MVB FINANCIAL CORP (MVBF) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that management believes is necessary to understand our financial condition, results of operations and cash flows for the year ended December 31, 2023 as compared to 2022. This information should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. A discussion of changes in our results of operations from 2021 to 2022 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, 2022, filed with the SEC on March 16, 2023. Further, we encourage you to revisit the Forward-Looking Statements at the beginning of this report.

Executive Summary

We continue to adapt our business model due to challenging market conditions, primarily brought on by an environment of increasing interest rates, a slowing economy and multiple high-profile bank failures that occurred during the first half of 2023. We remain committed to our key Fintech industries of gaming and payments. We continue to expand the Bank's treasury services function to support the banking needs of financial and emerging technology companies, which we believe will further enhance core deposits, notably through the expansion of deposit acquisition and fee income strategies through the Fintech division. Additionally, we have expanded our compliance and risk management team to support the growth in these lines of business.

Financial Results

Net interest income increased $11.5 million to $123.3 million, noninterest income decreased $7.9 million to $19.7 million and noninterest expense increased $7.5 million to $117.6 million during 2023 compared to 2022. Our yield on earning assets (tax-equivalent) in 2023 was 6.20% compared to 4.54% in 2022. Total loans decreased by $77.6 million to $2.32 billion as of December 31, 2023 from $2.40 billion as of December 31, 2022. Our overall cost of interest-bearing liabilities was 3.38% in 2023 compared to 1.03% in 2022. The increase in earning assets yield was partially offset by the increase in the cost of interest-bearing liabilities, which resulted in our net interest margin (tax-equivalent) remaining at 4.04% in 2023 and 2022.

Net income in 2023 totaled $31.2 million, compared to $15.0 million in 2022, an increase of $16.2 million. The 2023 earnings equated to a return on average assets of 0.9% and a return on average equity of 11.4%, compared to 2022 results of 0.5% and 5.9%, respectively. Basic and diluted earnings per share were $2.46 and $2.40, respectively, in 2023 compared to $1.23 and $1.17, respectively, in 2022.

Net Interest Income and Net Interest Margin (Average Balance Schedules)

The following tables present, for the periods indicated, information about (1) average balances, the total dollar amount of interest income from interest-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

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, 2023, 2022 and 2021, which is a non-U.S. GAAP financial measure. Please refer to the reconciliation of this non-U.S. GAAP financial measure to its most directly comparable U.S. GAAP financial measure following this table.

3 Our PPP loans, totaling $2.7 million, $13.6 million and $131.7 million at December 31, 2023, 2022 and 2021, respectively, are included in this amount for the years ended December 31, 2023, 2022 and 2021, respectively.

Rate Volume Calculation

The year over year change in rates and change in volume from 2022 to 2023 is as follows:

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Key Metrics

1 Noninterest expense as a percentage of net interest income and noninterest income

2 Noninterest expense as a percentage of average assets

3 Charge-offs less recoveries

4 Non-U.S. GAAP metric

Tangible book value ("TBV") per common share was $22.43 and $20.25 as of December 31, 2023 and 2022, respectively. TBV per common share is a non-U.S. GAAP measure that we believe is helpful to interpreting financial results. A reconciliation of TBV per common share is included below.

1 Includes $1.2 million of goodwill included under assets from discontinued operations on the balance sheet as of December 31, 2022.

2 Includes $1.1 million of intangibles included under assets from discontinued operations on the balance sheet as of December 31, 2022.

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds interest expense incurred on interest-bearing liabilities. Interest-earning assets include loans, investment securities and interest-bearing balances with 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 on a tax-equivalent basis was consistent at 4.04% in 2023 and 2022.

