MVB FINANCIAL CORP (MVBF) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. A discussion of changes in our results of operations from 2019 to 2020 may be found in Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 9, 2021. Further, we encourage you to revisit the Forward-Looking Statements at the beginning of this report.
Executive Summary
We have continued to invest in infrastructure to support anticipated future growth in each area that is key to our performance, including personnel, technology and processes in order to meet the increasing compliance obligations of the financial services industry. We believe we are well-positioned in high-growth markets in which we operate and will continue to focus on margin improvement, leveraging capital, organic portfolio loan growth and operating efficiency. We believe the key challenge for us in the future is to expand our lending platform and utilize the increase in our low cost deposits, while continuing to manage asset quality, as well as management of compliance in emerging and fast growing markets. We are expanding 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. During 2020 and into 2021, we entered into agreements for debit card program sponsorship to further enhance fee income and noninterest income. In addition, we continue to expand into the Fintech industry through the acquisition of technology, including a software development team, in order to scale and diversify our banking capabilities.
Financial Results
Net interest income increased $8.3 million, noninterest income decreased $29.2 million and noninterest expense increased $0.3 million during 2021 compared to 2020. Our yield on earning assets (tax-equivalent) in 2021 was 3.52% compared to 4.17% in 2020. Total loans increased by $416.1 million to $1.87 billion as of December 31, 2021 from $1.45 billion as of December 31, 2020. Our overall cost of interest-bearing liabilities was 0.44% in 2021 compared to 0.85% in 2020. The decrease in earning assets yield, partially offset by the decrease in the cost of interest-bearing liabilities, resulted in a decrease in our net interest margin (tax-equivalent) to 3.26% in 2021 from 3.57% in 2020.
We earned $39.1 million in 2021 compared to $37.4 million in 2020, an increase of $1.7 million. The 2021 earnings equated to a return on average assets of 1.5% and a return on average equity of 15.6%, compared to 2020 results of 1.7% and 16.7%, respectively. Basic and diluted earnings per share were $3.32 and $3.10, respectively, in 2021 compared to $3.13 and $3.06, respectively, in 2020.
COVID-19 Pandemic
The COVID-19 pandemic has introduced a great degree of uncertainty to both the global and domestic economy and 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 our 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 pricing 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 our current asset-sensitive position, management expects continued pressure on net interest income. 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.
We actively participated in the Paycheck Protection Program (“PPP”), and may evaluate other programs available to assist our clients and provide 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 our 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
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2, 2020, additional legislation was passed that allowed small businesses to apply for loans through August 8, 2020. On January 8, 2021, the Small Business Administration (“SBA”) announced that the PPP 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, 2021, we originated 734 PPP loans with outstanding balances of $18.0 million through our internal commercial team and originated 3,731 PPP loans with outstanding balances of $113.7 million through our partnership with a Fintech company.
As of December 31, 2021, mortgage loans totaling $2.1 million were outstanding for modifications, such as interest-only payments and payment deferrals. There were no commercial loan modifications outstanding as of December 31, 2021. 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.”
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-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.
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Average Balances and Analysis of Net Interest Income
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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 | $ | 249,801 | $ | 305 | 0.12 | % | $ | 125,259 | $ | 191 | 0.15 | % | $ | 9,264 | $ | 209 | 2.26 | % | |||||||||||||||
| CDs with banks | 10,406 | 201 | 1.93 | 12,484 | 246 | 1.97 | 14,097 | 280 | 1.99 | ||||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||||||
