 | | | 149 | | | 0 | | | 0 | |
Total | Total | | $ | 12,965 | | | $ | 183 | | | $ | 196 | | | $ | 11,491 | | | $ | 303 | | | $ | 289 | | | $ | 14,653 | | | $ | 338 | | | $ | 223 | |
As of December 31, 2020,2023, the Bank’s other real estate owned balance totaled $0.8 million, all of which was related to two unrelated commercial loans from our acquisition of The First State Bank (“First State”) in 2020. As of December 31, 2023, there were no residential mortgages in the process of foreclosure.
As of December 31, 2022, there are 5ten loans collateralized by residential real estate property in the process of foreclosure. The total recorded investment in these loans was $0.2$2.1 million as of December 31, 2020.2022. These loans are included in the table above and have no specific allowance allocated to them.
As of December 31, 2020,2022, the loans acquired through the acquisition of First StateBank's other real estate owned balance totaled $1.2 million. The Bank held 32five foreclosed residential real estate properties, representing $2.6$0.2 million, or 56.6%16.7%, of the total balance of other real estate owned. These properties are held as a result of the foreclosures of various commercial loans to different borrowers. There are 11 additional loans collateralized by
residential real estate property in the process of foreclosure. The total recorded investment in these loans was $1.1 million as of December 31, 2020. These loans are included in the table above and have 0 specific allowance allocated to them.
As of December 31, 2019, the Bank held 11 foreclosed residentialthree commercial real estate properties representing $0.6$1.0 million or 40.9%,83.3% of the total balance of other real estate owned. These properties are held as a result of the foreclosures of primarily 2 commercial loan relationships, one of which included two properties for a total of $0.3 million, while the other included seven properties for a total of $0.2 million. The three remaining properties, totaling $0.1 million, were the result of the foreclosure of 2 unrelated borrowers. There are 7 additional consumer mortgage loans collateralized by residential real estate property in the process of foreclosure. The total recorded investment in these loans was $0.6 million as of December 31, 2019. These loans are included in the table above and have 0 specific allowance allocated to them.
Bank management uses a 9 pointnine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first 6six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions.
Loans categorized as “Pass” rated have adequate sources of repayment, with little identifiable risk of collection and general conformity to the Bank's policy requirements, product guidelines and underwriting standards. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.
Loans categorized as “Special Mention” rated have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification.
Loans categorized as “Substandard” rated are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that bankthe institution will sustain some loss if the deficiencies are not corrected.
Loans categorized as “Doubtful” rated have all the weakness inherent in those classified substandardSubstandard with the added characteristic that the weakness makemakes collections or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.
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“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 Bank's Credit Department ensures that a review of all commercial relationships of $1.0 million or greatermore 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 Departmentcredit 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.with the intent of reviewing 40% to 45% of the Bank's commercial outstanding loan balances on an annual basis. The Credit DepartmentBank'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 presents the amortized cost of loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system by vintage year as of the period shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
December 31, 2023 | | | | | | | | | | | | | | | | | | |
Commercial business: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 176,309 | | | $ | 251,265 | | | $ | 92,307 | | | $ | 64,964 | | | $ | 50,765 | | | $ | 90,355 | | | $ | 20,315 | | | $ | — | | | $ | 746,280 | |
Special Mention | | 990 | | | 32,342 | | | 72 | | | 830 | | | 339 | | | 3,767 | | | — | | | — | | | 38,340 | |
Substandard | | 368 | | | 988 | | | 521 | | | — | | | 4,640 | | | 1,436 | | | — | | | — | | | 7,953 | |
Doubtful | | — | | | 2,022 | | | 839 | | | 264 | | | — | | | 1,402 | | | — | | | — | | | 4,527 | |
Total commercial business loans | | $ | 177,667 | | | $ | 286,617 | | | $ | 93,739 | | | $ | 66,058 | | | $ | 55,744 | | | $ | 96,960 | | | $ | 20,315 | | | $ | — | | | $ | 797,100 | |
Gross charge-offs | | $ | — | | | $ | 228 | | | $ | 1,250 | | | $ | 141 | | | $ | — | | | $ | 2,953 | | | $ | — | | | $ | — | | | $ | 4,572 | |
| | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 80,553 | | | $ | 149,189 | | | $ | 205,651 | | | $ | 11,952 | | | $ | 26,438 | | | $ | 101,322 | | | $ | 51,239 | | | $ | — | | | $ | 626,344 | |
Special Mention | | — | | | — | | | 7,961 | | | — | | | 6,079 | | | 11,201 | | | — | | | — | | | 25,241 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 18,999 | | | — | | | — | | | 18,999 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial real estate loans | | $ | 80,553 | | | $ | 149,189 | | | $ | 213,612 | | | $ | 11,952 | | | $ | 32,517 | | | $ | 131,522 | | | $ | 51,239 | | | $ | — | | | $ | 670,584 | |
Gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Commercial acquisition, development and construction: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 6,546 | | | $ | 54,170 | | | $ | 29,535 | | | $ | 22,041 | | | $ | — | | | $ | 1,483 | | | $ | 4,823 | | | $ | — | | | $ | 118,598 | |
Special Mention | | — | | | — | | | 14,652 | | | — | | | — | | | — | | | — | | | — | | | 14,652 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 754 | | | — | | | — | | | 754 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial acquisition, development and construction loans | | $ | 6,546 | | | $ | 54,170 | | | $ | 44,187 | | | $ | 22,041 | | | $ | — | | | $ | 2,237 | | | $ | 4,823 | | | $ | — | | | $ | 134,004 | |
Gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
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| | Term Loans Amortized Cost Basis by Origination Year | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
December 31, 2023 | | | | | | | | | | | | | | | | | | |
Residential Real Estate: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 33,867 | | | $ | 413,466 | | | $ | 96,413 | | | $ | 38,169 | | | $ | 7,306 | | | $ | 21,313 | | | $ | 50,815 | | | $ | — | | | $ | 661,349 | |
Special Mention | | — | | | — | | | — | | | 4,224 | | | 414 | | | 708 | | | — | | | — | | | 5,346 | |
Substandard | | — | | | 988 | | | 3,764 | | | 82 | | | 146 | | | 777 | | | — | | | — | | | 5,757 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | 95 | | | — | | | — | | | 95 | |
Total residential real estate loans | | $ | 33,867 | | | $ | 414,454 | | | $ | 100,177 | | | $ | 42,475 | | | $ | 7,866 | | | $ | 22,893 | | | $ | 50,815 | | | $ | — | | | $ | 672,547 | |
Gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 19 | | | $ | 381 | | | $ | — | | | $ | — | | | $ | 400 | |
| | | | | | | | | | | | | | | | | | |
Home equity lines of credit: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 638 | | | $ | 3,798 | | | $ | 1,779 | | | $ | 1,192 | | | $ | 501 | | | $ | 3,084 | | | $ | 3,154 | | | $ | — | | | $ | 14,146 | |
Special Mention | | — | | | 61 | | | — | | | 36 | | | — | | | 41 | | | 86 | | | — | | | 224 | |
Substandard | | — | | | 83 | | | — | | | 78 | | | — | | | — | | | — | | | — | | | 161 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total home equity lines of credit loans | | $ | 638 | | | $ | 3,942 | | | $ | 1,779 | | | $ | 1,306 | | | $ | 501 | | | $ | 3,125 | | | $ | 3,240 | | | $ | — | | | $ | 14,531 | |
Gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 2,275 | | | $ | 18,926 | | | $ | 5,753 | | | $ | 9 | | | $ | 28 | | | $ | 53 | | | $ | 20 | | | $ | — | | | $ | 27,064 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | 20 | | | 266 | | | 58 | | | — | | | — | | | — | | | — | | | — | | | 344 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total consumer loans | | $ | 2,295 | | | $ | 19,192 | | | $ | 5,811 | | | $ | 9 | | | $ | 28 | | | $ | 53 | | | $ | 20 | | | $ | — | | | $ | 27,408 | |
Gross charge-offs | | $ | 1,144 | | | $ | 10,608 | | | $ | 1,753 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 13,507 | |
| | | | | | | | | | | | | | | | | | |
Total: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 300,188 | | | $ | 890,814 | | | $ | 431,438 | | | $ | 138,327 | | | $ | 85,038 | | | $ | 217,610 | | | $ | 130,366 | | | $ | — | | | $ | 2,193,781 | |
Special Mention | | 990 | | | 32,403 | | | 22,685 | | | 5,090 | | | 6,832 | | | 15,717 | | | 86 | | | — | | | 83,803 | |
Substandard | | 388 | | | 2,325 | | | 4,343 | | | 160 | | | 4,786 | | | 21,966 | | | — | | | — | | | 33,968 | |
Doubtful | | — | | | 2,022 | | | 839 | | | 264 | | | — | | | 1,497 | | | — | | | — | | | 4,622 | |
Total loans | | $ | 301,566 | | | $ | 927,564 | | | $ | 459,305 | | | $ | 143,841 | | | $ | 96,656 | | | $ | 256,790 | | | $ | 130,452 | | | $ | — | | | $ | 2,316,174 | |
Gross charge-offs | | $ | 1,144 | | | $ | 10,836 | | | $ | 3,003 | | | $ | 141 | | | $ | 19 | | | $ | 3,336 | | | $ | — | | | $ | — | | | $ | 18,479 | |
| | | | | | | | | | | | | | | | | | |
The following table represents the classes of the loan portfolio excluding PCI loans, summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2020 and 2019:the periods shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
December 31, 2020 | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial business | | $ | 496,222 | | | $ | 9,529 | | | $ | 17,045 | | | $ | 1,095 | | | $ | 523,891 | |
Commercial real estate | | 356,544 | | | 32,044 | | | 34,001 | | | 533 | | | 423,122 | |
Acquisition and development | | 80,771 | | | 25,001 | | | 4,184 | | | 2,170 | | | 112,126 | |
SBA PPP | | 81,975 | | | 0 | | | 0 | | | 0 | | | 81,975 | |
Total commercial | | 1,015,512 | | | 66,574 | | | 55,230 | | | 3,798 | | | 1,141,114 | |
Residential | | 236,250 | | | 948 | | | 2,896 | | | 170 | | | 240,264 | |
Home equity | | 30,277 | | | 381 | | | 144 | | | 26 | | | 30,828 | |
Consumer | | 3,124 | | | 32 | | | 0 | | | 0 | | | 3,156 | |
Total Loans | | $ | 1,285,163 | | | $ | 67,935 | | | $ | 58,270 | | | $ | 3,994 | | | $ | 1,415,362 | |
| | | | | | | | | | |
December 31, 2019 | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial business | | $ | 511,590 | | | $ | 17,398 | | | $ | 11,894 | | | $ | 0 | | | $ | 540,882 | |
Commercial real estate | | 406,712 | | | 3,564 | | | 1,494 | | | 0 | | | 411,770 | |
Acquisition and development | | 106,428 | | | 1,869 | | | 2,879 | | | 0 | | | 111,176 | |
Total commercial | | 1,024,730 | | | 22,831 | | | 16,267 | | | 0 | | | 1,063,828 | |
Residential | | 267,367 | | | 1,946 | | | 2,177 | | | 114 | | | 271,604 | |
Home equity | | 34,641 | | | 383 | | | 82 | | | 0 | | | 35,106 | |
Consumer | | 3,613 | | | 56 | | | 28 | | | 0 | | | 3,697 | |
Total Loans | | $ | 1,330,351 | | | $ | 25,216 | | | $ | 18,554 | | | $ | 114 | | | $ | 1,374,235 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
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December 31, 2022 | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Business | | $ | 830,319 | | | $ | 5,963 | | | $ | 12,103 | | | $ | 2,687 | | | $ | 851,072 | |
Real estate | | 592,997 | | | 18,883 | | | 20,600 | | | 359 | | | 632,839 | |
Acquisition, development and construction | | 120,788 | | | 5,277 | | | 934 | | | — | | | 126,999 | |
| | | | | | | | | | |
Total commercial | | 1,544,104 | | | 30,123 | | | 33,637 | | | 3,046 | | | 1,610,910 | |
Residential | | 605,513 | | | 760 | | | 1,556 | | | 1,623 | | | 609,452 | |
Home equity lines of credit | | 18,269 | | | 375 | | | 90 | | | — | | | 18,734 | |
Consumer | | 131,562 | | | — | | | 4 | | | — | | | 131,566 | |
Total loans | | $ | 2,299,448 | | | $ | 31,258 | | | $ | 35,287 | | | $ | 4,669 | | | $ | 2,370,662 | |
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 deterioratedThe following table presents the amortized cost basis in loans by aging category 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 SARC,accrual status 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 the Company 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 the receipt of six consecutive months of regular, on-time payments. Removal of a loan from non-accrual status will require the approval of the Chief Credit Officer and/or SARC.periods shown:
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(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 | | Non Accrual with No Credit Loss | | Interest Income Recognized |
December 31, 2023 | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Business | | $ | 788,430 | | | $ | 4,728 | | | $ | 448 | | | $ | 3,494 | | | $ | 8,670 | | | $ | 797,100 | | | $ | 6,926 | | | $ | — | | | $ | 1,825 | | | $ | — | |
Real estate | | 670,170 | | | — | | | 414 | | | — | | | 414 | | | 670,584 | | | — | | | — | | | — | | | — | |
Acquisition, development and construction | | 134,004 | | | — | | | — | | | — | | | — | | | 134,004 | | | 754 | | | — | | | 754 | | | — | |
Total commercial | | 1,592,604 | | | 4,728 | | | 862 | | | 3,494 | | | 9,084 | | | 1,601,688 | | | 7,680 | | | — | | | 2,579 | | | — | |
Residential | | 670,539 | | | 1,671 | | | 337 | | | — | | | 2,008 | | | 672,547 | | | 82 | | | — | | | — | | | — | |
Home equity lines of credit | | 14,522 | | | 9 | | | — | | | — | | | 9 | | | 14,531 | | | 161 | | | — | | | — | | | — | |
Consumer | | 24,494 | | | 1,792 | | | 778 | | | 344 | | | 2,914 | | | 27,408 | | | 344 | | | — | | | — | | | — | |
Total loans | | $ | 2,302,159 | | | $ | 8,200 | | | $ | 1,977 | | | $ | 3,838 | | | $ | 14,015 | | | $ | 2,316,174 | | | $ | 8,267 | | | $ | — | | | $ | 2,579 | | | $ | — | |
The following table presents the classesaging of the loan portfolio, excluding PCIrecorded investment in loans, summarized by aging categories of performing loansincluding accruing and nonaccrual loans, as of December 31, 2020 and 2019:the period shown:
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(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 |
December 31, 2020 | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial business | | $ | 521,799 | | | $ | 1,040 | | | $ | 33 | | | $ | 1,019 | | | $ | 2,092 | | | $ | 523,891 | | | $ | 8,601 | | | $ | 0 | |
Commercial real estate | | 422,343 | | | 34 | | | 212 | | | 533 | | | 779 | | | 423,122 | | | 944 | | | 0 | |
Acquisition and development | | 109,686 | | | 0 | | | 0 | | | 2,440 | | | 2,440 | | | 112,126 | | | 2,534 | | | 0 | |
SBA PPP | | 81,975 | | | 0 | | | 0 | | | 0 | | | 0 | | | 81,975 | | | 0 | | | 0 | |
Total commercial | | 1,135,803 | | | 1,074 | | | 245 | | | 3,992 | | | 5,311 | | | 1,141,114 | | | 12,079 | | | 0 | |
Residential | | 235,420 | | | 2,058 | | | 1,969 | | | 817 | | | 4,844 | | | 240,264 | | | 1,534 | | | 0 | |
Home equity | | 30,369 | | | 289 | | | 75 | | | 95 | | | 459 | | | 30,828 | | | 95 | | | 0 | |
Consumer | | 3,156 | | | 0 | | | 0 | | | 0 | | | 0 | | | 3,156 | | | 5 | | | 0 | |
Total Loans | | $ | 1,404,748 | | | $ | 3,421 | | | $ | 2,289 | | | $ | 4,904 | | | $ | 10,614 | | | $ | 1,415,362 | | | $ | 13,713 | | | $ | 0 | |
| | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial business | | $ | 537,602 | | | $ | 3,189 | | | $ | 47 | | | $ | 44 | | | $ | 3,280 | | | $ | 540,882 | | | $ | 2,848 | | | $ | 0 | |
Commercial real estate | | 411,070 | | | 522 | | | 178 | | | 0 | | | 700 | | | 411,770 | | | 295 | | | 0 | |
Acquisition and development | | 110,717 | | | 180 | | | 0 | | | 279 | | | 459 | | | 111,176 | | | 390 | | | 0 | |
Total commercial | | 1,059,389 | | | 3,891 | | | 225 | | | 323 | | | 4,439 | | | 1,063,828 | | | 3,533 | | | 0 | |
Residential | | 267,515 | | | 3,003 | | | 549 | | | 537 | | | 4,089 | | | 271,604 | | | 1,461 | | | 0 | |
Home equity | | 34,382 | | | 545 | | | 84 | | | 95 | | | 724 | | | 35,106 | | | 95 | | | 0 | |
Consumer | | 3,610 | | | 1 | | | 58 | | | 28 | | | 87 | | | 3,697 | | | 34 | | | 0 | |
Total Loans | | $ | 1,364,896 | | | $ | 7,440 | | | $ | 916 | | | $ | 983 | | | $ | 9,339 | | | $ | 1,374,235 | | | $ | 5,123 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 |
December 31, 2022 | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Business | | $ | 850,112 | | | $ | — | | | $ | 960 | | | $ | — | | | $ | 960 | | | $ | 851,072 | | | $ | 7,528 | | | $ | — | |
Real estate | | 632,839 | | | — | | | — | | | — | | | — | | | 632,839 | | | — | | | — | |
Acquisition, development and construction | | 126,999 | | | — | | | — | | | — | | | — | | | 126,999 | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Total commercial | | 1,609,950 | | | — | | | 960 | | | — | | | 960 | | | 1,610,910 | | | 7,528 | | | — | |
Residential | | 606,554 | | | 1,820 | | | 1,078 | | | — | | | 2,898 | | | 609,452 | | | 2,196 | | | — | |
Home equity lines of credit | | 18,131 | | | 603 | | | — | | | — | | | 603 | | | 18,734 | | | 90 | | | — | |
Consumer | | 120,504 | | | 6,848 | | | 2,867 | | | 1,347 | | | 11,062 | | | 131,566 | | | 1,351 | | | — | |
Total loans | | $ | 2,355,139 | | | $ | 9,271 | | | $ | 4,905 | | | $ | 1,347 | | | $ | 15,523 | | | $ | 2,370,662 | | | $ | 11,165 | | | $ | — | |
The ALLACL is maintained to absorb lossesa valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be
collected on the loans. Loans are charged off against the ACL when management believes the loan portfoliobalance is uncollectible. Accrued interest receivable is excluded from the estimate of credit losses. Management determines the ACL balance using relevant available information, from internal and is based on management’s continuing evaluationexternal sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit behaviors along with model judgments provide the basis for the estimation of theexpected credit losses. Adjustments to modeled loss estimates may be made for differences in current loan-specific risk characteristics and credit quality of the loansuch as differences in underwriting standards, portfolio assessment of currentmix, delinquency level or term, as well as for changes in environmental conditions, such as changes in economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of non-performing loans.property values or other relevant factors.
Interest income onAt December 31, 2023 and 2022, individually analyzed loans would have increased by approximately $0.6 million, $0.6totaled $11.8 million and $0.8$18.2 million, for 2020, 2019respectively. A portion of the ACL of $1.9 million and 2018, respectively, if$1.7 million was allocated to cover any loss in these loans had performed in accordance with their terms.at December 31, 2023 and 2022, respectively.
The Bank’s methodology for determiningfollowing table presents the ALL is based on the requirementsamortized cost basis of ASC Section 310 forcollateral-dependent loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 forby class of 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 2 components represents the Bank’s ALL. periods shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Real Estate | | Vehicles and Equipment | | Assignment of Cash Flow | | Accounts Receivable | | Other | | Totals | | Allowance for Credit Losses |
December 31, 2023 | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | |
Business | | $ | 424 | | | $ | 2,277 | | | $ | — | | | $ | 452 | | | $ | 1,037 | | | $ | 4,190 | | | $ | 1,583 | |
Real estate | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Acquisition, development and construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial | | $ | 424 | | | $ | 2,277 | | | $ | — | | | $ | 452 | | | $ | 1,037 | | | $ | 4,190 | | | $ | 1,583 | |
Residential | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Home equity lines of credit | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | | — | | | 344 | | | — | | | — | | | — | | | 344 | | | 60 | |
Total | | $ | 424 | | | $ | 2,621 | | | $ | — | | | $ | 452 | | | $ | 1,037 | | | $ | 4,534 | | | $ | 1,643 | |
| | | | | | | | | | | | | | |
Collateral value | | $ | 301 | | | $ | 2,040 | | | $ | — | | | $ | 906 | | | $ | 320 | | | $ | 3,567 | | | |
The Bank analyzesevaluates 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 impairmentexpected credit losses by applying allocation rates derived from the Bank’s historical losses specific to impaired loans and thethese loans. The reserve totaled $0.1 million and $0.1 million, and $0.2 million as ofwas immaterial at December 31, 2020, 20192023 and 2018, respectively.December 31, 2022.
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 above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Company and Bank management track 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 haveManagement has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor asestimated losses derived from the loss rate methodologies employed within the CECL model because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historicalthe loss experience.rate methodologies. 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, conclusionquality of the loan reviews, audits and exams,review system, 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. The liability for unfunded commitments was $0.6 million and $0.3 million as of December 31, 2020 and 2019, respectively.
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.ACL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.ACL.