In 2023, the Federal Reserve raised its key interest rate from a range of 4.25% to 4.50% to a range of 5.25% to 5.50% as of

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December 31, 2023. We continue to analyze methods to deploy assets into an earning asset mix to result in a stronger net interest margin. Management’s estimate of the impact of future changes in market interest rates is shown in the section captioned Interest Rate Risk, in Item 7A – Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Net interest spread is calculated by taking the difference between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest, while maintaining an appropriate level of interest rate risk. Net interest spread on a tax-equivalent basis was 2.82% in 2023 compared to 3.51% in 2022. The difference between the net interest margin on a tax-equivalent basis and net interest spread on a tax-equivalent basis was 122 basis points in 2023 compared to 53 basis points in 2022. This was driven by the 235 basis point increase in the cost of interest-bearing liabilities outpacing the 166 basis point increase in yield on earning assets.

During 2023, net interest income increased $11.5 million, or 10.3%, driven largely by higher average earning asset balances of $278.9 million and the increase in the yield on earning assets, partially offset by the higher funding costs. Total interest income increased $63.9 million, or 50.7%, in 2023 driven by higher yields from new loan production at favorable interest rates and the repricing of variable rate loans. Average total loans increased $136.1 million in 2023, primarily as the result of a $104.1 million increase in average real estate loans and a $27.2 million increase in average commercial loans. The yield on loans increased 154 basis points.

Average investment securities decreased $37.6 million in 2023, or 10.0%, as the result of a $22.7 million decrease in tax-exempt investments and a $14.9 million decrease in taxable investments. The yield increased two basis points and 104 basis points on tax-exempt securities and taxable securities, respectively.

Average interest-bearing liabilities increased $594.9 million, or 43.3%, in 2023 primarily the result of a $406.1 million increase in certificates of deposit and a $174.5 million increase in the average balance of money market checking accounts.

Average interest-bearing deposits increased $591.2 million in 2023. Total interest expense increased by $52.4 million, primarily due to a $51.2 million increase in deposit interest. The result was a 235 basis point increase in the cost of interest-bearing liabilities, primarily from increases in interest rates, a migration out of NIB deposits driven by the highly-competitive deposit environment and liquidity actions taken during 2023 in response to market conditions.

The cost of interest bearing liabilities increased to 3.38% in 2023 from 1.03% in 2022. This increase is primarily the result of an increase of 249 basis point in the cost of deposits and 225 basis points in the cost of FHLB and other borrowings. Further discussion on borrowings is included in Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.

Provision for Credit Losses

Our release of allowance for credit losses for 2023 was $1.9 million compared to a provision for losses of $14.2 million for 2022. In January 2023, we adopted CECL for calculating the allowance for credit losses ("ACL") and required an adjustment to the allowance of $8.9 million to make the allowance adequate under the new methodology. The provision for credit losses, which is a product of management's analysis, is recorded in response to forecasted losses over the remaining life of the loan portfolio. Further discussion on the provision for credit losses is included in Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report. The decrease in the provision for credit losses is primarily the result of the changes to the outstanding balances of the loan portfolios, including a decrease in our consumer loan segment, forecasted loss rates, as well as the level of recognized charge-offs within the portfolio.

Meanwhile, total loan receivable balances decreased $55.0 million in 2023 versus an increase of $502.8 million in 2022. The commercial loan portfolio decreased by $9.2 million in 2023, in comparison to an increase of $116.5 million in 2022, while the consumer loan portfolio decreased by $104.2 million in 2023, in comparison to an increase of $87.7 million in 2022. Additionally, the residential mortgage loan portfolio increased by $63.0 million and $299.0 million in 2023 and 2022, respectively. Net charge-offs in 2023 totaled $9.3 million, in comparison to net charge-offs of $8.6 million in 2022. Lastly, the provision for credit losses was impacted by a $0.1 million increase in the specific credit loss allocations in 2023, relative to a $1.3 million increase in provision for such loan losses in 2022.

Noninterest Income

Payment card and service charge income, consulting compliance income, equity method investment income or loss and gains on sale of loans generally account for the majority of our noninterest income. From time to time, we also recognize gains or losses on

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acquisition and divestiture activity, sales of assets or our investment portfolio. Total noninterest income for 2023, 2022 and 2021 was $19.7 million, $27.6 million and $55.9 million, respectively.

