MVB FINANCIAL CORP (MVBF) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management believes is necessary to understand our financial condition, results of operations and cash flows for the year ended December 31, 2024 as compared to 2023. 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 2022 to 2023 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, 2023, filed with the SEC on March 13, 2024. 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 sustained higher interest rates, a slowing economy and multiple high-profile bank failures that occurred during the first half of 2023. Interest rates have remained at an elevated level through December 31, 2024, although the Federal Reserve did reduce its key interest rate to a range of 4.25% to 4.50% in December 2024. Lower loan balances are the result of slower market demand, the impact of loan amortization and payoffs and slower loan growth based on overall market conditions and portfolio management. We initiated the process of winding down our digital asset program account relationships, while maintaining operating accounts, during the second quarter of 2024. This decision was prompted by changing market conditions and profitability challenges that contributed to an unfavorable risk/reward dynamic. We remain committed to the gaming, payments and banking-as-a-service industries. 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.
Financial Results
Net interest income decreased $14.1 million to $109.2 million, noninterest income increased $23.2 million to $42.9 million and noninterest expense increased $4.6 million to $122.2 million during 2024 compared to 2023. Our tax-equivalent yield on earning assets was 6.22% in 2024, compared to 6.20% in 2023. Total loans decreased by $218.1 million to $2.10 billion as of December 31, 2024 from $2.32 billion as of December 31, 2023. Our overall cost of interest-bearing liabilities was 4.07% in 2024 compared to 3.38% in 2023. The increase in the cost of interest-bearing liabilities outpaced the increase in the earning assets yield, which resulted in our tax-equivalent net interest margin decreasing to 3.67% at December 31, 2024 from 4.04% at December 31, 2023.
Net income available to common shareholders in 2024 totaled $20.1 million, compared to $31.2 million in 2023, a decrease of $11.1 million. The 2024 earnings equated to a return on average assets of 0.6% and a return on average equity of 6.9%, compared to 2023 results of 0.9% and 11.4%, respectively. Basic and diluted earnings per share were $1.56 and $1.53, respectively, in 2024 compared to $2.46 and $2.40, respectively, in 2023.
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
| 2024 | 2023 | 2022 | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (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 | $ | 422,165 | $ | 21,814 | 5.17 | % | $ | 414,466 | $ | 21,043 | 5.08 | % | $ | 232,935 | $ | 1,613 | 0.69 | % | |||||||||||||||
| CDs with banks | — | — | — | — | — | — | 1,033 | 24 | 2.32 | ||||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||||||
| Taxable | 261,986 | 7,693 | 2.94 | $ | 221,395 | 5,576 | 2.52 | 236,344 | 3,496 | 1.48 | |||||||||||||||||||||||
| Tax-exempt 1 | 104,765 | 3,287 | 3.14 | 116,680 | 4,347 | 3.73 | 139,353 | 5,166 | 3.71 | ||||||||||||||||||||||||
| Loans and loans held-for-sale: 2 | |||||||||||||||||||||||||||||||||
| Commercial | 1,570,284 | 122,839 | 7.82 | 1,621,299 | 124,078 | 7.65 | 1,594,069 | 87,845 | 5.51 | ||||||||||||||||||||||||
| Tax-exempt 1 | 3,175 | 139 | 4.38 | 3,732 | 163 | 4.37 | 4,661 | 203 | 4.36 | ||||||||||||||||||||||||
| Real estate | 564,633 | 25,474 | 4.51 | 591,157 | 24,764 | 4.19 | 487,044 | 15,721 | 3.23 | ||||||||||||||||||||||||
| Consumer | 70,943 | 5,314 | 7.49 | 108,988 | 10,793 | 9.90 | 103,345 | 13,017 | 12.60 | ||||||||||||||||||||||||
| Total loans | 2,209,035 | 153,766 | 6.96 | 2,325,176 | 159,798 | 6.87 | 2,189,119 | 116,786 | 5.33 | ||||||||||||||||||||||||
| Total earning assets | 2,997,951 | 186,560 | 6.22 | 3,077,717 | 190,764 | 6.20 | 2,798,784 | 127,085 | 4.54 | ||||||||||||||||||||||||
| Allowance for credit losses | (22,108) | (29,746) | (22,248) | ||||||||||||||||||||||||||||||
| Cash and due from banks | 5,246 | 6,659 | 5,670 | ||||||||||||||||||||||||||||||
| Other assets | 302,304 | 302,036 | 244,861 | ||||||||||||||||||||||||||||||
| Total assets | $ | 3,283,393 | $ | 3,356,666 | $ | 3,027,067 | |||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||
| Deposits: | |||||||||||||||||||||||||||||||||
| NOW | $ | 521,337 | $ | 17,587 | 3.37 | % | $ | 697,266 | $ | 19,851 | 2.85 | % | $ | 707,282 | $ | 4,724 | 0.67 | % | |||||||||||||||
| Money market checking | 396,881 | 12,770 | 3.22 | 504,730 | 10,352 | 2.05 | 330,208 | 1,449 | 0.44 | ||||||||||||||||||||||||
| Savings | 115,270 | 3,756 | 3.26 | 76,908 | 1,871 | 2.43 | 56,697 | 418 | 0.74 | ||||||||||||||||||||||||
| IRAs | 7,990 | 338 | 4.23 | 6,662 | 194 | 2.91 | 6,216 | 71 | 1.14 | ||||||||||||||||||||||||
| CDs | 760,714 | 38,654 | 5.08 | 576,726 | 29,392 | 5.10 | 170,648 | 3,814 | 2.24 | ||||||||||||||||||||||||
| Repurchase agreements | 3,477 | 44 | 1.27 | 5,662 | 1 | 0.02 | 10,987 | 6 | 0.05 | ||||||||||||||||||||||||
| FHLB and other borrowings | 25 | 2 | 6.46 | 17,542 | 889 | 5.07 | 15,494 | 437 | 2.82 | ||||||||||||||||||||||||
| Senior term loan 3 | 2,355 | 264 | 11.21 | 9,007 | 766 | 8.50 | 2,328 | 163 | 7.00 | ||||||||||||||||||||||||
| Subordinated debt | 73,667 | 3,229 | 4.38 | 73,415 | 3,219 | 4.38 | 73,159 | 3,072 | 4.20 | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 1,881,716 | 76,644 | 4.07 | 1,967,918 | 66,535 | 3.38 | 1,373,019 | 14,154 | 1.03 | ||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 1,071,900 | 1,074,292 | 1,357,426 | ||||||||||||||||||||||||||||||