The following tables summarize the activityrelease of primary segments of the ALL, excluding the ALLallowance related to PCI loans, segregated intounfunded commitments was $0.6 million for the amount required for loans individually evaluated for impairmentyear ended December 31, 2023 and the amount required for loans collectively evaluated for impairmentimmaterial for the years endingended December 31, 2020, 20192022 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial | | Residential | | Home Equity | | Consumer | | Total |
ALL balance at December 31, 2019 | | $ | 10,098 | | | $ | 1,272 | | | $ | 327 | | | $ | 78 | | | $ | 11,775 | |
Charge-offs | | (1,932) | | | (224) | | | (23) | | | 0 | | | (2,179) | |
Recoveries | | 22 | | | 0 | | | 9 | | | 3 | | | 34 | |
Provision | | 15,845 | | | 684 | | | (15) | | | (30) | | | 16,484 | |
Allowance contributed with mortgage combination transaction | | 0 | | | (354) | | | 0 | | | 0 | | | (354) | |
ALL balance at December 31, 2020 | | $ | 24,033 | | | $ | 1,378 | | | $ | 298 | | | $ | 51 | | | $ | 25,760 | |
Individually evaluated for impairment | | $ | 1,296 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,296 | |
Collectively evaluated for impairment | | $ | 22,737 | | | $ | 1,378 | | | $ | 298 | | | $ | 51 | | | $ | 24,464 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial | | Residential | | Home Equity | | Consumer | | Total |
ALL balance at December 31, 2018 | | $ | 8,605 | | | $ | 1,405 | | | $ | 684 | | | $ | 245 | | | $ | 10,939 | |
Charge-offs | | (998) | | | 0 | | | 0 | | | (10) | | | (1,008) | |
Recoveries | | 1 | | | 1 | | | 4 | | | 49 | | | 55 | |
Provision | | 2,490 | | | (134) | | | (361) | | | (206) | | | 1,789 | |
ALL balance at December 31, 2019 | | $ | 10,098 | | | $ | 1,272 | | | $ | 327 | | | $ | 78 | | | $ | 11,775 | |
Individually evaluated for impairment | | $ | 574 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 574 | |
Collectively evaluated for impairment | | $ | 9,524 | | | $ | 1,272 | | | $ | 327 | | | $ | 78 | | | $ | 11,201 | |
2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial | | Residential | | Home Equity | | Consumer | | Total |
ALL balance at December 31, 2017 | | $ | 7,804 | | | $ | 1,119 | | | $ | 705 | | | $ | 250 | | | $ | 9,878 | |
Charge-offs | | (1,024) | | | (166) | | | 0 | | | (290) | | | (1,480) | |
Recoveries | | 15 | | | 22 | | | 59 | | | 5 | | | 101 | |
Provision | | 1,810 | | | 430 | | | (80) | | | 280 | | | 2,440 | |
ALL balance at December 31, 2018 | | $ | 8,605 | | | $ | 1,405 | | | $ | 684 | | | $ | 245 | | | $ | 10,939 | |
Individually evaluated for impairment | | $ | 1,043 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,043 | |
Collectively evaluated for impairment | | $ | 7,562 | | | $ | 1,405 | | | $ | 684 | | | $ | 245 | | | $ | 9,896 | |
The following table presents the balance and activity for the primary segments of the ACL as of the periods shown: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | | | | | | | |
(Dollars in thousands) | | Business | | Real Estate | | Acquisition, development and construction | | Total Commercial | | Residential | | Home Equity Lines of Credit | | Consumer | | Total |
ALL, prior to adoption of ASC 326, at December 31, 2022 | | $ | 8,771 | | | $ | 5,704 | | | $ | 1,064 | | | $ | 15,539 | | | $ | 2,880 | | | $ | 131 | | | $ | 5,287 | | | $ | 23,837 | |
Impact of adopting ASC 326 | | (126) | | | (2,846) | | | 288 | | | (2,684) | | | 3,889 | | | (5) | | | 6,482 | | | 7,682 | |
Provision (release of allowance) for credit losses | | 2,954 | | | 71 | | | 322 | | | 3,347 | | | (541) | | | (33) | | | (4,091) | | | (1,318) | |
Initial allowance on loans purchased with credit deterioration | | 710 | | | — | | | — | | | 710 | | | 507 | | | — | | | — | | | 1,217 | |
Charge-offs | | (4,572) | | | — | | | — | | | (4,572) | | | (400) | | | — | | | (13,507) | | | (18,479) | |
Recoveries | | 194 | | | 2 | | | — | | | 196 | | | 77 | | | 4 | | | 8,908 | | | 9,185 | |
ACL balance at December 31, 2023 | | $ | 7,931 | | | $ | 2,931 | | | $ | 1,674 | | | $ | 12,536 | | | $ | 6,412 | | | $ | 97 | | | $ | 3,079 | | | $ | 22,124 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | | | | | | | |
(Dollars in thousands) | | Business | | Real Estate | | Acquisition, development and construction | | Total Commercial | | Residential | | Home Equity Lines of Credit | | Consumer | | Total |
ALL, prior to adoption of ASC 326, at December 31, 2021 | | $ | 8,027 | | | $ | 5,091 | | | $ | 982 | | | $ | 14,100 | | | $ | 1,492 | | | $ | 128 | | | $ | 2,546 | | | $ | 18,266 | |
Provision (release of allowance) for credit losses | | 3,546 | | | 486 | | | 82 | | | 4,114 | | | 1,472 | | | (4) | | | 8,612 | | | 14,194 | |
Charge-offs | | (2,858) | | | — | | | — | | | (2,858) | | | (84) | | | — | | | (12,241) | | | (15,183) | |
Recoveries | | 56 | | | 127 | | | — | | | 183 | | | — | | | 7 | | | 6,370 | | | 6,560 | |
| | | | | | | | | | | | | | | | |
ALL, prior to adoption of ASC 326, at December 31, 2022 | | $ | 8,771 | | | $ | 5,704 | | | $ | 1,064 | | | $ | 15,539 | | | $ | 2,880 | | | $ | 131 | | | $ | 5,287 | | | $ | 23,837 | |
Individually evaluated for impairment | | $ | 1,253 | | | $ | 222 | | | $ | — | | | $ | 1,475 | | | $ | — | | | $ | — | | | $ | 268 | | | $ | 1,743 | |
Collectively evaluated for impairment | | $ | 7,518 | | | $ | 5,482 | | | $ | 1,064 | | | $ | 14,064 | | | $ | 2,880 | | | $ | 131 | | | $ | 5,019 | | | $ | 22,094 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | | | | | | | |
(Dollars in thousands) | | Business | | Real Estate | | Acquisition, development and construction | Total Commercial | | Residential | | Home Equity Lines of Credit | | Consumer | | Total |
ALL, prior to adoption of ASC 326, at December 31, 2020 | | $ | 12,193 | | | $ | 9,079 | | | $ | 2,761 | | $ | 24,033 | | | $ | 1,462 | | | $ | 298 | | | $ | 51 | | | $ | 25,844 | |
Provision (release of allowance) for credit losses | | (3,113) | | | (3,905) | | | (1,779) | | (8,797) | | | 35 | | | (194) | | | 2,681 | | | (6,275) | |
Charge-offs | | (1,284) | | | (83) | | | — | | (1,367) | | | (5) | | | — | | | (247) | | | (1,619) | |
Recoveries | | 231 | | | — | | | — | | 231 | | | — | | | 24 | | | 61 | | | 316 | |
| | | | | | | | | | | | | | | |
ALL, prior to adoption of ASC 326, at December 31, 2021 | | $ | 8,027 | | | $ | 5,091 | | | $ | 982 | | $ | 14,100 | | | $ | 1,492 | | | $ | 128 | | | $ | 2,546 | | | $ | 18,266 | |
Individually evaluated for impairment | | $ | 232 | | | $ | 243 | | | $ | — | | $ | 475 | | | $ | — | | | $ | — | | | $ | — | | | $ | 475 | |
Collectively evaluated for impairment | | $ | 7,795 | | | $ | 4,848 | | | $ | 982 | | $ | 13,625 | | | $ | 1,492 | | | $ | 128 | | | $ | 2,546 | | | $ | 17,791 | |
The following table summarizes the primary segments of the loan portfolio as of the period shown: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | | | | | | | |
(Dollars in thousands) | | Business | | Real Estate | | Acquisition, development and construction | | Total Commercial | | Residential | | Home Equity Lines of Credit | | Consumer | | Total |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 10,451 | | | $ | 1,365 | | | $ | — | | | $ | 11,816 | | | $ | 2,603 | | | $ | 90 | | | $ | 1,351 | | | $ | 15,860 | |
Collectively evaluated for impairment | | 840,621 | | | 631,474 | | | 126,999 | | | 1,599,094 | | | 606,849 | | | 18,644 | | | 130,215 | | | 2,354,802 | |
Total loans | | $ | 851,072 | | | $ | 632,839 | | | $ | 126,999 | | | $ | 1,610,910 | | | $ | 609,452 | | | $ | 18,734 | | | $ | 131,566 | | | $ | 2,370,662 | |
The allowance for loan lossesACL is based on estimates and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools andportfolio segments, the related historical loss ratiosestimation methodologies and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALLACL that is representative of the risk found in the components of the portfolio at any given date.
Loan Modifications for Borrowers Experiencing Financial Difficulty
Occasionally, the Bank modifies loans to borrowers in financial distress by providing concessions that allow for the borrower to lower their payment obligations for a defined period, these may include, but are not limited to: principal forgiveness, payment delays, term extensions, interest rate reductions and any combinations of the preceding.
The following tables summarize the amortized cost basis of loans that were modified during the twelve months ended December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Principal Forgiveness | | Payment Delay | | Term Extension | | Interest Rate Reduction | | Total | | Total Class of Financing Receivable |
December 31, 2023 | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | |
Business | | $ | — | | | $ | 8,535 | | | $ | — | | | $ | — | | | $ | 8,535 | | | 1 | % |
Real estate | | — | | | 11,201 | | | 1,702 | | | — | | | 12,903 | | | 2 | % |
Acquisition, development and construction | | — | | | — | | | 754 | | | — | | | 754 | | | 1 | % |
Total commercial | | — | | | 19,736 | | | 2,456 | | | — | | | 22,192 | | | 1 | % |
Residential | | — | | | — | | | — | | | — | | | — | | | — | % |
Home equity lines of credit | | — | | | — | | | — | | | — | | | — | | | — | % |
Consumer | | — | | | — | | | — | | | — | | | — | | | — | % |
Total | | $ | — | | | $ | 19,736 | | | $ | 2,456 | | | $ | — | | | $ | 22,192 | | | 1 | % |
The above table presents the amortized cost basis of loans at December 31, 2023 that were experiencing financial difficulty and modified during the twelve months ended December 31, 2023, by class and by type of modification. Also presented above is the percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable. 18 loans to 17 borrowers received payment delay modifications in the twelve months ended December 31, 2023, including one secured by commercial office real estate totaling $11.2 million, one commercial loan secured by accounts receivable totaling $0.2 million, and 16 commercial loans with government guarantees totaling $8.3 million.
The Bank closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified as of the period shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 89 Days Past Due | | Total Past Due |
December 31, 2023 | | | | | | | | |
Commercial | | | | | | | | |
Business | | $ | 1,702 | | | $ | 418 | | | $ | 3,370 | | | $ | 5,490 | |
Real estate | | — | | | — | | | — | | | — | |
Acquisition, development and construction | | — | | | — | | | — | | | — | |
Total commercial | | 1,702 | | | 418 | | | 3,370 | | | 5,490 | |
Residential | | — | | | — | | | — | | | — | |
Home equity lines of credit | | — | | | — | | | — | | | — | |
Consumer | | — | | | — | | | — | | | — | |
Total | | $ | 1,702 | | | $ | 418 | | | $ | 3,370 | | | $ | 5,490 | |
As of December 31, 2023, there are eight modified loans past due, with an amortized costs basis of $5.5 million. Of the eight modified loans past due, three are commercial notes to a single borrower totaling $1.7 million secured by equipment and five commercial notes with government guarantees totaling $3.8 million. All eight of these notes are considered non-accrual as of December 31, 2023.
The following table presents the amortized cost basis of loans that had a payment default and were modified prior to that default to borrowers experiencing financial difficulty as of the period shown:
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(Dollars in thousands) | | Principal Forgiveness | | Payment Delay | | Term Extension | | Interest Rate Reduction | | Total |
December 31, 2023 | | | | | | | | | | |
Commercial | | | | | | | | | | |
Business | | $ | — | | | $ | 2,634 | | | $ | — | | | $ | — | | | $ | 2,634 | |
Real estate | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | |
Total commercial | | — | | | 2,634 | | | — | | | — | | | 2,634 | |
Residential | | — | | | — | | | — | | | — | | | — | |
Home equity lines of credit | | — | | | — | | | — | | | — | | | — | |
Consumer | | — | | | — | | | — | | | — | | | — | |
Total | | $ | — | | | $ | 2,634 | | | $ | — | | | $ | — | | | $ | 2,634 | |
As of December 31, 2023, there are two modified loans that has defaulted, with an amortized costs basis of $2.6 million. These loans are commercial notes with government guarantees and both are considered non-accrual as of December 31, 2023. Upon the Bank’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written-off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount.
Troubled Debt Restructurings
Results for reporting periods beginning January 2023 are presented under ASC 326, which eliminated the accounting guidance for TDRs, while prior period amounts continue to be reported in accordance with the TDR model.
At December 31, 2020 and 2019,2022, the Bank had specific reserve allocations for TDRs of $0.6 million and $0.5 million, respectively.$0.4 million. Loans considered to be troubled debt restructured loans totaled $10.2 million and $7.7$10.4 million as of December 31, 2020 and December 31, 2019, respectively.2022. Of these totals, $1.6the total, $4.7 million, and $4.4 million, respectively, represent accruing troubled debt restructured loans and represent 12% and 46%, respectively,45% of total impaired loans. Meanwhile, asAs of December 31, 2020, $8.02022, $5.7 million represents 7nine loans to 3seven borrowers that have defaulted under the restructured terms. The largest of these loans at $2.2 million, is a $1.9 million restructured commercial loan to a company previously dependent on the coal industry, which is now structured as an unsecured loan. Three of these loans to an unrelated borrower, totaling $5.2$3.1 million, are restructured equipment loans to a borrower in the coal industry, which was provided extended interest-only terms to allow time for the collateral equipment to be sold. There is a commercial loan totaling $0.5 million secured by government lease payments that previously defaulted and is now making restructured payments. The last of these loans are commercial acquisition and development loansfour remaining unrelated borrowers have a single loan each, totaling $0.6 million that were considered TDRs due to extended interest only periods and/or unsatisfactory repayment structures once transitioned to principal and interest payments.$0.2 million. These borrowers have experienced continued financial difficulty and are considered non-performing loans as of December 31, 2020. The unsecured loan and the three development loans were also considered non-performing loans as of December 31, 2019.2022.
During the year ended December 31, 2020,2023, no restructured loans defaulted under their modified terms that were not already classified as non-performing for having previously defaulted under their modified terms.
There were no commitments to advance funds to any TDRs as of December 31, 2020.
The following table presents details related to loans identified as TDRs during the years ended December 31, 2020 and 2019.
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| | New TDRs 1 |
| | December 31, 2020 | | December 31, 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 | | 6 | | | $ | 6,294 | | | $ | 5,326 | | | 2 | | | $ | 336 | | | $ | 333 | |
Commercial real estate | | 2 | | | 159 | | | 150 | | | 0 | | | 0 | | | 0 | |
Acquisition and development | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total commercial | | 8 | | | 6,453 | | | 5,476 | | | 2 | | | 336 | | | 333 | |
Residential | | 1 | | | 87 | | | 86 | | | 3 | | | 246 | | | 323 | |
Home equity | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Consumer | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total | | 9 | | | $ | 6,540 | | | $ | 5,562 | | | 5 | | | $ | 582 | | | $ | 656 | |
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 acquisition of First State, the Company has PCI loans. The Company did not hold any PCI loans as of December 31, 2019. See Note 24 – Acquisitions and Divestitures for further details of the acquisition of First State.
The carrying amount of the PCI loan portfolio is as follows:
| | | | | | | | | | |
(Dollars in thousands) | | As of December 31, 2020 | | |
Commercial | | $ | 21,008 | | | |
Residential | | 16,943 | | | |
| | | | |
Consumer | | 1,488 | | | |
Outstanding balance | | $ | 39,439 | | | |
Carrying amount, net of allowance | | $ | 39,355 | | | |
Accretable yield, or income expected to be collected, is as follows:
| | | | | | | | | | |
(Dollars in thousands) | | As of December 31, 2020 | | |
Beginning balance | | $ | 0 | | | |
New loans purchased | | 11,746 | | | |
Accretion of income | | (2,945) | | | |
Reclassification from non-accretable difference | | (488) | | | |
| | | | |
Ending balance | | $ | 8,313 | | | |
For the PCI loan portfolio disclosed above, the Company increased the allowance for loan losses by $0.1 million during 2020.
PCI loans purchased during 2020, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
| | | | | | | | | | |
(Dollars in thousands) | | | | |
Contractually required payments receivable of loans purchased during the period: | | |
Commercial | | $ | 36,046 | | | |
Residential | | 47,787 | | | |
| | | | |
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 PCI loans if the Company cannot reasonably estimate cash flows expected to be collected and, as of
December 31, 2020, the Company held no such loans.
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 December 31, 2020 for the PCI loan portfolio:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | Residential | | | | | | Total |
ALL balance as of December 31, 2019 | | | | $ | 0 | | | | | | | $ | 0 | |
Charge-offs | | | | (11) | | | | | | | (11) | |
| | | | | | | | | | |
Provision | | | | 95 | | | | | | | 95 | |
ALL balance at December 31, 2020 | | | | $ | 84 | | | | | | | $ | 84 | |
| | | | | | | | | | |
Collectively evaluated for impairment | | | | $ | 84 | | | | | | | 84 | |
As of December 31, 2020, the loans in the Company's PCI loan portfolio are all collectively evaluated for impairment and are segmented into three categories: commercial loans totaling $17.1 million, residential loans totaling $16.9 million and consumer loans totaling $1.3 million, for portfolio total of $35.4 million.
The following table represents the classes of the PCI 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 December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
December 31, 2020 | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial Business | | $ | 12,263 | | | $ | 136 | | | $ | 345 | | | $ | 4,860 | | | $ | 17,604 | |
Commercial Real Estate | | 982 | | | 3 | | | 263 | | | 21 | | | 1,269 | |
Acquisition & Development | | 1,900 | | | 0 | | | 0 | | | 235 | | | 2,135 | |
| | | | | | | | | | |
Total Commercial | | 15,145 | | | 139 | | | 608 | | | 5,116 | | | 21,008 | |
Residential | | 15,157 | | | 0 | | | 1,665 | | | 121 | | | 16,943 | |
| | | | | | | | | | |
Consumer | | 1,256 | | | 0 | | | 0 | | | 232 | | | 1,488 | |
Total Loans | | $ | 31,558 | | | $ | 139 | | | $ | 2,273 | | | $ | 5,469 | | | $ | 39,439 | |
| | | | | | | | | | |
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The following table presents the classes of the PCI loan portfolio summarized by aging categories of performing loans and non-accrual loans as of December 31, 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 | | |
December 31, 2020 | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial Business | | $ | 16,264 | | | $ | 71 | | | $ | 65 | | | $ | 1,204 | | | $ | 1,340 | | | $ | 17,604 | | | $ | 0 | | | |
Commercial Real Estate | | 1,157 | | | 0 | | | 0 | | | 112 | | | 112 | | | 1,269 | | | 0 | | | |
Acquisition & Development | | 2,135 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,135 | | | 0 | | | |
| | | | | | | | | | | | | | | | |
Total Commercial | | 19,556 | | | 71 | | | 65 | | | 1,316 | | | 1,452 | | | 21,008 | | | 0 | | | |
Residential | | 13,714 | | | 710 | | | 145 | | | 2,374 | | | 3,229 | | | 16,943 | | | 0 | | | |
| | | | | | | | | | | | | | | | |
Consumer | | 1,245 | | | 3 | | | 1 | | | 239 | | | 243 | | | 1,488 | | | 0 | | | |
Total Loans | | $ | 34,515 | | | $ | 784 | | | $ | 211 | | | $ | 3,929 | | | $ | 4,924 | | | $ | 39,439 | | | $ | 0 | | | |
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None of the PCI loans are considered non-accrual as they are all currently accreting interest income under PCI accounting.
As the Company's PCI 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.
PPP Loans and CARES Act Deferrals
The Company is actively participating in the PPP as a lender, evaluating other programs available to assist its clients and providing deferrals consistent with GSE guidelines. The Company originated 455 PPP loans with original balances of $92.8 million and outstanding balances of $82.0 million as of December 31, 2020.
As of December 31, 2020, commercial loans totaling $34.7 million and mortgage loans totaling $13.5 million were approved for modifications, such as interest-only payments and payment deferrals. These modifications were not considered to be troubled debt restructurings in reliance on guidance issued by banking regulators titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.”
Note 4 – Premises and Equipment
The following table presents the components of premises and equipment at December 31,:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 |
Land | | $ | 3,936 | | | $ | 3,105 | |
Buildings and improvements | | 14,350 | | | 13,352 | |
Furniture, fixtures and equipment | | 18,701 | | | 15,553 | |
Construction in progress | | 326 | | | 1,019 | |
Leasehold improvements | | 3,079 | | | 1,985 | |
| | 40,392 | | | 35,014 | |
Accumulated depreciation | | (14,189) | | | (13,040) | |
Premises and equipment, net | | $ | 26,203 | | | $ | 21,974 | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 |
Land | | $ | 3,465 | | | $ | 3,465 | |
Buildings and improvements | | 13,393 | | | 13,393 | |
Furniture, fixtures and equipment | | 18,300 | | | 17,549 | |
Software | | 7,140 | | | 6,019 | |
Construction in progress | | 45 | | | 508 | |
Leasehold improvements | | 2,836 | | | 2,836 | |
| | 45,179 | | | 43,770 | |
Accumulated depreciation | | (24,251) | | | (20,140) | |
Premises and equipment, net | | $ | 20,928 | | | $ | 23,630 | |
Depreciation expense totaled $3.0$4.6 million, $3.0$4.4 million and $2.8$3.3 million for 2020, 20192023, 2022 and 2018,2021, respectively.
The Company leasesWe lease certain premises for the operation of banking offices and certain equipment under operating and finance leases. At December 31, 2020, the Company2023, we had lease liabilities totaling $18.4$14.0 million and right-of-use assets totaling $12.9 million, substantially all of which $18.3 million was related to operating leases and $0.2 million was related to finance leases, and right-of-use assets totaling $17.7 million, of which $17.5 million was related to operating leases and $0.2 million was related to finance leases, related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the year ended December 31, 2020, the weighted-average remaining lease term for finance leases was 2.3 years and the weighted-average discount rate used in the measurement of finance lease liabilities was 2.4%. At December 31, 2020,2023, the weighted-average remaining lease term for operating leases was 12.910.5 years and the weighted-average discount rate used in the measurement of operating lease liabilities was 2.9%3.1%.
The Company leases certain premises, for the operation of some banking offices and equipment under operating and finance leases.AtAt December 31, 2019, the Company2022, we had lease liabilities totaling $14.8$15.0 million and right-of-use assets totaling $13.9 million, substantially all of which $14.6 million was related to operating leases and $0.2 million was related to finance leases, and right-of-use assets totaling $13.5 million, of which $13.2 million was related to operating leases and $0.3 million was related to finance leases, related to these leases. For the year endedAt December 31, 2019, the weighted-average remaining lease term for finance leases was 2.7 years and the weighted-average discount rate used in the measurement of finance lease liabilities was 2.8%. For the year ended December 31, 2019,2022, the weighted-average remaining lease term for operating leases was 11.811.6 years, and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.5%3.0%.
Lease costs were as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2020 | | December 31, 2019 |
Amortization of right-of-use assets, finance leases | | $ | 65 | | | $ | 77 | |
Interest on lease liabilities, finance leases | | 4 | | | 6 | |
Operating lease cost | | 2,072 | | | 2,120 | |
Short-term lease cost | | 27 | | | 72 | |
Variable lease cost | | 38 | | | 38 | |
Total lease cost | | $ | 2,206 | | | $ | 2,313 | |
liabilities and right-of-use assets are reflected in accrued interest payable and other liabilities and accrued interest receivable and other assets, respectively.
Rent expenseThe following shows lease costs for the year ended December 31, 2018, prior to the adoption of ASU 2016-02, was $2.0 million.years ended:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2023 | | December 31, 2022 |
Amortization of right-of-use assets, finance leases | | $ | 10 | | | $ | 57 | |
| | | | |
Operating lease cost | | 1,795 | | | 1,781 | |
Short-term lease cost | | 8 | | | 32 | |
Variable lease cost | | 38 | | | 38 | |
Total lease cost | | $ | 1,851 | | | $ | 1,908 | |
There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the year ended December 31, 2020.2023.
Future minimum payments for finance leases andFor operating leases with initial or remaining terms of one year or more as of December 31, 2023, the following table presents future minimum payments for the twelve month periods ended December 31:
| | | | | | | | | | |
| | | | |
(Dollars in thousands) | | | | Operating Leases |
2024 | | | | $ | 1,793 | |
2025 | | | | 1,738 | |
2026 | | | | 1,611 | |
2027 | | | | 1,641 | |
2028 | | | | 1,629 | |
2029 and thereafter | | | | 8,320 | |
Total future minimum lease payments | | | | $ | 16,732 | |
Less: Amounts representing interest | | | | (2,698) | |
Present value of net future minimum lease payments | | | | $ | 14,034 | |
There are no material future minimum payments on finance leases as follows:
| | | | | | | | | | | | | | |
| | December 31, 2020 |
(Dollars in thousands) | | Finance Leases | | Operating Leases |
2021 | | $ | 68 | | | $ | 1,779 | |
2022 | | 59 | | | 1,623 | |
2023 | | 41 | | | 1,825 | |
2024 | | 5 | | | 1,779 | |
2025 | | 5 | | | 1,709 | |
2026 and thereafter | | 4 | | | 14,280 | |
Total future minimum lease payments | | $ | 182 | | | $ | 22,995 | |
Less: Amounts representing interest | | (6) | | | (4,723) | |
Present value of net future minimum lease payments | | $ | 176 | | | $ | 18,272 | |
of December 31, 2023.
Note 5 – Equity Method InvestmentInvestments
In the third quarter of 2020, the Company acquired a portion of ICM and recognizes its ownership as an equity method investment initially recorded at fair value. In accordance with Rule 8-03(b)(3)Rules 3-09 and 4-08(g) of Regulation S-X, the Companywe must assess whether itsour equity method investment is a significant equity method investment.investments are significant. In evaluating the significance of this investment, the Companythese investments, we performed the income, asset,investment and investmentasset tests described in S-X 3-05 and1-02(w) for each equity method investment. Rule 3-09 of Regulation S-X 1-02(w)requires separate audited financial statements of an equity method investee in an annual report if either the income or investment test exceeds 20%. Rule 8-03(b)(3)4-08(g) of Regulation S-X requires summarized financial information for all equity method investees in a quarterlyan annual report if any of the threeequity method investees, individually or in the aggregate, result in any of the tests exceeds 20%exceeding 10%.
Under the income test, the Company’sour proportionate share of itsthe revenue from equity method investee's aggregated net incomeinvestments in the aggregate exceeded the applicable threshold under Rule 4-08(g) of 20%, and10% for the year ended December 31, 2023, accordingly, it iswe are required to provide summarized income statement information for this investeeall investees for all periods presented. The Company's share of net income from itsThere were no equity method investment totaled $24.2 millioninvestments which met any of the applicable thresholds for reporting Rule 3-09 for reporting separate financial statements as of the year ended December 31, 2020.2023.
Our equity method investments are initially recorded at cost, including transaction costs to obtain the equity method investment, and are subsequently adjusted for changes due to our share of the entities' earnings.