The decrease in noninterest income for 2023 compared to 2022 was primarily the result of a decrease of $2.4 million in gain on sale of loans, a decrease of $2.2 million in investment portfolio gains, an increase of $1.8 million in equity method investment losses and a loss on divestiture activity of $1.0 million. Additionally, there was a $1.9 million holding gain on equity method investments and a $5.0 million gain on sale of assets in 2022 without corresponding gains in 2023. These decreases were partially offset by increases of $4.2 million in other operating income and $2.1 million in payment card and service charge income.

Gain on sale of portfolio loans decreased $2.4 million primarily driven by losses on the sale of $44.4 million of subprime automobile loans during 2023 as we reduced that portfolio. Investment portfolio gains decreased $2.2 million primarily driven by losses on the sale of securities as a result of repositioning our investment portfolio during the first quarter of 2023. The $1.8 million increase in equity method investment losses was due to lower mortgage banking revenue driven by market conditions. The $1.9 million holding gain on equity method investments in the prior year reflected an in substance sale of an equity method investment from our portfolio during the third quarter of 2022. The $1.0 million loss on divestiture activity was primarily related to the loss on the divestiture of Flexia during the second quarter of 2023. For more information regarding the Flexia transaction, see Note 26 - Acquisition and Divestiture Activity. Payment card and service charge income increased by $2.1 million, which primarily reflects an increase in payment relationships and fee income on Fintech deposits.

Noninterest Expense

Noninterest expense was $117.6 million, $110.1 million and $91.8 million in 2023, 2022 and 2021, respectively. Approximately, 54%, 57% and 58% of noninterest expense for 2023, 2022 and 2021, 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 of noninterest expense relative to the year ended December 31, 2022 primarily reflects an increase of professional fees of $2.7 million attributable to actions taken in response to the market events in March 2023 to further enhance risk management and compliance-related infrastructure, and an increase of insurance, tax, and assessment expense of $1.8 million, primarily the result of a market wide increase in FDIC insurance costs.

Discontinued Operations

In February 2023, we completed the sale of Chartwell for total consideration of $14.4 million in the form of a loan issued to the buyer, resulting in a gain on sale of $11.8 million. To facilitate a transition of the Chartwell services and support the onboarding and conversion of systems, we entered into a 60 day Employee Lease and Service Agreement, whereby we provided the purchaser with finance and accounting, human capital, information technology, marketing and record/data retention services. In addition, we entered into a contract with the purchaser for Chartwell to continue to provide services and support for three years following the sale.

Income Taxes

We incurred income tax expense of $8.1 million, $4.1 million and $9.9 million in 2023, 2022 and 2021, respectively. Our effective tax rate was 21%, 22% and 20% in 2023, 2022 and 2021, 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 2023, we expect to file tax returns in 29 states.

Return on Assets and Equity

Assets

Our return on average assets was 0.9% in 2023, compared to 0.5% in 2022. The increased return in 2023 is a result of a $16.2 million, or 108.0%, increase in earnings, which was offset by an increase in average total assets of $329.6 million, or 10.9%, as compared to 2022. The increase in average total assets was mainly as a result of a $136.1 million, or 6.2%, increase in average total loans and a $57.1 million, or 23.3%, increase in other assets. The increase in average total loans and other assets were partially offset by a $181.6 million, or 78.0%, increase in average interest-bearing cash balances with banks and a $37.6 million,

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or 10.0%, decrease in average investment securities.

Equity

Our return on average stockholders’ equity was 11.4% in 2023, compared to 5.9% in 2022. The increased return in 2023 is a result of a $16.2 million, or 108.0%, increase in earnings compared to 2022, while average equity increased by $19.1 million to $273.9 million.

Statement of Financial Condition

Cash and Cash Equivalents

Cash and cash equivalents totaled $398.2 million at December 31, 2023, compared to $40.3 million at December 31, 2022. The increase in cash and cash equivalents reflects actions taken in 2023 to ensure liquidity in response to recent conditions in the banking industry. We believe the current balance of cash and cash equivalents adequately serves 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 $386.4 million at December 31, 2023, compared to $418.6 million at December 31, 2022.

The following table sets forth a summary of the investment securities portfolio as of the dates indicated. The available-for-sale securities are reported at estimated fair value.