| Other liabilities | 37,683 | 40,435 | 41,098 | ||||||||||||||||||||||||||||||
| Total liabilities | 2,991,299 | 3,082,645 | 2,771,543 | ||||||||||||||||||||||||||||||
| Stockholders’ equity | |||||||||||||||||||||||||||||||||
| Common stock | 13,738 | 13,541 | 13,320 | ||||||||||||||||||||||||||||||
| Additional paid-in capital | 162,811 | 159,523 | 147,728 | ||||||||||||||||||||||||||||||
| Treasury stock | (16,741) | (16,741) | (16,741) | ||||||||||||||||||||||||||||||
| Retained earnings | 161,181 | 154,041 | 137,498 | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive loss | (28,821) | (36,419) | (26,918) | ||||||||||||||||||||||||||||||
| Total stockholders' equity attributable to parent | 292,168 | 273,945 | 254,887 | ||||||||||||||||||||||||||||||
| Noncontrolling interest | (74) | 76 | 637 | ||||||||||||||||||||||||||||||
| Total stockholders' equity | 292,094 | 274,021 | 255,524 | ||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 3,283,393 | $ | 3,356,666 | $ | 3,027,067 | |||||||||||||||||||||||||||
| Net interest spread (tax-equivalent) | 2.15 | 2.82 | 3.51 | ||||||||||||||||||||||||||||||
| Net interest income and margin (tax-equivalent) 1 | $ | 109,916 | 3.67 | % | $ | 124,229 | 4.04 | % | $ | 112,931 | 4.04 | % | |||||||||||||||||||||
| Less: Tax-equivalent adjustments | (718) | (946) | (1,128) | ||||||||||||||||||||||||||||||
| Net interest spread | 2.13 | 2.79 | 3.47 | ||||||||||||||||||||||||||||||
| Net interest income and margin | $ | 109,198 | 3.64 | % | $ | 123,283 | 4.01 | % | $ | 111,803 | 3.99 | % |
1 In order to make pre-tax income and resultant yields on tax-exempt loans and investment securities comparable to those on taxable loans and investment securities, a tax-equivalent adjustment has been computed using a Federal tax rate of 21% for the years ended December 31, 2024, 2023 and 2022, which is a non-U.S. GAAP financial measure. 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.
2 Non-accrual loans are included in total loan balances, lowering the effective yield for the portfolio in the aggregate.
3 The senior term loan was paid off in May 2024 and the unamortized debt issuance costs were recorded as interest expense upon the repayment.
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| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2024 | 2023 | 2022 | ||||||||
| Net interest margin - U.S. GAAP basis | |||||||||||
| Net interest income | $ | 109,198 | $ | 123,283 | $ | 111,803 | |||||
| Average interest-earning assets | 2,997,951 | 3,077,717 | 2,798,784 | ||||||||
| Net interest margin | 3.64 | % | 4.01 | % | 3.99 | % | |||||
| Net interest margin - non-U.S. GAAP basis | |||||||||||
| Net interest income | $ | 109,198 | $ | 123,283 | $ | 111,803 | |||||
| Plus: Impact of fully tax-equivalent adjustment | 718 | 946 | 1,128 | ||||||||
| Net interest income on a fully-tax equivalent basis | $ | 109,916 | $ | 124,229 | $ | 112,931 | |||||
| Average interest-earning assets | $ | 2,997,951 | $ | 3,077,717 | $ | 2,798,784 | |||||
| Net interest margin on a fully tax-equivalent basis | 3.67 | % | 4.04 | % | 4.04 | % |
Rate Volume Calculation
The year over year change in rates and change in volume from 2023 to 2024 was as follows:
| (Dollars in thousands) | Change in Volume | Change in Rate | Total Change | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Earning Assets | |||||||||||
| Loans: | |||||||||||
| Commercial | $ | (3,904) | $ | 2,665 | $ | (1,239) | |||||
| Tax-exempt | (24) | — | (24) | ||||||||
| Real estate | (1,111) | 1,821 | 710 | ||||||||
| Consumer | (3,768) | (1,711) | (5,479) | ||||||||
| Investment securities: | |||||||||||
| Taxable | 1,022 | 1,095 | 2,117 | ||||||||
| Tax-exempt | (444) | (616) | (1,060) | ||||||||
| Interest-bearing deposits in banks | 391 | 380 | 771 | ||||||||
| CDs with banks | — | — | — | ||||||||
| Total earning assets | $ | (7,838) | $ | 3,634 | $ | (4,204) | |||||
| Interest-bearing liabilities | |||||||||||
| Negotiable order of withdrawal | $ | (5,009) | $ | 2,745 | $ | (2,264) | |||||
| Money market checking | (2,212) | 4,630 | 2,418 | ||||||||
| Savings | 933 | 952 | 1,885 | ||||||||
| IRAs | 39 | 105 | 144 | ||||||||
| CDs | 9,377 | (115) | 9,262 | ||||||||
| Repurchase agreements | — | 43 | 43 | ||||||||
| FHLB and other borrowings | (888) | 1 | (887) | ||||||||
| Senior term loan | (566) | 64 | (502) | ||||||||
| Subordinated debt | 11 | (1) | 10 | ||||||||
| Total interest-bearing liabilities | 1,685 | 8,424 | 10,109 | ||||||||
| Total | $ | (9,523) | $ | (4,790) | $ | (14,313) |
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Key Metrics
| Year ended December 31, | |||||
|---|---|---|---|---|---|
| (Dollars in thousands, except per share data) | 2024 | 2023 | |||
| Book value per common share | $ | 23.61 | $ | 22.68 | |
| Tangible book value per common share 1 | $ | 23.37 | $ | 22.43 | |
| Efficiency ratio 1 2 | 80.4 | % | 82.3 | % | |
| Overhead ratio 1 3 | 3.7 | % | 3.5 | % | |
| Net loan charge-offs to total loans receivable 4 | 0.2 | % | 0.4 | % | |
| Allowance for credit losses to total loans receivable | 0.94 | % | 0.95 | % | |
| Nonperforming loans | $ | 24,607 | $ | 8,267 | |
| Nonperforming loans to total loans receivable | 1.2 | % | 0.4 | % | |
| Equity to assets | 9.8 | % | 8.7 | % | |
| Community Bank Leverage Ratio | 11.2 | % | 10.5 | % |
1 Non-U.S. GAAP metric
2 Noninterest expense as a percentage of net interest income and noninterest income
3 Noninterest expense as a percentage of average assets
4 Charge-offs, less recoveries
Tangible book value ("TBV") per common share was $23.37 and $22.43 as of December 31, 2024 and 2023, 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.