ICM
The following table provides summarized income statement information for ICM for the Company'syears ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | |
| | December 31, | | | |
(Dollars in thousands) | | 2023 | 2022 | 2021 | | | | |
Total revenues | | $ | 39,283 | | $ | 67,207 | | $ | 153,549 | | | | | |
Net income (loss) | | (9,418) | | 343 | | 41,381 | | | | | |
| | | | | | | | |
Gain on loans sold | | 22,782 | | 44,921 | | 150,896 | | | | | |
Gain (loss) on loans held for sale | | 457 | | (2,834) | | (10,223) | | | | | |
Volume of loans sold | | 1,353,410 | | 2,325,709 | | 5,326,757 | | | | | |
Our ownership percentage of 40% of ICM allows us to have significant influence over the operations and decision making at ICM. Accordingly, the investment, which had a carrying value of $21.6 million at December 31, 2023, is accounted for as an equity method investment. Our share of net loss and net income from our investment in ICM was $3.8 million and $16.4 million for the years ended December 31, 2023 and 2021, respectively. Our share of net income for the year ended December 31, 2022 was not material. As ICM did not exist prior to July 1, 2020, no historical financialof December 31, 2023 and 2022, the locked mortgage pipeline was $439.0 million and $678.3 million, respectively.
Warp Speed
The following table presents summarized income statement information is presented.for our equity method investment in Warp Speed for the periods shown:
| | | | | | | | | | | | |
| | Twelve Months Ended December 31, | |
(Dollars in thousands) | | 20202023 | | | | | | |
Total revenues | | $ | 120,323143,784 | | | | | |
| Gross profit | 59,659 | | | | | |
Net income | | 59,7617,234 | | | | | | | |
| | | | | | | | |
Gain on sale of loans sold | | 100,40237,218 | | | | | | | |
Gain on loans held for sale | | 8,210 | | | | | | | |
Volume of loans sold | | 2,948,7241,370,313 | | | | | | | |
In October 2022, we acquired a 37.5% interest in Warp Speed and accounted for our ownership as an equity method investment, initially recorded at cost including costs incurred to obtain the equity method investment. It was determined that our ownership percentage of Warp Speed provides that we have significant influence over its operations and decision making. Accordingly, the investment, which had a carrying value of $52.7 million at December 31, 2023, is accounted for as an equity method investment. At the time of acquisition, we made a policy election to record our proportionate share of net income of the investee on a three month lag. Our share of Warp Speed's net income for the year ended December 31, 2023 totaled $2.7 million. As of December 31, 2020,2023, the locked mortgage pipeline was $1.54 billion. For more information, please see Note 24 – Acquisitions and Divestitures.$267.8 million.
Our ownership percentage of Ayers Socure II is 10% and it was determined that we have significant influence over the company. Accordingly, the investment, which had a carrying value of $1.5 million at December 31, 2023, is accounted for as an equity method investment. Our share of net income from Ayers Socure II for the twelve months ended December 31, 2023 was not significant. The equity method investment in Ayers Socure II is not considered a significant investment based on the criteria of Rule 10-01(b)(1) of Regulation S-X.
Ayers Socure II's sole business is ownership of equity securities in Socure Inc. ("Socure"). In addition to our equity method investment in Ayers Socure II, we also have direct equity security ownership interest in Socure. With the combination of our investments in both Ayers Socure II and Socure directly, we own less than 1% of Socure in total.
Note 6 – Deposits
Deposits at December 31, were as follows:
| (Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | (Dollars in thousands) | | 2023 | | 2022 |
Demand deposits of individuals, partnerships and corporations | Demand deposits of individuals, partnerships and corporations | | | | | Demand deposits of individuals, partnerships and corporations | | |
Noninterest-bearing demand | Noninterest-bearing demand | | $ | 715,791 | | | $ | 278,547 | |
Interest-bearing demand | | 496,502 | | | 351,435 | |
NOW | |
Savings and money markets | Savings and money markets | | 545,501 | | | 363,026 | |
Time deposits, including CDs and IRAs | Time deposits, including CDs and IRAs | | 224,595 | | | 272,034 | |
Total deposits | Total deposits | | $ | 1,982,389 | | | $ | 1,265,042 | |
| Time deposits that meet or exceed the FDIC insurance limit | Time deposits that meet or exceed the FDIC insurance limit | | $ | 16,955 | | | $ | 8,955 | |
Time deposits that meet or exceed the FDIC insurance limit | |
Time deposits that meet or exceed the FDIC insurance limit | |
Maturities of time deposits at December 31, 20202023 were as follows (dollars in thousands):
| 2021 | | $ | 126,863 | |
2022 | | 62,833 | |
2023 | | 20,864 | |
2024 | 2024 | | 12,705 | |
2025 | 2025 | | 1,330 | |
2026 | |
2027 | |
2028 | |
Thereafter | |
Total | Total | | $ | 224,595 | |
As of December 31, 2020,2023, overdrawn deposit accounts totaling $0.2$3.8 millionwere reclassified as loan balances.
Note 7 – Borrowed Funds
The Bank is a member of the FHLB of Pittsburgh, Pennsylvania. At December 31, 2019 the Bank had borrowed $222.9 million. No amounts were outstanding as of December 31, 2020. As of December 31, 2020,2023, the Bank's maximum borrowing capacity with the FHLB was $452.2$712.9 million and the remaining borrowing capacity was $440.9$699.8 million, with the difference being deposit letters of credit.credit of $11.9 million and credit enhancement recourse obligations related to the master commitments through the FHLB's Mortgage Partnership Finance program of $1.2 million.
Short-term borrowings
Along with traditional deposits,As of December 31, 2023, the Bank has access tohad no short-term borrowings fromwith the FHLB to fund its operationsor Federal Reserve Bank and investments.no Fed Funds purchased outstanding.As of December 31, 2022, the Bank had $102.3 million short-term borrowings with the FHLB and no borrowings with the Federal Reserve Bank or Fed Funds purchased outstanding.
Information related to short-term borrowings is summarized as follows:
| (Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | |
(Dollars in thousands) | |
(Dollars in thousands) | |
Balance at end of year | |
Balance at end of year | |
Balance at end of year | Balance at end of year | | $ | 0 | | | $ | 192,063 | | |
Average balance during the year | Average balance during the year | | 68,407 | | | 187,226 | | |
Average balance during the year | |
Average balance during the year | |
Maximum month-end balance | |
Maximum month-end balance | |
Maximum month-end balance | Maximum month-end balance | | 154,248 | | | 240,811 | | |
Weighted-average rate during the year | Weighted-average rate during the year | | 0.58 | % | | 2.24 | % | |
Weighted-average rate during the year | |
Weighted-average rate during the year | |
Weighted-average rate at December 31 | Weighted-average rate at December 31 | | 0 | % | | 1.81 | % | |
Weighted-average rate at December 31 | |
Weighted-average rate at December 31 | |
Long-term borrowings
As of December 31, 2020,2023 and December 31, 2022, the Bank had 0no long-term borrowings with the FHLB. As of December 31, 2019,FHLB or the Bank had long-term borrowings totaling $30.8 million. Of this total, $30.0 million was fixed interest rate notes, originated in November 2019, due between November 2022 and November 2024, with interest of between 1.7% and 1.8% payable monthly and $0.8 million was fixed interest rate notes, originated between October 2006 and April 2007, due between October 2021 and April 2022, with interest of between 5.18% and 5.20% payable monthly.Federal Reserve Bank.
Repurchase agreements
Along with traditional deposits, the Bank has access to securities sold under agreements to repurchase. Repurchase agreementsrepurchase (“repurchase agreements”) with customers representclients representing funds deposited by customers,clients, on an overnight basis, that are collateralized by investment securities owned by the Company. Repurchase agreements with customers are presented as an individual line item on the consolidated
balance sheets.us. All repurchase agreements are subject to terms and conditions of repurchase/security agreements between the Companyus and the client and are accounted for as secured borrowings. The Company’sOur repurchase agreements reflected in liabilities consist of customerclient accounts and securities which are pledged on an individual security basis.
The Company monitorsWe monitor the fair value of the underlying securities on a monthly basis. Repurchase agreements are reflected atin the amount of cash received in connection with the transaction and included in securities sold under agreements to repurchase on the consolidated balance sheets.transaction. The primary risk with the Company'sour repurchase agreements is the market risk associated with the investments securing the transactions, as itwe 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’sour repurchase agreements were overnight agreements at December 31, 20202023 and December 31, 2019.2022. These borrowings were collateralized with investment securities with a carrying value of $10.7$4.9 million and $10.5$10.4 million at December 31, 20202023 and December 31, 2019,2022, respectively, and were comprised of United States Government Agencies and Mortgage backedMortgage-backed securities. Declines in the value of the collateral would require the Companyus to increase the amounts of securities pledged.
Information related to repurchase agreements is summarized as follows:
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | |
Balance at end of year | | $ | 10,266 | | | $ | 10,172 | | | |
Average balance during the year | | 9,856 | | | 11,252 | | | |
Maximum month-end balance | | 10,505 | | | 14,655 | | | |
Weighted-average rate during the year | | 0.23 | % | | 0.43 | % | | |
Weighted-average rate at December 31 | | 0.14 | % | | 0.44 | % | | |
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | |
Balance at end of year | | $ | 4,821 | | | $ | 10,037 | | | |
Average balance during the year | | 5,662 | | | 10,987 | | | |
Maximum month-end balance | | 10,041 | | | 12,680 | | | |
Weighted-average rate during the year | | 0.02 | % | | 0.05 | % | | |
Weighted-average rate at December 31 | | 0.01 | % | | 0.06 | % | | |
Subordinated Debt
Information related to subordinated debt is summarized as follows: | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | |
Balance at end of year | | $ | 73,540 | | | $ | 73,286 | | | |
Average balance during the year | | 73,415 | | | 73,159 | | | |
Maximum month-end balance | | 73,540 | | | 73,286 | | | |
Weighted-average rate during the year | | 4.38 | % | | 4.20 | % | | |
Weighted-average rate at December 31 | | 4.02 | % | | 3.97 | % | | |
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | |
Balance at end of year | | $ | 43,407 | | | $ | 4,124 | | | |
Average balance during the year | | 7,568 | | | 12,125 | | | |
Maximum month-end balance | | 43,524 | | | 17,524 | | | |
Weighted-average rate during the year | | 3.45 | % | | 6.35 | % | | |
Weighted-average rate at December 31 | | 4.02 | % | | 3.51 | % | | |
In September 2021, we completed the private placement of $30 million fixed-to-floating rate subordinated notes to certain qualified institutional investors. These notes are unsecured and have a 10-year term, maturing October 1, 2031, and will bear interest at a fixed rate of 3.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate, which is Three-Month Term SOFR, plus 254 basis points, payable quarterly in arrears. These notes have been structured to qualify as Tier 2 capital for regulatory capital purposes.
In November 2020, the Companywe completed the private placement of $40 million fixed-to-floating rate subordinated notes to certain qualified institutional investors. These notes are unsecured and have a ten-year term, maturing December 1, 2030, and will bear interest at a fixed rate of 4.25%, payable semi-annually in arrears, for the first five years of the term. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR, plus 401 basis points, payable quarterly in arrears. These notes have been structured to qualify as Tier 2 capital for regulatory capital purposes.
In March 2007, the Companywe completed the private placement of $4$4.0 million Floating Rate, Trust Preferred Securities through itsour MVB Financial Statutory Trust I subsidiary (the “Trust”). The CompanyWe established the Trust for the sole purpose of issuing the Trust Preferred Securities pursuant to an Amended and Restated Declaration of Trust. The Trust Preferred Securities and the Debentures mature in 2037 and have been redeemable by the Companyus 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.0.26%plus Three-Month Term SOFR. The obligations of the Companywe provide with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Companyus of the Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantees. The securities issued by the Trust are includable for regulatory purposes as a component of the Company’sour Tier 1 capital.
In June 2014, the Company issued its Convertible Subordinated Promissory Notes to various investors in the aggregate principal amount of $29.4 million. The notes were issued in $0.1 million increments per note, subject to a minimum investment of $1 million. The Notes were to expire 10 years after the initial issuance date of the Notes. In July 2019, the Federal Reserve Board provided the Company with its approval for the Company to redeem all of the outstanding Notes. On or about August 1, 2019, the
Company provided notice to the holders of the outstanding notes that it would redeem the outstanding notes on September 30, 2019.
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 $1.0 million.
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 providing an annual interest expense savings of $1.1 million.
The CompanyWe recognized interest expense on itsour subordinated debt of $0.3$3.2 million, $0.8$3.1 million and $1.8$2.2 million for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, respectively.
Senior term loan
Information related to senior term loan is summarized as follows:
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | |
Balance at end of year | | $ | 6,786 | | | $ | 9,765 | | | |
Average balance during the year | | 9,007 | | | 2,328 | | | |
Maximum month-end balance | | 9,768 | | | 9,886 | | | |
Weighted-average rate during the year | | 8.50 | % | | 7.00 | % | | |
Rate at December 31 | | 8.76 | % | | 7.44 | % | | |
In October 2022, we entered into a credit agreement with Raymond James Bank ("Raymond James"). Pursuant to the credit agreement, Raymond James has extended to us a senior term loan in the aggregate principal amount of up to $10 million. In connection with the closing of the Warp Speed transaction, we borrowed $10 million and paid Raymond James an upfront fee of 1% of the loan amount. The loan will bear interest per annum at a rate equal to 2.75%, plus term SOFR, which will reset monthly. Accrued interest is payable on the last business day of each month, beginning with October 31, 2022, with the then outstanding principal balance of the loan payable on the last business day of each quarter in the amount of $125,000 during the first year and $250,000 thereafter. The loan will mature in April 2025, unless accelerated earlier upon an event of default.
We recognized interest expense on our senior term loan of $0.8 million, $0.2 million, and none for the years ended December 31, 2023, 2022 and 2021, respectively.
Note 8 – Commitments and Contingent Liabilities
Commitments
The Company isWe are a party to financial instruments with off-balance-sheetoff-balance sheet risk in the normal course of business to meet the financing needs of itsour customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition.
The Company’sOur exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company usesWe use the same credit policies in making commitments and conditional obligations as it doeswe do for on-balance-sheeton-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluatesWe evaluate each customer’s credit worthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Companyus upon extension of credit, varies and is based on management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Companyus to guarantee the performance of a customer to a third-party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’sOur policy for obtaining collateral, and the nature of such collateral, is essentiallysubstantially the same as that involved in making commitments to extend credit.
Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits.
To estimate the liability for off-balance sheet credit exposures, Bank management analyzed the portfolios of unfunded commitments based on the same segmentation used for the ACL calculation. The estimated funding rate for each segment was derived from a funding rate study created by a third-party vendor which analyzed funding of various loan types over time to develop industry benchmarks at the call report code level. Once the estimated future advances were calculated, the allocation rate applicable to that portfolio segment was applied in the same manner as those used for the ACL 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 December 31, 2023 and December 31, 2022, the liability for unfunded commitments related to loans held for investment was $1.0 million and $0.5 million, respectively.
Total contractual amounts of the commitments as of December 31, were as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 |
Available on lines of credit | | $ | 393,814 | | | $ | 385,871 | |
Stand-by letters of credit | | 19,806 | | | 18,145 | |
Other loan commitments | | 22,418 | | | 24,821 | |
| | $ | 436,038 | | | $ | 428,837 | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 |
Available on lines of credit | | $ | 363,452 | | | $ | 495,618 | |
Stand-by letters of credit | | 36,826 | | | 17,153 | |
Other loan commitments | | 16,788 | | | 14,901 | |
| | $ | 417,066 | | | $ | 527,672 | |
Concentration of Credit Risk
The Company grantsWe grant a majority of itsour commercial, financial, agricultural, real estate and installment loans to customers throughout the North Central West Virginia and Northern Virginia markets. Collateral for loans is primarily residential and commercial real estate, personal property and business equipment. The Company evaluatesWe evaluate the credit worthiness of each of itsour customers on a case-by-case basis and the amount of collateral it obtainswe obtain is based upon management’s credit evaluation.
Regulatory
The Company is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. In accordance with these requirements, the Company implemented a deposit reclassification program that allowed the Company to maintain 0 such reserve balances as of December 31, 2020 and 2019.
Contingent Liabilities
The subsidiary Bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.
Note 9 – Income Taxes
The provisions for income taxes for the years ended December 31, were as follows:
| (Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2018 | (Dollars in thousands) | | 2023 | | 2022 | | 2021 |
Current: | Current: | | | | | | |
Federal | |
Federal | |
Federal | Federal | | $ | 10,899 | | | $ | 10,450 | | | $ | 2,203 | |
State | State | | 2,019 | | | 2,101 | | | 1,031 | |
| | | $ | 12,918 | | | $ | 12,551 | | | $ | 3,234 | |
Deferred: | Deferred: | | | | | | | Deferred: | | |
Federal | Federal | | $ | (3,183) | | | $ | (3,716) | | | $ | 117 | |
State | State | | (203) | | | (237) | | | 22 | |
| (3,386) | | | (3,953) | | | 139 | |
| | 97 | |
Income tax expense | Income tax expense | | $ | 9,532 | | | $ | 8,598 | | | $ | 3,373 | |
Following is a reconciliation of income taxes at federal statutory rates to recorded income taxes for the year ended December 31:
| | 2020 | | 2019 | | 2018 |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Amount | | % | | Amount | | % | | Amount | | % | (Dollars in thousands) | | Amount | | % | | Amount | | % | | Amount | | % |
Income tax at federal statutory rate | Income tax at federal statutory rate | | $ | 9,858 | | | 21.0 | % | | $ | 7,353 | | | 21.0 | % | | $ | 3,229 | | | 21.0 | % | Income tax at federal statutory rate | | $ | 8,217 | | | 21.0 | | 21.0 | % | | $ | 3,889 | | | 21.0 | | 21.0 | % | | $ | 10,201 | | | 21.0 | | 21.0 | % |
Tax effect of: | Tax effect of: | | | | | | | | | Tax effect of: | | | | | | | | |
State income taxes, net of federal income taxes | State income taxes, net of federal income taxes | | 1,435 | | | 3.1 | % | | 2,101 | | | 6.0 | % | | 738 | | | 4.8 | % | State income taxes, net of federal income taxes | | 1,109 | | | 2.8 | | 2.8 | % | | 456 | | | 2.5 | | 2.5 | % | | 1,099 | | | 2.2 | | 2.2 | % |
Tax exempt earnings | Tax exempt earnings | | (1,381) | | | (3.0) | % | | (856) | | | (2.8) | % | | (594) | | | (3.9) | % | Tax exempt earnings | | (941) | | | (2.4) | | (2.4) | % | | (1,596) | | | (8.6) | | (8.6) | % | | (1,460) | | | (3.0) | | (3.0) | % |
Other | Other | | (380) | | | (0.8) | % | | 0 | | | 0 | % | | 0 | | | 0 | % | Other | | (266) | | | (0.6) | | (0.6) | % | | 1,379 | | | 7.4 | | 7.4 | % | | 42 | | | 0.1 | | 0.1 | % |
| | | $ | 9,532 | | | 20.3 | % | | $ | 8,598 | | | 24.2 | % | | $ | 3,373 | | | 21.9 | % | | | $ | 8,119 | | | 20.8 | | 20.8 | % | | $ | 4,128 | | | 22.3 | | 22.3 | % | | $ | 9,882 | | | 20.3 | | 20.3 | % |
Deferred income tax assets and liabilities were comprised of the following at December 31:
| (Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | (Dollars in thousands) | | 2023 | | 2022 |
Gross deferred tax assets: | Gross deferred tax assets: | | | | |
Allowance for loan losses | | $ | 7,141 | | | $ | 3,310 | |
Allowance for credit losses | |
Allowance for credit losses | |
Allowance for credit losses | |
Minimum pension liability | Minimum pension liability | | 1,544 | | | 1,589 | |
| SERP/RSU | | 1,039 | | | 652 | |
Research and development | |
Stock-based compensation | |
SERP | |
Unrealized loss on securities available-for-sale | |
Lease liabilities | |
Other | Other | | 1,209 | | | 10 | |
Total gross deferred tax assets | Total gross deferred tax assets | | 10,933 | | | 5,561 | |
| Gross deferred tax liabilities: | Gross deferred tax liabilities: | |
Gross deferred tax liabilities: | |
Gross deferred tax liabilities: | |
Depreciation | |
Depreciation | |
Depreciation | Depreciation | | (1,733) | | | (1,505) | |
Pension | Pension | | (262) | | | (164) | |
Unrealized gain on securities available-for-sale | Unrealized gain on securities available-for-sale | | (2,320) | | | (1,088) | |
Holding gain on equity securities | Holding gain on equity securities | | (3,893) | | | (3,838) | |
Equity method investment | |
Goodwill | Goodwill | | (2,498) | | | (2,134) | |
Right-of-use assets | |
Other | |
Total gross deferred tax liabilities | Total gross deferred tax liabilities | | (10,706) | | | (8,729) | |
| Net deferred tax assets (liabilities) | | $ | 227 | | | $ | (3,168) | |
Net deferred tax assets | |
Net deferred tax assets | |
Net deferred tax assets | |
DeferredNet deferred income tax assets and net deferred income tax liabilities were included in other assets and other liabilities, respectively.
The Company has invested, as a limited partner, in 3 Section 42 affordable housing investment funds. In exchange for these investments,respectively, based on the Company receives its pro rata share of income, expense, gains and losses, including tax credits, that are received by the projects. As of December 31, 2020 and December 31, 2019, the Company recognized, as an investment, $2.8 million and $3.0 million in the aggregate between the 3 affordable housing investment funds. In addition, the Company has recognized 0 gains or losses from the funds.ending balance.
Note 10 – Related Party Transactions
The Company hasWe have granted loans to our officers and directors of the Company and to their immediate family members, as well as loans to related companies. These related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk of collectability. Set forth below is a summary of the related loan activity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Balance at Beginning of Year | | Borrowings | | Executive Officer and Director Retirements | | Repayments | | Balance at End of Year |
December 31, 2020 | | $ | 12,284 | | | $ | 24,453 | | | $ | (8,187) | | | $ | (1,127) | | | $ | 27,423 | |
| | | | | | | | | | |
December 31, 2019 | | $ | 27,971 | | | $ | 13,897 | | | $ | 0 | | | $ | (29,584) | | | $ | 12,284 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Balance at Beginning of Year | | Borrowings, net of participations | | Executive Officer and Director Retirements | | Repayments | | Balance at End of Year |
December 31, 2023 | | $ | 33,433 | | | $ | 866,011 | | | $ | — | | | $ | (877,072) | | | $ | 22,372 | |
| | | | | | | | | | |
December 31, 2022 | | $ | 27,606 | | | $ | 221,825 | | | $ | (998) | | | $ | (215,000) | | | $ | 33,433 | |
The CompanyWe held related party deposits of $73.8$256.0 million and $35.5$112.5 million at December 31, 20202023 and December 31, 2019,2022, respectively.
The Company held 0In January 2022, the MVB Bank Inc. Board of Directors approved a $35.0 million line of credit to BillGO, Inc. a related party repurchase agreements atof the Bank. As of December 31, 20202023 the line of credit to BillGO, Inc. has been closed. Interest income on the line of credit totaled $0.3 million and $0.2 million for December 31, 2023 and December 31, 2019.2022, respectively. Issuing sponsorship income generated during the year from contracts with BillGO, Inc. totaled $0.3 million for both December 31, 2023 and December 31, 2022.
In October 2022, we acquired an interest in Warp Speed and account for our ownership as an equity method investment, initially recorded at cost including costs incurred to obtain the equity method investment. As part of the purchase, we are able to designate two out of seven directors to the board of directors of Warp Speed. We purchase loan participations from CalCon Mutual Mortgage LLC, a subsidiary of Warp Speed. As of December 31, 2023 and December 31, 2022, loans purchased from CalCon had an outstanding balance of $46.0 million and $39.1 million. Interest income recognized on these participations was $2.2 million and $0.9 million for the years ended December 31, 2023 and December 31, 2022.
We account for our ownership interests in ICM as an equity method investment and purchase loan participations from ICM. As of December 31, 2023 and December 31, 2022, loans purchased from ICM had an outstanding balance of $564.8 million and $572.7 million.
Note 11 – Pension Plan
The Company participatesWe participate in a trusteed pension plan known as the Allegheny Group Retirement Plan covering virtually all full-time employees.Plan. Benefits are based on years of service and the employee’s compensation. Accruals under thisthe plan were frozen as of May 31, 2014. Freezing the plan resulted in a re-measurementremeasurement of the pension obligations and plan assets as of the freeze date. The pension obligation was re-measuredremeasured using the discount rate based on the Citigroup Above Median Pension Discount Curve in effect on May 31, 2014 of 4.46%4.5%.
OnIn June 19, 2017, the Companywe approved a Supplemental Executive Retirement Plan (“SERP”(the “SERP”), pursuant to which the Chief
Executive Officer of PMGPotomac Mortgage Group ("PMG") is entitled to receive certain supplemental nonqualified retirement benefits. The SERP took effect on December 31, 2017. IfAs the executive completescompleted three years of continuous employment with PMG prior to retirement date (which shall be no earlier than the date he attains age 55) he will, upon retirement, be entitled to receive $1.8 million payable in 180 equal consecutive monthly installments of $10 thousand. The liability is calculated by discounting the anticipated future cash flows at 4.0%. The liability accrued for this obligation was $1.2$1.4 million and $0.8$1.3 million as ofat December 31, 20202023 and 2019,2022, respectively. Service costcosts were not material for any periods covered by this report. In February 2024, the SERP was $0.2terminated. Within the agreement, there is a one year provision for payment delay, as such the $1.8 million and $0.4 millionobligation is scheduled to be paid in 2020 and 2019, respectively.February 2025.