At December 31, 2023, all investment securities are available-for-sale or equity securities. Management believes the available-for-sale classification provides flexibility in terms of managing the portfolio for liquidity, yield enhancement and interest rate risk management opportunities. The decrease in investment securities balances during 2023 was primarily driven by sales and maturities of available-for-sale securities. At December 31, 2023, the amortized cost of available-for-sale investment securities totaled $377.8 million, resulting in a net unrealized loss in the investment portfolio of $32.5 million. Management has the intent and ability to hold the investments to maturity and they are all high quality investments with no credit impairment. The municipal securities continue to give us the ability to pledge and to decrease the effective tax rate.

At December 31, 2023, equity securities primarily consist of our Fintech investment portfolio and are comprised of investments in 10 companies with a carrying value of $36.4 million. Investments in our top four equity securities represented $34.1 million, or 93.7%, of our total Fintech investment portfolio at December 31, 2023. The Fintech equity securities do not have readily determinable fair values 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, 2023:

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.

Management continually evaluates hedging strategies that are available to manage interest rate risk. We enter into interest rate swap contracts designated as hedging instruments to manage the interest rate risk associated with certain fixed rate available for sale securities. In 2023 we entered into a portfolio layer method interest rate swap with a notional amount of $50.0 million and a swap liability fair value of $1.6 million at December 31, 2023. The swap is designated as a hedging instrument over a closed portfolio of municipal securities with an amortized cost basis of $59.3 million at December 31, 2023, which includes a $1.6 million basis adjustment. At December 31, 2022 we had an interest rate swap with a notional amount of $10.9 million designated as a hedging instrument over a closed portfolio of municipal securities with an amortized cost basis of $11.1 million, which includes a $0.2 million basis adjustment. This hedging relationship was discontinued during the first quarter of 2023.

Loans

Our primary market areas are North Central West Virginia, Northern Virginia, North Carolina and South Carolina. Our loan portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages, home equity lines of credit and consumer lending. Loans receivable totaled $2.32 billion as of December 31, 2023, a decrease of $55.1

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million from $2.37 billion as of December 31, 2022.

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

At December 31, 2023, commercial and non-residential real estate loans represented the largest portion of the portfolio at 69.2%. Commercial and non-residential real estate loans totaled $1.60 billion at December 31, 2023, compared to $1.61 billion at December 31, 2022. 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 $2.7 million and $13.6 million as of December 31, 2023 and 2022, respectively.

Residential real estate loans to retail customers account for the second largest portion of the loan portfolio, comprising 29.0%. Residential real estate loans totaled $672.5 million at December 31, 2023, compared to $609.5 million at December 31, 2022. 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 both those in the primary North Central West Virginia and Northern Virginia markets, as well as those in the surrounding areas as management deems appropriate.

Consumer loans totaled $27.4 million at December 31, 2023, compared to $131.6 million at December 31, 2022. This decrease was concentrated in automotive loans originated by a third-party, which decreased from $84.5 million at December 31, 2022 to $27.3 million at December 31, 2023, primarily the result of the sale of $44.4 million of subprime automobile loans during 2023. In addition, $46.9 million in consumer loans were reclassified as other loan types during the transition to CECL, with $45.2 million moving to the Residential category.

At December 31, 2023, Special Mention loans amounted to $83.8 million. The balance is comprised of 53 loans, which include seven loans totaling $26.1 million to a single borrower for retail commercial real estate projects, $18.9 million to finance two multifamily housing construction projects to two related borrowers, a $8.0 million commercial real estate loan to a senior care facility and a $11.2 million commercial real estate loan to finance an office building. In addition, there are 42 loans to various unrelated borrowers totaling $19.6 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.

There were 34 additional loans that management identified as Substandard loans, totaling $34.0 million as of December 31, 2023. These loans include $18.4 million in three loans to finance hospitality properties to three related borrowers, a $3.8 million loan to finance a multifamily real estate property and two loans totaling $3.1 million loan secured by leases. In addition, there are 28 loans to various unrelated borrowers totaling $8.7 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 34 loans discussed above, as to the borrowers’ ability to comply with the loan repayment terms in the future.