| Taxable | 231,450 | 2,405 | 1.04 | 121,607 | 2,448 | 2.01 | 129,486 | 3,055 | 2.36 | ||||||||||||||||||||||||
| Tax-exempt 2 | 201,532 | 6,328 | 3.14 | 144,389 | 5,361 | 3.71 | 103,235 | 4,456 | 4.32 | ||||||||||||||||||||||||
| Loans and loans held-for-sale: 1 3 | |||||||||||||||||||||||||||||||||
| Commercial | 1,387,273 | 63,551 | 4.58 | 1,136,858 | 54,434 | 4.79 | 987,674 | 53,087 | 5.37 | ||||||||||||||||||||||||
| Tax-exempt 2 | 6,646 | 300 | 4.51 | 8,966 | 422 | 4.70 | 12,549 | 561 | 4.47 | ||||||||||||||||||||||||
| Real estate | 307,829 | 9,662 | 3.14 | 403,166 | 18,100 | 4.49 | 447,891 | 21,220 | 4.74 | ||||||||||||||||||||||||
| Consumer | 15,890 | 2,069 | 13.02 | 6,973 | 465 | 6.67 | 8,948 | 547 | 6.11 | ||||||||||||||||||||||||
| Total loans | 1,717,638 | 75,582 | 4.40 | 1,555,963 | 73,421 | 4.72 | 1,457,062 | 75,415 | 5.18 | ||||||||||||||||||||||||
| Total earning assets | 2,410,827 | 84,821 | 3.52 | 1,959,702 | 81,667 | 4.17 | 1,713,144 | 83,415 | 4.87 | ||||||||||||||||||||||||
| Allowance for loan losses | (25,682) | (18,079) | (11,318) | ||||||||||||||||||||||||||||||
| Cash and due from banks | 13,874 | 26,460 | 17,625 | ||||||||||||||||||||||||||||||
| Other assets | 201,904 | 181,439 | 131,370 | ||||||||||||||||||||||||||||||
| Total assets | $ | 2,600,923 | $ | 2,149,522 | $ | 1,850,821 | |||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||
| Deposits: | |||||||||||||||||||||||||||||||||
| Negotiable order of withdrawal | $ | 673,547 | $ | 1,612 | 0.24 | % | $ | 408,110 | $ | 2,521 | 0.62 | % | $ | 381,092 | $ | 3,586 | 0.94 | % | |||||||||||||||
| Money market checking | 469,010 | 883 | 0.19 | 458,606 | 2,680 | 0.58 | 331,636 | 5,144 | 1.55 | ||||||||||||||||||||||||
| Savings | 42,800 | 5 | 0.01 | 45,420 | 6 | 0.01 | 38,324 | 4 | 0.01 | ||||||||||||||||||||||||
| IRAs | 9,674 | 121 | 1.25 | 13,691 | 218 | 1.59 | 17,415 | 329 | 1.89 | ||||||||||||||||||||||||
| CDs | 134,250 | 1,355 | 1.01 | 349,787 | 4,869 | 1.39 | 387,660 | 8,376 | 2.16 | ||||||||||||||||||||||||
| Repurchase agreements | 10,821 | 13 | 0.12 | 9,856 | 23 | 0.23 | 11,252 | 48 | 0.43 | ||||||||||||||||||||||||
| FHLB and other borrowings | 25,275 | 93 | 0.37 | 68,407 | 1,049 | 1.53 | 183,812 | 4,704 | 2.56 | ||||||||||||||||||||||||
| Subordinated debt | 51,149 | 2,188 | 4.28 | 7,568 | 261 | 3.45 | 12,124 | 770 | 6.35 | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,416,526 | 6,270 | 0.44 | 1,361,445 | 11,627 | 0.85 | 1,363,315 | 22,961 | 1.68 | ||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 895,024 | 502,457 | 258,546 | ||||||||||||||||||||||||||||||
| Other liabilities | 38,100 | 61,169 | 33,810 | ||||||||||||||||||||||||||||||
| Total liabilities | 2,349,650 | 1,925,071 | 1,655,671 | ||||||||||||||||||||||||||||||
| Stockholders’ equity | |||||||||||||||||||||||||||||||||
| Preferred stock | 730 | 7,334 | 7,660 | ||||||||||||||||||||||||||||||
| Common stock | 12,614 | 12,047 | 11,762 | ||||||||||||||||||||||||||||||
| Additional paid-in capital | 140,610 | 130,312 | 118,837 | ||||||||||||||||||||||||||||||
| Treasury stock | (16,741) | (2,637) | (1,084) | ||||||||||||||||||||||||||||||
| Retained earnings | 112,843 | 77,044 | 61,712 | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive income (loss) | 534 | 351 | (3,737) | ||||||||||||||||||||||||||||||
| Total stockholders' equity attributable to parent | 250,590 | 224,451 | 195,150 | ||||||||||||||||||||||||||||||
| Noncontrolling interest | 683 | — | — | ||||||||||||||||||||||||||||||
| Total stockholders' equity | 251,273 | 224,451 | 195,150 | ||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 2,600,923 | $ | 2,149,522 | $ | 1,850,821 | |||||||||||||||||||||||||||
| Net interest spread (tax-equivalent) | 3.08 | 3.32 | 3.19 | ||||||||||||||||||||||||||||||
| Net interest income and margin (tax-equivalent) 2 | $ | 78,551 | 3.26 | % | $ | 70,040 | 3.57 | % | $ | 60,454 | 3.53 | % | |||||||||||||||||||||
| Less: Tax-equivalent adjustments | (1,392) | (1,214) | (1,054) | ||||||||||||||||||||||||||||||
| Net interest spread | 3.02 | 3.25 | 3.13 | ||||||||||||||||||||||||||||||
| Net interest income and margin | $ | 77,159 | 3.20 | % | $ | 68,826 | 3.51 | % | $ | 59,400 | 3.47 | % |
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, 2021, 2020 and 2019, 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
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financial measure following this table.
3 Our PPP loans, totaling $131.7 million and $82.0 million at December 31, 2021 and 2020, respectively, are included in this amount for the twelve months ended December 31, 2021 and 2020, respectively.
