# MVB FINANCIAL CORP (MVBF) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MVB FINANCIAL CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1277902/000127790223000042/mvbf-20221231.htm
Accession: 0001277902-23-000042
Filing date: 2023-03-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MVBF/
All MD&A years: /company/MVBF/mda/
Previous year: /company/MVBF/mda/fy2021/ (FY 2021)
Next year: /company/MVBF/mda/fy2023/ (FY 2023)

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, 2022, as compared to 2021. This information 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 2020 to 2021 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, 2021, filed with the SEC on March 10, 2022. Further, we encourage you to revisit the Forward-Looking Statements at the beginning of this report.

Executive Summary

During 2022, we adapted our business model due to challenging market conditions, primarily brought on by an environment of increasing interest rates and a slowing economy. We remained committed to key Fintech industry gaming and payments initiatives and implemented cost-saving measures. 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. We entered into agreements for card issuing and acquiring program sponsorships to further enhance fee income and noninterest income. In addition, we continue to expand into the Fintech industry through the acquisition of technology in order to scale and diversify our banking capabilities.

Financial Results

Net interest income increased $34.6 million to $111.8 million, noninterest income decreased $24.3 million to $38.3 million and noninterest expense increased $19.9 million to $117.4 million during 2022 compared to 2021. Our yield on earning assets (tax-equivalent) in 2022 was 4.54% compared to 3.52% in 2021. Total loans increased by $526.0 million to $2.40 billion as of December 31, 2022 from $1.87 billion as of December 31, 2021. Our overall cost of interest-bearing liabilities was 1.03% in 2022 compared to 0.44% in 2021. The increase in earning assets yield, partially offset by the increase in the cost of interest-bearing liabilities, resulted in an increase in our net interest margin (tax-equivalent) to 4.04% in 2022 from 3.26% in 2021.

Net income in 2022 totaled $15.0 million, compared to $39.1 million in 2021, a decrease of $24.1 million. The 2022 earnings equated to a return on average assets of 0.5% and a return on average equity of 5.9%, compared to 2021 results of 1.5% and 15.6%, respectively. Basic and diluted earnings per share were $1.23 and $1.17, respectively, in 2022 compared to $3.32 and $3.10, respectively, in 2021.