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The following table provides loan maturities at December 31, 2023:

The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 2023 that mature after one year:

Loan Concentration

At December 31, 2023, commercial and non-residential real estate loans comprised the largest component of the loan portfolio. Healthcare loans are a significant component of commercial and non-residential real estate loans and comprise 23.4% of total loans receivable at December 31, 2023. A large portion of commercial loans are secured by real estate and they are diverse with respect to geographical location and industry. Loans that are not secured by real estate are typically secured by accounts receivable, mortgages or equipment. While the loan concentration is in commercial loans, the commercial portfolio is comprised of loans to many different borrowers, in numerous different industries, primarily located in our market areas.

Lending operations of commercial banks may be subject to enhanced scrutiny by federal banking regulators based on a bank’s concentration of commercial real estate (“CRE”) loans. The federal banking regulators have issued guidance to remind financial institutions of the risk posed by CRE lending concentrations. CRE loans generally include land development, construction loans, and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for bank examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

As of December 31, 2023, the Bank's concentration of loans for construction, land development, and other land as a percentage of capital totaled 36.0% and the Bank's CRE concentration, excluding owner-occupied loans, as a percentage of capital totaled 234.1%.

Allowance for Credit Losses

Management continually monitors the risk in the loan portfolio through the review of the monthly delinquency reports and the Loan Review Committee. The Loan Review Committee is responsible for the determination of the adequacy of the ACL. This analysis involves both experience of the portfolio to date and the makeup of the overall portfolio. Specific loss estimates are derived for individual loans based on specific criteria such as current delinquent status, related deposit account activity, where applicable and changes in the local and national economy. When appropriate, we also consider public knowledge and 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 ACL was considered by management to be adequate to absorb forecasted losses over the remaining life of the loan portfolio.

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At December 31, 2023 and 2022, individually analyzed loans totaled $11.8 million and $18.2 million, respectively. A portion of the ACL of $1.9 million and $1.7 million was allocated to cover any loss in these loans at December 31, 2023 and 2022, respectively. Loans past due more than 30 days were $14.0 million and $15.5 million, respectively, at December 31, 2023 and 2022.

For tables reflecting the allocation of the ACL, please refer to Note 3 – Loans and Allowance for Credit Losses accompanying the consolidated financial statements included elsewhere in this report.

The following table summarizes the primary segments of the ACL as of December 31, 2023 and 2022:

The ACL decrease in the consumer and other loan segment was driven by a $44.4 million sale of subprime automobile loans during 2023. This segment realizes elevated charge offs, and therefore is allocated against a much higher rate than commercial, residential or home equity. We continue to monitor this segment closely.

Non-performing assets consist of loans that are no longer accruing interest and real estate acquired through foreclosure. When interest accruals are suspended, accrued interest income is reversed and charged to earnings. When, in management’s judgment, the borrower’s ability to make periodic interest and principal payments resumes and collectability is no longer in doubt, 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 $0.8 million, $0.5 million and $0.4 million for 2023, 2022 and 2021, respectively, if loans had performed in accordance with their terms.

Non-performing assets and past due loans as of December 31, are as follows:

Individually analyzed loans have decreased by $6.4 million, or 35.2%, during 2023. This change is the net effect of multiple factors, primarily the reclassification of $2.0 million of previously reported individually analyzed loans to performing loans, the

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identification of $4.8 million of recently individually analyzed loans, principal curtailments/payoffs of $3.8 million, normal loan amortization of $3.0 million and $2.4 million in charge offs.

The $4.8 million of recently individually analyzed loans were concentrated in nine commercial loans with government guarantees totaling $3.6 million, or 75%, of the recently identified loans and a single development note secured by residential lots totaling $0.8 million, or 17%, of the recently identified loans. The loans with government guarantees are to eight separate borrowers and are various stages of either forbearance agreement or liquidation. The development note is currently paying under a forbearance agreement.