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2021 | 2020 | 2019 | ||||||||
| Net interest margin - U.S. GAAP basis | |||||||||||
| Net interest income | $ | 77,159 | $ | 68,826 | $ | 59,400 | |||||
| Average interest-earning assets | 2,410,827 | 1,959,702 | 1,713,144 | ||||||||
| Net interest margin | 3.20 | % | 3.51 | % | 3.47 | % | |||||
| Net interest margin - non-U.S. GAAP basis | |||||||||||
| Net interest income | $ | 77,159 | $ | 68,826 | $ | 59,400 | |||||
| Plus: Impact of fully tax-equivalent adjustment | 1,392 | 1,214 | 1,054 | ||||||||
| Net interest income on a fully-tax equivalent basis | $ | 78,551 | $ | 70,040 | $ | 60,454 | |||||
| Average interest-earning assets | $ | 2,410,827 | $ | 1,959,702 | $ | 1,713,144 | |||||
| Net interest margin on a fully tax-equivalent basis | 3.26 | % | 3.57 | % | 3.53 | % |
Rate Volume Calculation
The year over year change in rate volume to 2021 from 2020 is as follows:
| (Dollars in thousands) | Change in Volume | Change in Rate | Change in Both Rate & Volume | Total Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Earning Assets | |||||||||||||||
| Loans | |||||||||||||||
| Commercial | $ | 11,991 | $ | (2,355) | $ | (519) | $ | 9,117 | |||||||
| Tax-exempt | (109) | (17) | 4 | (122) | |||||||||||
| Real estate | (4,280) | (5,446) | 1,288 | (8,438) | |||||||||||
| Consumer | 595 | 443 | 566 | 1,604 | |||||||||||
| Investment securities: | |||||||||||||||
| Taxable | 2,211 | (1,184) | (1,070) | (43) | |||||||||||
| Tax-exempt | 2,121 | (827) | (327) | 967 | |||||||||||
| Interest-bearing deposits in banks | 190 | (38) | (38) | 114 | |||||||||||
| CDs with banks | (41) | (5) | 1 | (45) | |||||||||||
| Total earning assets | $ | 12,678 | $ | (9,429) | $ | (95) | $ | 3,154 | |||||||
| Interest-bearing liabilities | |||||||||||||||
| Negotiable order of withdrawal | $ | 1,639 | $ | (1,544) | $ | (1,004) | $ | (909) | |||||||
| Money market checking | 61 | (1,817) | (41) | (1,797) | |||||||||||
| Savings | — | (1) | — | (1) | |||||||||||
| IRAs | (64) | (47) | 14 | (97) | |||||||||||
| CDs | (3,000) | (1,339) | 825 | (3,514) | |||||||||||
| Repurchase agreements | 2 | (11) | (1) | (10) | |||||||||||
| FHLB and other borrowings | (662) | (797) | 503 | (956) | |||||||||||
| Subordinated debt | 1,503 | 63 | 361 | 1,927 | |||||||||||
| Total interest-bearing liabilities | (521) | (5,493) | 657 | (5,357) | |||||||||||
| Total | $ | 13,199 | $ | (3,936) | $ | (752) | $ | 8,511 |
Net Interest Income
Net interest income, which is the primary source of revenue for the Bank, is the amount by which interest income on earning assets exceeds interest expense incurred on interest-bearing liabilities. Interest-earning assets include loans and investment securities, as well as interest-bearing deposits and certificates of deposit in banks. Interest-bearing liabilities include interest-bearing deposits, borrowed funds, such as sweep accounts and repurchase agreements, and subordinated debt. Net interest income is also impacted by changes in market interest rates, as well as the mix of interest-earning assets and interest-bearing liabilities.
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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 of the net revenue stream generated by the Bank’s balance sheet. Net interest margin (tax equivalent) was 3.26% in 2021 compared to 3.57% in 2020. The net interest margin continues to face considerable pressure due to falling interest rates and competitive pricing of loans and deposits in the Bank’s markets. During 2020, the Federal Reserve lowered its key interest rate from a range of 1.50% to 1.75% to a range of —% to 0.25% and remained at this range as of 2021. 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, while maintaining an appropriate level of interest rate risk. Net interest spread (tax-equivalent) was 3.08% in 2021 compared to 3.32% in 2020. The difference between the net interest margin (tax-equivalent) and net interest spread (tax-equivalent) was 18 basis points in 2021 compared to 25 basis points in 2020. This was driven by the 65 basis point decrease in yield on earning assets outpacing the impact of the increase of $392.6 million in average noninterest-bearing demand deposits.
We continue 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 expects that loan activity will remain strong in the near-term future.
During 2021, net interest income increased by $8.3 million, or 12.1%, to $77.2 million from $68.8 million in 2020. This increase is largely due to the increase in earnings assets of $451.1 million primarily funded by the increase in noninterest-bearing demand deposits of $404.6 million. Also impacting the yield was the sale of certain assets and liabilities of four banking center locations to Summit in July 2021, the accretion related to loans acquired from First State and the amortization of PPP origination fees. Average total earning assets were $2.41 billion in 2021 compared to $1.96 billion in 2020. As a result of the increase in average total earning assets, total interest income increased by $3.0 million, or 3.7%, to $83.4 million in 2021 from $80.5 million in 2020. Average total loans and loans held-for-sale increased to $1.72 billion in 2021 from $1.56 billion in 2020, primarily as the result of a $250.4 million increase in average commercial loans; however, PPP loans with an outstanding balance of $131.7 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 32 basis points. Changes in the balance sheet related to the Summit and First State transactions also impacted yield on earning assets.
Average investment securities increased $167.0 million in 2021 as the result of a $57.1 million increase in tax-exempt investments and a $109.8 million increase in taxable investments. Yield on tax-exempt securities decreased 57 basis points and taxable securities yield decreased 97 basis points.
Average interest-bearing liabilities increased in 2021 by $55.1 million. The increase was primarily the result of an increase of $265.4 million in the average balance of negotiable order of withdrawal accounts and an increase of $10.4 million in money market checking accounts. The increase in average interest-bearing liabilities was partially offset by decreases of $215.5 million in the average balance of CDs and $43.1 million in the average balance of FHLB and other borrowings.
Average interest-bearing deposits grew to $1.33 billion in 2021 from $1.28 billion in 2020. Total interest expense decreased by $5.4 million, primarily due to decreases of $6.3 million in deposit interest and $1.0 million in interest on FHLB and other borrowings, partially offset by an increase of $1.9 million in interest on subordinated debt. The result was a 41-basis point decrease in the cost of interest bearing liabilities from 2020 to 2021.
The Bank’s yield on earning assets declined during 2021 due to decrease in the loan portfolio yield of 32 basis points, driven by the addition of PPP loans purchased in the first quarter of 2021, and the investment portfolio yield of 92 basis points, while the cost of interest bearing liabilities decreased by 41 basis points.
The cost of interest bearing liabilities decreased to 0.44% in 2021 from 0.85% in 2020. This decrease is primarily the result of decrease of 116 basis points in the cost of FHLB and other borrowings and a 51 basis point decrease in the cost of deposits. Further discussion on borrowings is included in Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.