| (Dollars in thousands, except per share data) | December 31, 2024 | December 31, 2023 | |||||
|---|---|---|---|---|---|---|---|
| Goodwill | $ | 2,838 | $ | 2,838 | |||
| Intangibles | 262 | 352 | |||||
| Total intangibles | $ | 3,100 | $ | 3,190 | |||
| Total equity attributable to parent | $ | 305,679 | $ | 289,384 | |||
| Less: Total intangibles | (3,100) | (3,190) | |||||
| Tangible common equity | $ | 302,579 | $ | 286,194 | |||
| Tangible common equity | $ | 302,579 | $ | 286,194 | |||
| Common shares outstanding (000s) | 12,945 | 12,758 | |||||
| Tangible book value per common share | $ | 23.37 | $ | 22.43 |
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 3.67% and 4.04% in 2024 and 2023, respectively.
In 2024, the Federal Reserve lowered its key interest rate from a range of 5.25% to 5.50% to a range of 4.25% to 4.50% as of December 31, 2024. 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.
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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 2.15% in 2024 compared to 2.82% in 2023. The difference between the net interest margin on a tax-equivalent basis and net interest spread on a tax-equivalent basis was 152 basis points in 2024 compared to 122 basis points in 2023. This was driven by the 69 basis point increase in the cost of interest-bearing liabilities outpacing the two basis point increase in yield on earning assets.
During 2024, net interest income declined $14.1 million, or 11.4%, and total interest income declined $4.0 million, or 2.1%. These declines were primarily driven by a $116.1 million decline in average total loans and a 40 basis point increase in the cost of funds as compared to 2023. The $116.1 million decline in average total loans during 2024 reflects declines of $51.0 million in average commercial loans, $38.0 million in average consumer loans and $26.5 million in average real estate loans. The yield on loans increased nine basis points during 2024.
Average investment securities increased $28.7 million, or 8.5%, in 2024 as the result of a $40.6 million increase in taxable investments, partially offset by an $11.9 million decline in tax-exempt investments. The yield increased 42 basis points on taxable securities and declined 59 basis points on tax-exempt securities.
Average interest-bearing liabilities declined $86.2 million, or 4.4%, in 2024, primarily as a result of declines of $175.9 million and $107.8 million in average NOW accounts and average money market checking accounts, respectively, partially offset by an increase of $184.0 million in average certificates of deposit.
Average interest-bearing deposits declined $60.1 million in 2024. Total interest expense increased $10.1 million, primarily due to an $11.4 million increase in deposit interest. The result was a 69 basis point increase in the cost of interest-bearing liabilities, from 3.38% in 2023 to 4.07% in 2024. This increase is primarily the result of a 75 basis point increase in the cost of deposits, reflecting a shift in the mix of average deposits driven by the highly-competitive deposit environment. There was also a 271 basis point increase in the cost of the senior term loan associated with unamortized debt issuance costs that were recorded as interest expense upon the repayment in May 2024. 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 provision for credit losses for 2024 was $3.5 million compared to a release of allowance for credit losses of $1.9 million for 2023. 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 and available-for-sale investment security portfolios. 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 change from release of allowance to provision for credit losses is primarily the result of the level of recognized charge-offs within the loan portfolio, which was partially offset by changes to the outstanding balances of the loan portfolios, including decreases in the commercial, residential and consumer loan segments. The 2023 release was primarily the result of the sale of subprime automobile loans.
Total loan receivable balances decreased $217.5 million in 2024 versus a decrease of $55.0 million in 2023. The commercial loan portfolio decreased by $184.8 million in 2024, in comparison to a decrease of $9.2 million in 2023, while the consumer loan portfolio decreased by $8.8 million in 2024, in comparison to a decrease of $104.2 million in 2023. Additionally, the residential mortgage loan portfolio decreased by $21.8 million and $63.0 million in 2024 and 2023, respectively. Net charge-offs in 2024 totaled $4.4 million, in comparison to net charge-offs of $9.3 million in 2023. Lastly, the provision for credit losses was impacted by a $0.6 million decrease in the specific credit loss allocations in 2024, relative to a $0.1 million decrease in provision for such loan losses in 2023.
Noninterest Income
Payment card and service charge income, consulting compliance income, equity method investment income or loss and gains or losses on sale of loans account for the majority of our noninterest income. From time to time, we also recognize gains or losses on acquisition and divestiture activity, sales of assets or our investment portfolio. Total noninterest income for 2024, 2023 and 2022 was $42.9 million, $19.7 million and $27.6 million, respectively.
The increase in noninterest income for 2024 compared to 2023 was primarily the result of increases of $11.7 million in gain on sale of assets, $2.5 million in payment card and service charge income and $1.0 million in holding gains on equity securities. The gain on sale of assets in 2024 was primarily driven by the sale-leaseback transaction, resulting in a pre-tax gain on sale of assets
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of $11.8 million. For more information regarding the sale-leaseback transaction, refer to Note 4 – Premises and Equipment accompanying the consolidated financial statements included elsewhere in this report. Additionally, there was $1.4 million in equity method investment income from our mortgage segment, compared to equity method investment losses of $2.5 million in 2023. Gain on sale of available-for-sale investment securities was $0.7 million in 2024, compared to a loss of $1.5 million in 2023, and gain on sale of loans was $1.0 million in 2024, driven by government guaranteed loan sales, compared to a loss of $0.7 million on the sale of subprime automobile loans in 2023.