The $3.8 million of principal curtailments/payoffs were concentrated in a single commercial relationship, in which the note was curtailed through the sale of collateral of $1.5 million, or 39%, of the total principal curtailments, and through the sale of 12 non-performing consumer mortgage notes representing $1.8 million, or 47%, of the total principal curtailments.

The $2.4 million of charged off loans were concentrated in one commercial relationship representing $0.9 million, or 38%, of the charge offs. This note was secured by a government lease that was not renewed. The subprime auto segment also saw a net change of $1.0 million, which has been attributed to charge offs. These charge offs were to various individual loans secured by automobiles and comprised 42% of the total charge offs.

Loans classified as Special Mention totaled $83.8 million and $31.3 million as of December 31, 2023 and December 31, 2022, respectively. The increase of $52.5 million, or 167.7%, was concentrated in the commercial loan portfolio. This increase is primarily the result of the risk downgrade of 24 loans to 16 relationships, totaling $68.9 million. In addition, there was one loan that originated in 2023 classified as Special Mention at year end, totaling $1.0 million, a commercial note secured by owner occupied real estate. Of the 24 loans recently classified as Special Mention, there were seven commercial loans to one relationship for $26.1 million, one commercial multifamily real estate for $14.6 million, two commercial office real estate to a single borrower totaling $11.7 million, one commercial real estate loan secured by a healthcare facility for $8.0 million, and 11 commercial loans with government guarantees to nine borrowers for $6.6 million. Offsetting this increase was the upgrading of three notes to two separate borrowers, two secured by commercial hotel real estate totaling $11.9 million and a small commercial note of immaterial balance. There were also nine Special Mention notes that were paid off during the year totaling $4.3 million. These included eight commercial notes and one HELOC. These included a $2.0 million commercial PPP note, and a $1.4 million commercial construction note for multifamily housing.

Loans classified as Substandard totaled $34.0 million and $35.3 million as of December 31, 2023 and December 31, 2022, respectively. The decrease of $1.3 million, or 3.7%, was concentrated in the commercial loan portfolio. The decrease is primarily due the risk grade upgrade of three loans to separate commercial loan relationships totaling $1.9 million, the payoff of 13 mortgage loans totaling $0.9 million and the continued curtailment of the loans that remained within the portfolio. This decease is offset by the downgrade to Substandard of nine commercial notes totaling $5.4 million, and two loans secured by residential real estate totaling $1.1 million.

Loans classified as Doubtful totaled $4.6 million and $4.7 million as of December 31, 2023 and December 31, 2022, respectively. The decrease of $0.1 million, or 2.1%, 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, both MVB legacy and those obtained as part of the First State acquisition, as well as two charge offs of commercial loans totaling $1.0 million secured by a government lease and accounts receivable. As of December 31, 2022, there is $0.6 million in calculated credit loss reserve allocation against seven legacy MVB loans totaling $4.0 million. There is a single Doubtful purchased loan remaining, with an immaterial balance.

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Interest Rate Risk

Management continually evaluates hedging strategies that are available to manage interest rate risk. We enter into interest rate swap contracts designated as hedging instruments to manage the interest rate risk associated with certain fixed rate loans. In 2023 we entered into four portfolio layer method interest rate swaps designated as hedging instruments over a closed portfolio of fixed-rate mortgage loans. At December 31, 2023 the interest rate swaps had a notional amount of $390.3 million, which includes a $9.7 million amortization adjustment related to one of the swaps which is amortizing, and swap liability fair value of $4.5 million. The amortized cost basis of the closed portfolio of fixed-rate loans was $491.0 million, including a $4.1 million basis adjustment, at December 31, 2023. There were no interest rate swaps designated as hedging instruments over fixed-rate loans at December 31, 2022.

Management also enters into interest rate swap contracts not designated as hedging instruments to help a small number of commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allows them to convert floating-rate loan payments to fixed rate loan payments. When we enter into an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a "mirror" swap contract with a third-party who exchanges the borrower's fixed-rate payments for floating-rate loan payments. At December 31, 2023 the fair value and notional amount of the interest rate swap agreements were $6.2 million and $126.5 million, respectively, as compared to $8.4 million and $137.7 million at December 31, 2022.