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Provision for Loan Losses
Our release of allowance for loan losses for 2021 was $6.3 million and our provision for loan losses for 2020 was $16.6 million. The provision for loan losses, which is a product of management’s analysis, is recorded in response to inherent losses in the loan portfolio. The changes in loan loss provision are the result of a $2.6 million release allocated to a single loan as well as improvements in allocation rates, portfolio risk grades and economic and business factors.
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, in 2020 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. Throughout 2021, management observed continued improvement as the year progressed and the impacts of the pandemic began to be mitigated by the development and acceptance of vaccines. Furthermore, as a result of the ongoing analysis of the loan portfolios, a significant number of borrowers are reporting recovery from the strain on their operations experienced in 2020, and as a result present a relatively lower risk of default than a year ago. While the ultimate severity of impacts to the economic and business conditions in which we operate are not yet fully known, it seems that the impacts have begun to subside in recent months. However, the breadth of the worldwide COVID-19 pandemic has impacted virtually all industries and has created the potential for additional risk within the loan portfolios, should the pandemic again cause widespread economic disruptions.
Additionally, management executed an improvement to the qualitative factor framework in 2021 that was designed to significantly reduce the level of subjectivity within the model. More specifically, the framework was enhanced to include specific metrics for each qualitative factor that will be routinely monitored to measure the degree of potential risk in the loan portfolios. These new metrics indicate that there is considerably less risk in the loan portfolios than was previously indicated. As a result of both the improving economic and business conditions, and the improvement to the qualitative factor framework, there was no need for an increase to the total loan loss provision in 2021, and a total of $6.3 million was released from the allowance.
Meanwhile, total loan balances, excluding purchased credit impaired (“PCI”) loans, increased $437.4 million in 2021 versus an increase of $41.1 million in 2020. The commercial loan portfolio increased by $339.4 million in 2021, in comparison to an increase of $77.3 million in 2020, while the residential mortgage loan portfolio increased by $65.9 million and decreased by $31.3 million in 2021 and 2020, respectively. Included in the commercial and total loan volume increases are PPP loans totaling $131.7 million as of December 31, 2021. Growth in the commercial loan portfolio in 2021 was highly concentrated in loans purchased from our strategic lending partners. As a result, this directly impacted the perceived risk of Purchased Participations loan portfolio segment. Additionally in 2021, $40.7 million of consumer loans were originated through a strategic lending partner.
Net charge-offs in 2021 totaled $1.3 million, in comparison to net charge-offs of $2.1 million in 2020. Lastly, the release of allowance for loan losses was impacted by a $0.8 million decrease in the specific loan loss allocations in 2021, relative to a $0.7 million increase in 2020.
Noninterest Income
Payment card and service charge income, consulting compliance income and holding gains on equity securities generate the core of our noninterest income. During 2021 and 2020, equity method investment income and gains on acquisition and divestiture activity have generated additional noninterest income. Total noninterest income for 2021, 2020 and 2019 was $62.6 million, $91.8 million and $64.6 million, respectively.
The decrease in noninterest income for 2021 compared to 2020 was primarily the result of decrease of $33.4 million in mortgage fee income, $6.7 million in equity method investment income from ICM, $6.9 million in gains on acquisition and divestiture activity and $3.5 million in gain on sale of equity securities. These decrease were partially offset by increase of $5.2 million in compliance and consulting income, $4.7 million in payment card and service charge income, $3.4 million in holding gain on equity securities, $3.8 million gain on sale of portfolio loans and $3.0 million gain on sale of available-for-sale investment securities.
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Equity method investment income of $17.4 million was due primarily to income from ICM. Prior to the combination with ICM in July 2020, income from our mortgage activities was recognized through mortgage fee income. Mortgage fee income was $33.4 million in 2020.
Gains on acquisition and divestiture activity of $10.8 million were due to the divestiture of four branch locations.
Compliance and consulting income increased $5.2 million from $4.4 million in 2020 to $9.6 million in 2021, driven by the Trabian Technology acquisition in April 2021 and growth in Chartwell operations.
Payment card and service charge income increased $4.7 million from $2.8 million in 2020 to $7.5 million in 2021, driven by an increase in the number of interchange transactions and growth in our partnership with Worldpay.
Holding gain on equity securities increased $3.4 million from $0.4 million in 2020 to $3.8 million in 2021, primarily due to an increase in the valuation of our Fintech investment portfolio during the fourth quarter of 2021.
Gain on sale of portfolio loans increased $3.8 million from $0.3 million in 2020 to $4.2 million in 2021, primarily due to an increase volume of SBA loan sale activity.
Non interest Expense
Noninterest expense was $97.5 million, $97.1 million and $87.2 million in 2021, 2020 and 2019, respectively. Approximately 62%, 63% and 64% of noninterest expense for 2021, 2020 and 2019, respectively, related to personnel costs. Personnel costs are a significant part of our noninterest expense as such costs are critical to services organizations. Salaries and benefits decreased by $1.4 million in 2021, primarily as a result of the ICM combination, partially offset by incentive compensation and new hires to further build-out the Fintech vertical.
Professional fees increased by $2.3 million in 2021, primarily the result of deal costs related to the acquisitions of Trabian Technology, the sale of the Southern West Virginia banking centers and other strategic initiatives.
Income Taxes
We incurred income tax expense of $9.9 million, $9.5 million and $8.6 million in 2021, 2020 and 2019, respectively.
Our effective tax rate was 20%, 20% and 24% in 2021, 2020 and 2019, respectively. Our 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 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 2021, we expect to file tax returns in 33 states.