PensionNet periodic pension income was $0.1 million in 2023. Net periodic pension expense was $0.3 million, $0.3 million and $0.3 million in 2020, 20192022 and 2018,2021 respectively.
Information pertaining to the activity in the Company’sour defined benefit plan, using the latest available actuarial valuations with a measurement date of December 31, 20202023 and 20192022 is as follows:
| (Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | (Dollars in thousands) | | 2023 | | 2022 |
Change in benefit obligation | Change in benefit obligation | | | | |
Benefit obligation at beginning of year | Benefit obligation at beginning of year | | $ | 11,435 | | | $ | 9,416 | |
Benefit obligation at beginning of year | |
Benefit obligation at beginning of year | |
| Interest cost | |
Interest cost | |
Interest cost | Interest cost | | 365 | | | 392 | |
Actuarial loss | Actuarial loss | | (54) | | | 99 | |
Assumption changes | Assumption changes | | 1,255 | | | 1,769 | |
| Benefits paid | Benefits paid | | (286) | | | (241) | |
Benefits paid | |
Benefits paid | |
Benefit obligation at end of year | Benefit obligation at end of year | | $ | 12,715 | | | $ | 11,435 | |
| Change in plan assets: | Change in plan assets: | |
Change in plan assets: | |
Change in plan assets: | |
Fair value of plan assets at beginning of year | Fair value of plan assets at beginning of year | | $ | 6,165 | | | $ | 5,238 | |
Actual return on plan assets | | 511 | | | 808 | |
Employer contribution | | 706 | | | 360 | |
Fair value of plan assets at beginning of year | |
Fair value of plan assets at beginning of year | |
Actual return gain (loss) on plan assets | |
| Benefits paid | |
Benefits paid | |
Benefits paid | Benefits paid | | (286) | | | (241) | |
Fair value of plan assets at end of year | Fair value of plan assets at end of year | | $ | 7,096 | | | $ | 6,165 | |
| Funded status | Funded status | | $ | (5,619) | | | $ | (5,270) | |
Funded status | |
Funded status | |
Unrecognized net actuarial loss | Unrecognized net actuarial loss | | 6,591 | | | 5,883 | |
| Prepaid pension cost recognized | Prepaid pension cost recognized | | $ | 972 | | | $ | 613 | |
Prepaid pension cost recognized | |
Prepaid pension cost recognized | |
| Accumulated benefit obligation | Accumulated benefit obligation | | $ | 12,715 | | | $ | 11,435 | |
Accumulated benefit obligation | |
Accumulated benefit obligation | |
At December 31, 2020, 20192023, 2022 and 2018,2021, the weighted-average assumptions used to determine the benefit obligation are as follows:
| | 2020 | | 2019 | | 2018 |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
Discount rate | Discount rate | | 2.50 | % | | 3.24 | % | | 4.23 | % | Discount rate | | 5.01 | % | | 5.23 | % | | 2.83 | % |
Rate of compensation increase | Rate of compensation increase | | N/A | | N/A | | N/A | Rate of compensation increase | | n/a |
The components of net periodic pension cost (income) are as follows:
| (Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2018 | (Dollars in thousands) | | 2023 | | 2022 | | 2021 |
| Interest cost | Interest cost | | $ | 365 | | | $ | 392 | | | $ | 352 | |
Interest cost | |
Interest cost | |
Expected return on plan assets | Expected return on plan assets | | (438) | | | (407) | | | (372) | |
| Amortization of net actuarial loss | Amortization of net actuarial loss | | 420 | | | 271 | | | 306 | |
Net periodic pension cost | | $ | 347 | | | $ | 256 | | | $ | 286 | |
Amortization of net actuarial loss | |
Amortization of net actuarial loss | |
Net periodic pension cost (income) | |
For the years December 31, 2020, 20192023, 2022 and 2018,2021, the weighted-average assumptions used to determine net periodic pension cost (income) are as follows:
| | 2020 | | 2019 | | 2018 |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
Discount rate | Discount rate | | 2.50 | % | | 3.24 | % | | 3.55 | % | Discount rate | | 5.01 | % | | 5.23 | % | | 2.83 | % |
Expected long-term rate of return on plan assets | Expected long-term rate of return on plan assets | | 6.75 | % | | 6.75 | % | | 6.75 | % | Expected long-term rate of return on plan assets | | 5.75 | % | | 6.00 | % | | 6.75 | % |
Rate of compensation increase | Rate of compensation increase | | N/A | | N/A | | N/A | Rate of compensation increase | | n/a |
The Company’sOur pension plan asset allocations at December 31, 20202023 and 20192022 are as follows:
| | 2020 | | 2019 |
| | 2023 | | | | 2023 | | 2022 |
Plan Assets | Plan Assets | | | | |
Cash | |
Cash | |
Cash | Cash | | 9 | % | | 4 | % | | 5 | % | | 7 | % |
Fixed income | Fixed income | | 20 | % | | 23 | % | Fixed income | | 30 | % | | 28 | % |
Alternative investments | Alternative investments | | 19 | % | | 15 | % | Alternative investments | | 12 | % | | 13 | % |
Domestic equities | Domestic equities | | 27 | % | | 33 | % | Domestic equities | | 31 | % | | 26 | % |
Foreign equities | Foreign equities | | 24 | % | | 24 | % | Foreign equities | | 21 | % | | 22 | % |
Real estate investment trusts | Real estate investment trusts | | 1 | % | | 1 | % | Real estate investment trusts | | 1 | % | | 4 | % |
Total | Total | | 100 | % | | 100 | % | Total | | 100 | % | | 100 | % |
The estimatedfollowing table sets forth by level within the fair value hierarchy, as defined in Note 19 – Fair Value Measurements, the Pension Plan’s assets at fair value as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Assets: | | | | | | | | |
Cash | | $ | 500 | | | $ | — | | | $ | — | | | $ | 500 | |
Fixed income | | 3,002 | | | — | | | — | | | 3,002 | |
Alternative investments | | — | | | — | | | 1,201 | | | 1,201 | |
Domestic equities | | 3,102 | | | — | | | — | | | 3,102 | |
Foreign equities | | 2,101 | | | — | | | — | | | 2,101 | |
| | | | | | | | |
Total | | $ | 8,705 | | | $ | — | | | $ | 1,201 | | | $ | 9,906 | |
| | | | | | | | |
Investments reported at net asset value1 | | | | | | | | 100 | |
Total assets at fair value | | | | | | | | $ | 10,006 | |
1 Investments reported at net loss for the plan that is expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $0.5 million.asset value include real estate investment trusts.
The following table sets forth by level, within the fair value hierarchy, as defined in Note 18 – Fair Value Measurements, the Pension Plan’s assets at fair value as of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Assets: | | | | | | | | |
Cash | | $ | 639 | | | $ | 0 | | | $ | 0 | | | $ | 639 | |
Fixed income | | 1,419 | | | 0 | | | 0 | | | 1,419 | |
Alternative investments | | 0 | | | 0 | | | 1,348 | | | 1,348 | |
Domestic equities | | 1,916 | | | 0 | | | 0 | | | 1,916 | |
Foreign equities | | 1,703 | | | 0 | | | 0 | | | 1,703 | |
Real estate investment trusts | | 0 | | | 0 | | | 71 | | | 71 | |
| | | | | | | | |
Total assets at fair value | | $ | 5,677 | | | $ | 0 | | | $ | 1,419 | | | $ | 7,096 | |
The following table sets forth by level, within the fair value hierarchy, as defined in Note 1819 – Fair Value Measurements, the Pension Plan’s assets at fair value as of December 31, 2019.2022:
| (Dollars in thousands) | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Assets: | Assets: | | | | | | | | |
Cash | |
Cash | |
Cash | Cash | | $ | 247 | | | $ | 0 | | | $ | 0 | | | $ | 247 | |
Fixed income | Fixed income | | 1,418 | | | 0 | | | 0 | | | 1,418 | |
Alternative investments | Alternative investments | | 0 | | | 0 | | | 925 | | | 925 | |
Domestic equities | Domestic equities | | 2,034 | | | 0 | | | 0 | | | 2,034 | |
Foreign equities | Foreign equities | | 1,480 | | | 0 | | | 0 | | | 1,480 | |
Real estate investment trusts | | 0 | | | 0 | | | 61 | | | 61 | |
| | Total | |
| Total | |
| Total | |
| Investments reported at net asset value1 | |
Investments reported at net asset value1 | |
Investments reported at net asset value1 | |
Total assets at fair value | Total assets at fair value | | $ | 5,179 | | | $ | 0 | | | $ | 986 | | | $ | 6,165 | |
1 Investments reported at net asset value include real estate investment trusts.
Investment in government securities, and short-term investments, domestic equities and foreign equities are valued at the closing price reported on the active market on which the individual securities are traded. Alternative investments and investment in debt securities are valued at quoted prices, which are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. Real estate investment trusts are valued at the net asset value of the trust at the reporting date. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while this plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table includes the Company'sour best estimate of the plan contribution for next fiscal year and the benefits expected to be paid in each of the next five fiscal years and in the aggregate for the five fiscal years thereafter.thereafter:
| | | | | | | | |
(Dollars in thousands) | | Cash Flow |
Contributions for the period of January 1, 2024 through December 31, 2024 | | $ | — | |
| | |
Estimated future benefit payments reflecting expected future service | | |
2024 | | $ | 433 | |
2025 | | $ | 466 | |
2026 | | $ | 554 | |
2027 | | $ | 560 | |
2028 | | $ | 575 | |
2029 through 2033 | | $ | 2,884 | |
| | | | | | | | |
(Dollars in thousands) | | Cash Flow |
Contributions for the period of January 1, 2021 through December 31, 2021 | | $ | 199 | |
| | |
Estimated future benefit payments reflecting expected future service | | |
2021 | | $ | 344 | |
2022 | | $ | 407 | |
2023 | | $ | 423 | |
2024 | | $ | 445 | |
2025 | | $ | 508 | |
2026 through 2030 | | $ | 2,652 | |
Note 12 – Goodwill and Other Intangible Assets
The table below summarizes the changes in carrying amounts of goodwill and other intangibles, including core deposit intangibles, for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Intangibles |
(Dollars in thousands) | | Goodwill | | Gross | | Accumulated Depreciation | | Net |
Balance at January 1, 2020 | | $ | 19,630 | | | $ | 4,226 | | | $ | (753) | | | $ | 3,473 | |
| | | | | | | | |
Reduction of goodwill and intangibles from sale of branches to Summit | | (1,598) | | | (845) | | | 441 | | | (404) | |
Intangibles resulting from First State acquisition | | — | | | 560 | | | — | | | 560 | |
Reduction of goodwill from ICM transaction | | (16,882) | | | — | | | — | | | — | |
Goodwill resulting from Paladin acquisition | | 1,200 | | | — | | | — | | | — | |
Amortization expense | | — | | | — | | | (1,229) | | | (1,229) | |
Balance at December 31, 2020 | | $ | 2,350 | | | $ | 3,941 | | | $ | (1,541) | | | $ | 2,400 | |
| | | | | | | | |
Balance at January 1, 2019 | | $ | 18,480 | | | $ | 1,006 | | | $ | (456) | | | $ | 550 | |
Goodwill and intangibles resulting from Chartwell acquisition | | 1,150 | | | 3,220 | | | — | | | 3,220 | |
Amortization expense | | — | | | — | | | (297) | | | (297) | |
Balance at December 31, 2019 | | $ | 19,630 | | | $ | 4,226 | | | $ | (753) | | | $ | 3,473 | |
| | | | | | | | |
Balance at January 1, 2018 | | $ | 18,480 | | | $ | 1,006 | | | $ | (360) | | | $ | 646 | |
Amortization expense | | — | | | — | | | (96) | | | (96) | |
Balance at December 31, 2018 | | $ | 18,480 | | | $ | 1,006 | | | $ | (456) | | | $ | 550 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Intangibles |
(Dollars in thousands) | | Goodwill | | Gross | | Accumulated Amortization | | Net |
Balance at January 1, 2023 | | $ | 3,988 | | | $ | 3,820 | | | $ | (2,189) | | | $ | 1,631 | |
Reduction of goodwill and intangibles resulting from sale of Chartwell | | (1,150) | | | (3,220) | | | 2,133 | | | (1,087) | |
Amortization expense | | — | | | — | | | (192) | | | (192) | |
Balance at December 31, 2023 | | $ | 2,838 | | | $ | 600 | | | $ | (248) | | | $ | 352 | |
| | | | | | | | |
Balance at January 1, 2022 | | $ | 3,988 | | | $ | 3,820 | | | $ | (1,504) | | | $ | 2,316 | |
Amortization expense | | — | | | — | | | (685) | | | (685) | |
Balance at December 31, 20221 | | $ | 3,988 | | | $ | 3,820 | | | $ | (2,189) | | | $ | 1,631 | |
| | | | | | | | |
Balance at January 1, 2021 | | $ | 2,350 | | | $ | 3,941 | | | $ | (1,541) | | | $ | 2,400 | |
Goodwill and intangibles resulting from Trabian acquisition | | 1,638 | | | 600 | | | — | | | 600 | |
Reduction of intangibles from sale of branches to Summit | | — | | | (721) | | | 721 | | | — | |
Amortization expense | | — | | | — | | | (684) | | | (684) | |
Balance at December 31, 2021 | | $ | 3,988 | | | $ | 3,820 | | | $ | (1,504) | | | $ | 2,316 | |
1 Includes $1.2 million of goodwill and $1.1 million of intangibles included under assets from discontinued operations on the balance sheet as of December 31, 2022.
Goodwill represents the excess of the purchase price over the fair value of acquired net assets under the acquisition method of accounting. Intangibles represent the core deposit intangibles from the acquisition of First State in 2020 and the intangibles resulting from the Chartwell and Paladin acquisitions. The value of the acquired core deposit relationships was determined using the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The core deposit intangibles were being amortized over a ten-year period using an accelerated method. The intangibles resulting from the ChartwellTrabian acquisition are related to their customer relationships backlog, a trademark and a non-competition agreement.trade name. These items are amortized over five years, 5.3 years, 15four years and four10 years, respectively.
The table below presents estimated amortization expense for the Company’sour other intangible assets (dollars in thousands):
| 2021 | | $ | 616 | |
2022 | | 616 | |
2023 | | 507 | |
2024 | 2024 | | 235 | |
2025 | 2025 | | 47 | |
2026 | |
2027 | |
2028 | |
Thereafter | Thereafter | | 379 | |
| $ | 2,400 | |
| | $ | |
The Company’sOur assessment of qualitative factors determined that it is not more likely than not that the fair value of each reporting unit is less than its carrying amount and therefore, goodwill is 0tnot impaired as of December 31, 20202023 and 2019. The Company has2022. We have not identified any triggering events since the impairment evaluation that would indicate potential impairment.
Intangibles, including core deposit intangibles are evaluated for impairment if events and circumstances indicate a potential for impairment. Such an evaluation of other intangible assets is based on undiscounted cash flow projections. NaNNo impairment charges were recorded for other intangible assets in any of the periods presented.
Note 13 – Stock Offerings
In August 2019,April 2021, the Board of DirectorsBank entered into a Stock Purchase Agreement with Trabian, a leading software development firm servicing financial institutions. Pursuant to the agreement, a portion of the Company announcedBank's purchase consideration for Trabian included 17,597 unregistered shares of our common stock.
In August 2021, the approvalBank entered into a Stock Purchase Agreement with Interchecks, a leading payment disbursement platform. Pursuant to the agreement, a portion of athe Bank's purchase consideration for Interchecks included 107,928 unregistered shares of our common stock.
In September 2021, the Bank issued 24,408 shares of unregistered common stock repurchase program, of which 49,100 shares were repurchased for $0.7 millionvalued at an average price of $14.52$40.97 per share, totaling
$1.0 million, pursuant to the Stock Purchase Agreement dated September 13, 2019 between March 2020the Bank and July 2020. In August 2020, the Board of Directors of the Company announced the approval of an extension of the existing stock repurchase program. Under the extended 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 aggregate share repurchases are completed, whichever date 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. From August 2020 through November 2020, the Company purchased an additional 210,824 shares for $3.5 million at an average price of $15.93 per share.Chartwell.
In December 2020,2021, the Company repurchased 536,490Bank issued 23,558 shares of itsunregistered common stock valued at a price of $20.25$42.45 per share, via a modified “Dutch auction” tender offer. Additionally,totaling $1.0 million, pursuant to the Company’s Board of Directors authorizedStock Purchase Agreement dated September 13, 2019 between the repurchase from time to time, on or before December 31, 2021, of up to $31.9 million ofBank and Chartwell.
In October 2022, we issued 313,030 shares of the Company’sunregistered common stock as part ofvalued at $30.60 per share, totaling $9.58 million, pursuant to the Company’s stock repurchase program, which repurchases may occur from time to time, onEquity Purchase Agreement dated March 13, 2022 between the open market or otherwise, at such pricesBank and upon such terms as the Company may determine and otherwise in accordance with applicable law.Warp Speed.
Note 14 – Stock Options and Other Equity AwardsStock-Based Compensation
The MVB Financial Corp. Incentive Stock Plan (the “Plan”) provides for the issuance of stock options, restricted stock awards and RSUs to selected employees and directors. On April 4, 2022, the Board of Directors adopted the MVB Financial Corp 2022 Incentive Plan (the “2022 Plan”), which was approved by the shareholders at the annual meeting dated, May 17, 2022.The 2022 Plan replaces the MVB Financial Corp. 2013 Stock Incentive Plan (the “2013 Plan”) and provides for 975,000 shares authorized for grant which includes the number of shares reserved for issuance under the 2013 Plan that remained available for grant thereunder as of the date of Board approval of the 2022 Plan. As of December 31, 2020, the Plan had 3.2 million2023, 637,526 shares authorized and 569,997 shares remainingremain available for issuance. To date, the Company has awarded both stock options and RSUs to selected employees and directors.
Stock-Based Compensation Expense
Stock-based compensation expense is recognized as salary and employee benefit cost based upon the fair value of the instruments on the date of the grant. The amount that the Companywe recognized in stock-based compensation expense related to the issuance of stock options and RSUs is presented in the following table:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 |
Stock Options | | $ | 950 | | | $ | 873 | | | $ | 936 | |
RSUs | | 1,403 | | | 886 | | | 331 | |
Total Stock-based compensation expense | | $ | 2,353 | | | $ | 1,759 | | | $ | 1,267 | |
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 |
Stock Options | | $ | 435 | | | $ | 501 | | | $ | 832 | |
RSUs | | 2,223 | | | 2,299 | | | 1,802 | |
Total stock-based compensation expense | | $ | 2,658 | | | $ | 2,800 | | | $ | 2,634 | |
Proceeds from stock options exercised were $4.5$0.6 million, $2.2$2.1 million and $2.1$4.9 million during 2020, 20192023, 2022 and 2018,2021, respectively. During 2020, 20192023, 2022 and 2018,2021, certain options were exercised in broker-assisted cashless transactions. Shares were forfeited related to exercise price and related tax obligations and the Companywe paid tax authorities amounts due resulting in a net cash outflow.
Stock Options
Under the provisions of the Plan, the option price per share shall not be less than the fair market value of the common stock on the date of the grant. Stock options expire ten years from the date of the grant. With the exception of 125,000 shares granted in 2017 that vest in four years and expire in ten years, allgrant date. Generally, options granted vest in three to five years and expire ten10 years from the date of the grant.grant date.
The following summarizes stock options as of and for the year ended December 31, 2020 and 2019 and the changes for the years then ended:2023:
| | 2020 | |
| Number of Shares | | Weighted-Average Exercise Price | |
| | 2023 | |
| | 2023 | |
| | 2023 | |
| | Number of Shares | |
| | Number of Shares | |
| | Number of Shares | |
Outstanding at beginning of year | |
Outstanding at beginning of year | |
Outstanding at beginning of year | Outstanding at beginning of year | | 1,593,241 | | | $ | 14.96 | | |
Granted | Granted | | 126,250 | | | 18.11 | | |
Granted | |
Granted | |
Exercised | |
Exercised | |
Exercised | Exercised | | (305,697) | | | 14.36 | | |
Forfeited | Forfeited | | (9,750) | | | 16.85 | | |
Forfeited | |
Forfeited | |
Expired | Expired | | (7,250) | | | 14.78 | | |
Expired | |
Expired | |
| Outstanding at end of year | |
| Outstanding at end of year | |
| Outstanding at end of year | Outstanding at end of year | | 1,396,794 | | | $ | 15.36 | | |
| Exercisable at end of year | Exercisable at end of year | | 947,988 | | | $ | 14.66 | | |
| Weighted-average fair value of options granted during 2020 | | | | $ | 4.48 | | |
Weighted-average fair value of options granted during 2019 | | | | $ | 4.22 | | |
Weighted-average fair value of options granted during 2018 | | | | $ | 5.97 | | |
Exercisable at end of year | |
| Exercisable at end of year | |
| Weighted-average fair value of options granted during 2023 | |
| Weighted-average fair value of options granted during 2023 | |
| Weighted-average fair value of options granted during 2023 | |
Weighted-average fair value of options granted during 2022 | |
Weighted-average fair value of options granted during 2022 | |
Weighted-average fair value of options granted during 2022 | |
Weighted-average fair value of options granted during 2021 | |
Weighted-average fair value of options granted during 2021 | |
Weighted-average fair value of options granted during 2021 | |
The intrinsic value of options exercised during 2020, 20192023, 2022 and 20182021 was $1.9$0.6 million, $1.9$3.5 million and $0.9$8.0 million, respectively.
The fair value for the options was estimated at the grant date of grant using a Black-Scholes option-pricing model with the following inputs:
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
Average risk-free interest rates | | 0.66 | % | | 2.02 | % | | 2.81 | % |
Weighted-average life | | seven years | | seven years | | seven years |
Expected volatility | | 30.9 | % | | 21.8 | % | | 18.6 | % |
Expected dividend yield | | 2.20 | % | | 0.84 | % | | 0.54 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
Average risk-free interest rates | | 4.06 | % | | 2.23 | % | | 1.27 | % |
Weighted-average life (years) | | 7 | | 7 | | 7 |
Expected volatility | | 42.4 | % | | 41.2 | % | | 41.2 | % |
Expected dividend yield | | 3.07 | % | | 1.58 | % | | 1.08 | % |
The following summarizes information related to the total outstanding and exercisable stock options at December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options Outstanding | | Options Exercisable |
Total Options | | Weighted-Average Exercise Price | | Intrinsic Value (in millions) | | Weighted-Average Remaining Life | | Total Options | | Weighted-Average Exercise Price | | Intrinsic Value (in millions) | | Weighted-Average Remaining Life |
1,396,794 | | $15.36 | | $10.2 | | 5.64 | | 947,988 | | $14.66 | | $7.6 | | 4.80 |
2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options Outstanding | | Options Exercisable |
Total Options | | Weighted-Average Exercise Price | | Intrinsic Value (in millions) | | Weighted-Average Remaining Life | | Total Options | | Weighted-Average Exercise Price | | Intrinsic Value (in millions) | | Weighted-Average Remaining Life |
890,745 | | $16.80 | | $5.6 | | 4.07 | | 757,219 | | $15.79 | | $5.3 | | 3.36 |
At December 31, 2020, based on stock options outstanding at that time, the2023, total unrecognized pre-tax compensation expense related to unvested stock options outstanding was $1.3$0.8 million. This cost is expected to be recognized over a weighted-average period of 2.92.5 years. AtFor the year ended December 31, 2020,2023, the fair value of stock options vested during the year was $0.9$0.5 million.
Restricted Stock Units
Under the provisions of the Plan, RSUs are similar to restricted stock awards, except the recipient does not receive the stock immediately, but instead receives itthe stock according to a vesting plan and distribution schedule, after achieving required performance milestones or upon remaining with the Companyus for a particular length of time. Each RSU that vests entitles the recipient to receive one share of the Company’sour common stock on a specified issuance date. The recipient does not have any stockholder rights, including voting, dividend or liquidation rights, with respect to the shares underlying awarded RSUs until the recipient becomes the record holder of those shares.
The CompanyWe granted 153,642224,364 RSUs in 2020, 97,9112023, 137,274 of which were time-based awards and 55,73187,090 of which were performance-based awards. Time-based RSUs granted in 20202023 generally vest in 5three equal installments per year over a five-yearthree-year period, with the exception of time-based grants to members of the boardBoard of directors,Directors, which vest over a one-year period. Performance-based RSUs vest in one installment at the end of three years, based on set criteria.