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

[[GREPCENT_TABLE]]
[["","","2022","","2021","","2020"],["(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","","$","232,935","","","$","1,613","","","0.69","%","","$","249,801","","","$","305","","","0.12","%","","$","125,259","","","$","191","","","0.15","%"],["CDs with banks","","1,033","","","24","","","2.32","","","10,406","","","201","","","1.93","","","12,484","","","246","","","1.97"],["Investment securities:"],["Taxable","","236,344","","","3,496","","","1.48","","","$","231,450","","","2,405","","","1.04","","","121,607","","","2,448","","","2.01"],["Tax-exempt 2","","139,353","","","5,166","","","3.71","","","201,532","","","6,328","","","3.14","","","144,389","","","5,361","","","3.71"],["Loans and loans held-for-sale: 1 3"],["Commercial","","1,594,069","","","87,845","","","5.51","","","1,387,273","","","63,551","","","4.58","","","$","1,136,858","","","54,434","","","4.79"],["Tax-exempt 2","","4,661","","","203","","","4.36","","","6,646","","","300","","","4.51","","","$","8,966","","","422","","","4.70"],["Real estate","","487,044","","","15,721","","","3.23","","","307,829","","","9,662","","","3.14","","","$","403,166","","","18,100","","","4.49"],["Consumer","","103,345","","","13,017","","","12.60","","","15,890","","","2,069","","","13.02","","","6,973","","","465","","","6.67"],["Total loans","","2,189,119","","","116,786","","","5.33","","","1,717,638","","","75,582","","","4.40","","","1,555,963","","","73,421","","","4.72"],["Total earning assets","","2,798,784","","","127,085","","","4.54","","","2,410,827","","","84,821","","","3.52","","","1,959,702","","","81,667","","","4.17"],["Allowance for loan losses","","(22,248)","","","","","","","(25,682)","","","","","","","(18,079)"],["Cash and due from banks","","5,670","","","","","","","13,874","","","","","","","26,460"],["Other assets","","244,861","","","","","","","201,904","","","","","","","181,439"],["Total assets","","$","3,027,067","","","","","","","$","2,600,923","","","","","","","$","2,149,522"],["Liabilities"],["Deposits:"],["Negotiable order of withdrawal","","$","707,282","","","$","4,724","","","0.67","%","","$","673,547","","","$","1,612","","","0.24","%","","$","408,110","","","$","2,521","","","0.62","%"],["Money market checking","","330,208","","","1,449","","","0.44","","","469,010","","","883","","","0.19","","","458,606","","","2,680","","","0.58"],["Savings","","56,697","","","418","","","0.74","","","42,800","","","5","","","0.01","","","45,420","","","6","","","0.01"],["IRAs","","6,216","","","71","","","1.14","","","9,674","","","121","","","1.25","","","13,691","","","218","","","1.59"],["CDs","","170,648","","","3,814","","","2.24","","","134,250","","","1,355","","","1.01","","","349,787","","","4,869","","","1.39"],["Repurchase agreements","","10,987","","","6","","","0.05","","","10,821","","","13","","","0.12","","","9,856","","","23","","","0.23"],["FHLB and other borrowings","","15,494","","","437","","","2.82","","","25,275","","","93","","","0.37","","","68,407","","","1,049","","","1.53"],["Senior term loan","","2,328","","","163","","","7.00","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Subordinated debt","","73,159","","","3,072","","","4.20","","","51,149","","","2,188","","","4.28","","","7,568","","","261","","","3.45"],["Total interest-bearing liabilities","","1,373,019","","","14,154","","","1.03","","","1,416,526","","","6,270","","","0.44","","","1,361,445","","","11,627","","","0.85"],["Noninterest-bearing demand deposits","","1,357,426","","","","","","","895,024","","","","","","","502,457"],["Other liabilities","","41,098","","","","","","","38,100","","","","","","","61,169"],["Total liabilities","","2,771,543","","","","","","","2,349,650","","","","","","","1,925,071"],["Stockholders\u2019 equity"],["Preferred stock","","\u2014","","","","","","","730","","","","","","","7,334"],["Common stock","","13,320","","","","","","","12,614","","","","","","","12,047"],["Additional paid-in capital","","147,728","","","","","","","140,610","","","","","","","130,312"],["Treasury stock","","(16,741)","","","","","","","(16,741)","","","","","","","(2,637)"],["Retained earnings","","138,135","","","","","","","112,842","","","","","","","77,044"],["Accumulated other comprehensive income (loss)","","(26,918)","","","","","","","534","","","","","","","351"],["Total stockholders' equity attributable to parent","","255,524","","","","","","","250,589","","","","","","","224,451"],["Noncontrolling interest","","637","","","","","","","683","","","","","","","\u2014"],["Total stockholders' equity","","256,161","","","","","","","251,272","","","","","","","224,451"],["Total liabilities and stockholders\u2019 equity","","$","3,027,067","","","","","","","$","2,600,912","","","","","","","$","2,149,522"],["Net interest spread (tax-equivalent)","","","","","","3.51","","","","","","","3.08","","","","","","","3.32"],["Net interest income and margin (tax-equivalent) 2","","$","112,931","","","4.04","%","","","","$","78,551","","","3.26","%","","","","$","70,040","","","3.57","%"],["Less: Tax-equivalent adjustments","","","","(1,128)","","","","","","","(1,392)","","","","","","","(1,214)"],["Net interest spread","","","","","","3.47","","","","","","","3.02","","","","","","","3.25"],["Net interest income and margin","","","","$","111,803","","","3.99","%","","","","$","77,159","","","3.20","%","","","","$","68,826","","","3.51","%"]]
[[/GREPCENT_TABLE]]

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

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securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the twelve months ended December 31, 2022, 2021 and 2020, 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 Our PPP loans, totaling $13.6 million, $131.7 million and $82.0 million at December 31, 2022, 2021 and 2020, respectively, are included in this amount for the years ended December 31, 2022, 2021 and 2020, respectively.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(Dollars in thousands)","","2022","","2021","","2020"],["Net interest margin - U.S. GAAP basis"],["Net interest income","","$","111,803","","","$","77,159","","","$","68,826"],["Average interest-earning assets","","2,798,784","","","2,410,827","","","1,959,702"],["Net interest margin","","3.99","%","","3.20","%","","3.51","%"],["Net interest margin - non-U.S. GAAP basis"],["Net interest income","","$","111,803","","","$","77,159","","","$","68,826"],["Plus: Impact of fully tax-equivalent adjustment","","1,128","","","1,392","","","1,214"],["Net interest income on a fully-tax equivalent basis","","$","112,931","","","$","78,551","","","$","70,040"],["Average interest-earning assets","","$","2,798,784","","","$","2,410,827","","","$","1,959,702"],["Net interest margin on a fully tax-equivalent basis","","4.04","%","","3.26","%","","3.57","%"]]
[[/GREPCENT_TABLE]]