Noninterest Expense
Noninterest expense was $122.2 million and $117.6 million in 2024 and 2023, respectively. The increase of noninterest expense relative to the year ended December 31, 2023 primarily reflects increases of $4.6 million in salaries and employee benefits and $3.0 million in professional fees, incurred to enhance our risk management and compliance related infrastructure.
Approximately, 56% and 54% of noninterest expense for 2024 and 2023, respectively, related to personnel costs. Personnel costs are a significant part of our noninterest expense as such costs are critical to services organizations.
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. We paid $3.9 million and $2.5 million in fees related to this contract during the years ended December 31, 2024 and December 31, 2023, respectively.
Income Taxes
We incurred income tax expense of $6.1 million and $8.1 million in 2024 and 2023, respectively. Our effective tax rate was 23% and 21% in 2024 and 2023, 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 2024, we expect to file tax returns in 28 states.
Return on Assets and Equity
Assets
Our return on average assets was 0.6% in 2024, compared to 0.9% in 2023. The decline in 2024 is a result of an $11.1 million, or 35.6%, decline in earnings, which is partially offset by a $73.3 million, or 2.2%, decline in average total assets as compared to 2023. The decline in average total assets was primarily the result of a $116.1 million, or 5.0%, decline in average total loans, partially offset by increases of $28.7 million, or 8.5%, and $7.7 million, or 1.9%, in average investment securities and average interest-bearing deposits with banks, respectively.
Equity
Our return on average stockholders’ equity was 6.9% in 2024, compared to 11.4% in 2023. The decline in 2024 is a result of an $11.1 million, or 35.6%, decline in earnings and an $18.2 million, or 6.7%, increase in average equity to $292.2 million.
Statement of Financial Condition
Cash and Cash Equivalents
Cash and cash equivalents totaled $317.9 million at December 31, 2024, compared to $398.2 million at December 31, 2023. 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.
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Investment Securities
Investment securities totaled $454.2 million at December 31, 2024, compared to $386.4 million at December 31, 2023.
The following table sets forth a summary of the investment securities portfolio as of the dates indicated. The available-for-sale securities are reported at estimated fair value.
| December 31, (Dollars in thousands) | 2024 | 2023 | |||||
|---|---|---|---|---|---|---|---|
| Available-for-sale securities: | |||||||
| United States government agency securities | $ | 39,846 | $ | 38,408 | |||
| United States sponsored mortgage-backed securities | 147,580 | 82,382 | |||||
| United States treasury securities | 103,975 | 100,356 | |||||
| Municipal securities | 102,140 | 106,907 | |||||
| Corporate debt securities | 9,918 | 8,942 | |||||
| Other debt securities | 7,500 | 7,500 | |||||
| Other securities | 681 | 780 | |||||
| Total investment securities available-for-sale | $ | 411,640 | $ | 345,275 | |||
| Equity securities | $ | 42,583 | $ | 41,086 |
At December 31, 2024, 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 increase in investment securities balances during 2024 was driven by purchases of available-for-sale mortgage-backed securities. At December 31, 2024, the amortized cost of available-for-sale investment securities totaled $445.5 million, resulting in a net unrealized loss in the investment portfolio of $33.9 million. Management has the intent and ability to hold the investments to maturity and they are all high quality investments. Declines in the fair values of these securities can be attributed to general market conditions, rather than credit-related conditions. The municipal securities continue to give us the ability to pledge and to decrease the effective tax rate.
At December 31, 2024, equity securities primarily consist of our Fintech investment portfolio and are comprised of investments in nine companies with a carrying value of $36.5 million. Investments in our top four equity securities represented $34.1 million, or 93.4%, of our total Fintech investment portfolio at December 31, 2024. 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.
The following table shows the maturities for the available-for-sale investment securities portfolio at December 31, 2024:
| 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 | $ | — | — | % | $ | 4,223 | 1.36 | % | $ | 22,899 | 2.54 | % | $ | 18,327 | 3.70 | % | $ | 45,449 | $ | 39,846 | ||||||||||
| United States sponsored mortgage-backed securities | — | — | — | — | 5,241 | 2.82 | 155,791 | 4.24 | 161,032 | 147,580 | ||||||||||||||||||||
| United States treasury securities | 96,137 | 0.62 | 9,958 | 0.78 | — | — | — | — | 106,095 | 103,975 | ||||||||||||||||||||
| Municipal securities | 300 | 4.30 | 912 | 4.67 | 7,410 | 2.01 | 106,223 | 2.63 | 114,845 | 102,140 | ||||||||||||||||||||
| Corporate debt securities | 2,850 | 8.14 | 3,305 | 9.57 | 3,788 | 7.33 | — | — | 9,943 | 9,918 | ||||||||||||||||||||
| Other debt securities | — | — | — | — | 7,500 | — | — | — | 7,500 | 7,500 | ||||||||||||||||||||
| Total | $ | 99,287 | 0.84 | % | $ | 18,398 | 2.68 | % | $ | 46,838 | 2.47 | % | $ | 280,341 | 3.60 | % | $ | 444,864 | $ | 410,959 |
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
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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 designated as a hedging instrument over a closed portfolio of municipal securities. The notional amount was $50.0 million as of December 31, 2024 and December 31, 2023 and the swap was in a liability position with a fair value of $0.6 million and $1.6 million as of December 31, 2024 and December 31, 2023, respectively. The amortized cost basis of the closed portfolio of municipal securities was $58.3 million and $59.3 million as of December 31, 2024 and December 31, 2023, respectively, which includes basis adjustments of $0.6 million and $1.6 million. This interest rate swap was voluntarily discontinued in January 2025. For additional details on our hedging activity, refer to Note 19 – Derivatives accompanying the consolidated financial statements included elsewhere in this report.