Funding Sources

The Bank considers a number of alternatives, including but not limited to deposits, short-term borrowings and long-term borrowings when evaluating funding sources. Deposits continue to be the most significant source of funds, totaling $2.90 billion, or 97.1% of funding sources, at December 31, 2023, versus $2.57 billion, or 92.9% of such funding sources, at December 31, 2022. Of these amounts, gaming deposits totaled $354.1 million and $652.1 million at December 31, 2023 and 2022, respectively. Borrowings, consisting of subordinated debt, senior term loan and FHLB and other borrowings represented 2.7% of funding sources at December 31, 2023, versus 6.7% at December 31, 2022. Repurchase agreements, which are available to large corporate customers, represented 0.2% and 0.4% of funding sources at December 31, 2023 and 2022, respectively.

Management continues to emphasize the development of additional noninterest-bearing deposits as a core funding source for us. At December 31, 2023, noninterest-bearing balances totaled $1.20 billion, compared to $1.23 billion at December 31, 2022, or 41.3% and 47.9%, respectively, of total deposits. Interest-bearing deposits totaled $1.70 billion at December 31, 2023, compared to $1.34 billion at December 31, 2022, or 58.7% and 52.1%, respectively, of total deposits.

The following table sets forth the balance of each of the deposit categories for the years ended December 31, 2023 and 2022:

Average interest-bearing deposits totaled $1.86 billion during 2023 compared to $1.27 billion during 2022. Average noninterest bearing deposits totaled $1.07 billion during 2023 compared to $1.36 billion during 2022.

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We utilize a custodial deposit transference structure for certain deposit programs whereby we, acting as custodian of account holder funds, place a portion of such account holder funds that are not needed to support near term settlement at one or more third-party banks insured by the FDIC (each, a program bank). Accounts opened at program banks are established in our name as custodian, for the benefit of our account holders. We remain the issuer of all accounts under the applicable account holder agreements and have sole custodial control and transaction authority over the accounts opened at program banks. We maintain the records of each account holders' deposits maintained at program banks. Program banks undergo robust due diligence prior to becoming a program bank and are also subject to continuous monitoring. These off-balance sheet deposits totaled $1.1 billion at December 31, 2023 and $724.0 million at December 31, 2022 and represent gaming, banking-as-a-service and digital asset clients.

Maturities of time deposits that met or exceeded the FDIC insurance limit as of December 31, 2023:

Total uninsured deposits were $1.2 billion, or 42.5% of total deposits, as of December 31, 2023. Of these uninsured deposits, $236.2 million represents collateralized public fund deposits. Further, at December 31, 2023, we had available liquidity of $398.2 million of cash and cash equivalents on hand and $699.8 million remaining borrowing capacity with the FHLB.

Along with 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, 2023, stockholders’ equity increased $28.0 million to $289.3 million from $261.4 million. This increase consists of net income for the year of $31.0 million, other comprehensive income of $8.9 million, stock-based compensation of $2.7 million and common stock options exercised totaling $0.6 million partially offset by cash dividends paid of $8.6 million, the impact to retained earnings of adopting ASC 326, Measurement of Credit Losses on Financial Instruments ("ASC 326") of $6.6 million and minimum tax withholding on restricted stock units issued of $0.8 million.

With stockholders’ equity increasing as noted above and with the growth in assets of $245.0 million, the equity to assets ratio increased from 8.5% at December 31, 2022 to 8.7% at December 31, 2023. We paid dividends to common shareholders of $8.6 million in 2023 and $8.4 million in 2022, compared to earnings of $31.2 million in 2023 versus $15.0 million in 2022, resulting in an decrease in the dividend payout ratio to 27.7% in 2023 from 55.5% in 2022.

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.