Return on Assets and Equity
Assets
Our return on average assets was 1.5% in 2021, compared to 1.7% in 2020. The decreased return in 2021 is a result of a $1.7 million increase in earnings, while average total assets increased by $451.4 million, mainly as the result of a $124.5 million increase in average interset-bearing deposits with banks and a $161.7 million increase in average total loans.
Equity
Our return on average stockholders’ equity was 15.6% in 2021, compared to 16.7% in 2020. The decreased return in 2021 is a result of a $1.7 million increase in earnings, while average equity increased by $26.1 million.
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Statement of Financial Condition
Cash and Cash Equivalents
Cash and cash equivalents totaled $307.4 million at December 31, 2021, compared to $263.9 million at December 31, 2020.
Management believes the current balance of cash and cash equivalents adequately serves our 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 us 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 $453.9 million at December 31, 2021, compared to $438.2 million at December 31, 2020.
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) | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Available-for-sale securities: | |||||||
| United States government agency securities | $ | 40,437 | $ | 53,869 | |||
| United States sponsored mortgage-backed securities | 76,108 | 95,769 | |||||
| United States treasury securities | 110,389 | 3,123 | |||||
| Municipal securities | 175,012 | 231,887 | |||||
| Corporate debt securities | 11,142 | 17,548 | |||||
| Other debt securities | 7,500 | 7,500 | |||||
| Other securities | 878 | 928 | |||||
| Total investment securities available-for-sale | $ | 421,466 | $ | 410,624 | |||
| Equity securities | $ | 32,402 | $ | 27,585 |
At December 31, 2021, 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 balances in investment securities to generate additional interest income. At December 31, 2021, the amortized cost of available-for-sale investment securities totaled $421.3 million, resulting in a net unrealized gain in the investment portfolio of $0.2 million. Management has the intent and ability to hold the investments to maturity and they are all high quality investments with no other than temporary impairment. The municipal securities continue to give us the ability to pledge and to decrease the effective tax rate.
At December 31, 2021, equity securities primarily consist of our Fintech investment portfolio and are comprised of investments in nine companies with a carrying value of $27.3 million. These securities do not have readily determinable fair values; therefore, they are classified as equity securities and are recorded at cost and adjusted for observable price changes for underlying transactions for identical or similar investments.
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The following table shows the maturities for the available-for-sale investment securities portfolio at December 31, 2021:
| Within one year | After one year, but within five | After five years, but within ten | After ten years | Total investment securities | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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 | $ | — | — | % | $ | 841 | 1.91 | % | $ | 16,418 | 1.23 | % | $ | 23,846 | 1.20 | % | $ | 41,105 | $ | 40,437 | |||||||||||||||
| United States sponsored mortgage-backed securities | — | — | 1,312 | 0.55 | 3,069 | 1.70 | 73,138 | 1.16 | 77,519 | 76,108 | |||||||||||||||||||||||||
| United States treasury securities | — | — | 112,133 | 0.63 | — | — | — | — | 112,133 | 110,389 | |||||||||||||||||||||||||
| Municipal securities | 5 | 3.00 | 1,792 | 4.07 | 9,162 | 3.04 | 160,085 | 2.49 | 171,044 | 175,012 | |||||||||||||||||||||||||
| Corporate debt securities | 989 | 4.07 | 500 | 6.25 | 9,604 | 6.47 | — | — | 11,093 | 11,142 | |||||||||||||||||||||||||
| Other debt securities | — | — | — | — | — | — | 7,500 | — | 7,500 | 7,500 | |||||||||||||||||||||||||
| Other securities | — | — | — | — | 878 | — | — | — | 878 | 878 | |||||||||||||||||||||||||
| Total | $ | 994 | 4.06 | % | $ | 116,578 | 0.72 | % | $ | 39,131 | 2.95 | % | $ | 264,569 | 1.94 | % | $ | 421,272 | $ | 421,466 |
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 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 our customers. Management believes the risk characteristics inherent in the investment portfolio are acceptable based on these parameters.
Loans
Our primary market areas are North Central West Virginia and Northern Virginia. The portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages, and consumer lending. Loans totaled $1.87 billion as of December 31, 2021, an increase of $416.1 million from $1.45 billion as of December 31, 2020.
Major classification of loans held for investment, including PCI loans, at December 31, are as follows:
| (Dollars in thousands) | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Commercial and non-residential real estate | $ | 1,494,431 | $ | 1,162,122 | |||
| Residential | 310,498 | 257,207 | |||||
| Home equity | 22,186 | 30,828 | |||||
| Consumer | 44,332 | 4,644 | |||||
| Total loans | $ | 1,871,447 | $ | 1,454,801 | |||
| Deferred loan origination fees and costs, net | $ | (1,609) | $ | (1,057) | |||
| Loans receivable | $ | 1,869,838 | $ | 1,453,744 |
At December 31, 2021, commercial and non-residential real estate loans, including PCI loans, represented the largest portion of the portfolio at 79.9%. Commercial and non-residential real estate loans totaled $1.49 billion at December 31, 2021, compared to $1.16 billion at December 31, 2020. Management will continue to focus on the enhancement and growth of the commercial loan portfolio while maintaining appropriate underwriting standards and risk/price balance. PPP loans are included in the totals above and have outstanding balances of $131.7 million and $82.0 million as of December 31, 2021 and 2020, 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 16.6%. Residential real estate totaled $310.5 million at December 31, 2021, compared to $257.2 million at December 31, 2020. Management believes the home equity loans are competitive products with an acceptable return on investment after risk considerations. Residential 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 those in the North Central
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West Virginia and Norther Virginia markets.
For discussion related 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.