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 $2.10 billion as of December 31, 2024, a decrease of $217.5 million from $2.32 billion as of December 31, 2023.
Major classification of loans held for investment at December 31, are as follows:
| (Dollars in thousands) | 2024 | 2023 | |||||
|---|---|---|---|---|---|---|---|
| Business | $ | 668,458 | $ | 797,100 | |||
| Real estate | 632,898 | 670,584 | |||||
| Acquisition, development and construction | 115,500 | 134,004 | |||||
| Commercial | $ | 1,416,856 | $ | 1,601,688 | |||
| Residential | 650,708 | 672,547 | |||||
| Home equity lines of credit | 12,933 | 14,531 | |||||
| Consumer | 18,620 | 27,408 | |||||
| Total loans | $ | 2,099,117 | $ | 2,316,174 | |||
| Deferred loan origination fees and costs, net | 1,014 | 1,420 | |||||
| Loans receivable | $ | 2,100,131 | $ | 2,317,594 |
At December 31, 2024, commercial and non-residential real estate loans represented the largest portion of the portfolio at 67.5%. Commercial and non-residential real estate loans totaled $1.42 billion at December 31, 2024, compared to $1.60 billion at December 31, 2023. 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.
Residential real estate loans to retail customers account for the second largest portion of the loan portfolio, comprising 31.0%. Residential real estate loans totaled $650.7 million at December 31, 2024, compared to $672.5 million at December 31, 2023. 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 $18.6 million at December 31, 2024, compared to $27.4 million at December 31, 2023. This decrease was the result of $7.9 million of scheduled principal curtailments/payoffs and $0.9 million of charge-offs.
At December 31, 2024, Special Mention loans amounted to $50.4 million. The balance is comprised of 52 loans, which include four loans totaling $12.1 million to a single borrower for retail commercial real estate projects, an $8.9 million line of credit secured by a borrowing base, a $7.7 million commercial real estate loan to a senior care facility and a $2.5 million commercial term loan to finance a business acquisition. In addition, there are 45 loans to various unrelated borrowers totaling $19.1 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 54 additional loans that management identified as Substandard loans, totaling $76.8 million as of December 31, 2024. These loans include a $18.0 million loan to a skilled nursing facility, $17.7 million in three loans to finance hospitality properties to three related borrowers and a $13.5 million loan to finance a multifamily real estate property. In addition, there are 49 loans to
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various unrelated borrowers totaling $27.6 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 as to the borrowers’ ability to comply with the loan repayment terms in the future.
The following table provides loan maturities at December 31, 2024:
| (Dollars in thousands) | One Year or Less | One Through Five Years | Five Through Fifteen Years | Due After Fifteen Years | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial | $ | 458,074 | $ | 725,822 | $ | 218,259 | $ | 14,701 | $ | 1,416,856 | |||||||||
| Residential | 82,175 | 53,224 | 18,089 | 497,220 | 650,708 | ||||||||||||||
| Home equity lines of credit | 87 | 140 | 1,505 | 11,201 | 12,933 | ||||||||||||||
| Consumer | 60 | 18,560 | — | — | 18,620 | ||||||||||||||
| Total loans | $ | 540,396 | $ | 797,746 | $ | 237,853 | $ | 523,122 | $ | 2,099,117 |
The following table reflects the sensitivity of loans to changes in interest rates as of December 31, 2024 that mature after one year:
| (Dollars in thousands) | Commercial and non-residential real estate | Residential | Home equity lines of credit | Consumer | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Predetermined fixed interest rate | $ | 501,848 | $ | 204,566 | $ | 42 | $ | 18,578 | $ | 725,034 | |||||||||
| Floating or adjustable interest rate | 915,008 | 446,142 | 12,891 | 42 | 1,374,083 | ||||||||||||||
| Total as of December 31, 2024 | $ | 1,416,856 | $ | 650,708 | $ | 12,933 | $ | 18,620 | $ | 2,099,117 |
Loan Concentration
At December 31, 2024, 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 22.7% of total loans receivable at December 31, 2024. 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 loan risk and may warrant greater supervisory scrutiny:
| l | Total reported loans for construction, land development and other land represent 100 percent or more of the institution’s total capital; or |
|---|---|
| l | Total CRE loans as defined in the CRE guidance represent 300 percent or more of the institution’s total capital and the outstanding balance of the institution’s CRE loan portfolio has increased by 50 percent or more during the prior 36 months. |
As of December 31, 2024, the Bank's concentration of loans for construction, land development and other land as a percentage of capital totaled 31.3% and the Bank's CRE loan concentration, excluding owner-occupied loans, as a percentage of capital totaled 222.0%.
All commercial loans, regardless of loan type, with an exposure of $1 million or greater are subject to the Bank’s internal annual review process. This process involves the collection and analysis of updated financial statements from all parties required to provide them under the loan agreements, as well as several other review items, dependent upon the specific loan characteristics, including but not limited to:
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| l | Site visit |
|---|---|
| l | Field exam |
| l | Updated collateral valuation |
| l | General discussions with the borrower regarding business conditions and their overall sentiment |
The internal annual review process is specialized based on the loan type, with emphasis and additional analysis performed based on each specific loan type’s characteristics.