The Bank elected to begin using the CBLR for the first quarter of 2021 and intends to utilize this measure for the foreseeable

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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, 2023 was 10.5%, 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. Our liquid assets totaled $504.3 million and $354.4 million of December 31, 2023 and 2022, respectively. We believe that these sources of funds would enable us to 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, 2023, cash flows from operating, investing and financing activities totaled $58.2 million, $88.2 million and $211.5 million, respectively. Cash flows from operating, investing and financing activities during the year ended December 31, 2022 totaled $7.4 million, ($571.1) million and $296.6 million, respectively. Significant changes in cash flows during the year ended December 31, 2023 include inflows from the net increase in deposits of $331.0 million, net maturities/paydowns of available-for-sale investment securities of $76.6 million and sales of available-for-sale investment securities of $54.5 million, partially offset by cash outflows of $102.3 million to pay down FHLB and other borrowings and $89.5 million to purchase available-for-sale investment securities. When appropriate, the Bank has the ability to take advantage of external sources of funds such as advances from the FHLB, national market certificate of deposit issuance programs, the Federal Reserve discount window, brokered deposits and Certificate of Deposit Account Registry Services. Additionally, on March 12, 2023, the Federal Reserve implemented the Bank Term Funding Program to support federally-insured depository institutions in response to prevailing market uncertainty about the banking industry resulting from the insolvencies of certain regional depository institutions. These external sources often provide attractive interest rates and flexible maturity dates that enable the Bank to match funding with contractual maturity dates of assets. Securities in the investment portfolio are classified as available-for-sale and can be utilized as an additional source of liquidity.

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 Credit Losses

Since the implementation of CECL in January 2023, the ACL represents management’s current estimate of credit losses for the

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remaining estimated life of financial instruments, primarily to loans and unfunded loan commitments on our balance sheet. Estimating the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. Credit losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

We estimate the general component of the ACL based on a forecasting model and consideration of qualitative factors, both internal and external, all of which may be susceptible to significant change.

Through a loss driver analysis performed by a third-party vendor, a forecasting model that correlates specific economic factors with credit quality of each loan segment was developed. Peer bank data was identified and used in this process, as we did not have adequate quarterly loan data to analyze over the look-back period to 2007. After the third-party analyzed both historical peer loan data and various economic factors over the same look-back period, two economic variables, national GDP and national unemployment rate, were identified as showing the most correlation to the performance of the loans within each of the pooled segments. Within each loan segment forecast, these two economic variables are forecasted based on expected trends over a 12-month period, before reverting to the long-term average quarterly rate of each variable over the next 12-month period, then maintains this quarterly average for the life of the loan segment. The third-party vendor uses these variables to produce an estimated probability of default for each quarter period and, through a proprietary model, also calculates a loss given default factor to estimate overall losses. The vendor also prepares benchmark studies for prepayment and curtailment rate estimates for each loan segment, as well as recovery lag estimates. With all these factors combined, a forecasted allocation rate is produced for each loan segment.

The qualitative factors include items such as the nature and volume of the portfolio; the volume and severity of problem credits; collateral values; portfolio concentrations; economic and business conditions; lending policies and procedures; experience of lending management and staff; and quality of the loan review system. Each of these environmental factors has been analyzed by management and each has been assigned a risk modifier on a 4-point scale (No Change, Minor, Moderate, and Major) as a measure of the risk that factor creates to the Bank’s loan portfolio. Each environmental factor has also been weighted to reflect how it relates to the different portfolio segments (i.e., various Commercial, Residential, Consumer, and HELOC). Individual risk grade factors are then calculated by applying the individual weightings to the individual risk grades. The total of those factors provides an overall risk grade for each portfolio segment, which is then applied to a basis point scale to calculate an actual loss rate adjustment. This process is applied to each of the Bank’s portfolio segments. As of December 31, 2023, the "economic and business conditions" factor was generally the highest weighted qualitative factor, with a weighting of 10% to 20%, and given a risk rating of “Minor” for eight of the fourteen portfolio segments. Increasing the risk rating by one for all segments would have resulted in an additional allowance of $2.1 million at December 31, 2023 and decreasing the risk grade by one would have resulted in a reduction to the allowance of $1.9 million.

In addition to the above judgments and estimates, the specific reserves on impaired loans is an important input to the ACL due to the increased risks inherent in those loans. 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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