Rate Volume Calculation

The year over year change in rate volume to 2022 from 2021 is as follows:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Change in Volume","","Change in Rate","","Total Change"],["Earning Assets"],["Loans:"],["Commercial","","$","9,473","","","$","14,821","","","$","24,294"],["Tax-exempt","","(90)","","","(7)","","","(97)"],["Real estate","","5,625","","","434","","","6,059"],["Consumer","","11,387","","","(439)","","","10,948"],["Investment securities:"],["Taxable","","51","","","1,040","","","1,091"],["Tax-exempt","","(1,952)","","","790","","","(1,162)"],["Interest-bearing deposits in banks","","(21)","","","1,329","","","1,308"],["CDs with banks","","(181)","","","4","","","(177)"],["Total earning assets","","$","24,292","","","$","17,972","","","$","42,264"],["Interest-bearing liabilities"],["Negotiable order of withdrawal","","$","81","","","$","3,031","","","$","3,112"],["Money market checking","","(261)","","","827","","","566"],["Savings","","2","","","411","","","413"],["IRAs","","(43)","","","(7)","","","(50)"],["CDs","","367","","","2,092","","","2,459"],["Repurchase agreements","","\u2014","","","(7)","","","(7)"],["FHLB and other borrowings","","(36)","","","380","","","344"],["Senior term loan","","\u2014","","","163","","","163"],["Subordinated debt","","942","","","(58)","","","884"],["Total interest-bearing liabilities","","1,052","","","6,832","","","7,884"],["Total","","$","23,240","","","$","11,140","","","$","34,380"]]
[[/GREPCENT_TABLE]]

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Key Metrics

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["(Dollars in thousands, except per share data)","2022","2021"],["Book value per common share","$","20.69","","$","22.70"],["Tangible book value per common share 4","$","20.25","","$","22.17"],["Efficiency ratio 1 4","78.2","%","69.7","%"],["Overhead ratio 2 4","3.9","%","3.7","%"],["Net loan charge-offs to total loans receivable 3","0.4","%","0.1","%"],["Allowance for loan losses to total loans receivable","1.00","%","0.98","%"],["Nonperforming loans","$","11,165","","$","17,713"],["Nonperforming loans to total loans receivable","0.5","%","0.9","%"],["Equity to assets","8.5","%","9.8","%"],["Community Bank Leverage Ratio","9.8","%","11.6","%"]]
[[/GREPCENT_TABLE]]

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 $20.25 and $22.17 as of December 31, 2022 and 2021, 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.

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","December 31, 2021"],["Goodwill","","$","3,988","","","$","3,988"],["Intangibles","","1,631","","","2,316"],["Total intangibles","","$","5,619","","","$","6,304"],["Total equity attributable to parent","","$","261,084","","","$","274,328"],["Less: Total intangibles","","(5,619)","","","(6,304)"],["Tangible common equity","","$","255,465","","","$","268,024"],["Tangible common equity","","$","255,465","","","$","268,024"],["Common shares outstanding (000s)","","12,618","","","12,087"],["Tangible book value per common share","","$","20.25","","","$","22.17"]]
[[/GREPCENT_TABLE]]

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 in banks. Interest-bearing liabilities include interest-bearing deposits and borrowed funds such as sweep accounts, repurchase agreements, subordinated debt and 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 and the mix of interest-earning assets and interest-bearing liabilities.

Net interest margin is calculated by dividing net interest income by average interest-earning assets and measures the net revenue generated by the Bank’s balance sheet. Net interest margin (tax equivalent) was 4.04% in 2022 compared to 3.26% in 2021. The year over year increase in net interest margin was due primarily to strong loan growth at favorable interest rates during 2022, primarily driven by our strategic lending partnerships and broad-based growth throughout CoRe Banking business.

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In 2022, the Federal Reserve raised its key interest rate from a range of 0.00% to 0.25% to a range of 4.25% to 4.50% as of December 31, 2022. 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, while maintaining an appropriate level of interest rate risk. Net interest spread (tax-equivalent) was 3.51% in 2022 compared to 3.08% in 2021. The difference between the net interest margin (tax-equivalent) and net interest spread (tax-equivalent) was 53 basis points in 2022 compared to 18 basis points in 2021. This was driven by the 102 basis point increase in yield on earning assets and the increase of $462.4 million in average noninterest-bearing demand deposits outpacing the 59 basis point increase in the cost of interest-bearing liabilities.

During 2022, net interest income increased $34.6 million, or 44.8%. This increase is largely due to the increase in earning assets of $388.0 million, primarily funded by the increase in average noninterest-bearing demand deposits of $462.4 million. Total interest income increased $42.5 million, or 51.0%, in 2022. The increase in total interest income was driven by higher yields from new loan production at favorable interest rates, as well as the change in our loan portfolio, including the increase in consumer loans and accelerated accretion on PCI loans as a result of a loan sale in the second quarter of 2022, which resulted in the increase in yield on earning assets of 102 basis points. Average total loans increased $471.5 million in 2022, primarily as the result of a $206.8 million increase in average commercial loans. The yield on loans increased 93 basis points.

Average investment securities decreased $57.3 million in 2022, or 13.2%, as the result of a $62.2 million decrease in tax-exempt investments and a $4.9 million increase in taxable investments. The yield on tax-exempt securities increased 57 basis points and the taxable securities yield increased 44 basis points.

Average interest-bearing liabilities decreased $43.5 million in 2022, or 3.1%, primarily the result of a $138.8 million decrease in the average balance of money market checking accounts and $9.8 million in FHLB and other borrowings, partially offset by an increase of $33.7 million in average balance of negotiable order of withdrawal accounts, $22.1 million in subordinated debt and $36.4 million in certificates of deposit.