| l | CRE loans are analyzed on the characteristics of the subject property compared to any other aspect of the borrower. Rent rolls and current occupancy trends are compared to the local market. Recent sales of comparable properties in the area are reviewed for potential impacts on current market values. The property and tenant types are reviewed, as different CRE loan types carry different inherent risks. Property-specific cash flows are stressed through sensitivity analysis and lease burn-off analysis. |
|---|---|
| l | Commercial and industrial loans are usually analyzed with the borrower, and any co-borrowers or guarantors together as a global cash flow. For these loan types, while still important, less emphasis is put on loan-to-value ("LTV") or collateral than the CRE loans, and more emphasis is placed on the borrower’s financial operating performance, as well as the character of the individuals involved. The borrower’s financial performance is weighed more heavily, as this aspect of the credit is seen as more important for ongoing business operations than the CRE loan type, which focuses more on the subject property’s characteristics. |
| l | Commercial acquisition, development and construction loans are analyzed for the unique risks of development and construction. Less emphasis is given to cash flows, as the expected repayment source is often the sale of the subject property, which typically does not occur until after the construction is finished. The analysis is more reliant upon budgets, plans and as-complete collateral values, as well as management’s comfort and familiarity with the individual borrowers. |
| l | Residential Real Estate loans are only subject to the internal annual review process if they are commercial loans secured by 1-4 family homes, which includes both term and construction notes. Term loans require most of the same documentation as multifamily properties within the CRE loan type, such as rent rolls or leases, and collateral analysis of the subject property’s local market. Most of the construction loans to residential builders at the Bank have long relationships with the lending team and a history of successful projects. Analysis of these loans includes reviewing updated market conditions, such as days on market, median sales price, sold versus list price, months of inventory and other factors. These builders are concentrated in the Northern Virginia and Washington D.C. metro areas. |
| l | Consumer residential real estate, home equity lines of credit and consumer notes are not subject to the internal annual review process. These notes are underwritten at origination, and then monitored for payment performance. |
Management continuously reviews the commercial real estate portfolio on an annual basis, through the internal annual review process, third-party review engagements and other specialized ad hoc portfolio reviews as deemed appropriate by management. During the year ended December 31, 2024, management focused on the review of non-owner-occupied real estate, with an emphasis on office properties. This review was triggered by the macroeconomic trend of increasing vacancy rates, brought on by the continued work from home trend.
Management recognizes that the current business environment is inflationary, with elevated interest rates. This has portfolio wide impacts on borrowers’ cash flows and borrowing costs, and is not considered to be market or industry specific. However, management recognizes that some portions of the portfolio, such as loans with variables interest rates, are more susceptible to the current economic environment.
Should any deficiencies or problems be identified during these regular reviews, subject loans will be appropriately reviewed for any downgrades and be presented at the monthly Special Assets Review Committee for any further necessary action.
Management tracks several commercial real estate concentrations monthly. These concentrations are monitored through bi-annual concentration scorecards, which are presented to the Bank’s Board for review and approval. These scorecards are used to justify the lending limits for each concentration. There are five CRE loan concentrations currently being monitored:
| l | Nursing Homes |
|---|---|
| l | Retail |
| l | Office |
| l | Multifamily |
| l | Hospitality |
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| (Dollars in thousands) | Real Estate Concentration | Classified Loans | Classified Loans per Concentration | Weighted LTV | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2024 | ||||||||||||||
| CRE Loans | ||||||||||||||
| Nursing Homes | $ | 382,879 | $ | 17,984 | 4.7 | % | 62.3 | % | ||||||
| Retail | 70,527 | — | — | % | 58.6 | % | ||||||||
| Office | 63,680 | 13,298 | 20.9 | % | 53.6 | % | ||||||||
| Multifamily | 55,841 | — | — | % | 60.1 | % | ||||||||
| Hospitality | 35,568 | 16,654 | 46.8 | % | 47.5 | % | ||||||||
| Other | 24,403 | — | — | % | 57.1 | % | ||||||||
| Total CRE | $ | 632,898 | $ | 47,936 | 7.6 | % |
Overall, these concentrations have weighted average LTVs between 47% - 63%. The “Other” segment above contains all CRE loan types outside of the five listed. These Other concentrations are not tracked through scorecards, and are immaterial to the CRE loan portfolio.
Nursing Homes are mainly originated through purchased participation from third-party banks. These loans typically are made to skilled nursing facilities ("SNF") and are secured by the subject properties. A majority of these loans are bridge to U.S. Department of Housing and Urban Development loans and have a three to five year term. As of December 31, 2024, these borrowers are in 21 different states. This concentration contains a single classified note, well secured by multiple SNF properties in Michigan.
Retail borrowers are mainly located in the Northern Virginia and Washington, D.C. metro area. These borrowers vary in size and scope, but generally include multi-unit retail strip centers.
Office borrowers are more dispersed, with material loan balances in Northern Virginia, Southwest Pennsylvania and North Central West Virginia. Since the COVID-19 pandemic, the office CRE loan concentration has been subject to increased scrutiny by management, due to the lowered demand for office space. This concentration includes three Classified notes to unrelated borrowers, secured by properties in North Central West Virginia and Southwestern Pennsylvania.
Multifamily borrowers are mainly located in the Northern Virginia and North Central West Virginia areas and are heavily concentrated in three loans to two unrelated borrowers. These three loans make up more than 60% of the total concentration.
The Hospitality concentration consists of eight loans to two unrelated ownership groups. One group with five loans are in the Washington, D.C. metro area, with all loans performing. The second group includes three loans in North West Virginia/Southeast Ohio, and are all classified. However, these notes are paying as agreed under forbearance agreements.
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.
At December 31, 2024 and 2023, individually analyzed loans totaled $43.2 million and $11.8 million, respectively. The increase in individually analyzed loans is primarily due to the addition of two commercial real estate loans totaling $31.5 million. A portion of the ACL of $1.3 million and $1.9 million was allocated to cover any loss in individually analyzed loans at December 31, 2024 and 2023, respectively. Loans past due more than 30 days were $45.5 million and $14.0 million, respectively, at December 31, 2024 and 2023.
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| December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Loans past due more than 30 days to gross loans | 2.2 | % | 0.6 | % | ||
| Loans past due more than 90 days to gross loans | 1.8 | % | 0.2 | % |
For tables reflecting the allocation of the ACL, 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, 2024 and 2023:
| (Dollars in thousands) | 2024 | 2023 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | $ | 10,838 | 67 | % | $ | 12,536 | 69 | % | ||||||
| Residential | 7,322 | 31 | 6,412 | 29 | ||||||||||
| Home equity lines of credit | 95 | 1 | 97 | 1 | ||||||||||
| Consumer and other | 1,408 | 1 | 3,079 | 1 | ||||||||||
| Total | $ | 19,663 | 100 | % | $ | 22,124 | 100 | % |
Nonperforming 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 $1.6 million, $0.8 million and $0.5 million for 2024, 2023 and 2022, respectively, if loans had performed in accordance with their terms.