A summary of the activity for the Company’sour RSUs for the period indicated is presented in the following table:
| | 2020 | |
| Shares | | Weighted-Average Grant Date Fair Value | |
| | 2023 | |
| | 2023 | |
| | 2023 | |
| | Shares | |
| | Shares | |
| | Shares | |
Balance at beginning of year | |
Balance at beginning of year | |
Balance at beginning of year | Balance at beginning of year | | 160,758 | | | $ | 16.67 | | |
Granted | Granted | | 153,642 | | | 13.08 | | |
Granted | |
Granted | |
Vested | |
Vested | |
Vested | Vested | | (53,981) | | | 15.36 | | |
Forfeited | Forfeited | | (7,383) | | | 16.55 | | |
Forfeited | |
Forfeited | |
Balance at end of year | |
Balance at end of year | |
Balance at end of year | Balance at end of year | | 253,036 | | | $ | 14.70 | | |
| Weighted-average fair value of RSUs granted during 2020 | | $ | 13.08 | | |
Weighted-average fair value of RSUs granted during 2019 | | $ | 15.50 | | |
Weighted-average fair value of RSUs granted during 2018 | | $ | 19.33 | | |
Weighted-average fair value of RSUs granted during 2023 | |
| Weighted-average fair value of RSUs granted during 2023 | |
| Weighted-average fair value of RSUs granted during 2023 | |
Weighted-average fair value of RSUs granted during 2022 | |
Weighted-average fair value of RSUs granted during 2022 | |
Weighted-average fair value of RSUs granted during 2022 | |
Weighted-average fair value of RSUs granted during 2021 | |
Weighted-average fair value of RSUs granted during 2021 | |
Weighted-average fair value of RSUs granted during 2021 | |
At December 31, 2020,2023, based on RSU awards outstanding at that time, the total unrecognized pre-tax compensation expense related to unvested RSU awards was $2.3 million. $3.5 million. This cost is expected to be recognized over a weighted-average period of 2.81.8 years. At December 31, 2020,2023, the fair value of RSU awards vested during the year was $0.8$2.5 million.
Subsidiary Equity Plan
In December 2021, Victor's Board of Directors approved the Victor Technologies, Inc. 2021 Incentive Plan (the “2021 Victor LTI Plan”) which is an incentive plan denominated in Victor’s common shares. The 2021 Victor LTI Plan provides for the issuance of stock options, stock appreciation rights, restricted stock awards and restricted stock units to selected employees and directors. Effective October 2023, the maximum number of shares that may be issued under the plan was amended to 3.0 million shares from 5.0 million. As of December 31, 2023, 1.7 million shares remain available for issuance.
During 2023, Victor issued a total of 201,999options to employees and non-employees at an average exercise price of $0.29 per share. The options have a ten-year term and will vest over a three-year period, so long as the optionees remain employed by Victor.
During 2023, 372,331 shares vested and 9,999 shares were forfeited at an average exercise price of $0.29.
At December 31, 2023, the unrecognized compensation expense related to 636,698 nonvested stock options was not material.
Note 15 – Earnings Per Share
We determine basic earnings per share (“EPS”) by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is determined by dividing net income available to common shareholders by the weighted-average number of shares outstanding, increased by both the number of shares that would be issued assuming the exercise of instruments under our incentive stock plan.
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended |
| | December 31, |
(Dollars in thousands except shares and per share data) | | 2023 | | 2022 | | 2021 |
Numerator for earnings per share: | | | | | | |
Net income from continuing operations | | $ | 22,224 | | | $ | 11,734 | | | $ | 37,838 | |
Net loss attributable to noncontrolling interest | | 226 | | | 660 | | | 425 | |
Dividends on preferred stock | | — | | | — | | | (35) | |
Net income available to common shareholders from continuing operations | | 22,450 | | | 12,394 | | | 38,228 | |
Net income from discontinued operations available to common shareholders - basic and diluted | | 8,782 | | | 2,653 | | | 858 | |
Net income available to common shareholders | | $ | 31,232 | | | $ | 15,047 | | | $ | 39,086 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Denominator: | | | | | | |
Weighted-average shares outstanding - basic | | 12,694,206 | | | 12,279,462 | | | 11,778,557 | |
Effect of dilutive stock options and restricted stock units | | 303,126 | | | 591,272 | | | 835,063 | |
Weighted-average shares outstanding - diluted | | 12,997,332 | | | 12,870,734 | | | 12,613,620 | |
| | | | | | |
Earnings per share from continuing operations - basic | | $ | 1.77 | | | $ | 1.01 | | | $ | 3.25 | |
Earnings per share from discontinued operations - basic | | $ | 0.69 | | | $ | 0.22 | | | $ | 0.07 | |
Earnings per common share - basic | | $ | 2.46 | | | $ | 1.23 | | | $ | 3.32 | |
Earnings per share from continuing operations - diluted | | $ | 1.72 | | | $ | 0.96 | | | $ | 3.03 | |
Earnings per share from discontinued operations - diluted | | $ | 0.68 | | | $ | 0.21 | | | $ | 0.07 | |
Earnings per common share - diluted | | $ | 2.40 | | | $ | 1.17 | | | $ | 3.10 | |
| | | | | | |
Instruments not included in the computation of diluted EPS because the effect would be antidilutive | | 364,105 | | | 113,427 | | | 93,895 | |
Note 1516 – Regulatory Capital Requirements
The Company and the BankWe are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’sour consolidated financial statements. The Bank is required to comply with applicable capital adequacy standards established by the FDIC. The Company is exempt from the Federal Reserve Board’s capital adequacy standards as it believes it meets the requirements of the Small Bank Holding Company Policy Statement.federal banking agencies. West Virginia state chartered banks, such as the Bank, are subject to similar capital requirements adopted by the West Virginia Division of Financial Institutions.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Totalcapital. The optional community bank leverage ratio ("CBLR") framework, which is issued through interagency guidance, intends to provide a simple alternative measure of capital Tier 1 capital and Tier 1 common equityadequacy for electing qualifying depository institutions as directed under the EGRRCPA. Under the CBLR, if a qualifying depository institution elects to risk-weighted assets, anduse such measure, such institutions will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets as defined.(i.e., leverage ratio) exceeds a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios. As of December 31, 20202023 and 2019, the Company2022, we and the Bank meetmet all capital adequacy requirements to which they are subject.
The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain the minimum total risk-based, Tier 1 risk-based, Tier 1 common equity risk-based and Tier 1 leverage ratiosCBLR as set forth in the table below. Both the Company’s and the Bank’sOur actual capital amounts and ratios areratio is presented in the table below.
The Bank elected to begin using the CBLR for the first quarter of 2021 and intends to utilize this measure for the foreseeable future. Eligibility criteria to utilize the CBLR includes the following:
● Total assets of less than $10 billion;
● Total trading assets plus liabilities of 5% or less of consolidated assets;
● Total off-balance sheet exposures of 25% or less of consolidated assets;
● Cannot be an advanced approaches banking organization; and
● Leverage ratio greater than 9% or temporarily prescribed threshold established in response to COVID-19.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Requirement | | | | Minimum to be Well Capitalized |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | | | | | Amount | | Ratio |
As of December 31, 2020 | | | | | | | | | | | | | | | | |
Total Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 273,318 | | | 15.8% | | $ | 138,277 | | | 8.0% | | | | | | $ | 172,846 | | | 10.0% |
| | | | | | | | | | | | | | | | |
Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 251,565 | | | 14.6% | | $ | 103,708 | | | 6.0% | | | | | | $ | 138,277 | | | 8.0% |
| | | | | | | | | | | | | | | | |
Common Equity Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 251,565 | | | 14.6% | | $ | 77,781 | | | 4.5% | | | | | | $ | 112,350 | | | 6.5% |
| | | | | | | | | | | | | | | | |
Tier 1 Capital (to average assets) | | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 251,565 | | | 11.0% | | $ | 91,269 | | | 4.0% | | | | | | $ | 114,086 | | | 5.0% |
| | | | | | | | | | | | | | | | |
As of December 31, 2019 | | | | | | | | | | | | | | | | |
Total Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 201,672 | | | 12.8% | | $ | 125,686 | | | 8.0% | | | | | | $ | 157,107 | | | 10.0% |
| | | | | | | | | | | | | | | | |
Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 189,365 | | | 12.1% | | $ | 94,264 | | | 6.0% | | | | | | $ | 125,686 | | | 8.0% |
| | | | | | | | | | | | | | | | |
Common Equity Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 189,365 | | | 12.1% | | $ | 70,698 | | | 4.5% | | | | | | $ | 102,120 | | | 6.5% |
| | | | | | | | | | | | | | | | |
Tier 1 Capital (to average assets) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Subsidiary Bank | | $ | 189,365 | | | 9.9% | | $ | 76,182 | | | 4.0% | | | | | | $ | 95,227 | | | 5.0% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Requirement | | | | Minimum to be Well Capitalized |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | | | | | Amount | | Ratio |
As of December 31, 2023 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Community Bank leverage ratio | | | | | | | | | | | | | | | | |
Subsidiary bank | | $ | 348,760 | | | 10.5% | | $ | 264,484 | | | 8.0% | | | | | | $ | 297,544 | | | 9.0% |
| | | | | | | | | | | | | | | | |
As of December 31, 2022 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Community Bank leverage ratio | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Subsidiary bank | | $ | 307,936 | | | 9.8% | | $ | 250,675 | | | 8.0% | | | | | | $ | 282,010 | | | 9.0% |
Note 1617 – Regulatory Restriction on Dividends
The approval of the regulatory agencies is required if the total of all dividends declared by the Bank in any calendar year exceeds the Bank’s net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years.
Note 1718 – Fair Value of Financial Instruments
The carrying values and estimated fair values of 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) |
December 31, 2020 | | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 263,893 | | | $ | 263,893 | | | $ | 263,893 | | | $ | 0 | | | $ | 0 | |
Certificates of deposit with banks | | 11,803 | | | 11,986 | | | 0 | | | 11,986 | | | 0 | |
Securities available-for-sale | | 410,624 | | | 410,624 | | | 0 | | | 366,945 | | | 43,679 | |
Equity securities | | 27,585 | | | 27,585 | | | 472 | | | 0 | | | 27,113 | |
Loans held-for-sale | | 1,062 | | | 1,062 | | | 0 | | | 1,062 | | | 0 | |
Loans | | 1,427,900 | | | 1,434,275 | | | 0 | | | 0 | | | 1,434,275 | |
Mortgage servicing rights | | 2,942 | | | 2,942 | | | 0 | | | 0 | | | 2,942 | |
| | | | | | | | | | |
Interest rate swap | | 13,822 | | | 13,822 | | | 0 | | | 13,822 | | | 0 | |
Accrued interest receivable | | 7,793 | | | 7,793 | | | 0 | | | 2,770 | | | 5,023 | |
Fair value hedge | | 2,215 | | | 2,215 | | | 0 | | | 2,215 | | | 0 | |
Bank-owned life insurance | | 41,262 | | | 41,262 | | | 0 | | | 41,262 | | | 0 | |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 1,982,389 | | | $ | 1,964,860 | | | $ | 0 | | | $ | 1,964,860 | | | $ | 0 | |
Repurchase agreements | | 10,266 | | | 10,266 | | | 0 | | | 10,266 | | | 0 | |
| | | | | | | | | | |
| | | | | | | | | | |
Fair value hedge | | 2,141 | | | 2,141 | | | 0 | | | 2,141 | | | 0 | |
Interest rate swap | | 13,822 | | | 13,822 | | | 0 | | | 13,822 | | | 0 | |
Accrued interest payable | | 572 | | | 572 | | | 0 | | | 572 | | | 0 | |
Subordinated debt | | 43,407 | | | 45,536 | | | 0 | | | 45,536 | | | 0 | |
| | | | | | | | | | |
December 31, 2019 | | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 28,002 | | | $ | 28,002 | | | $ | 28,002 | | | $ | 0 | | | $ | 0 | |
Certificates of deposits with banks | | 12,549 | | | 12,586 | | | 0 | | | 12,586 | | | 0 | |
Securities available-for-sale | | 235,821 | | | 235,821 | | | 0 | | | 198,562 | | | 37,259 | |
Equity securities | | 18,514 | | | 18,514 | | | 0 | | | 0 | | | 18,514 | |
Loans held-for-sale | | 109,788 | | | 109,788 | | | 0 | | | 109,788 | | | 0 | |
Loans | | 1,362,766 | | | 1,364,706 | | | 0 | | | 0 | | | 1,364,706 | |
Mortgage servicing rights | | 348 | | | 348 | | | 0 | | | 0 | | | 348 | |
Interest rate lock commitment | | 1,660 | | | 1,660 | | | 0 | | | 0 | | | 1,660 | |
Interest rate swap | | 5,722 | | | 5,722 | | | 0 | | | 5,722 | | | 0 | |
| | | | | | | | | | |
Fair value hedge | | 1,770 | | | 1,770 | | | 0 | | | 1,770 | | | 0 | |
Accrued interest receivable | | 7,909 | | | 7,909 | | | 0 | | | 1,592 | | | 6,317 | |
Bank-owned life insurance | | 35,374 | | | 35,374 | | | 0 | | | 35,374 | | | 0 | |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 1,265,042 | | | $ | 1,249,135 | | | $ | 0 | | | $ | 1,249,135 | | | $ | 0 | |
Repurchase agreements | | 10,172 | | | 10,172 | | | 0 | | | 10,172 | | | 0 | |
FHLB and other borrowings | | 222,885 | | | 222,891 | | | 0 | | | 222,891 | | | 0 | |
Mortgage-backed security hedges | | 186 | | | 186 | | | 0 | | | 186 | | | 0 | |
Fair value hedge | | 1,418 | | | 1,418 | | | 0 | | | 1,418 | | | |
Interest rate swap | | 5,722 | | | 5,722 | | | 0 | | | 5,722 | | | 0 | |
Accrued interest payable | | 1,060 | | | 1,060 | | | 0 | | | 1,060 | | | 0 | |
Subordinated debt | | 4,124 | | | 4,124 | | | 0 | | | 4,124 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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) |
December 31, 2023 | | | | | | | | | | |
Financial Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 398,229 | | | $ | 398,229 | | | $ | 398,229 | | | $ | — | | | $ | — | |
| | | | | | | | | | |
Securities available-for-sale | | 345,275 | | | 345,275 | | | — | | | 319,530 | | | 25,745 | |
Equity securities | | 41,086 | | | 41,086 | | | 3,590 | | | — | | | 37,496 | |
Loans held-for-sale | | 629 | | | 629 | | | — | | | 629 | | | — | |
Loans receivable, net | | 2,295,470 | | | 2,230,279 | | | — | | | — | | | 2,230,279 | |
Servicing assets | 0 | 1,768 | | | 1,799 | | | — | | | — | | | 1,799 | |
Interest rate swaps | | 6,249 | | | 6,249 | | | — | | | 6,249 | | | — | |
| | | | | | | | | | |
Accrued interest receivable | | 15,267 | | | 15,267 | | | — | | | 2,836 | | | 12,431 | |
FHLB Stock | | 2,094 | | | 2,094 | | | — | | | 2,094 | | | — | |
Bank-owned life insurance | | 44,287 | | | 44,287 | | | — | | | 44,287 | | | — | |
Embedded derivative | | 648 | | | 648 | | | — | | | — | | | 648 | |
| | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | |
Deposits | | $ | 2,901,476 | | | $ | 2,587,246 | | | $ | — | | | $ | 2,587,246 | | | $ | — | |
Repurchase Agreements | | 4,821 | | | 4,821 | | | — | | | 4,821 | | | — | |
Interest rate swaps | | 6,249 | | | 6,249 | | | — | | | 6,249 | | | — | |
Fair value hedge | | 6,111 | | | 6,111 | | | — | | | 6,111 | | | — | |
Accrued interest payable | | 2,385 | | | 2,385 | | | — | | | 2,385 | | | — | |
| | | | | | | | | | |
Senior term loan | | 6,786 | | | 6,786 | | | — | | | 6,786 | | | — | |
Subordinated debt | | 73,540 | | | 57,234 | | | — | | | 57,234 | | | — | |
| | | | | | | | | | |
December 31, 2022 | | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 40,280 | | | $ | 40,280 | | | $ | 40,280 | | | $ | — | | | $ | — | |
Securities available-for-sale | | 379,814 | | | 379,814 | | | — | | | 344,471 | | | 35,343 | |
Equity securities | | 38,744 | | | 38,744 | | | 5,382 | | | — | | | 33,362 | |
Loans held-for-sale | | 23,126 | | | 24,898 | | | — | | | 24,898 | | | — | |
Loans receivable, net | | 2,348,808 | | | 2,285,427 | | | — | | | — | | | 2,285,427 | |
Servicing rights | | 1,616 | | | 1,634 | | | — | | | — | | | 1,634 | |
Interest rate swaps | | 8,427 | | | 8,427 | | | — | | | 8,427 | | | — | |
Accrued interest receivable | | 12,617 | | | 12,617 | | | — | | | 2,778 | | | 9,839 | |
Bank-owned life insurance | | 43,239 | | | 43,239 | | | — | | | 43,239 | | | — | |
Embedded derivative | | 787 | | | 787 | | | — | | | — | | | 787 | |
| | | | | | | | | | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 2,570,482 | | | $ | 2,226,037 | | | $ | — | | | $ | 2,226,037 | | | $ | — | |
Repurchase agreements | | 10,037 | | | 10,037 | | | — | | | 10,037 | | | — | |
FHLB and other borrowings | | 102,333 | | | 102,006 | | | — | | | 102,006 | | | — | |
Fair value hedges | | 572 | | | 572 | | | — | | | 572 | | | |
Interest rate swaps | | 8,427 | | | 8,427 | | | — | | | 8,427 | | | — | |
Accrued interest payable | | 2,558 | | | 2,558 | | | — | | | 2,558 | | | — | |
Senior term loan | | 9,765 | | | 9,765 | | | — | | | 9,765 | | | — | |
Subordinated debt | | 73,286 | | | 64,330 | | | — | | | 64,330 | | | — | |
Note 1819 – Fair Value Measurements
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’sof our entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’sour 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 balanceon- 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.
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 Company classified investments in government securities as Level II instruments and valued them using the market approach. 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 United States 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,
United States Treasury securities that are traded by dealers or brokers in inactive over-the-counter markets and corporate debt securities. There have been no changes in valuation techniques for the year ended December 31, 2020. Valuation techniques are consistent with techniques used in prior periods.2023. Certain local municipal securities related to tax increment financing (“TIF”) are independently valued and classified as Level III instruments. We classified investments in government securities as Level II instruments and valued them using the market approach.
Equity securities — Certainequity securities are recorded at fair value on a nonrecurringrecurring 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’ssecurity'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 year ended December 31, 2023. 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-marketsecondary 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. If the fair value at the reporting date exceeds the amortized cost of a loan, the loan is reported at amortized cost.
Interest rate lock commitment —swaps 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 — –Mortgage-backed security 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 the fair value of identical or similar instruments by using pricing models that consider observable market data.
Fair value hedge —hedges – 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.
Bank-owned life insurance - Life insurance where the bank is both the policy beneficiary and owner. Bank-owned life insurance is recorded at fair value on a recurring basis, and increases in cash surrender, contract value and net insurance proceeds at maturity are recorded as other income.
Embedded derivatives — Accounted for and recorded separately from the underlying contract as a derivative at fair value on a recurring basis. Fair values are determined using the Monte Carlo model valuation technique. The valuation methodology utilized includes significant unobservable inputs.
The following tables present the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of December 31, 20202023 and 20192022 by level within the fair value hierarchy.hierarchy:
| | | | December 31, 2020 | | | December 31, 2023 |
(Dollars in thousands) | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Assets: | Assets: | | | | | | | | |
United States government agency securities | United States government agency securities | | $ | 0 | | | $ | 56,992 | | | $ | 0 | | | $ | 56,992 | |
United States government agency securities | |
United States government agency securities | |
United States sponsored mortgage-backed securities | United States sponsored mortgage-backed securities | | 0 | | | 95,769 | | | 0 | | | 95,769 | |
United States treasury securities | |
Municipal securities | Municipal securities | | 0 | | | 188,208 | | | 43,679 | | | 231,887 | |
Corporate debt securities | |
| Other securities | |
Other securities | |
Other securities | Other securities | | 0 | | | 18,476 | | | 0 | | | 18,476 | |
Equity securities | Equity securities | | 472 | | | 0 | | | 0 | | | 472 | |
Loans held-for-sale | Loans held-for-sale | | 0 | | | 1,062 | | | 0 | | | 1,062 | |
Interest rate swaps | |
| Interest rate swap | | 0 | | | 13,822 | | | 0 | | | 13,822 | |
Bank-owned life insurance | |
Bank-owned life insurance | |
Bank-owned life insurance | |
Embedded derivative | |
Liabilities: | |
Interest rate swaps | |
Interest rate swaps | |
Interest rate swaps | |
Fair value hedge | Fair value hedge | | 0 | | | 2,215 | | | 0 | | | 2,215 | |
| Liabilities: | |
Interest rate swap | | 0 | | | 13,822 | | | 0 | | | 13,822 | |
Fair value hedge | | 0 | | | 2,141 | | | 0 | | | 2,141 | |
|
| | | | December 31, 2019 | | | December 31, 2022 |
(Dollars in thousands) | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Assets: | Assets: | | | | | | | | |
United States government agency securities | United States government agency securities | | $ | 0 | | | $ | 51,996 | | | $ | 0 | | | $ | 51,996 | |
United States government agency securities | |
United States government agency securities | |
United States sponsored mortgage-backed securities | United States sponsored mortgage-backed securities | | 0 | | | 58,312 | | | 0 | | | 58,312 | |
United States treasury securities | |
Municipal securities | Municipal securities | | 0 | | | 75,833 | | | 37,259 | | | 113,092 | |
Corporate debt securities | |
Other securities | Other securities | | 0 | | | 12,421 | | | 0 | | | 12,421 | |
| Equity securities | |
Loans held-for-sale | Loans held-for-sale | | 0 | | | 109,788 | | | 0 | | | 109,788 | |
Interest rate lock commitment | | 0 | | | 0 | | | 1,660 | | | 1,660 | |
Interest rate swap | | 0 | | | 5,722 | | | 0 | | | 5,722 | |
| Interest rate swaps | |
Bank-owned life insurance | |
Embedded derivative | |
Liabilities: | |
Interest rate swaps | |
Interest rate swaps | |
Interest rate swaps | |
Fair value hedge | Fair value hedge | | 0 | | | 1,770 | | | 0 | | | 1,770 | |
| Liabilities: | |
Interest rate swap | | 0 | | | 5,722 | | | 0 | | | 5,722 | |
Fair value hedge | | 0 | | | 1,418 | | | 0 | | | 1,418 | |
Mortgage-backed security hedges | | 0 | | | 186 | | | 0 | | | 186 | |
The following table represents recurring Level III assets:assets as of the periods shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Interest Rate Lock Commitments | | Municipal Securities | | Equity Securities | | Total |
Balance at December 31, 2019 | | $ | 1,660 | | | $ | 37,259 | | | $ | 0 | | | $ | 38,919 | |
Realized and unrealized gains (losses) included in earnings | | (1,660) | | | 3 | | | 0 | | | (1,657) | |
Purchase of securities | | 0 | | | 22,228 | | | 0 | | | 22,228 | |
Maturities/calls | | 0 | | | (15,778) | | | 0 | | | (15,778) | |
Unrealized gain included in other comprehensive income (loss) | | 0 | | | 7,119 | | | 0 | | | 7,119 | |
Unrealized loss included in other comprehensive income (loss) | | 0 | | | (7,152) | | | 0 | | | (7,152) | |
Balance at December 31, 2020 | | $ | 0 | | | $ | 43,679 | | | $ | 0 | | | $ | 43,679 | |
| | | | | | | | |
Balance at December 31, 2018 | | $ | 1,750 | | | $ | 33,122 | | | $ | 300 | | | $ | 35,172 | |
Realized and unrealized losses included in earnings | | (90) | | | 0 | | | 0 | | | (90) | |
Purchase of securities | | 0 | | | 842 | | | 0 | | | 842 | |
Reclassification to nonrecurring assets | | 0 | | | 0 | | | (300) | | | (300) | |
Maturities/calls | | 0 | | | (15,716) | | | 0 | | | (15,716) | |
Unrealized gain included in other comprehensive income (loss) | | 0 | | | 34,702 | | | 0 | | | 34,702 | |
Unrealized loss included in other comprehensive income (loss) | | 0 | | | (15,691) | | | 0 | | | (15,691) | |
Balance at December 31, 2019 | | $ | 1,660 | | | $ | 37,259 | | | $ | 0 | | | $ | 38,919 | |
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Municipal Securities | | Embedded Derivatives | | Total |
Balance at December 31, 2022 | | $ | 35,343 | | | $ | 787 | | | $ | 36,130 | |
Realized and unrealized income (loss) included in earnings | | 47 | | | (139) | | | (92) | |
Purchase of securities | | 246 | | | — | | | 246 | |
Maturities/calls | | (18,294) | | | — | | | (18,294) | |
Unrealized gain included in other comprehensive loss | | 903 | | | — | | | 903 | |
Balance at December 31, 2023 | | $ | 18,245 | | | $ | 648 | | | $ | 18,893 | |
| | | | | | |
Balance at December 31, 2021 | | $ | 41,763 | | | $ | — | | | $ | 41,763 | |
Realized and unrealized gains included in earnings | | 9 | | | — | | | 9 | |
Purchase of securities | | 1,048 | | | — | | | 1,048 | |
Maturities/calls | | (3,207) | | | — | | | (3,207) | |
Unrealized loss included in other comprehensive loss | | (4,270) | | | — | | | (4,270) | |
Host contract executed | | — | | | 787 | | | 787 | |
Balance at December 31, 2022 | | $ | 35,343 | | | $ | 787 | | | $ | 36,130 | |
Assets Measured on a Nonrecurring Basis
The CompanyWe 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. GAAP. 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 non-recurring 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 20202023 and 20192022 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loancredit 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.