Average interest-bearing deposits decreased $58.2 million in 2022. Total interest expense increased by $7.9 million, primarily due to a $6.5 million increase in deposit interest and a $0.9 million increase in interest on subordinated debt. The result was a 59 basis point increase in the cost of interest-bearing liabilities, primarily from increases in interest rates, despite the improved deposit mix resulting from the replacement of high-cost deposits with noninterest-bearing deposits.

The cost of interest bearing liabilities increased to 1.03% in 2022 from 0.44% in 2021. This increase is primarily the result of an increase of 245 basis points in the cost of FHLB and other borrowings and a 52 basis point increase 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.

Provision for Loan Losses

Our provision for loan losses for 2022 was $14.2 million and our release of allowance for loan losses for 2021 was $6.3 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 increase in loan loss provision is primarily the result of the changes to the outstanding balances of the loan portfolios, including an increase in our consumer loan segment, level of recognized charge-offs and resulting historical loss rates, as well as adjustments to the risk grading of loans within the portfolio.

Meanwhile, total loan receivable balances increased $502.8 million in 2022 versus an increase of $415.0 million in 2021. The commercial loan portfolio increased by $116.5 million in 2022, in comparison to an increase of $332.3 million in 2021, while the residential mortgage loan portfolio increased by $299.0 million and $53.3 million in 2022 and 2021, respectively. Partially offsetting the commercial and residential loan volume increases are the decrease in PPP loans, totaling $13.6 million as of December 31, 2022 compared to $131.7 million as of December 31, 2021. In addition, net charge-offs in 2022 totaled $8.6 million, in comparison to net charge-offs of $1.3 million in 2021. Lastly, the provision for loan losses was impacted by a $1.3 million increase in the specific loan loss allocations in 2022, relative to a $0.8 million decrease in 2021.

Noninterest Income

Payment card and service charge income, consulting compliance income, equity method investment income and gains on sale of

41

loans generally account for the majority of our noninterest income. Also from time to time, we recognize gains or losses on acquisition and divestiture activity, sales of assets or our investment portfolio. Total noninterest income for 2022, 2021 and 2020 was $38.3 million, $62.6 million and $91.8 million, respectively.

The decrease in noninterest income for 2022 compared to 2021 was primarily the result of a decrease of $18.1 million in equity method investment income, a $10.8 million decrease in gains on acquisition and divestiture activity, a $6.8 million decrease in investment portfolio gains and a $2.5 million decrease in gain on sale of portfolio loans. These decreases were partially offset by increases of $5.9 million in compliance consulting income, $5.0 million in gain on sale of assets, $4.1 million in payment card and service charge income and $1.9 million in an equity method investment gains.

Equity method investment income decreased $18.1 million, primarily due to lower mortgage banking revenue. Gain on sale of available-for-sale securities decreased $3.3 million due to the decreased sale of available-for-sale securities totaling $60.6 million in 2022 compared to $146.0 million in 2021 and market conditions. Gain on sale of portfolio loans decreased $2.5 million primarily driven by the $3.8 million loss on sale of bitcoin mining loans, which represented our entire crypto-lending exposure as we elected to exit our bitcoin mining portfolio. This was offset by the gain on sale of SBA loans of $5.5 million. Compliance and consulting income increased $5.9 million, primarily driven by revenue growth from professional services companies. Gain on sale of assets increased $5.0 million, primarily due to sale of mortgage servicing rights. Payment card and service charge income increased $4.1 million due to increased interchange income from our banking-as-a-service relationships and increased service charges on deposit accounts. The equity method investment gain of $1.9 million resulted from an in substance sale of an equity method investment from our portfolio.

Noninterest Expense

Noninterest expense was $117.4 million, $97.5 million and $97.1 million in 2022, 2021 and 2020, respectively. Approximately 61%, 62% and 63% of noninterest expense for 2022, 2021 and 2020, respectively, related to personnel costs. Personnel costs are a significant part of our noninterest expense as such costs are critical to services organizations. The increase relative to the year ended December 31, 2021 primarily reflects higher salaries and employee benefit costs of $12.0 million as headcount increased in 2022 as compared to 2021, which resulted in a 16% increase in average full time equivalent employees. Beginning in the fourth quarter of 2022, we implemented cost-savings initiatives to drive a 12% reduction from our annualized third quarter 2022 noninterest expense base, which partially offset the increase related to headcount.

Income Taxes

We incurred income tax expense of $4.1 million, $9.9 million and $9.5 million in 2022, 2021 and 2020, respectively. Our effective tax rate was 22%, 20% and 20% in 2022, 2021 and 2020, 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 2022, we expect to file tax returns in 40 states.