Nonperforming assets and past due loans as of December 31, are as follows:
| (Dollars in thousands) | 2024 | 2023 | ||||
|---|---|---|---|---|---|---|
| Non-accrual loans | ||||||
| Commercial | $ | 20,109 | $ | 7,680 | ||
| Real estate and home equity | 4,278 | 243 | ||||
| Consumer and other | 220 | 344 | ||||
| Total nonperforming loans | 24,607 | 8,267 | ||||
| Other real estate, net | 2,827 | 825 | ||||
| Total nonperforming assets | $ | 27,434 | $ | 9,092 | ||
| Allowance for credit losses | $ | 19,663 | $ | 22,124 | ||
| Nonperforming loans to gross loans | 1.2 | % | 0.4 | % | ||
| Allowance for credit losses to total loans | 0.94 | % | 0.95 | % | ||
| Allowance for credit losses to nonperforming loans | 79.9 | % | 267.6 | % | ||
| Nonperforming assets to total assets | 0.9 | % | 0.3 | % |
Individually analyzed loans have increased by $31.4 million, or 266.1%, during 2024. This change is the net effect of multiple factors, primarily the identification of $40.0 million of recently individually analyzed loans, offset by normal loan amortization of $6.4 million, $0.9 million in charge offs, the reclassification of $0.7 million of previously reported individually analyzed loans to performing loans and principal curtailments/payoffs of $0.6 million.
The $40.0 million of recently individually analyzed loans were concentrated in an $18.0 million commercial real estate loan to a skilled nursing facility, or 45%, of the recently identified loans and a construction note secured by a multifamily property totaling $13.5 million, or 34%, of the recently identified loans. There are additionally $4.2 million, or 11%, in loans with government guarantees to 17 separate borrowers and are in various stages of either forbearance agreement or liquidation. The nursing facility note is currently paying while going through the process to sell the property via auction and the multifamily property is currently paying while being examined for a possible refinance.
The $0.6 million of principal curtailments/payoffs were concentrated in a single government lease commercial relationship, in
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which a curtailment of $0.5 million was received under a forbearance agreement, or 83% of the total principal curtailments, and a curtailment of $0.1 million received from the sale of heavy equipment collateral, or 17% of the total principal curtailments.
The $0.9 million of charged off loans were concentrated in one commercial relationship representing $0.6 million, or 67%, of the charge offs. This note was a government guaranteed note that was secured by business assets. The subprime auto segment also saw a net change of $0.1 million, which has been attributed to charge offs. These charge offs were to various individual loans secured by automobiles and comprised 11% of the total charge offs.
Loans classified as Special Mention totaled $50.4 million and $83.8 million as of December 31, 2024 and December 31, 2023, respectively. The decrease of $33.4 million, or 39.9%, was concentrated in the commercial loan portfolio. This decrease is primarily the result of the risk downgrade to either Substandard or Doubtful of 12 loans to 10 relationships, totaling $36.3 million. Of the 20 loans recently downgraded to Special Mention, there were five commercial loans totaling $12.2 million to three relationships for government lending, a commercial business acquisition loan for $2.5 million and a $2.3 million commercial real estate construction loan. Offsetting this increase was the upgrading of a note secured by a senior care facility totaling $4.0 million. There were also two Special Mention notes that were paid off during the year totaling $0.7 million. These included one commercial note and one HELOC.
Loans classified as Substandard totaled $76.8 million and $34.0 million as of December 31, 2024 and December 31, 2023, respectively. The increase of $42.8 million, or 125.9%, was concentrated in the commercial loan portfolio. The increase is primarily due the risk grade downgrade of 14 loans to separate commercial loan relationships totaling $50.0 million, the downgrade of 11 residential and HELOC notes totaling $4.7 million, the payoff of six commercial and mortgage loans totaling $3.3 million, the charge off of a $0.6 million commercial note and the continued curtailment of the loans that remained within the portfolio.
Loans classified as Doubtful totaled $3.4 million and $4.6 million as of December 31, 2024 and December 31, 2023, respectively. The decrease of $1.2 million, or 26.1%, 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, as well as two charge offs of commercial loans totaling $0.5 million secured by heavy equipment and vehicles. As of December 31, 2024, there is $0.2 million in in calculated credit loss reserve allocation against these 16 Doubtful loans.
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, one of which was voluntarily discontinued during 2024. The notional amount of the interest rate swap portfolio was $126.0 million and $390.3 million as of December 31, 2024 and December 31, 2023, respectively, including amortization adjustments of $24.0 million and $9.7 million related to one of the swaps which is amortizing. The interest rate swap portfolio was in an asset position with a fair value of $0.5 million as of December 31, 2024 and a liability position with a fair value of $4.5 million as of December 31, 2023. The amortized cost basis of the closed portfolio of fixed-rate loans was $443.8 million and $491.0 million as of December 31, 2024 and December 31, 2023, respectively, which include basis adjustments of $1.1 million and $4.1 million.
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, 2024 the fair value and notional amount of the interest rate swap agreements were $5.9 million and $133.9 million, respectively, as compared to $6.2 million and $126.5 million at December 31, 2023. For additional details on our hedging activity, refer to Note 19 – Derivatives accompanying the consolidated financial statements included elsewhere in this report.
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 $2.69 billion, or 97.2% of funding sources, at December 31, 2024, versus $2.90 billion, or 97.1% of such funding sources, at December 31,
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2023. Of these amounts, gaming deposits totaled $227.6 million and $354.1 million at December 31, 2024 and 2023, respectively. Borrowings, consisting of subordinated debt, senior term loan and other borrowings represented 2.7% of funding sources at December 31, 2024 and December 31, 2023. Repurchase agreements, which are available to large corporate customers, represented 0.1% and 0.2% of funding sources at December 31, 2024 and 2023, respectively.