ImpairedCollateral-dependent loans — Loans- Certain loans receivable are evaluated individually for which itcredit loss when the borrower is probable that paymentexperiencing financial difficulties and repayment is expected to be provided substantially through the operation or sale of interest and principal will not be made in accordance with the contractual terms of the loan agreementcollateral. Estimated credit losses are considered impaired. Once a loan is identified as individually 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 whichbased on the fair value of the expected repayments or collateral, exceed the recorded investments in such loans.adjusted for costs to sell. 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 impairedcollateral-dependent real estate related loans, the Company obtainswe obtain 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 obtainswe obtain a current external appraisal.
Other debt securities — – Certain debt securities are recorded at fair value on a nonrecurring basis. These other debt securities which include preferred member interest in an equity method investment, are securities without a readily determinable fair value and are measured at cost minus impairment, if any.
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.
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 December 31, 20202023 and 20192022 are included in the table below:
| | December 31, 2020 |
| | December 31, 2023 | | | | December 31, 2023 |
(Dollars in thousands) | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total | (Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Impaired loans | | $ | 0 | | | $ | 0 | | | $ | 14,098 | | | $ | 14,098 | |
Collateral-dependent loans | |
Other real estate owned | Other real estate owned | | 0 | | | 0 | | | 5,730 | | | 5,730 | |
Other debt securities | Other debt securities | | 0 | | | 0 | | | 7,500 | | | 7,500 | |
Equity securities | Equity securities | | 0 | | | 0 | | | 27,113 | | | 27,113 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Collateral-dependent loans | | $ | — | | | $ | — | | | $ | 14,117 | | | $ | 14,117 | |
Other real estate owned | | — | | | — | | | 1,194 | | | 1,194 | |
Other debt securities | | — | | | — | | | 7,500 | | | 7,500 | |
| | | | | | | | |
Equity securities | | — | | | — | | | 33,362 | | | 33,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Level I | | Level II | | Level III | | Total |
Impaired loans | | $ | 0 | | | $ | 0 | | | $ | 8,909 | | | $ | 8,909 | |
Other real estate owned | | 0 | | | 0 | | | 1,397 | | | 1,397 | |
Equity securities | | 0 | | | 0 | | | 18,514 | | | 18,514 | |
The carrying amount of equity securities without a readily determinable fair value and amounts of unrealized gains and losses recognized in earnings as of December 31, 2023 and 2022 are included in the table below: | | | | | | | | | | | | | | |
(Dollars in thousands) | | Cumulative Adjustments | | Annual Adjustments |
December 31, 2023 | | | | |
Carrying value | | $ | 37,496 | | | $ | 37,496 | |
Carrying value adjustments: | | | | |
Upward changes for observable prices | | 18,038 | | | 671 | |
Downward changes for observable prices | | (2,014) | | | (250) | |
Net gain | | $ | 16,024 | | | $ | 421 | |
| | | | |
December 31, 2022 | | | | |
Carrying value | | $ | 33,362 | | | $ | 33,362 | |
Carrying value adjustments: | | | | |
Upward changes for observable prices | | 17,367 | | | 203 | |
Downward changes for observable prices | | (1,764) | | | (1,652) | |
Net gain (loss) | | $ | 15,603 | | | $ | (1,449) | |
At December 31, 2023 equity securities consist of our Fintech investment portfolio, which is comprised of investments in10 companies with a carrying value of $36.4 million, and other equity security investments with a carrying value of $1.1 million. The equity securities included in the table above do not have readily determinable fair values and are recorded at cost and adjusted for observable price changes for underlying transactions for identical or similar investments. The net gain (loss) in values of the equity securities is included in holding gain (loss) on equity securities in our consolidated statements of income.
The following tables presents quantitative information about the Level III significant unobservable inputs for assets and liabilities measured at fair value at December 31, 20202023 and 2019.2022:
| | | | Quantitative Information about Level III Fair Value Measurements | | | Quantitative Information about Level III Fair Value Measurements |
(Dollars in thousands) | (Dollars in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input | | Range | (Dollars in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input | | Range |
December 31, 2020 | | | | | | | | |
December 31, 2023 | |
Nonrecurring measurements: | Nonrecurring measurements: | |
Impaired loans | | $ | 14,098 | | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 20% - 62% |
Nonrecurring measurements: | |
Nonrecurring measurements: | |
Collateral-dependent loans | |
Collateral-dependent loans | |
Collateral-dependent loans | | | $ | 2,891 | | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 0% - 20% |
| | | | | | | Liquidation expense 2 | | 5% - 10% | | | | | | | Liquidation expense 2 | | 6% |
| Other real estate owned | |
Other real estate owned | |
Other real estate owned | Other real estate owned | | $ | 5,730 | | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 20% - 30% | | $ | 825 | | | Appraisal of collateral 1 | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 0% - 20% |
| | | | | | | Liquidation expense 2 | | 5% - 10% | | | | | | | Liquidation expense 2 | | 6% |
| Other debt securities | Other debt securities | | $ | 7,500 | | | Net asset value | | Cost minus impairment | | 0% |
Other debt securities | |
Other debt securities | | | $ | 7,500 | | | Net asset value | | Cost, less impairment | | 0% |
| Equity securities | |
Equity securities | |
Equity securities | Equity securities | | $ | 27,113 | | | Net asset value | | Cost minus impairment | | 0% | | $ | 37,496 | | | Net asset value | | Net asset value | | Cost, less impairment | | 0% |
| Recurring measurements: | Recurring measurements: | |
Municipal securities (Local TIF bonds) | | $ | 43,679 | | | Appraisal of bond 3 | | Bond appraisal adjustment 4 | | 5% - 15% |
Recurring measurements: | |
Recurring measurements: | |
Municipal securities 5 | |
Municipal securities 5 | |
Municipal securities 5 | | | $ | 18,245 | | | Appraisal of bond 3 | | Bond appraisal adjustment 4 | | 5% - 15% |
| Embedded Derivatives | |
Embedded Derivatives | |
Embedded Derivatives | | | $ | 648 | | | Monte Carlo pricing model | | Deferred payment | | $0 - $49.1 million |
| | | | | | Volatility | | | | | | | | Volatility | | 59% |
| | | | | | Term | | | | | | | | Term | | 4.75 years |
| | | | | | Risk free rate | | | | | | | | Risk free rate | | 3.59% |
| | | | Quantitative Information about Level III Fair Value Measurements | | | Quantitative Information about Level III Fair Value Measurements |
(Dollars in thousands) | (Dollars in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input | | Range | (Dollars in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input | | Range |
December 31, 2019 | | | | | | | | |
December 31, 2022 | |
Nonrecurring measurements: | Nonrecurring measurements: | |
Nonrecurring measurements: | |
Nonrecurring measurements: | |
Impaired loans | |
Impaired loans | |
Impaired loans | Impaired loans | | $ | 8,909 | | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 20% - 62% | | $ | 14,117 | | | Appraisal of collateral 1 | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 0% - 20% |
| | | | | | | Liquidation expense 2 | | 5% - 10% | | | | | | | Liquidation expense 2 | | 6% |
| Other real estate owned | Other real estate owned | | $ | 1,397 | | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 20% - 30% |
Other real estate owned | |
Other real estate owned | | | $ | 1,194 | | | Appraisal of collateral 1 | | Appraisal adjustments 2 | | 0% - 20% |
| | | | | | | Liquidation expense 2 | | 5% - 10% | | | | | | | Liquidation expense 2 | | 6% |
| Other debt securities | |
Other debt securities | |
Other debt securities | | | $ | 7,500 | | | Net asset value | | Cost, less impairment | | 0% |
| Equity securities | |
Equity securities | |
Equity securities | Equity securities | | $ | 18,514 | | | Net asset value | | Cost minus impairment | | 0% | | $ | 33,362 | | | Net asset value | | Net asset value | | Cost, less impairment | | 0% |
| Recurring measurements: | Recurring measurements: | |
Municipal securities (Local TIF bonds) | | $ | 37,259 | | | Appraisal of bond 3 | | Bond appraisal adjustment 4 | | 5% - 15% |
Recurring measurements: | |
Recurring measurements: | |
Municipal securities 5 | |
Municipal securities 5 | |
Municipal securities 5 | | | $ | 35,343 | | | Appraisal of bond 3 | | Bond appraisal adjustment 4 | | 5% - 15% |
| Interest rate lock commitments | | $ | 1,660 | | | Pricing model | | Pull through rates | | 77% - 82% |
Embedded Derivatives | |
Embedded Derivatives | |
Embedded Derivatives | | | $ | 787 | | | Monte Carlo pricing model | | Deferred payment | | $0 - $51.9 million |
| | | | | | Volatility | | | | | | | | Volatility | | 58% |
| | | | | | Term | | | | | | | | Term | | 5 years |
| | | | | | Risk free rate | | | | | | | | Risk free rate | | 3.95% |
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.conditions, liquidity, marketability and legal structure.
5 Municipal securities classified as Level III instruments are comprised of TIF bonds related to certain local municipal securities.
Note 20 – Derivatives
We use certain derivative instruments to meet the needs of customers, as well as to manage the interest rate risk associated with certain transactions. All derivative financial instruments are recognized as either assets or liabilities and measured at fair value.
Fair Value Hedges of Interest Rate Risk
We are exposed to changes in the fair value of fixed rate mortgages and certain fixed rate available for sale securities included in a closed portfolio due to changes in benchmark interest rates.
We entered into a pay-fixed/receive-variable interest rate swap in 2019 with a notional amount of $10.9 million and a fair value of $0.6 million at December 31, 2022, which was designated as a fair value hedge associated with certain available for sale securities.This hedging relationship was discontinued during the first quarter of 2023.
In 2023, we entered into five fixed portfolio layer method fair value swaps, designated as hedging instruments, to manage exposure to changes in fair value on fixed rate mortgages and certain fixed rate available for sale securities attributable to the designated interest rate. Four of the interest rate swaps are designated to hedge a closed portfolio of fixed rate mortgages, and one of the interest rate swaps is designated to hedge a closed portfolio of fixed rate municipal bonds. The interest rate swaps involve the payment of fixed-rate amounts to a counterparty in exchange for us receiving variable-rate payments over the life of the agreements, without the exchange of the underlying notional amount.
We designated the fair value swaps under the portfolio layer method (“PLM”). The total notional amount of the five swaps was $440.3 millionas of December 31, 2023, one of which is amortizing and included a $9.7 millionamortization adjustment to the notional amount at December 31, 2023. Under this method, the hedged items are designated as a hedged layer of closed portfolios of financial loans and municipal bonds that are anticipated to remain outstanding for the designated hedged periods. Adjustments are made to record the swaps at fair value on the consolidated balance sheets, with changes in fair value recognized in interest income. The carrying values of the fair value swaps on the consolidated balance sheets are also adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.
The following table represents the carrying value of the portfolio layer method hedged assets and the cumulative fair value hedging adjustments included in the carrying value of the hedged assets as of December 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
(Dollars in thousands) | Balance Sheet Location | Amortized Cost Basis | Hedged Asset | Basis Adjustment | | Amortized Cost Basis | Hedged Asset | Basis Adjustment |
Fixed rate mortgages | Loans receivable | $ | 491,018 | | $ | 390,297 | | $ | 4,055 | | | $ | — | | $ | — | | $ | — | |
Fixed rate bonds | Investment securities available-for-sale | 59,270 | | 50,000 | | 1,570 | | | 11,059 | | 10,885 | | (244) | |
Total hedged assets | | $ | 550,288 | | $ | 440,297 | | $ | 5,625 | | | $ | 11,059 | | $ | 10,885 | | $ | (244) | |
Derivatives Not Designated as Hedging Instruments
Matched Interest Rate Swaps. We enter into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating-rate loan payments to fixed rate loan payments. When we enter into an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a "mirror" swap contract with a third-party. The third-party exchanges the borrower's fixed-rate loan payments for floating-rate loan payments. These derivatives are not designated as hedges and changes in fair value are recognized in earnings. Because these derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in earnings through loan-related derivative income.
The following tables summarize outstanding financial derivative instruments as of December 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | December 31, 2023 |
(Dollars in thousands) | Balance Sheet Location | Notional Amount | Fair Value of Asset (Liability) | Gain (Loss) |
Fair value hedge of interest rate risk: | | | | |
Pay fixed rate swaps with counterparty | Accrued interest receivable and other assets | $ | 440,297 | | $ | (6,111) | | $ | (6,111) | |
| | | | |
Not designated hedges of interest rate risk: | | | | |
Matched interest rate swaps with borrowers | Accrued interest receivable and other assets | 126,494 | | 6,249 | | 6,249 | |
Matched interest rate swaps with counterparty | Accrued interest payable and other liabilities | 126,494 | | (6,249) | | (6,249) | |
| | | | |
Total derivatives | | $ | 693,285 | | $ | (6,111) | | $ | (6,111) | |
| | | | | | | | | | | | | | |
| | December 31, 2022 |
(Dollars in thousands) | Balance Sheet Location | Notional Amount | Fair Value of Asset (Liability) | Gain (Loss) |
Fair value hedge of interest rate risk: | | | | |
Pay fixed rate swaps with counterparty | Accrued interest receivable and other assets | $ | 10,885 | | $ | 578 | | $ | 578 | |
| | | | |
Not designated hedges of interest rate risk: | | | | |
Matched interest rate swaps with borrowers | Accrued interest receivable and other assets | 137,739 | | 8,427 | | 8,427 | |
Matched interest rate swaps with counterparty | Accrued interest payable and other liabilities | 137,739 | | (8,427) | | (8,427) | |
| | | | |
Total derivatives | | $ | 286,363 | | $ | 578 | | $ | 578 | |
Embedded Derivative
In December 2022, we entered into an agreement to sell a portion of our shares of Interchecks Technologies, Inc., a former equity method investment that was subsequently reclassified to equity securities due to the decrease in the remaining ownership percentage. Based on the terms of the sale, we recognized the cash received at closing, as well as a receivable for the remaining installment payment, which is based on a future economic event and is accounted for and separately recorded as a derivative. The derivative instrument is included in accrued interest receivable and other assets on the consolidated balance sheet, while the gains and losses are included in noninterest income on the consolidated statement of income. The fair value of the embedded derivative was $0.6 million and $0.8 million at December 31, 2023 and December 31, 2022, respectively, with a loss of $0.1 million as of December 31, 2023.
Note 1921 – Comprehensive Income
The following tables present the components of accumulated other comprehensive income (“AOCI”) for the years ended December 31:
| (Dollars in thousands) | (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | | (Dollars in thousands) | | 2023 | | 2022 | | 2021 | | |
Details about AOCI Components | Details about AOCI Components | | Amount Reclassified from AOCI | | Amount Reclassified from AOCI | | Amount Reclassified from AOCI | | Consolidated Statement of Income Line Item | Details about AOCI Components | | Amount Reclassified from AOCI | | Consolidated Statement of Income Line Item |
Available-for-sale securities | Available-for-sale securities | | | | | | | | | Available-for-sale securities | | |
Unrealized holding gain (loss) | Unrealized holding gain (loss) | | $ | 914 | | | $ | (166) | | | $ | 327 | | | Gain (loss) on sale of available-for-sale securities | Unrealized holding gain (loss) | | $ | (1,536) | | | $ | | $ | 650 | | | $ | | $ | 3,875 | | | Gain (loss) on sale of available-for-sale securities | | Gain (loss) on sale of available-for-sale securities |
| | | 914 | | | (166) | | | 327 | | | Total before tax | | | (1,536) | | | 650 | | 650 | | | 3,875 | | 3,875 | | | Total before tax | | Total before tax |
| | | (214) | | | 44 | | | (88) | | | Income tax expense | | | 369 | | | (152) | | (152) | | | (908) | | (908) | | | Income tax expense | | Income tax expense |
| | | 700 | | | (122) | | | 239 | | | Net of tax | | | (1,167) | | | 498 | | 498 | | | 2,967 | | 2,967 | | | Net of tax | | Net of tax |
Defined benefit pension plan items | Defined benefit pension plan items | | | | | | | | | Defined benefit pension plan items | | | | |
Amortization of net actuarial loss | Amortization of net actuarial loss | | (420) | | | (271) | | | (306) | | | Salaries and employee benefits | Amortization of net actuarial loss | | (117) | | | (429) | | (429) | | | (507) | | (507) | | | Salaries and employee benefits | | Salaries and employee benefits |
| | | (420) | | | (271) | | | (306) | | | Total before tax | | | (117) | | | (429) | | (429) | | | (507) | | (507) | | | Total before tax | | Total before tax |
| | | 98 | | | 73 | | | 83 | | | Income tax expense | | | 28 | | | 103 | | 103 | | | 119 | | 119 | | | Income tax benefit | | Income tax benefit |
| | | (322) | | | (198) | | | (223) | | | Net of tax | | | (89) | | | (326) | | (326) | | | (388) | | (388) | | | Net of tax | | Net of tax |
Investment hedge | Investment hedge | |
Carrying value adjustment | Carrying value adjustment | | 473 | | | (44) | | | 0 | | | Interest on investment securities |
| 473 | | | (44) | | | 0 | | | Total before tax |
| (128) | | | 12 | | | 0 | | | Income tax expense |
| 345 | | | (32) | | | 0 | | | Net of tax |
Carrying value adjustment | |
Carrying value adjustment | | | 289 | | | 83 | | | (862) | | | Interest on investment securities |
| | 289 | | | | 289 | | | 83 | | | (862) | | | Total before tax |
| | (69) | | | | (69) | | | (21) | | | 233 | | | Income tax benefit (expense) |
| | 220 | | | | 220 | | | 62 | | | (629) | | | Net of tax |
| Total reclassifications | Total reclassifications | | $ | 723 | | | $ | (352) | | | $ | 16 | | | |
Total reclassifications | |
Total reclassifications | | | $ | (1,036) | | | $ | 234 | | | $ | 1,950 | | | |
| (Dollars in thousands) | (Dollars in thousands) | | Unrealized gains (losses) on available for-sale securities | | Defined benefit pension plan items | | Investment Hedge | | Total | (Dollars in thousands) | | Unrealized gains (losses) on available for-sale securities | | Defined benefit pension plan items | | Investment Hedge | | Total |
Balance at January 1, 2020 | | $ | 2,942 | | | $ | (4,295) | | | $ | 32 | | | $ | (1,321) | |
Balance at January 1, 2023 | |
Other comprehensive income (loss) before reclassification | Other comprehensive income (loss) before reclassification | | 5,344 | | | (1,074) | | | 0 | | | 4,270 | |
Amounts reclassified from AOCI | Amounts reclassified from AOCI | | (700) | | | 322 | | | (345) | | | (723) | |
Net current period OCI | Net current period OCI | | 4,644 | | | (752) | | | (345) | | | 3,547 | |
Balance at December 31, 2020 | | $ | 7,586 | | | $ | (5,047) | | | $ | (313) | | | $ | 2,226 | |
Balance at December 31, 2023 | |
| Balance at January 1, 2019 | | $ | (3,384) | | | $ | (3,422) | | | $ | 0 | | | $ | (6,806) | |
Balance at January 1, 2022 | |
Balance at January 1, 2022 | |
Balance at January 1, 2022 | |
Other comprehensive income (loss) before reclassification | Other comprehensive income (loss) before reclassification | | 6,204 | | | (1,071) | | | 0 | | | 5,133 | |
Amounts reclassified from AOCI | Amounts reclassified from AOCI | | 122 | | | 198 | | | 32 | | | 352 | |
Net current period OCI | Net current period OCI | | 6,326 | | | (873) | | | 32 | | | 5,485 | |
Balance at December 31, 2019 | | $ | 2,942 | | | $ | (4,295) | | | $ | 32 | | | $ | (1,321) | |
Balance at December 31, 2022 | |
Note 2022 – Condensed Financial Statements of Parent Company
Information relative to the parent company’s condensed balance sheets at December 31, 20202023 and 20192022 and the related condensed statements of income and cash flows for the years ended December 31, 2020, 20192023, 2022 and 20182021 are presented below:
Condensed Balance Sheets
| | | | | | | | | | | | | | |
| | December 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Assets | | | | |
Cash | | $ | 15,566 | | | $ | 1,058 | |
Investment in subsidiaries | | 265,679 | | | 211,271 | |
Other assets | | 6,077 | | | 6,397 | |
Total assets | | $ | 287,322 | | | $ | 218,726 | |
| | | | |
Liabilities and stockholders’ equity | | | | |
Other liabilities | | $ | 4,432 | | | $ | 2,666 | |
Subordinated debt | | 43,407 | | | 4,124 | |
Total liabilities | | 47,839 | | | 6,790 | |
| | | | |
Total stockholders’ equity | | 239,483 | | | 211,936 | |
Total liabilities and stockholders’ equity | | $ | 287,322 | | | $ | 218,726 | |
| | | | | | | | | | | | | | |
| | December 31, |
(Dollars in thousands) | | 2023 | | 2022 |
Assets | | | | |
Cash | | $ | 8,590 | | | $ | 31,085 | |
Investment in subsidiaries | | 319,504 | | | 277,173 | |
Debt and equity securities | | 2,400 | | | 4,904 | |
Equity method investments | | 54,199 | | | 50,976 | |
Other assets | | 14,835 | | | 11,033 | |
Total assets | | $ | 399,528 | | | $ | 375,171 | |
| | | | |
Liabilities and stockholders’ equity | | | | |
Other liabilities | | $ | 29,818 | | | $ | 31,036 | |
Senior term loan | | 6,786 | | | 9,765 | |
Subordinated debt | | 73,540 | | | 73,286 | |
Total liabilities | | 110,144 | | | 114,087 | |
| | | | |
Total stockholders’ equity | | 289,384 | | | 261,084 | |
Total liabilities and stockholders’ equity | | $ | 399,528 | | | $ | 375,171 | |
Condensed Statements of Income
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 |
Income, dividends from Bank subsidiary | | $ | 6,688 | | | $ | 6,280 | | | $ | 8,906 | |
Operating expenses | | 16,804 | | | 14,296 | | | 13,439 | |
Loss from continuing operations, before income taxes | | (10,116) | | | (8,016) | | | (4,533) | |
Income tax benefit - continuing operations | | (2,082) | | | (1,880) | | | (1,569) | |
Net loss from continuing operations | | (8,034) | | | (6,136) | | | (2,964) | |
Income from discontinued operations, before income taxes | | 0 | | | 575 | | | 0 | |
Income tax expense - discontinued operations | | 0 | | | 148 | | | 0 | |
Net income from discontinued operations | | 0 | | | 427 | | | 0 | |
Equity in undistributed income earnings of subsidiaries | | 45,445 | | | 32,700 | | | 14,967 | |
Net income | | $ | 37,411 | | | $ | 26,991 | | | $ | 12,003 | |
| | | | | | |
Preferred dividends | | $ | 461 | | | $ | 479 | | | $ | 489 | |
Net income available to common shareholders | | $ | 36,950 | | | $ | 26,512 | | | $ | 11,514 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 |
Income, dividends from the Bank | | $ | 23,014 | | | $ | 50,985 | | | $ | 19,165 | |
Operating expenses | | 27,002 | | | 27,774 | | | 22,458 | |
Income (loss), before income taxes | | (3,988) | | | 23,211 | | | (3,293) | |
Income taxes | | (4,050) | | | (3,450) | | | (2,090) | |
Net income (loss) | | 62 | | | 26,661 | | | (1,203) | |
| | | | | | |
| | | | | | |
| | | | | | |
Equity in undistributed income earnings of subsidiaries | | 31,170 | | | (11,614) | | | 40,324 | |
Net income | | $ | 31,232 | | | $ | 15,047 | | | $ | 39,121 | |
| | | | | | |
Preferred dividends | | $ | — | | | $ | — | | | $ | 35 | |
Net income available to common shareholders | | $ | 31,232 | | | $ | 15,047 | | | $ | 39,086 | |
Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 |
OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 37,411 | | | $ | 26,991 | | | $ | 12,003 | |
Equity in undistributed earnings of subsidiaries | | (45,445) | | | (32,700) | | | (14,967) | |
Stock-based compensation | | 2,353 | | | 1,759 | | | 1,267 | |
Other assets | | (2,101) | | | (4,104) | | | 1,997 | |
Other liabilities | | 1,767 | | | 344 | | | 1,311 | |
| | | | | | |
Net cash from operating activities | | (6,015) | | | (7,710) | | | 1,611 | |
| | | | | | |
INVESTING ACTIVITIES | | | | | | |
Investment in subsidiaries | | (2,982) | | | 16,791 | | | (2,194) | |
| | | | | | |
Net cash from investing activities | | (2,982) | | | 16,791 | | | (2,194) | |
| | | | | | |
FINANCING ACTIVITIES | | | | | | |
Proceeds from stock issuance | | 240 | | | 1,033 | | | 0 | |
AOCI reclassification of pension and available-for-sale investments | | 0 | | | 0 | | | 743 | |
Subordinated debt issuance (redemption) | | 40,000 | | | (12,400) | | | (35) | |
Common stock repurchased | | (15,746) | | | 0 | | | 0 | |
Preferred stock redemption | | 0 | | | (500) | | | 0 | |
Common stock options exercised | | 4,464 | | | 2,164 | | | 2,129 | |
Cash dividends paid on common stock | | (4,275) | | | (2,290) | | | (1,220) | |
Cash dividends paid on preferred stock | | (461) | | | (479) | | | (489) | |
| | | | | | |
Net cash from financing activities | | 24,222 | | | (12,472) | | | 1,128 | |
| | | | | | |
Net change in cash | | 15,225 | | | (3,391) | | | 545 | |
| | | | | | |
Cash at beginning of period | | 1,058 | | | 4,449 | | | 3,904 | |
| | | | | | |
Cash at end of period | | $ | 16,283 | | | $ | 1,058 | | | $ | 4,449 | |
| | | | | | |
Noncash common stock converted from subordinated debt | | $ | 0 | | | $ | 1,000 | | | $ | 15,965 | |
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 |
OPERATING ACTIVITIES | | | | | | |
Net income | | $ | 31,232 | | | $ | 15,047 | | | $ | 39,121 | |
Equity in undistributed earnings of subsidiaries | | (31,170) | | | 11,614 | | | (40,324) | |
Stock-based compensation | | 3,392 | | | 3,217 | | | 3,208 | |
Depreciation and amortization | | 305 | | | 269 | | | 175 | |
Other assets | | (11,638) | | | (45,406) | | | (6,849) | |
Other liabilities | | (2,887) | | | 16,358 | | | 11,215 | |
| | | | | | |
Net cash from operating activities | | (10,766) | | | 1,099 | | | 6,546 | |
| | | | | | |
INVESTING ACTIVITIES | | | | | | |
Investment in subsidiaries | | 150 | | | (240) | | | (15,871) | |
| | | | | | |
Net cash from investing activities | | 150 | | | (240) | | | (15,871) | |
| | | | | | |
FINANCING ACTIVITIES | | | | | | |
| | | | | | |
| | | | | | |
Issuance of senior term loan, net of issuance costs | | — | | | 9,877 | | | — | |
Issuance of subordinated debt, net of issuance costs | | — | | | — | | | 29,448 | |
| | | | | | |
Preferred stock redemption | | — | | | — | | | (7,334) | |
Stock option exercise proceeds | | 637 | | | 2,069 | | | 4,930 | |
Withholding cash issued in lieu of restricted stock | | (847) | | | (670) | | | (249) | |
Issuance of subsidiary membership units | | — | | | — | | | 500 | |
Principal payments on senior term loan | | (3,030) | | | (125) | | | — | |
Stock purchase from noncontrolling interest | | — | | | (33) | | | — | |
Cash dividends paid on common stock | | (8,639) | | | (8,355) | | | (6,038) | |
Cash dividends paid on preferred stock | | — | | | — | | | (35) | |
| | | | | | |
Net cash from financing activities | | (11,879) | | | 2,763 | | | 21,222 | |
| | | | | | |
Net change in cash | | (22,495) | | | 3,622 | | | 11,897 | |
| | | | | | |
Cash at beginning of period | | 31,085 | | | 27,463 | | | 15,566 | |
| | | | | | |
Cash at end of period | | $ | 8,590 | | | $ | 31,085 | | | $ | 27,463 | |
| | | | | | |
| | | | | | |
Note 2123 – Segment Reporting
The Company hasWe have identified 3three reportable segments: CoRe banking; mortgage banking;Banking, Mortgage Banking and financial holding company.Financial Holding Company. All other operating segments are summarized in an Other category.