Return on Assets and Equity

Assets

Our return on average assets was 0.5% in 2022, compared to 1.5% in 2021. The decreased return in 2022 is a result of a $24.1 million, or 61.6%, decrease in earnings and an increase in average total assets of $426.2 million, or 16.4%, as compared to 2021. The increase in average total assets was mainly as a result of a $471.5 million, or 27.5%, increase in average total loans and a $43.0 million, or 21.3%, increase in other assets. The increase in average total loans and other assets were partially offset by a $16.9 million decrease in average interest-bearing cash balances with banks and a $57.3 million decrease in average investment securities.

Equity

Our return on average stockholders’ equity was 5.9% in 2022, compared to 15.6% in 2021. The decreased return in 2022 is a result of a $24.1 million, or 61.6%, decrease in earnings compared to 2021, while average equity increased by $4.9 million to $255.5 million.

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Statement of Financial Condition

Cash and Cash Equivalents

Cash and cash equivalents totaled $40.3 million at December 31, 2022, compared to $307.4 million at December 31, 2021. We believe the current balance of cash and cash equivalents adequately serves our liquidity and performance needs. Total cash and cash equivalents fluctuate daily due to transactions in process and other liquidity demands.

Investment Securities

Investment securities totaled $418.6 million at December 31, 2022, compared to $453.9 million at December 31, 2021.

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.

[[GREPCENT_TABLE]]
[["December 31, (Dollars in thousands)","","2022","","2021"],["Available-for-sale securities:"],["United States government agency securities","","$","44,814","","","$","40,437"],["United States sponsored mortgage-backed securities","","56,571","","","76,108"],["United States treasury securities","","120,909","","","110,389"],["Municipal securities","","138,636","","","175,012"],["Corporate debt securities","","10,560","","","11,142"],["Other debt securities","","7,500","","","7,500"],["Other securities","","824","","","878"],["Total investment securities available-for-sale","","$","379,814","","","$","421,466"],["Equity securities","","$","38,744","","","$","32,402"]]
[[/GREPCENT_TABLE]]

At December 31, 2022, 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. The decrease in investment security balances during 2022 was primarily driven by unrealized holding losses. At December 31, 2022, the amortized cost of available-for-sale investment securities totaled $427.1 million, resulting in a net unrealized loss in the investment portfolio of $47.3 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, 2022, equity securities primarily consist of our Fintech investment portfolio and are comprised of investments in 12 companies with a carrying value of $32.9 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, 2022:

[[GREPCENT_TABLE]]
[["","","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","","$","\u2014","","","\u2014","%","","$","3,695","","","3.55","%","","$","24,794","","","2.45","%","","$","22,947","","","2.17","%","","$","51,436","","","$","44,814"],["United States sponsored mortgage-backed securities","","\u2014","","","\u2014","","","1,374","","","4.08","","","2,581","","","1.77","","","64,312","","","1.84","","","68,267","","","56,571"],["United States treasury securities","","\u2014","","","\u2014","","","130,689","","","1.15","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","130,689","","","120,909"],["Municipal securities","","280","","","4.21","","","912","","","4.78","","","4,575","","","3.37","","","152,075","","","3.54","","","157,842","","","138,636"],["Corporate debt securities","","4,754","","","8.00","","","3,900","","","10.36","","","1,916","","","6.16","","","\u2014","","","\u2014","","","10,570","","","10,560"],["Other debt securities","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","7,500","","","\u2014","","","\u2014","","","\u2014","","","7,500","","","7,500"],["Other securities","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","824","","","\u2014","","","\u2014","","","\u2014","","","824","","","824"],["Total","","$","5,034","","","7.79","%","","$","140,570","","","1.52","%","","$","42,190","","","2.20","%","","$","239,334","","","2.95","%","","$","427,128","","","$","379,814"]]
[[/GREPCENT_TABLE]]

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, home equity lines of credit and consumer lending. Loans receivable totaled $2.37 billion as of December 31, 2022, an increase of $502.8 million from $1.87 billion as of December 31, 2021.

Major classification of loans held for investment at December 31, are as follows:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2022","","2021"],["Business","","$","851,072","","","$","821,615"],["Real estate","","632,839","","","572,736"],["Acquisition, development and construction","","126,999","","","100,080"],["Commercial","","$","1,610,910","","","$","1,494,431"],["Residential","","609,452","","","310,498"],["Home equity lines of credit","","18,734","","","22,186"],["Consumer","","131,566","","","44,332"],["Total loans","","$","2,370,662","","","$","1,871,447"],["Deferred loan origination fees and costs, net","","1,983","","","(1,609)"],["Loans receivable","","$","2,372,645","","","$","1,869,838"]]
[[/GREPCENT_TABLE]]

At December 31, 2022, commercial and non-residential real estate loans represented the largest portion of the portfolio at 68.0%. Commercial and non-residential real estate loans totaled $1.61 billion at December 31, 2022, compared to $1.49 billion at December 31, 2021. Management expects to continue to focus on the enhancement and growth of the commercial loan portfolio while maintaining appropriate underwriting standards and risk/price balance. Paycheck Protection Program (“PPP”) loans are included in the totals above and have outstanding balances of $13.6 million and $131.7 million as of December 31, 2022 and 2021, respectively.