At December 31, 2021, Special Mention loans not yet impaired amounted to $30.8 million. The balance is comprised of 71 loans, which include $7.0 million in three commercial real estate hospitality loans to a single relationship, a $4.2 million owner occupied commercial property, $4.9 million in two related loans to multifamily commercial real estate developers, a $4.9 million commercial real estate loan to a senior care facility, $4.7 million to finance two government lease transactions for a single borrower and $1.5 million in two loans to finance a multifamily property. In addition, there are 60 loans to various unrelated borrowers totaling $3.6 million in 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, most of these loans were 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, 2021.
There were 74 additional loans that management identified as Substandard loans not yet impaired, totaling $39.7 million as of December 31, 2021. These loans include $27.8 million in four loans to finance hospitality properties to two unrelated borrowers, $4.7 million in three loans to a single borrower to finance movie theaters and a multifamily real estate property, a $2.2 million loan to finance a Montessori school, a $1.6 million loan secured by residential lots, a $1.0 million loan secured by a borrowing base and $0.5 million in two loans to a borrower in the energy industry. In addition, there are 62 loans to various unrelated borrowers totaling $1.9 million in 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 eleven 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, 2021:
| (Dollars in thousands) | One Year or Less | One Through Five Years | Five Through Fifteen Years | Due After Fifteen Years | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial and non-residential real estate | $ | 352,656 | $ | 781,502 | $ | 317,005 | $ | 43,267 | $ | 1,494,431 | |||||||||
| Residential | 135,624 | 543 | 6,554 | 167,777 | 310,498 | ||||||||||||||
| Home equity | 740 | 2,726 | 642 | 18,078 | 22,186 | ||||||||||||||
| Consumer | 3,762 | 32,222 | 7,197 | 1,151 | 44,332 | ||||||||||||||
| Total loans | $ | 492,782 | $ | 820,457 | $ | 331,398 | $ | 226,809 | $ | 1,871,447 |
The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 2021 that mature after one year:
| (Dollars in thousands) | Commercial and non-residential real estate | Residential | Home equity | Consumer | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Predetermined fixed interest rate | $ | 658,765 | $ | 259,439 | $ | 41 | $ | 44,300 | $ | 962,546 | |||||||||
| Floating or adjustable interest rate | 835,666 | 51,059 | 22,145 | 32 | 908,901 | ||||||||||||||
| Total as of December 31, 2021 | $ | 1,494,431 | $ | 310,498 | $ | 22,186 | $ | 44,332 | $ | 1,871,447 |
Loan Concentration
At December 31, 2021, commercial and non-residential real estate loans comprised the largest component of the loan portfolio. 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 our market areas.
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Allowance for Loan Losses
The Loan Review Committee is responsible for the determination of the adequacy of the allowance for loan losses (“ALL”). The Committee’s determination is based on management’s assessment of risk in the loan portfolios which is calculated through the ALL model. Management continually monitors the risk in the loan portfolio through routine delinquency reporting and the internal loan review system, which directly inform the ALL calculation. 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, management also considers public knowledge and/or 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 ALL was considered by management to be adequate to absorb losses inherent in the loan portfolio.
At December 31, 2021 and 2020, impaired loans totaled $22.5 million and $15.4 million, respectively. A portion of the ALL of $0.5 million and $1.3 million was allocated to cover any loss in these loans at December 31, 2021 and 2020, respectively. Loans past due more than 30 days were $12.0 million and $10.6 million, respectively, at December 31, 2021 and 2020.
| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Loans past due more than 30 days to gross loans | 0.9 | % | 1.2 | % | ||
| Loans past due more than 90 days to gross loans | 0.5 | % | 0.6 | % |
For tables reflecting the allocation of the ALL, please refer to Note 3 – Loans and Allowance for Loan Losses accompanying the consolidated financial statements included elsewhere in this report.
The following table summarizes the primary segments of the ALL, excluding the ALL related to PCI loans and loans individually evaluated for impairment as of December 31, 2021 and 2020:
| (Dollars in thousands) | 2021 | 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | $ | 14,100 | 80 | % | $ | 24,033 | 80 | % | ||||||
| Residential | 948 | 17 | 1,378 | 18 | ||||||||||
| Home equity | 128 | 1 | 298 | 2 | ||||||||||
| Consumer and other | 2,427 | 2 | 51 | — | ||||||||||
| Total | $ | 17,603 | 100 | % | $ | 25,760 | 100 | % |
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 accruals charged to earnings and prior year amounts generally charged off as a credit loss. When, in management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes and collectability is no longer in doubt, which 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 $0.4 million, $0.6 million and $0.6 million for 2021, 2020 and 2019, respectively, if loans had performed in accordance with their terms.
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Non-performing assets and past due loans as of December 31, are as follows:
| (Dollars in thousands) | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Non-accrual loans | ||||||
| Commercial | $ | 9,845 | $ | 12,079 | ||
| Real estate and home equity | 7,853 | 1,629 | ||||
| Consumer and other | 259 | 5 | ||||
| Total non-accrual loans | 17,957 | 13,713 | ||||
| Accruing loan past due 90 days or more | — | — | ||||
| Total non-performing loans | 17,957 | 13,713 | ||||
| Other real estate, net | 2,330 | 5,730 | ||||
| Total non-performing assets | $ | 20,287 | $ | 19,443 | ||
| Allowance for loan losses | $ | 18,266 | $ | 25,844 | ||
| Non-performing loans to gross loans | 0.9 | % | 0.9 | % | ||
| Allowance for loan losses to total loans | 1.0 | % | 1.8 | % | ||
| Allowance for loan losses to non-performing loans | 103.1 | % | 188.5 | % | ||
| Non-performing assets to total assets | 0.7 | % | 0.8 | % |
Impaired loans have increased by $7.1 million, or 45.9%, during 2021. This change is the net effect of multiple factors, primarily the identification of $13.0 million of recently impaired loans, principal curtailments/payoffs of $3.7 million, normal loan amortization of $0.5 million and the reclassification of $0.7 million of previously reported impaired loans to performing loans.