Our CoRe Banking segment, which includes our Fintech division, represents banking products and services offered to customers by the Bank, primarily loans and deposits accounts. Revenue from CoRe banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts. The Fintech division, Chartwell and Paladin Fraud reside in the CoRe banking segment.
Revenue from theour Mortgage Banking segment is primarily comprised of our share of net income or loss from mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage loan origination process. Prior to July 1, 2020, the mortgage banking services were conducted by PMG. In July 2020, the Company announced the completion of PMG’s combination with Intercoastal to form ICM. The Company has recognized its ownership as anour equity method investment, initially recorded at fair value. Income related to this equity method investment is includedinvestments in the Mortgage Banking segment. ICM and Warp Speed.
Revenue from financial holding companyFinancial Holding Company activities is mainly comprised of intercompany service income and dividends.
Information about the reportable segments and reconciliation to the consolidated financial statements for the years ended December 31, 2020, 20192023, 2022 and 20182021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
(Dollars in thousands) | | CoRe Banking | | Mortgage Banking | | Financial Holding Company | | Intercompany Eliminations | | Consolidated |
Interest income | | $ | 75,812 | | | $ | 6,269 | | | $ | 3 | | | $ | (1,631) | | | $ | 80,453 | |
Interest expense | | 10,400 | | | 3,139 | | | 261 | | | (2,173) | | | 11,627 | |
Net interest income (loss) | | 65,412 | | | 3,130 | | | (258) | | | 542 | | | 68,826 | |
Provision for (recovery of) loan losses | | 16,649 | | | (70) | | | 0 | | | 0 | | | 16,579 | |
Net interest income after provision for loan losses | | 48,763 | | | 3,200 | | | (258) | | | 542 | | | 52,247 | |
| | | | | | | | | | |
Noninterest Income: | | | | | | | | | | |
Mortgage fee income | | 247 | | | 33,722 | | | 0 | | | (542) | | | 33,427 | |
Other income | | 30,082 | | | 29,768 | | | 6,685 | | | (8,125) | | | 58,410 | |
Total noninterest income | | 30,329 | | | 63,490 | | | 6,685 | | | (8,667) | | | 91,837 | |
| | | | | | | | | | |
Noninterest Expenses: | | | | | | | | | | |
Salaries and employee benefits | | 28,801 | | | 21,550 | | | 11,278 | | | 0 | | | 61,629 | |
Other expenses | | 33,298 | | | 5,074 | | | 5,265 | | | (8,125) | | | 35,512 | |
Total noninterest expenses | | 62,099 | | | 26,624 | | | 16,543 | | | (8,125) | | | 97,141 | |
| | | | | | | | | | |
Income (loss) before income taxes | | 16,993 | | | 40,066 | | | (10,116) | | | 0 | | | 46,943 | |
Income tax expense (benefit) | | 1,752 | | | 9,862 | | | (2,082) | | | 0 | | | 9,532 | |
Net income (loss) | | $ | 15,241 | | | $ | 30,204 | | | $ | (8,034) | | | $ | 0 | | | $ | 37,411 | |
Preferred stock dividends | | 0 | | | 0 | | | 461 | | | 0 | | | 461 | |
Net income (loss) available to common shareholders | | $ | 15,241 | | | $ | 30,204 | | | $ | (8,495) | | | $ | 0 | | | $ | 36,950 | |
| | | | | | | | | | |
Capital Expenditures for the year ended December 31, 2020 | | $ | 6,439 | | | $ | 99 | | | $ | 77 | | | $ | 0 | | | $ | 6,615 | |
Total Assets as of December 31, 2020 | | 2,343,556 | | | 58,140 | | | 284,943 | | | (355,163) | | | 2,331,476 | |
Goodwill as of December 31, 2020 | | 2,350 | | | 0 | | | 0 | | | 0 | | | 2,350 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 |
(Dollars in thousands) | | CoRe Banking | | Mortgage Banking | | Financial Holding Company | | Intercompany Eliminations | | Consolidated |
Interest income | | $ | 75,874 | | | $ | 8,342 | | | $ | 13 | | | $ | (1,868) | | | $ | 82,361 | |
Interest expense | | 18,698 | | | 6,014 | | | 769 | | | (2,520) | | | 22,961 | |
Net interest income | | 57,176 | | | 2,328 | | | (756) | | | 652 | | | 59,400 | |
Provision for loan losses | | 1,622 | | | 167 | | | 0 | | | 0 | | | 1,789 | |
Net interest income after provision for loan losses | | 55,554 | | | 2,161 | | | (756) | | | 652 | | | 57,611 | |
| | | | | | | | | | |
Noninterest Income: | | | | | | | | | | |
Mortgage fee income | | 657 | | | 41,040 | | | 0 | | | (652) | | | 41,045 | |
Other income | | 23,033 | | | 1,289 | | | 6,268 | | | (7,031) | | | 23,559 | |
Total noninterest income | | 23,690 | | | 42,329 | | | 6,268 | | | (7,683) | | | 64,604 | |
| | | | | | | | | | |
Noninterest Expenses: | | | | | | | | | | |
Salaries and employee benefits | | 19,067 | | | 28,432 | | | 8,676 | | | 0 | | | 56,175 | |
Other expenses | | 25,070 | | | 8,136 | | | 4,851 | | | (7,031) | | | 31,026 | |
Total noninterest expenses | | 44,137 | | | 36,568 | | | 13,527 | | | (7,031) | | | 87,201 | |
| | | | | | | | | | |
Income (loss) from continuing operations, before income taxes | | 35,107 | | | 7,922 | | | (8,015) | | | 0 | | | 35,014 | |
Income tax expense (benefit) - continuing operations | | 8,175 | | | 2,155 | | | (1,880) | | | 0 | | | 8,450 | |
Net income (loss) from continuing operations | | 26,932 | | | 5,767 | | | (6,135) | | | 0 | | | 26,564 | |
Income from discontinued operations, before income taxes | | 0 | | | 0 | | | 575 | | | 0 | | | 575 | |
Income tax expense - discontinued operations | | 0 | | | 0 | | | 148 | | | 0 | | | 148 | |
Net income from discontinued operations | | 0 | | | 0 | | | 427 | | | 0 | | | 427 | |
Net income (loss) | | 26,932 | | | 5,767 | | | (5,708) | | | 0 | | | 26,991 | |
Preferred stock dividends | | 0 | | | 0 | | | 479 | | | 0 | | | 479 | |
Net income (loss) available to common shareholders | | $ | 26,932 | | | $ | 5,767 | | | $ | (6,187) | | | $ | 0 | | | $ | 26,512 | |
| | | | | | | | | | |
Capital Expenditures for the year ended December 31, 2019 | | $ | 1,438 | | | $ | 112 | | | $ | 492 | | | $ | 0 | | | $ | 2,042 | |
Total Assets as of December 31, 2019 | | 1,953,975 | | | 248,382 | | | 216,411 | | | (474,564) | | | 1,944,114 | |
Goodwill as of December 31, 2019 | | 2,748 | | | 16,882 | | | 0 | | | 0 | | | 19,630 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | |
(Dollars in thousands) | | CoRe Banking | | Mortgage Banking | | Financial Holding Company | | Other | | Intercompany Eliminations | | Consolidated |
Interest income | | $ | 189,498 | | | $ | 416 | | | $ | 41 | | | $ | — | | | $ | (137) | | | $ | 189,818 | |
Interest expense | | $ | 62,507 | | | $ | — | | | $ | 3,985 | | | $ | 180 | | | $ | (137) | | | $ | 66,535 | |
Net interest income (expense) | | $ | 126,991 | | | $ | 416 | | | $ | (3,944) | | | $ | (180) | | | $ | — | | | $ | 123,283 | |
Release of allowance for credit losses | | $ | (1,921) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (1,921) | |
Net interest income (expense) after release of allowance for credit losses | | $ | 128,912 | | | $ | 416 | | | $ | (3,944) | | | $ | (180) | | | $ | — | | | $ | 125,204 | |
| | | | | | | | | | | | |
Noninterest income | | $ | 17,286 | | | $ | (2,486) | | | $ | 10,453 | | | $ | 9,138 | | | $ | (14,676) | | | $ | 19,715 | |
| | | | | | | | | | | | |
Noninterest Expenses: | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 37,265 | | | $ | 7 | | | $ | 17,041 | | | $ | 9,058 | | | $ | — | | | $ | 63,371 | |
Other expenses | | $ | 53,221 | | | $ | 65 | | | $ | 8,233 | | | $ | 7,411 | | | $ | (14,676) | | | $ | 54,254 | |
Total noninterest expenses | | $ | 90,486 | | | $ | 72 | | | $ | 25,274 | | | $ | 16,469 | | | $ | (14,676) | | | $ | 117,625 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | 55,712 | | | (2,142) | | | (18,765) | | | (7,511) | | | — | | | 27,294 | |
Income taxes | | 12,342 | | | (557) | | | (4,923) | | | (1,792) | | | — | | | 5,070 | |
Net income (loss) from continuing operations | | 43,370 | | | (1,585) | | | (13,842) | | | (5,719) | | | — | | | 22,224 | |
Income from discontinued operations, before income taxes | | — | | | — | | | — | | | 11,831 | | | — | | | 11,831 | |
Income tax expense - discontinued operations | | — | | | — | | | — | | | 3,049 | | | — | | | 3,049 | |
Net income from discontinued operations | | — | | | — | | | — | | | 8,782 | | | — | | | 8,782 | |
Net income (loss) | | 43,370 | | | (1,585) | | | (13,842) | | | 3,063 | | | — | | | 31,006 | |
Net loss attributable to noncontrolling interest | | — | | | — | | | — | | | 226 | | | — | | | 226 | |
Net income (loss) available to common shareholders | | $ | 43,370 | | | $ | (1,585) | | | $ | (13,842) | | | $ | 3,289 | | | $ | — | | | $ | 31,232 | |
| | | | | | | | | | | | |
Capital expenditures for the year ended December 31, 2023 | | $ | 914 | | | $ | — | | | $ | 58 | | | $ | 943 | | | $ | — | | | $ | 1,915 | |
Total assets as of December 31, 2023 | | $ | 3,255,369 | | | $ | 83,909 | | | $ | 345,314 | | | $ | 17,728 | | | $ | (388,438) | | | $ | 3,313,882 | |
Goodwill as of December 31, 2023 | | $ | — | | | $ | — | | | $ | — | | | $ | 2,838 | | | $ | — | | | $ | 2,838 | |
| | | 2018 |
| | 2022 | |
(Dollars in thousands) | |
(Dollars in thousands) | |
(Dollars in thousands) | (Dollars in thousands) | | CoRe Banking | | Mortgage Banking | | Financial Holding Company | | Intercompany Eliminations | | Consolidated | | CoRe Banking | | Mortgage Banking | | Financial Holding Company | | Other | | Intercompany Eliminations | | Consolidated |
Interest income | Interest income | | $ | 63,762 | | | $ | 6,667 | | | $ | 5 | | | $ | (674) | | | $ | 69,760 | |
Interest expense | Interest expense | | 13,667 | | | 4,085 | | | 1,756 | | | (1,802) | | | 17,706 | |
Net interest income | | 50,095 | | | 2,582 | | | (1,751) | | | 1,128 | | | 52,054 | |
Net interest income (expense) | |
Provision for loan losses | Provision for loan losses | | 2,386 | | | 54 | | | 0 | | | 0 | | | 2,440 | |
Net interest income after provision for loan losses | | 47,709 | | | 2,528 | | | (1,751) | | | 1,128 | | | 49,614 | |
Net interest income (expense) after provision for loan losses | |
| Noninterest Income: | |
Mortgage fee income | | 585 | | | 32,880 | | | 0 | | | (1,128) | | | 32,337 | |
Other income | | 6,479 | | | (243) | | | 6,411 | | | (6,344) | | | 6,303 | |
Total noninterest income | | 7,064 | | | 32,637 | | | 6,411 | | | (7,472) | | | 38,640 | |
| Noninterest Expenses: | |
| Noninterest income | |
| Noninterest income | |
| Noninterest income | |
| Noninterest expenses: | |
Noninterest expenses: | |
Noninterest expenses: | |
Salaries and employee benefits | |
Salaries and employee benefits | |
Salaries and employee benefits | Salaries and employee benefits | | 14,924 | | | 23,927 | | | 7,373 | | | 0 | | | 46,224 | |
Other expenses | Other expenses | | 20,081 | | | 8,608 | | | 4,309 | | | (6,344) | | | 26,654 | |
Total noninterest expenses | Total noninterest expenses | | 35,005 | | | 32,535 | | | 11,682 | | | (6,344) | | | 72,878 | |
| Income (loss) before income taxes | Income (loss) before income taxes | | 19,768 | | | 2,630 | | | (7,022) | | | 0 | | | 15,376 | |
Income tax expense (benefit) | | 4,265 | | | 677 | | | (1,569) | | | 0 | | | 3,373 | |
Income (loss) before income taxes | |
Income (loss) before income taxes | |
Income taxes | |
Net income (loss) from continuing operations | |
Income from discontinued operations before income taxes | |
Income tax expense - discontinued operations | |
Net income from discontinued operations | |
Net income (loss) | Net income (loss) | | $ | 15,503 | | | $ | 1,953 | | | $ | (5,453) | | | $ | 0 | | | $ | 12,003 | |
Preferred stock dividends | | 0 | | | 0 | | | 489 | | | 0 | | | 489 | |
Net loss attributable to noncontrolling interest | |
Net income (loss) available to common shareholders | Net income (loss) available to common shareholders | | $ | 15,503 | | | $ | 1,953 | | | $ | (5,942) | | | $ | 0 | | | $ | 11,514 | |
| Capital Expenditures for the year ended December 31, 2018 | | $ | 2,284 | | | $ | 272 | | | $ | 137 | | | $ | 0 | | | $ | 2,693 | |
| Capital expenditures for the year ended December 31, 2022 | |
Capital expenditures for the year ended December 31, 2022 | |
Capital expenditures for the year ended December 31, 2022 | |
Total assets as of December 31, 2022 | |
Goodwill as of December 31, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | |
(Dollars in thousands) | | CoRe Banking | | Mortgage Banking | | Financial Holding Company | | Other | | Intercompany Eliminations | | Consolidated |
Interest income | | $ | 83,023 | | | $ | 411 | | | $ | 15 | | | $ | (8) | | | $ | (12) | | | $ | 83,429 | |
Interest expense | | 4,078 | | | — | | | 2,188 | | | 16 | | | (12) | | | 6,270 | |
Net interest income (expense) | | 78,945 | | | 411 | | | (2,173) | | | (24) | | | — | | | 77,159 | |
Provision for loan losses | | (6,274) | | | (1) | | | — | | | — | | | — | | | (6,275) | |
Net interest income (expense) after provision for loan losses | | 85,219 | | | 412 | | | (2,173) | | | (24) | | | — | | | 83,434 | |
| | | | | | | | | | | | |
Noninterest income | | 33,179 | | | 16,342 | | | 11,103 | | | 3,575 | | | (8,346) | | | 55,853 | |
| | | | | | | | | | | | |
Noninterest Expenses: | | | | | | | | | | | | |
Salaries and employee benefits | | 33,595 | | | — | | | 13,704 | | | 5,666 | | | — | | | 52,965 | |
Other expenses | | 37,033 | | | 16 | | | 6,573 | | | 3,567 | | | (8,346) | | | 38,843 | |
Total noninterest expenses | | 70,628 | | | 16 | | | 20,277 | | | 9,233 | | | (8,346) | | | 91,808 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | 47,770 | | | 16,738 | | | (11,347) | | | (5,682) | | | — | | | 47,479 | |
Income taxes | | 9,154 | | | 4,068 | | | (2,091) | | | (1,490) | | | — | | | 9,641 | |
Net income (loss) from continuing operations | | 38,616 | | | 12,670 | | | (9,256) | | | (4,192) | | | — | | | 37,838 | |
Income from discontinued operations before income taxes | | — | | | — | | | — | | | 1,099 | | | — | | | 1,099 | |
Income tax expense - discontinued operations | | — | | | — | | | — | | | 241 | | | — | | | 241 | |
Net income from discontinued operations | | — | | | — | | | — | | | 858 | | | — | | | 858 | |
Net income (loss) | | 38,616 | | | 12,670 | | | (9,256) | | | (3,334) | | | — | | | 38,696 | |
Net loss attributable to noncontrolling interest | | — | | | — | | | — | | | 425 | | | — | | | 425 | |
Net income (loss) attributable to parent | | $ | 38,616 | | | $ | 12,670 | | | $ | (9,256) | | | $ | (2,909) | | | $ | — | | | $ | 39,121 | |
Preferred stock dividends | | — | | | — | | | 35 | | | — | | | — | | | 35 | |
Net income (loss) available to common shareholders | | $ | 38,616 | | | $ | 12,670 | | | $ | (9,291) | | | $ | (2,909) | | | $ | — | | | $ | 39,086 | |
| | | | | | | | | | | | |
Capital expenditures for the year ended December 31, 2021 | | $ | 2,590 | | | $ | — | | | $ | 43 | | | $ | 2,731 | | | $ | — | | | $ | 5,364 | |
Note 2224 – Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Earnings Per Share |
(Dollars in thousands) | | Interest Income | | Net Interest Income | | Income Before Taxes | | Net Income | | Basic | | Diluted |
2020 | | | | | | | | | | | | |
First quarter | | $ | 20,699 | | | $ | 16,171 | | | $ | 1,227 | | | $ | 1,048 | | | $ | 0.08 | | | $ | 0.08 | |
Second quarter | | 21,774 | | | 18,458 | | | 24,042 | | | 18,034 | | | 1.50 | | | 1.49 | |
Third quarter | | 18,627 | | | 16,510 | | | 8,512 | | | 6,491 | | | 0.53 | | | 0.53 | |
Fourth quarter | | 19,353 | | | 17,687 | | | 13,162 | | | 11,838 | | | 1.00 | | | 0.97 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Earnings Per Share |
(Dollars in thousands) | | Interest Income | | Net Interest Income | | Income Before Taxes | | Net Income | | Basic | | Diluted |
2023 | | | | | | | | | | | | |
First quarter | | $ | 44,763 | | | $ | 32,729 | | | $ | 14,734 | | | $ | 11,342 | | | $ | 0.90 | | | $ | 0.87 | |
Second quarter | | 47,031 | | | 29,582 | | | 9,954 | | | 8,112 | | | 0.64 | | | 0.63 | |
Third quarter | | 48,325 | | | 29,865 | | | 5,090 | | | 3,867 | | | 0.30 | | | 0.29 | |
Fourth quarter | | 49,699 | | | 31,107 | | | 9,347 | | | 7,911 | | | 0.62 | | | 0.61 | |
| | | | | | | Earnings Per Share |
| | | | | | | | | | Earnings Per Share | | | | | | | | | | | | Earnings Per Share |
(Dollars in thousands) | (Dollars in thousands) | | Interest Income | | Net Interest Income | | Income Before Taxes | | Net Income | | Basic | | Diluted | (Dollars in thousands) | | Interest Income | | Net Interest Income | | Income Before Taxes | | Net Income | | Basic | | Diluted |
2019 | | | | | | | | | | | | |
2022 | |
First quarter | |
First quarter | |
First quarter | First quarter | | $ | 19,623 | | | $ | 13,972 | | | $ | 3,989 | | | $ | 3,192 | | | $ | 0.26 | | | $ | 0.26 | |
Second quarter | Second quarter | | 20,470 | | | 14,529 | | | 20,526 | | | 15,377 | | | 1.31 | | | 1.18 | |
Third quarter | Third quarter | | 21,038 | | | 15,034 | | | 5,668 | | | 4,327 | | | 0.36 | | | 0.35 | |
Fourth quarter | Fourth quarter | | 21,230 | | | 15,865 | | | 5,406 | | | 4,095 | | | 0.34 | | | 0.32 | |
Note 2425 – Acquisitions and Divestitures
The First State Bank AcquisitionFlexia Payments, LLC
In April 2020, the BankMay 2023, MVB Technology entered into a Purchasean Assignment and Assumption Agreement with the FDIC, as receiver for First State, providing
Flexia, wherein Flexia assigned loans outstanding between Flexia and MVB to MVB Technology. In consideration for the assumption byassignment, Flexia granted a license to MVB Technology for the BankFlexia software. Additionally, through a Mutual Release Agreement between Edge Ventures and Flexia, Edge Ventures transferred its 800 Class A Common Units and 1,500 Preferred Units of certain liabilities and the purchase by the Bank of certain assets of First State. This was deemedFlexia back to beFlexia for cancellation. As a strategic opportunity to acquire deposits and certain assets of an institution that operated in counties contiguous to the Company's Southern WV market and further solidified the strategy for growth within core commercial markets. The Company has accounted for this acquisition under the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations, whereby the assets acquired and liabilities assumed were recorded by the Company at their estimated fair values as of their acquisition date. Fair value estimates were based on management's acceptance of a fair market valuation analysis performed by an independent third-party firm.