44

Residential real estate loans to retail customers, including PCI loans, account for the second largest portion of the loan portfolio, comprising 25.7%. Residential real estate loans totaled $609.5 million at December 31, 2022, compared to $310.5 million at December 31, 2021. Management believes 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 West Virginia and Northern Virginia markets.

Consumer loans totaled $131.6 million at December 31, 2022, compared to $44.3 million at December 31, 2021. This increase was concentrated in two loan products: purchased automotive loans originated by a third-party in Puerto Rico, which increased from $40.7 million at December 31, 2021 to $84.5 million at December 31, 2022, and purchased residential real estate loans also originated by a third-party, which we began purchasing in 2022 and had a balance of $35.4 million at December 31, 2022.

At December 31, 2022, Special Mention loans amounted to $31.3 million compared to $30.3 million. The balance is comprised of 40 loans, which include two loans totaling $11.9 million to a single borrower for commercial real estate hospitality loans, $5.3 million to finance two multifamily housing construction projects to two related borrowers, a $4.8 million commercial real estate loan to a senior care facility and a $2.1 million commercial real estate loan to finance an office building. In addition, there are 34 loans to various unrelated borrowers totaling $7.2 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, 2022.

There were 12 additional loans that management identified as Substandard loans not yet impaired, totaling $23.5 million as of December 31, 2022. These loans include $19.2 million in three loans to finance hospitality properties to three related borrowers, a $2.0 million loan to finance a multifamily real estate property, a $1.0 million loan secured by receivables and a $0.9 million loan secured by residential lots. In addition, there are six loans to various unrelated borrowers totaling $0.3 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 12 loans discussed above, as to the borrowers’ ability to comply with the loan repayment terms in the future. 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 as of year-end were not considered impaired loans.

The following table provides loan maturities at December 31, 2022:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","One Year or Less","","One Through Five Years","","Five Through Fifteen Years","","Due After Fifteen Years","","Total"],["Commercial","","$","355,221","","","$","871,266","","","$","351,645","","","$","32,778","","","$","1,610,910"],["Residential","","85,405","","","491","","","8,155","","","515,401","","","609,452"],["Home equity lines of credit","","1,051","","","1,486","","","540","","","15,657","","","18,734"],["Consumer","","4,216","","","29,362","","","56,017","","","41,971","","","131,566"],["Total loans","","$","445,893","","","$","902,592","","","$","416,358","","","$","605,819","","","$","2,370,662"]]
[[/GREPCENT_TABLE]]

The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 2022 that mature after one year:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Commercial and non-residential real estate","","Residential","","Home equity lines of credit","","Consumer","","Total"],["Predetermined fixed interest rate","","$","547,102","","","$","220,172","","","$","46","","","$","84,625","","","$","851,945"],["Floating or adjustable interest rate","","1,063,808","","","389,280","","","18,688","","","46,941","","","1,518,717"],["Total as of December 31, 2022","","$","1,610,910","","","$","609,452","","","$","18,734","","","$","131,566","","","$","2,370,662"]]
[[/GREPCENT_TABLE]]

Loan Concentration

At December 31, 2022, 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

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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.

Allowance for Loan Losses

Management is responsible for establishing the allowance for loan losses (“ALL”) and the Loan Review Committee provides oversight for the adequacy of the 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, 2022 and 2021, impaired loans totaled $15.9 million and $22.5 million, respectively. A portion of the ALL of $1.7 million and $0.5 million was allocated to cover any loss in these loans at December 31, 2022 and 2021, respectively. Loans past due more than 30 days were $15.5 million and $18.1 million, respectively, at December 31, 2022 and 2021.

[[GREPCENT_TABLE]]
[["","","December 31,"],["","","2022","","2021"],["Loans past due more than 30 days to gross loans","","0.7","%","","1.0","%"],["Loans past due more than 90 days to gross loans","","0.1","%","","0.5","%"]]
[[/GREPCENT_TABLE]]

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 loans individually evaluated for impairment as of December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2022","","2021"],["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","","$","15,539","","","68","%","","$","14,100","","","80","%"],["Residential","","2,880","","","26","","","1,492","","","17"],["Home equity lines of credit","","131","","","1","","","128","","","1"],["Consumer and other","","5,287","","","5","","","2,546","","","2"],["Total","","$","23,837","","","100","%","","$","18,266","","","100","%"]]
[[/GREPCENT_TABLE]]