The $13.0 million of recently impaired loans were concentrated in one commercial relationship representing $4.8 million, or 37%, of the recently impaired loans and one residential mortgage loan representing $5.6 million, or 43% of the recently impaired loans. Both loans are currently under forbearance agreements and paying as agreed.
The $3.7 million of principal curtailments/payoffs were concentrated in two commercial relationships in which the notes were curtailed through the partial sale of collateral. These two relationships represented $2.4 million, or 65%, of the total principal curtailments.
The $0.9 million of charged off loans were concentrated in one commercial relationship representing $0.8 million, or 89%, of the purchased impaired loans. The relationship of $0.8 million is secured by a borrowing base.
Loans classified as Special Mention totaled $30.3 million and $67.9 million as of December 31, 2021, and December 31, 2020, respectively. The decrease of $37.6 million, or 55.4%, was concentrated in the commercial loan portfolio. This decrease is primarily the result of the payoff of 19 existing loans totaling $40.8 million to 12 borrowers, the risk grade upgrade of eight loans to four separate loan relationships, totaling $16.1 million, offset by the risk grade downgrade of 30 loans to 13 relationships, totaling $15.5 million. There was also a single commercial real estate hotel note upgraded to Special Mention, totaling $4.4 million. Of the 30 loans recently classified as Special Mention, there were eight commercial equipment loans to one relationship for $0.7 million, two government lease transactions totaling $4.7 million, two loans to multifamily development corporations totaling $4.9 million, and an owner occupied commercial real estate loan to a trucking company totaling $4.2 million. The $40.8 million in payoffs included four notes to two relationships totaling $15.9 million secured by retail properties, two notes to a single borrower totaling $14.7 million secured by office properties, a single note to a multifamily borrower for $8.6 million, and twelve remaining notes to various borrowers totaling $1.5 million.
Loans classified as Substandard totaled $61.0 million and $58.3 million as of December 31, 2021 and December 31, 2020, respectively. The increase of $2.7 million, or 4.6%, was concentrated in the commercial loan portfolio. This increase is primarily the result of the downgrade to Substandard of 30 loans totaling $14.3 million, including two loans to a single relationship totaling $4.8 million, secured by government lease transactions, a single residential mortgage of $5.6 million, and a single note of $1.0 million secured by equipment. The increase is partially offset by the risk grade upgrade of three loans to two separate commercial loan relationships, totaling $4.5 million, the payoff of 40 existing loans totaling $5.6 million and the $2.0 million, or 39%, curtailment of three related equipment loans. There was also a charge-off of $0.3 million to a single borrower involved in government contracting. The $5.6 million in payoffs included a $0.9 million line of credit secured by the account receivables of an energy company, and three notes totaling $0.9 million to a retail commercial real estate developer.
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Loans classified as Doubtful totaled $1.7 million and $4.0 million as of December 31, 2021 and December 31, 2020, respectively. The decrease of $2.3 million, or 57.5%, was concentrated in the commercial loan portfolio and is the result of charging off the balance against associated marks of acquisition of various loans to unrelated borrowers obtained as part of the First State acquisition, as well as a charge off of a commercial loan totaling $0.9 million secured by a borrowing base. As of December 31, 2021, there is $0 in calculated loan loss reserve allocation against three legacy MVB loans totaling $0.1 million. The largest of purchased loans had a balance of $1.3 million, while the remaining 34 loans had balances totaling $3.9 million.
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 deposits continue to be the most significant source of funds, totaling $2.38 billion, or 96.6% of funding sources, at December 31, 2021. This same information at December 31, 2020 reflected $1.98 billion in deposits, representing 97.4% of such funding sources. Subordinated debt totaled $73.0 million and $43.4 million at December 31, 2021 and 2020, respectively, and represented 3.0% and 2.1% as of December 31, 2021 and 2020, respectively. Repurchase agreements, which are available to large corporate customers, represented 0.5% and 0.5% of funding sources at December 31, 2021 and 2020, respectively. There were no FHLB and other borrowings at December 31, 2021 and 2020.
Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source. At December 31, 2021, noninterest-bearing balances totaled $1.1 billion, compared to $715.8 million at December 31, 2020, or 47.1% and 36.1% of total deposits, respectively. Interest-bearing deposits totaled $1.3 billion at December 31, 2021 and 2020, or 52.9% and 63.9% 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. We currently expect our Fintech banking activities to continue to grow.
The following table sets forth the balance of each of the deposit categories for the years ended December 31, 2021 and 2020:
| (Dollars in thousands) | 2021 | 2020 | |||||
|---|---|---|---|---|---|---|---|
| Demand deposits of individuals, partnerships and corporations | |||||||
| Noninterest-bearing demand | $ | 1,120,433 | $ | 715,791 | |||
| Interest-bearing demand | 651,016 | 496,502 | |||||
| Savings and money markets | 510,068 | 545,501 | |||||
| Time deposits including CDs and IRAs | 96,088 | 224,595 | |||||
| Total deposits | $ | 2,377,605 | $ | 1,982,389 | |||
| Time deposits that meet or exceed the FDIC insurance limit | $ | 9,573 | $ | 16,955 |
Average interest-bearing deposits totaled $1.33 billion during 2021 compared to $1.28 billion during 2020. Average noninterest bearing deposits totaled $895.0 million during 2021 compared to $502.5 million during 2020.