Management continues to emphasize the development of noninterest-bearing deposits as a core funding source. At December 31, 2024, noninterest-bearing balances totaled $941.0 million, compared to $1.20 billion at December 31, 2023, or 34.9% and 41.3%, respectively, of total deposits. Interest-bearing deposits totaled $1.75 billion at December 31, 2024, compared to $1.70 billion at December 31, 2023, or 65.1% and 58.7%, respectively, of total deposits.
The following table sets forth the balance of each of the deposit categories for the years ended December 31, 2024 and 2023:
| (Dollars in thousands) | 2024 | 2023 | |||||
|---|---|---|---|---|---|---|---|
| Demand deposits of individuals, partnerships and corporations | |||||||
| Noninterest-bearing demand | $ | 940,994 | $ | 1,197,272 | |||
| NOW | 473,225 | 538,444 | |||||
| Savings and money markets | 437,145 | 571,299 | |||||
| Time deposits, including CDs and IRAs | 842,251 | 594,461 | |||||
| Total deposits | $ | 2,693,615 | $ | 2,901,476 | |||
| Time deposits that meet or exceed the FDIC insurance limit | $ | 2,962 | $ | 3,150 |
Average interest-bearing deposits totaled $1.80 billion during 2024 compared to $1.86 billion during 2023. Average noninterest bearing deposits totaled $1.07 billion during 2024 and 2023.
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 $1.42 billion at December 31, 2024 and $1.09 billion at December 31, 2023, and substantially all represent banking-as-a-service clients.
Maturities of time deposits that met or exceeded the FDIC insurance limit as of December 31, 2024:
| (Dollars in thousands) | 2024 | ||
|---|---|---|---|
| Under three months | $ | 1,604 | |
| Over three to 12 months | 1,358 | ||
| Total | $ | 2,962 |
Total uninsured deposits were $966.0 million, or 35.9% of total deposits, as of December 31, 2024. Of these uninsured deposits, $258.5 million represents collateralized public fund deposits. Further, at December 31, 2024, we had available liquidity of $317.9 million of cash and cash equivalents on hand and $648.6 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, refer to Note 7 – Borrowed Funds accompanying the consolidated financial statements included elsewhere in this report.
Capital Resources
During the year ended December 31, 2024, stockholders’ equity increased $16.4 million to $305.8 million from $289.3 million. This increase primarily consists of net income for the year of $20.1 million, stock-based compensation of $2.9 million, common stock options exercised totaling $1.5 million and other comprehensive income of $0.6 million, partially offset by cash dividends paid of $8.8 million.
With stockholders’ equity increasing as noted above and with the decline in assets of $185.2 million, the equity to assets ratio
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increased from 8.7% at December 31, 2023 to 9.8% at December 31, 2024. We paid dividends to common shareholders of $8.8 million in 2024 and $8.6 million in 2023, compared to earnings of $20.1 million in 2024 versus $31.2 million in 2023, resulting in an increase in the dividend payout ratio to 43.7% in 2024 from 27.7% in 2023.
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 15 – 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.
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%.
The Bank's CBLR at December 31, 2024 was 11.2%, 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 $379.7 million and $504.3 million as of December 31, 2024 and 2023, 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, 2024, cash flows from investing activities totaled $144.5 million, while cash used in operating and financing activities totaled $0.3 million and $224.5 million, respectively. Cash flows from operating, investing and financing activities during the year ended December 31, 2023 totaled $58.2 million, $88.2 million and $211.5 million, respectively. Significant changes in cash flows during the year ended December 31, 2024 include inflows from the net change in loans of $199.6 million, sales of available-for-sale investment securities of $24.3 million and net maturities/paydowns of available-for-sale investment securities of $17.4 million, partially offset by cash outflows of $207.9 million from the net change in deposits and $111.8 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.
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
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sell securities on acceptable terms, or at all.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting policies are described in Note 1 – Summary of Significant Accounting Policies accompanying the consolidated financial statements included elsewhere in this report. The preparation of these statements requires us to make certain assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities and commitments as of the date of our financial statements. We analyze and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Changes in facts and circumstances or additional information may result in revised estimates and actual results may differ from these estimates. We have identified the following estimates as critical to the understanding of our financial position and results of operations and which require the application of significant judgment by management.
Allowance for Credit Losses
Since the implementation of CECL in January 2023, the ACL represents management’s current estimate of credit losses for the 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, a forecasting model that correlates specific economic factors with credit quality of each loan segments 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 both historical peer loan data and various economic factors over the same look-back period were analyzed, 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. We use these variables to produce an estimated probability of default for each quarter period and, through a proprietary model, also calculate a loss given default factor to estimate overall losses. Benchmark studies are also prepared 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 four-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 modifiers. The total of these 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, 2024, 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 fifteen and "Moderate" for five of the 21 portfolio segments. Increasing the risk rating by one for all segments would have resulted in an additional allowance of $1.9 million at December 31, 2024 and decreasing the risk grade by one would have resulted in a reduction to the allowance of $1.8 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.
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Fair Value of Level III Financial Instruments
Available-for-sale investment securities are recorded at fair value based upon quoted prices, if available. However, certain local municipal securities included in available-for-sale securities, which are related to tax increment financing, represent Level III instruments. These are assets that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. The fair value of Level III municipal securities are based upon pricing obtained from third-party pricing services, which perform independent analysis of liquidity, rating, yield and duration. Based upon internal review procedures and the fair values provided by the pricing services, we believe that the fair values provided by the pricing services are consistent with the principles of ASC 820, Fair Value Measurement.
ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. Assets acquired, liabilities assumed and consideration exchanged are recorded at their respective acquisition date fair values. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not available, management judgment and the use of models are necessary to estimate fair value. Significant assumptions used in models, which include assumptions for interest rates, discount rates, prepayments and credit losses, are independently verified against observable market data when possible. Fair value estimates are also based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. When changes in market conditions reduce the availability of quoted prices or observable data, the estimate of fair value becomes more subjective and requires a higher degree of management judgment.
Refer to Note 18 – Fair Value Measurements accompanying the consolidated financial statements included elsewhere in this report for a complete discussion of our use of fair value and the related measurement practices.
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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