The ALL increase in the consumer and other loan segment was driven by a $43.8 million increase in purchased automotive loans throughout 2022. This segment realizes elevated charge offs, and therefore is allocated against at 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 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 $0.5 million, $0.4 million and $0.6 million for 2022, 2021 and 2020, 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:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2022","","2021"],["Non-accrual loans"],["Commercial","","$","7,528","","$","9,845"],["Real estate and home equity","","2,286","","7,853"],["Consumer and other","","1,351","","259"],["Total non-accrual loans","","11,165","","17,957"],["Accruing loan past due 90 days or more","","\u2014","","\u2014"],["Total non-performing loans","","11,165","","17,957"],["Other real estate, net","","1,194","","2,330"],["Total non-performing assets","","$","12,359","","$","20,287"],["Allowance for loan losses","","$","23,837","","$","18,266"],["Non-performing loans to gross loans","","0.5","%","","0.9","%"],["Allowance for loan losses to total loans","","1.0","%","","1.0","%"],["Allowance for loan losses to non-performing loans","","213.5","%","","103.1","%"],["Non-performing assets to total assets","","0.4","%","","0.7","%"]]
[[/GREPCENT_TABLE]]

Impaired loans have decreased by $6.6 million, or 29.3%, during 2022. This change is the net effect of multiple factors, primarily the reclassification of $5.9 million of previously reported impaired loans to performing loans, the identification of $3.4 million of recently impaired loans, principal curtailments/payoffs of $1.1 million, normal loan amortization of $2.9 million and $0.1 million in charge offs.

The $3.4 million of recently impaired loans were concentrated in sixty-seven purchased subprime auto loans totaling $1.1 million, or 32%, of the recently impaired loans and one commercial loan representing $0.9 million, or 26%, of the recently impaired loans. The subprime auto loans change on a quarterly basis as individual loans are either charged off or resume payments. The commercial loan is currently involved in legal proceedings.

The $1.1 million of principal curtailments/payoffs were concentrated in two commercial relationships, one in which the note was curtailed through the sale of collateral, and one in which two notes to a single borrower were refinanced into a third restructured note. These two relationships represented $0.8 million, or 74%, of the total principal curtailments.

The $0.1 million of charged off loans were concentrated in one mortgage relationship representing $0.1 million, or 100%, of the charge offs. The relationship of $0.1 million is secured by a residence.

Loans classified as Special Mention totaled $31.3 million and $30.3 million as of December 31, 2022 and December 31, 2021, respectively. The increase of $1.0 million, or 3.3%, was concentrated in the commercial loan portfolio. This increase is primarily the result of the payoff of 27 existing loans totaling $5.2 million to 16 borrowers, the risk grade upgrade of three loans to two separate loan relationships, totaling $10.0 million, offset by the risk grade downgrade of six loans to four relationships, totaling $4.5 million. There were also two loans originated in 2022 that were classified as Special Mention at year end, totaling $4.5 million, a commercial real estate hotel note of $4.5 million and a commercial note of less than $0.1 million. Of the 11 loans recently classified as Special Mention, there were two commercial real estate hotel loans to one relationship for $11.9 million, two commercial real estate loans secured by movie theaters totaling $2.5 million and a PPP commercial loan for $2.0 million. The $5.2 million in payoffs included one note to a relationship totaling $4.2 million secured by an industrial trucking property, thirteen notes to five borrowers previously associated with purchased loans totaling $0.9 million and seven remaining notes to various borrowers totaling $0.1 million.

Loans classified as Substandard totaled $35.3 million and $63.9 million as of December 31, 2022 and December 31, 2021, respectively. The decrease of $28.6 million, or 44.8%, was concentrated in the commercial loan portfolio. The decrease is primarily due the risk grade upgrade of seven loans to six separate commercial and mortgage loan relationships, totaling $18.1 million, the payoff of 49 existing loans totaling $4.5 million and the continued curtailment of the loans that remained within the portfolio. This decrease is further enhanced by the downgrade to Substandard of three residential mortgages totaling $1.3 million. The $4.5 million in payoffs included a 30 notes to 14 borrowers previously associated with purchased loans totaling $2.8 million and nineteen remaining notes to various borrowers totaling $1.7 million.

47

Loans classified as Doubtful totaled $4.7 million and $6.2 million as of December 31, 2022 and December 31, 2021, respectively. The decrease of $1.5 million, or 24.2%, was concentrated in the commercial loan portfolio and is the result of the implementation of the workout of these loans resulting in principal reduction from paydowns, loan sales and foreclosures 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 $0.1 million secured by residential real estate. As of December 31, 2022, there is $1.0 million in calculated loan loss reserve allocation against seven legacy MVB loans totaling $2.5 million. The largest of purchased loans had a balance of $1.3 million, while the remaining two loans had balances totaling $0.4 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. Deposits continue to be the most significant source of funds, totaling $2.57 billion, or 92.9% of funding sources, at December 31, 2022, versus $2.38 billion, or 96.6% of such funding sources, at December 31, 2021. Of these amounts, gaming deposits totaled $652.1 million and $911.6 million at December 31, 2022 and 2021, respectively. Borrowings, consisting of subordinated debt, senior term loan and FHLB and other borrowings represented 6.7% of funding sources at December 31, 2022, versus 3.0% at December 31, 2021. Repurchase agreements, which are available to large corporate customers, represented 0.4% and 0.5% of funding sources at December 31, 2022 and 2021, respectively.

Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source for the Company. At December 31, 2022, noninterest-bearing balances totaled $1.23 billion, compared to $1.12 billion at December 31, 2021, or 47.9% and 47.1%, respectively, of total deposits. Interest-bearing deposits totaled $1.34 billion at December 31, 2022, compared to $1.26 billion at December 31, 2021, or 52.1% and 52.9%, respectively, of total deposits.

The following table sets forth the balance of each of the deposit categories for the years ended December 31, 2022 and 2021: 

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2022","","2021"],["Demand deposits of individuals, partnerships and corporations"],["Noninterest-bearing demand","","$","1,231,544","","","$","1,120,433"],["Interest-bearing demand","","720,074","","","651,016"],["Savings and money markets","","284,447","","","510,068"],["Time deposits including CDs and IRAs","","334,417","","","96,088"],["Total deposits","","$","2,570,482","","","$","2,377,605"],["Time deposits that meet or exceed the FDIC insurance limit","","$","4,386","","","$","9,573"]]
[[/GREPCENT_TABLE]]

Average interest-bearing deposits totaled $1.27 billion during 2022 compared to $1.33 billion during 2021. Average noninterest bearing deposits totaled $1.36 billion during 2022 compared to $895.0 million during 2021.

Maturities of time deposits that met or exceeded the FDIC insurance limit as of December 31, 2022:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2022"],["Under three months","","$","1,581"],["Over three to 12 months","","1,497"],["Over one to three years","","\u2014"],["Over three years","","1,308"],["Total","","$","4,386"]]
[[/GREPCENT_TABLE]]

Along with 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 Resources

During the year ended December 31, 2022, stockholders’ equity decreased approximately $13.9 million to $261.4 million from $275.3 million. This decrease consists of net income for the year of $14.4 million, common stock options exercised totaling $2.1 million, stock-based compensation of $2.8 million, common stock issued related to Warp Speed acquisition of $9.6 million and stock-based compensation related to equity method investment of $0.4 million, respectively. These changes were offset by a $34.1

48

million decrease in accumulated other comprehensive income, dividends paid to common shareholders totaling $8.4 million and minimum tax withholding on restricted stock units issued of $0.7 million, respectively.

With stockholders’ equity decreasing as noted above and with the growth in assets of $276.5 million, the equity to assets ratio decreased from 9.8% at December 31, 2021 to 8.5% at December 31, 2022. We paid dividends to common shareholders of $8.4 million in 2022 and $6.0 million in 2021, compared to earnings of $15.0 million in 2022 versus $39.1 million in 2021, resulting in an increase in the dividend payout ratio to 55.5% in 2022 from 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 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 our risk-based capital ratios can be found in Supervision and Regulation in Item 1 – Business and Note 16 – Regulatory Capital Requirements accompanying the consolidated financial statements included elsewhere in this report.

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 EGRRCPA. 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.

In April 2020, under the CARES Act, the 9% leverage ratio threshold was temporarily reduced to 8% in response to the COVID-19 pandemic. The threshold increased to 8.5% in 2021 and has returned to 9% in 2022. 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.

The Bank's CBLR at December 31, 2022 was 9.83%, which is above the well-capitalized standard of 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 our policy to optimize the funding of the balance sheet, continually balancing the stability and cost factors of various funding sources. We believe 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.

Our main source of liquidity 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, 2022, cash flows from operating, investing and financing activities totaled $65.2 million, ($629.0) million and $296.6 million, respectively. Cash flows from operating, investing and financing activities during the year ended December 31, 2021 totaled $34.8 million, ($572.0) million and $580.7 million, respectively. Significant changes in operating cash flows during the year ended December 31, 2022 include proceeds of loans sold of $141.3 million, primarily consisting of the SBA lending program, sale of PCI loans and subprime consumer loans, partially offset by loans originated for sale of $101.4 million related to the SBA lending program. Additionally, significant changes in operating cash flows during the year include outflows in other liabilities of

49

$12.4 million, primarily related to federal tax liability and SBA participation payments in process. Significant changes in cash flows from investing activities during the year include outflows of $576.3 million from net increase in loans, $89.6 million from purchases of available-for-sale investment securities, $61.2 million from purchases of restricted bank stock and $38.4 million of purchases of equity method investments. These outflows were partially offset by cash inflows of $60.6 million in sales of available-for-sale investment securities, $53.0 million in redemptions of restricted bank stock and $21.0 million in maturities/paydowns of available-for-sale investment securities. Significant changes in cash flow from financing activities during the year include a decrease in the net change in deposits of $192.9 million in 2022 compared to $558.3 million in 2021, partially offset by the increased cash of $102.3 million from FHLB and other borrowings. 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.

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.

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 estimate 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, 2022, 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 three 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 $3.2 million at December 31, 2022 and decreasing the risk grade by one would have resulted in a reduction to the allowance of approximately $1.7 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.

50

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.

51