Maturities of time deposits that met or exceeded the FDIC insurance limit as of December 31, 2021:
| (Dollars in thousands) | 2021 | ||
|---|---|---|---|
| Under three months | $ | 1,160 | |
| Over three to 12 months | 5,657 | ||
| Over one to three years | 2,356 | ||
| Over three years | 400 | ||
| Total | $ | 9,573 |
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 our borrowings, please refer to Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.
Capital and Stockholders’ Equity
During the year ended December 31, 2021, stockholders’ equity increased approximately $35.8 million to $275.3 million. This increase consists of net income for the year of $38.7 million, common stock options exercised totaling $4.9 million, stock-based
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compensation of $2.6 million, common stock issued related to stock-based compensation of $2.0 million and common stock issued related to the Trabian and Flexia acquisitions of $0.6 million and $4.5 million, respectively. These changes were offset by a $5.8 million decrease in accumulated other comprehensive income, dividends paid to both common and preferred shareholder totaling $6.1 million and redemption of preferred stock of $7.3 million. Despite the increase in stockholders’ equity, the equity to assets ratio decreased from 10.3% to 9.8% due to asset growth of $461.0 million outpacing the increase in stockholders' equity during 2021. We paid dividends to common shareholders of $6.0 million in 2021 and $4.3 million in 2020, compared to earnings of $39.1 million in 2021 versus $37.4 million in 2020, resulting in the dividend payout ratio increase from 11.4% in 2020 to 15.4% in 2021.
We 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 our consolidated financial statements. The Bank is required to comply with applicable capital adequacy standards established by the FDIC. We are exempt from the Federal Reserve Board’s capital adequacy standards as we believe we meet the requirements of the Small Bank Holding Company Policy Statement. 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 our risk-based capital ratios can be found in Supervision and Regulation in Item 1 – Business and Note 15 – Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.
At December 31, 2021, the Bank’s risk-based capital ratios were above the minimum standards for a well-capitalized institution. The total risk-based capital ratio of 16.7% at December 31, 2021 is above the well capitalized standard of 10%. The Tier 1 risk-based capital ratio of 15.8% at December 31, 2021 also exceeded the well capitalized minimum of 8%. The common equity Tier 1 capital ratio of 15.8% at December 31, 2021 is above the well capitalized standard of 6.5%. The leverage ratio at December 31, 2021 was 11.6% and was also above the well capitalized standard of 5%. Management believes that capital continues to provide a strong base for profitable growth.
Tangible book value ("TBV") per common share was $22.17 and $19.73 as of December 31, 2021 and 2020, 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, 2021 | December 31, 2020 | ||||||
|---|---|---|---|---|---|---|---|
| Goodwill | $ | 3,988 | $ | 2,350 | |||
| Intangibles | 2,316 | 2,400 | |||||
| Total intangibles | $ | 6,304 | $ | 4,750 | |||
| Total equity attributable to parent | $ | 274,328 | $ | 239,483 | |||
| Less: Preferred equity | — | (7,334) | |||||
| Less: Total intangibles | (6,304) | (4,750) | |||||
| Tangible common equity | $ | 268,024 | $ | 227,399 | |||
| Tangible common equity | $ | 268,024 | $ | 227,399 | |||
| Common shares outstanding (000s) | 12,087 | 11,526 | |||||
| Tangible book value per common share | $ | 22.17 | $ | 19.73 |
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 our policy to manage liquidity so that there is no need to make unplanned sales of assets or to borrow funds under emergency conditions.
The main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from
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investment maturities, principal payments from loans and income from loans and investment securities. During the year ended December 31, 2021, cash provided by financing activities totaled $580.7 million, while outflows from investing activity totaled $572.0 million. 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. 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.
We 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 our discretion. While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms, or at all.
We continue to experience increasing concentrations of deposits from emerging industries and have instituted policies and procedures to ensure that we maintain adequate liquidity to manage such deposit levels.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting policies are described in Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report. The preparation of these statements requires us to make certain assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities and 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 following estimates as critical to the understanding of our financial position and results of operations and which require the application of significant judgment by management.
Allowance for Loan Losses
The ALL represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the ALL requires significant judgment and the use of estimates related to the amount and timing of losses inherent in the loan portfolio consisting of specific and general components.
We estimate the general component of the ALL based on the Bank’s historical loss experience and consideration of qualitative factors, both internal and external, all of which may be susceptible to significant change. 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. Within each of our eight portfolio segments, each of these individual factors are assigned a rating between zero and seven, representing a measure of the risk that we believe each factor creates for the Bank's loan portfolio. Each factor is also weighted based on the relative risk we believe it poses to the Bank’s portfolio to determine a proportionate risk rating. As of December 31, 2021, the "economic and business conditions" factor was generally the highest weighted qualitative factor, with a weighting of 25% to 30%, and given a risk grade of two out of seven for seven of the eight portfolio segments. Increasing the risk grade by one for all segments would have resulted in an additional allowance of approximately $2.0 million at December 31, 2021, and decreasing the risk grade to three would have resulted in a reduction to the allowance of approximately $1.8 million.
In addition to the above judgments and estimates, the specific reserves on impaired loans is an important input to the ALL due to the increased risks inherent in those loans. This evaluation requires significant judgment and estimates related to the amount and timing of expected future cash flows and collateral values. To the 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.
Recent Accounting Pronouncements and Developments
Recent accounting pronouncements and developments applicable to us are described further in Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report.
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