In first quarter 2020, the Bank submitted a bid to the FDIC which included a bid based upon acquiring loans at a discounted amount, and also assuming the deposits of First State with no deposit premium. The Bank was notified that it was the winning bidder in the process, and the net asset discount accepted by the FDIC was $33.2 million. Immediately after the closing of this transaction, the FDIC remitted these funds to the Bank. As part of this transaction, the Bank acquired 3 branch locations for aggregate consideration of approximately $1.5 million. Also included was other real estate owned (“OREO”) at 46.5%result of the book value, along with deposits with an aggregate valuetransactions, we incurred a loss of approximately $140.0$1.1 million, cash and investment securities of $37.0 million and loans with a book value of $83.5 million. Net proceeds received from the FDIC for the transaction were $39.6 million.
Management made significant estimates and exercised significant judgement in accounting for the acquisition of First State. Management judgmentally assigned risk ratings to loans based on appraisals and estimated collateral values, expected cash flows, prepayment speeds and estimated loss factors to measure fair values for the acquired loans. Premises and equipment was valued based on recent appraised values. Management used quoted or current market prices to determine the fair value of investment securities. These values are subject to change based on continued evaluations of appraisals and other loan-related assumptions.
The statement of net assets acquired and the resulting bargain purchase gain recorded is presented in the following tables. As explained in the notes that accompany the following table, the assets acquired and liabilities assumed were recorded at the acquisition date fair value.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | As recorded by The First State Bank | | Fair Value Adjustments | | | | As recorded by MVB |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 26,053 | | | $ | 0 | | | | | $ | 26,053 | |
Investment securities - available-for-sale, at fair value | | 10,964 | | | 0 | | | | | 10,964 | |
Loans | | 83,514 | | | (22,861) | | | (a) | | 60,653 | |
OREO | | 22,610 | | | (10,520) | | | (b) | | 12,090 | |
Premises and equipment, net | | 1,582 | | | (12) | | | (c) | | 1,570 | |
Accrued interest receivable and other assets | | 2,234 | | | 211 | | | (d) | | 2,445 | |
Total Assets | | $ | 146,957 | | | $ | (33,182) | | | | | $ | 113,775 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Deposits - transaction accounts | | $ | 70,931 | | | $ | 0 | | | | | $ | 70,931 | |
Deposits - certificates of deposit | | 69,029 | | | 2,560 | | | (e) | | 71,589 | |
Total deposits | | 139,960 | | | 2,560 | | | | | 142,520 | |
FHLB and other borrowings | | 5,800 | | | 0 | | | | | 5,800 | |
Accrued interest payable and other liabilities | | 411 | | | 0 | | | | | 411 | |
Total Liabilities | | $ | 146,171 | | | $ | 2,560 | | | | | $ | 148,731 | |
| | | | | | | | |
Net identifiable assets acquired over/(under) liabilities assumed | | $ | 786 | | | $ | (35,742) | | | | | $ | (34,956) | |
(a) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired loan portfolio and excludes the allowance for loan losses recorded by First State.
(b) Adjustment reflects the fair value of OREO acquired.
(c) Adjustment reflects the fair value adjustments based on the Company's evaluation of the acquired premises and equipment.
(d) Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts and the fair value adjustment to other assets.
(e) Adjustment arises since the interest rates paid on interest-bearing deposits where higher than rates available in the market on similar deposits as of the acquisition date.
The following table summarizes the assets acquired and liabilities assumed in the First State acquisition as of the acquisition date, and the pre-tax bargain purchase gain of $4.7 million recognized on the transaction, which is included in gainsloss on acquisition and divestiture activity in the accompanying consolidated statements of income.income, andno longer consolidate Flexia in our financial statements.
Chartwell Compliance
In February 2023, we completed the sale of the Bank’s wholly-owned subsidiary, Chartwell, for total consideration of $14.4 million in the form of a note issued to the buyer, resulting in a gain on sale of $11.8 million. The note matures June 20, 2027 and bears interest at a fixed rate of 7%, payable in four equal annual installments commencing June 20, 2024. To facilitate a transition of the Chartwell services and support the onboarding and conversion of systems, we entered into a 60 day Employee Lease and Service Agreement, whereby we provided the purchaser with finance and accounting, human capital, information technology, marketing and record/data retention services. In addition, we entered into a contract with the purchaser to continue to receive services and support from Chartwell for three years following the sale. We have paid $2.5 million in fees related to this contract during the year ended December 31, 2023.
Balances attributable to Chartwell are included in assets from discontinued operations and liabilities from discontinued operations on our December 31, 2022 consolidated balance sheet. There were no assets from discontinued operations or liabilities from discontinued operations as of December 31, 2023. Chartwell's net income, including the $11.8 million gain, is presented in income from discontinued operations for all periods shown. Prior period balances have been reclassified to conform with this presentation. Chartwell's depreciation and amortization expense was $0.1 million and $0.6 million for the year ended December 31, 2023 and December 31, 2022, respectively.
The following table presents the major classes of assets held-for-sale from discontinued operations and liabilities held-for-sale from discontinued operations as of December 31, 2022:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | | | |
Assets acquired at fair value:December 31, 2022 | | | | |
Cash and cash equivalents | | $ | 26,053 | | | |
Investment securities - available-for-sale, at fair value | | 10,964 | | | |
Loans | | 60,653 | | | |
OREO | | 12,090 | | | |
Premises and equipment net | | $ | 1,57023 | | | |
Accrued interest receivable and other assets | | 2,445��3,142 | |
Goodwill | | 1,150 | |
Total fair value of assets acquiredfrom discontinued operations | | $ | 113,7754,315 | | | |
| | | | |
Liabilities assumed at fair value: | | | | |
Deposits | | $ | 142,520 | | | |
FHLB and other borrowings | | 5,800 | | | |
Accrued interest payable and other liabilities | | 411 | | | |
Total fair value of liabilities acquired | | $ | 148,7315,444 | | | |
| | | | |
Net assets assumed at fair valueTotal liabilities from discontinued operations | | | | $ | (34,956)5,444 | |
Transaction cash consideration received from the FDIC | | | | 39,627 | |
Bargain purchase gain, before tax | | | | $ | 4,671 | |
Acquired Loans
The following table outlinespresents the contractually required payments receivable, cash flows the Company expects to receive, non-accretable credit adjustments and the accretable yield for all First State loans asmajor classes of the acquisition date:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Contractually Required Payments Receivable | | Non-Accretable Credit Adjustments | | Cash Flows Expected to be Collected | | Accretable FMV Adjustments | | Carrying Value of Loans Receivable |
PCI loans | | $ | 86,823 | | | $ | 24,842 | | | $ | 61,981 | | | $ | 11,746 | | | $ | 50,235 | |
Purchased performing loans | | 12,818 | | | 2,561 | | | 10,257 | | | 1,817 | | | 8,440 | |
Other purchased loans | | 1,978 | | | 0 | | | 1,978 | | | 0 | | | 1,978 | |
Total | | $ | 101,619 | | | $ | 27,403 | | | $ | 74,216 | | | $ | 13,563 | | | $ | 60,653 | |
The Company recorded all loans acquired at the estimated fair value on the purchase date, with no carryover of the related allowance for loan losses. On the acquisition date, the Company segmented the loan portfolio into six loan pools: performing commercial, performing commercial real estate, performing consumer and residential real estate, classified commercial, classified commercial real estate and classified consumer and residential real estate. Of the 934 loans acquired, 663 were determined to be of deteriorated credit and were accounted for under ASC 310-30 as PCI loans. The 271 remaining loans acquired were accounted for under ASC 310-20 as purchased performing loans. Other purchased loans include premium finance loans, credit cards and overdrawn escrow accounts.
The Company had an independent third-party determine the net discounted value of cash flows on approximately 718 performing loans totaling $39.5 million. The valuation took into consideration the loans' underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan to value ratios, loss exposures and remaining balances. These performing loans were segmented into pools based on loan and payment type and in some cases, risk grade.
The Company established a credit risk-related non-accretable difference of $24.8 million relating to these acquired, credit-impaired loans, reflected in the recorded net fair value. It further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount adjustment of $11.7 million at acquisition relating to
these impaired loans.
The following table discloses the impact of the acquisition of First Stateincome from the acquisition date through December 31, 2020. This table also presents certain pro forma information (net interest income and noninterest income and net income) as of the First State acquisition had occurred on January 1, 2019. The pro forma financial information is not necessarily indicative of the results ofdiscontinued operations had the acquisitions been effective as of these dates.
Deal-related costs from the First State acquisition of $1.2 million have been excluded from the 12 month period of 2020 pro forma information presented below and included in the 12 month period of 2019 pro forma information below. The actual results and pro forma information were as follows:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | Revenue | | Net Income |
2020: | | | | |
Actual First State results included in consolidated statement of income since acquisition date | | $ | 8,793 | | | $ | 3,351 | |
Supplemental consolidated pro forma as if First State had been acquired January 1, 2019 | | $ | 157,180 | | | $ | 34,522 | |
| | | | |
2019: | | | | |
Supplemental consolidated pro forma as if First State had been acquired January 1, 2019 | | $ | 133,429 | | | $ | 29,290 | |
Paladin, LLC Acquisition
In April 2020, Paladin Fraud, LLC, a newly-formed West Virginia limited liability company and wholly-owned subsidiary of MVB Bank, entered into an Asset Purchase Agreement by and among Paladin Fraud, Paladin, LLC, a Washington limited liability company, James Houlihan and Jamon Whitehead. Pursuant to the Purchase Agreement, Paladin Fraud acquired substantially all of the assets and certain liabilities of Paladin and the purchase price of the transaction consisted of 19,278 unregistered shares of MVB common stock and an undisclosed amount of cash. Paladin is a respected leader in the fraud prevention industry and has formed a specialty niche that aligns well with the MVB as a preferred bank for Fintech companies.
Divestiture of Four Eastern Panhandle, WV Branches
In November 2019, the Company entered into a Purchase and Assumption Agreement with Summit, pursuant to which Summit purchased certain assets and assumed certain liabilities of 3 Bank branch locations in Berkeley County, WV and 1 Bank branch location in Jefferson County, WV. Upon closing, Summit assumed $188.1 million in deposits and acquired $36.8 million in loans, as well as cash, real property, personal property and other fixed assets. The Company recognized a gain of $9.6 million related to this transaction and was recorded in noninterest income for the in 2020. The completion of this sale resulted in the Company exiting the Eastern Panhandle, WV market. The Company closed this transaction in April 2020, and as such, 0 assets or liabilities of branches are classified as held-for-sale as of December 31, 2020. The Company recognized a gain on sale of banking centers of $9.6 million, which is included in gains on acquisition and divestiture activity.periods shown:
Assets to be acquired and liabilities to be assumed that were classified as held-for-sale as of December 31, 2019 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 | |
Combination with Intercoastal
In July 2020, the Company completed the combination with Intercoastal to form ICM. The Bank contributed certain of its assets and in exchange received common units representing 47% of the common interest of ICM, as well as $7.5 million in preferred units. The Company has recognized its ownership as an equity method investment, initially recorded at fair value. The Company recognized a gain on this transaction of $3.3 million, which is included in gains on acquisition and divestiture activity.
Acquisition of Grand Software
In August 2020, MVB Technology, LLC, a newly formed West Virginia limited liability company and wholly-owned subsidiary of the Bank, entered into an Asset Purchase Agreement with Invest Forward, Inc., a Delaware corporation doing business as Grand. Pursuant to the Purchase Agreement, MVB Technology acquired the assets of Grand. The purchase price of the transaction consisted of cash totaling $1.0 million, plus the conversion of MVB’s note with Invest Forward. As of December 31, 2020, the assets acquired were recorded in premises and equipment with a balance of $1.3 million.
Note 25 – Subsequent Event
In January 2021, the Company redeemed all of its outstanding shares of series B convertible noncumulative perpetual preferred stock, par value $1.00 per share, with a liquidation preference of $1,000 per share and all of its outstanding shares of series C convertible noncumulative perpetual preferred stock, par value $1.00 per share, with a liquidation preference of $1,000 per share, at a redemption price per share equal to $10,000, plus declared and unpaid dividends of $46.03 per share of series B preferred stock, and $49.86 per share of series C preferred stock. Upon redemption, the Preferred Stock was no longer outstanding and all rights with respect to such stock ceased and terminated, except the right to payment of the redemption price.
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, |
(Dollars in thousands) | | 2023 | | 2022 | | 2021 |
Compliance consulting income | | $ | 2,369 | | | $ | 17,151 | | | $ | 11,427 | |
Gain on sale of discontinued operations | | 11,800 | | | — | | | — | |
Total income | | $ | 14,169 | | | $ | 17,151 | | | $ | 11,427 | |
| | | | | | |
Salaries and employee benefits | | $ | 2,082 | | | $ | 9,628 | | | $ | 7,245 | |
Other expenses | | 256 | | | 4,036 | | | 3,083 | |
Total expenses | | $ | 2,338 | | | $ | 13,664 | | | $ | 10,328 | |
| | | | | | |
Income before income taxes | | $ | 11,831 | | | $ | 3,487 | | | $ | 1,099 | |
Income taxes | | 3,049 | | | 834 | | | 241 | |
Net income from discontinued operations | | $ | 8,782 | | | $ | 2,653 | | | $ | 858 | |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, the Company2023, we carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer (who is our principal executive officer) and Chief Financial Officer (who is our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. The term "disclosure controls and procedures" means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on the results of this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.2023.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. The Company’sOur internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. GAAP.
As permitted by SEC guidance, management excluded from its assessment the operations of the First State Bank acquisition made during 2020, which is described in Note 24 – Acquisitions and Divestitures accompanying the consolidated financial statements included elsewhere in this report. Total assets of First State Bank constituted two percent of total assets and five percent of total revenue of the consolidated financial statement amounts as of and for the year ended December 31, 2020. Such exclusion was in accordance with the SEC guidance that an assessment of a recently acquired business may be omitted in management’s report on internal controls over financial reporting, providing the acquisition took place within twelve months of management’s evaluation.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’sour internal control over financial reporting as of December 31, 2020.2023. Management’s assessment did not identify any material weaknesses in the Company’sour internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework in 2013. Because there were no material weaknesses discovered, management believes that, as of December 31, 2020, the Company’s2023, our internal control over financial reporting was effective.
Dixon Hughes GoodmanFORVIS LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report and has issued aan attestation report on the effectiveness of the Company'sour internal control over financial reporting, which report is included in Item 87 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
ThereBeginning in January 2023, we adopted ASC 326. We implemented changes to the policies, processes and controls over the estimation of the allowance for credit losses to support the adoption of ASC 326. While many controls in operation under this new pronouncement mirror controls under prior GAAP, there were some new controls implemented.
Except as related to the adoption of ASC 326, there were no changes in the Company'sour internal control over financial reporting during the
quarter ended December 31, 20202023 that have materially affected, or are reasonably likely to materially affect, itsour internal control over financial reporting.
| | | | | | | | | | | |
Date: | March 9, 202112, 2024 | | /s/ Larry F. Mazza |
| | | Larry F. Mazza |
| | | President, CEO and Director |
| | | (Principal Executive Officer) |
| | | |
Date: | March 9, 202112, 2024 | | /s/ Donald T. Robinson |
| | | Donald T. Robinson |
| | | Executive Vice President and CFO |
| | | (Principal Financial and Accounting Officer) |
ITEM 9B. OTHER INFORMATION
None.Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements
During the three months ended December 31, 2023, none of our officers or directors (as defined in Rule 16a-1 (f) of the Securities Exchange Act of 1934) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Companywe will file with the SEC itsour definitive Proxy Statement pursuant to Regulation 14A of the Exchange Act for the 20212024 Annual Meeting of Shareholders (the “Proxy Statement”) not later than 120 days after December 31, 2020.2023. The applicable information appearing in the Proxy Statement is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Companywe will file with the SEC itsour definitive Proxy Statement not later than 120 days after December 31, 2020.2023. The applicable information appearing in the Proxy Statement is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
This information is omitted from this report (with the exception of the equity compensation plan information, which is disclosed below) pursuant to General Instruction G(3) of Form 10-K as the Companywe will file with the SEC itsour definitive Proxy Statement not later than 120 days after December 31, 2020.2023. The applicable information appearing in the Proxy Statement is incorporated by reference.
Equity Compensation Plan Information as of December 31, 2020:2023:
| Plan Category | Plan Category | | Number of securities to be issued upon exercise of outstanding options (a) | | Weighted-average exercise price of outstanding options (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | Plan Category | | Number of securities to be issued upon exercise of outstanding options (a) | | Weighted-average exercise price of outstanding options (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
Equity compensation plans approved by security holders | Equity compensation plans approved by security holders | | 947,988 | | | $ | 14.66 | | | 569,997 | |
Equity compensation plans not approved by security holders | Equity compensation plans not approved by security holders | | N/A | | N/A | | N/A | Equity compensation plans not approved by security holders | | n/a |
Total | Total | | 947,988 | | | $ | 14.66 | | | 569,997 | |
During 2020, 305,6972023, 107,500 stock options under the Company’sour equity compensation plan were exercised.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Companywe will file with the SEC itsour definitive Proxy Statement not later than 120 days after December 31, 2020.2023. The applicable information appearing in the Proxy Statement is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
This information is omitted from this report pursuant to General Instruction G(3) of Form 10-K as the Companywe will file with the SEC itsour definitive Proxy Statement not later than 120 days after December 31, 2020.2023. The applicable information appearing in the Proxy Statement is incorporated by reference.
The Independent Registered Public Accounting Firm is FORVIS, LLP ("FORVIS") (PCAOB Firm ID No. 686) located in Tampa, Florida.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of the registrant and its subsidiaries are filed as part of this report under Item 8 - Financial Statements and Supplementary Data and Item 9A - Controls and Procedures.
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(a)(1) | Financial Statements |
| Report of Independent Registered Public Accounting Firm Opinion on the Consolidated Financial Statements |
| Report of Independent Registered Public Accounting Firm Opinion on Internal Control over Financial Reporting |
| Consolidated Balance Sheets at December 31, 20202023 and 20192022 |
| Consolidated Statements of Income for the years ended December 31, 2020, 20192023, 2022 and 20182021 |
| Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 20192023, 2022 and 20182021 |
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 20192023, 2022 and 20182021 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2020, 20192023, 2022 and 20182021 |
| Notes to Consolidated Financial Statements |
| Management’s Annual Report on Internal Control over Financial Reporting |
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(b) | Exhibits |
| Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, please refer to the “Exhibit Index” below. The Exhibit Index specifically identifies each management contract or compensatory plan required to be filed as an exhibit to this Annual Report on Form 10-K. |
EXHIBIT INDEX
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Exhibit Number | | Description | | Exhibit Location |
2.1 | | Agreement and Plan of Merger and Reorganization, dated August 12, 2022 by and between MVB Financial Corp. and Integrated Financial Holdings, Inc. | | Purchase and Assumption Agreement Whole Bank All Deposits, among the Federal Deposit Insurance Corporation, receiver of The First State Bank, Barboursville, West Virginia, the Federal Deposit Insurance Corporation and MVB Bank, Inc., dated as of April 3, 2020 | |
3.1 | | Articles of Incorporation, as amended | | |
3.2 | | Articles of Amendment to Articles of Incorporation of MVB Financial Corp. | | |
3.3 | | Second Amended and Restated Bylaws, as amended | | |
4.1 | | Specimen of Stock Certificate representing MVB Financial Corp. Common Stock | | |
4.2 | | Form of Subscription Rights Certificate | | |
4.3 | | Description of Securities | | |
10.1† | | MVB Financial Corp. 2003 Stock Incentive Plan | | |
10.2† | | MVB Financial Corp. 2013 Stock Incentive Plan, as amended | | |
10.3†10.2† | | MVB Financial Corp. 2018 Annual Senior Executive Performance Incentive Plan | | |
10.3† | | MVB Financial Corp. 2022 Stock Incentive Plan | | |
10.4 | | Lease Agreement with Essex Properties, LLC for land occupied by Bridgeport Branch | | |
10.5† | | Amended and Restated Executive Employment Agreement of Larry F. Mazza | | |
10.6† | | Employment Agreement of Donald T. Robinson | | |
10.7† | | Offer Letter for Donald T. Robinson | | |
10.8† | | Investment Agreement between MVB Financial Corp. and Larry F. Mazza | | |
10.9† | | Third Addendum to the Employment Agreement with MVB Financial Corp. and MVB Bank, Inc. and H. Edward Dean, III, President and Chief Executive Officer of Potomac Mortgage Group, Inc. | | |
10.10† | | Fourth Addendum to the Employment Agreement with MVB Financial Corp. and MVB Bank, Inc. and H. Edward Dean, III, President and Chief Executive Officer of Potomac Mortgage Group, Inc. | | |
10.11† | | MVB Financial Corp. Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement | | |
10.1210.10 | | Purchase and Assumption Agreement, dated November 21, 2019,April 22, 2021, by and between MVB Bank, Inc. and Summit Community Bank, Inc. | | |
10.1310.11 | | Subordinated Note Purchase Agreement, dated November 30, 2020, by and among MVB Financial Corp. and certain qualified institutional buyers | |
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10.1410.12 | | Subordinated Note Purchase Agreement, dated September 28, 2021, by and among MVB Financial Corp. and certain qualified institutional buyers | |
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10.13 | | Agreement, dated March 2, 2020, by and between the Bank, PMG, Intercoastal, H. Edward Dean, III, Tom Pyne and Peter Cameron | | |
2110.14 | | Subsidiaries of RegistrantEquity Purchase Agreement, dated March 13, 2022, between Warp Speed Holdings LLC and MVB Bank, Inc. | | |
10.15 | | Credit Agreement, dated as of October 7, 2022, between MVB Financial Corp., as Borrower, and Raymond James Bank, as Lender | | |
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10.16 | | Limited Consent, Waiver and Omnibus Amendment to Credit Agreement, dated as of December 27, 2022, between MVB Financial Corp., as Borrower, and Raymond James Bank, as Lender | | |
10.17 | | Second Amendment to Credit Agreement, dated as of February 24, 2023, between MVB Financial Corp., as Borrower, and Raymond James Bank, as Lender | | |
10.18 | | Termination Agreement, dated May 9, 2023, by and among MVB Financial Corp., Integrated Financial Holdings, Inc., West Town Bank & Trust, and MVB Bank, Inc. | | |
10.19† | | Clawback Policy | | |
21 | | Subsidiaries of Registrant | | | | | |
23.1 | | Consent of Independent Registered Public Accounting Firm | | |
24 | | Power of Attorney | | |
31.1 | | Certificate of Principal Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002 | | |
31.2 | | Certificate of Principal Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002 | | |
32.1* | | Certificate of Principal Executive Officer & Principal Financial Officer pursuant to Section 906 of Sarbanes Oxley Act of 2002 | | |
101.INS | | XBRL Instance Document | | |
101.SCH | | XBRL Taxonomy Extension Schema | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase | | |
(*) In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
(†) Management contract or compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
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| MVB Financial Corp. |
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Date: | March 9, 202112, 2024 | By: | /s/ Larry F. Mazza |
| | Larry F. Mazza |
| | President, CEO and Director |
| | (Principal Executive Officer) |
POWER OF ATTORNEY AND SIGNATURES
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Know all persons by the presents, that each person whose signature appears below constitutes and appoints Larry F. Mazza and/or Donald T. Robinson, and either of them, as attorney-in-fact, with each having the power of substitution, for him or her in any and all capacities, to sign in his or her name and on his or her behalf, any amendment to this Form 10-K and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
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/s/ Larry F. Mazza | | Date: | March 9, 202112, 2024 |
Larry F. Mazza, President, CEO and Director | | | |
(Principal Executive Officer) | | | |
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/s/ Donald T. Robinson | | Date: | March 9, 202112, 2024 |
Donald T. Robinson, Executive Vice President and CFO | | | |
(Principal Financial and Accounting Officer) | | | |
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/s/ David B. Alvarez | | Date: | March 9, 2021 |
David B. Alvarez, Chairman | | | |
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/s/ W. Marston Becker | | Date: | March 9, 202112, 2024 |
W. Marston Becker, DirectorChairman | | | |
| | | |
/s/ John W. Ebert | | Date: | March 9, 202112, 2024 |
John W. Ebert, Director | | | |
| | | |
/s/ Daniel W. Holt | | Date: | March 9, 202112, 2024 |
Daniel W. Holt, Director | | | |
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/s/ Gary A. LeDonne | | Date: | March 9, 202112, 2024 |
Gary A. LeDonne, Director | | | |
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/s/ Kelly R. Nelson | | Date: | March 9, 202112, 2024 |
Kelly R. Nelson, Director | | | |
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/s/ J. Christopher PallottaJan L. Owen | | Date: | March 9, 202112, 2024 |
J. Christopher Pallotta,Jan L. Owen, Director | | | |
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/s/ Anna J. SainsburyLindsay Slader | | Date: | March 9, 202112, 2024 |
Anna J. Sainsbury,Lindsay Slader, Director | | | |
| | | |
/s/ Cheryl D. Spielman | | Date: | March 9, 202112, 2024 |
Cheryl D. Spielman, Director | | | |