MVB Financial Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes and other detailed information appearing in the 2022 Form 10-K. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. See the “Forward-Looking Statements” section of this report for further information on forward-looking statements.

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.

Current Market Conditions

In March 2023, certain specialized banking institutions with elevated concentrations of uninsured deposits experienced large deposit outflows, resulting in the institutions being placed into FDIC receiverships. In the aftermath, there has been substantial market disruption and indications that deposit concerns could spread within the banking industry, leading to deposit outflows and other destabilizing results. These market events could have a material adverse affect on our business. A deterioration in economic conditions or the loss of confidence in financial institutions may result in deposit base outflows and limit our access to some of our customary sources of liquidity, including, but not limited to, inter-bank borrowings and borrowings from the Federal Reserve and FHLB. In addition, account and deposit balances may decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return tradeoff. Furthermore, the portion of our deposit portfolio that is comprised of large uninsured deposits may be more likely to be withdrawn rapidly under adverse economic conditions. If our clients move money out of bank deposits into investments or to other financial institutions, we could lose a relatively low cost source of funds.

Financial Results

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

During the three months ended September 30, 2023, net interest income increased $0.1 million, noninterest income increased $0.3 million and noninterest expenses increased by $2.5 million compared to the three months ended September 30, 2022. Our tax- equivalent yield on earning assets in the three months ended September 30, 2023 was 6.29% compared to 4.83% in the three months ended September 30, 2022. Loans receivable decreased by $42.0 million to $2.27 billion during the three months ended September 30, 2023. Our overall cost of interest-bearing liabilities was 3.58% in the three months ended September 30, 2023 compared to 1.15% in the three months ended September 30, 2022. This cost of interest-bearing liabilities, combined with the earning asset yield, resulted in a tax-equivalent net interest margin of 3.90% in the three months ended September 30, 2023, compared to 4.25% in the three months ended September 30, 2022.

Our net income for the three months ended September 30, 2023 was $3.9 million compared to $2.7 million in the three months ended September 30, 2022. Earnings for the three months ended September 30, 2023 equated to a return on average assets of 0.5% and a return on average equity of 5.8%, compared to the three months ended September 30, 2022 results of 0.4% and 4.2%, respectively. Basic and diluted earnings per share were $0.30 and $0.29, respectively, for the three months ended September 30, 2023, compared to $0.22 and $0.21, respectively, for the three months ended September 30, 2022.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

During the nine months ended September 30, 2023, net interest income increased $13.8 million, noninterest income decreased $8.9 million and noninterest expenses increased by $5.9 million compared to the nine months ended September 30, 2022. Our yield on tax-equivalent earning assets in the nine months ended September 30, 2023 was 6.10% compared to 4.18% in the nine months ended September 30, 2022. Loans receivable decreased by $102.2 million to $2.27 billion during the nine months ended September 30, 2023. Our overall cost of interest-bearing liabilities was 3.30% in the nine months ended September 30, 2023 compared to 0.70% in the nine months ended September 30, 2022. This cost of interest-bearing liabilities, combined with the earning asset yield, resulted in a tax-equivalent net interest margin of 4.03% in the nine months ended September 30, 2023, compared to 3.84% in the nine months ended September 30, 2022.

Our net income for the nine months ended September 30, 2023 was $23.1 million compared to $8.5 million in the nine months ended September 30, 2022, largely the result of an $11.8 million pre-tax gain related to the sale of the Bank’s wholly-owned subsidiary, Chartwell. Earnings for the nine months ended September 30, 2023 equated to a return on average assets of 0.9% and a return on average equity of 11.41%, compared to the nine months ended September 30, 2022 results of 0.4% and 4.4%, respectively. Basic and diluted earnings per share were $1.84 and $1.79, respectively, for the nine months ended September 30, 2023, compared to $0.70 and $0.66, respectively, for the nine months ended September 30, 2022.

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

The following tables present information regarding (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) as of and for the periods shown. The average balances presented are derived from daily average balances.

(Dollars in thousands)

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 three months ended September 30, 2023 and 2022, which is a non-U.S. GAAP financial measure. See 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.

(Dollars in thousands)

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 nine months ended September 30, 2023 and 2022, which is a non-U.S. GAAP financial measure. See 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.

The following table presents the reconciliation of net interest margin for the periods shown:

(Dollars in thousands)

Key Metrics

(Dollars in thousands, except per share data)

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

2 Annualized for the quarterly periods presented

3 Noninterest expense as a percentage of average assets

4 Charge-offs less recoveries

5 Non-U.S. GAAP metric

6 Includes net income from discontinued operations

7 Excludes loans held-for-sale

Tangible book value (“TBV”) per common share was $21.08 and $19.38 as of September 30, 2023 and September 30, 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.

(Dollars in thousands, except per share data)

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds interest expense incurred on interest-bearing liabilities. Interest-earning assets include loans, investment securities and certificates of deposit in banks. Interest-bearing liabilities include interest-bearing deposits and borrowed funds such as sweep accounts, repurchase agreements, subordinated debt and the senior term loan. Net interest income, which is the primary source of revenue for the Bank, is also impacted by changes in market interest rates and the mix of interest-earning assets and interest-bearing liabilities.

Net interest margin is calculated by dividing net interest income by average interest-earning assets and measures the net revenue stream generated by the Bank’s balance sheet. Net interest spread is calculated by taking the difference between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income, while maintaining an appropriate level of interest rate risk.

In 2023, the Federal Reserve raised its key interest rate from a range of 4.25% to 4.5% as of December 31, 2022 to a range of 5.25% to 5.50% as of September 30, 2023. We continually analyze methods to deploy assets into an earning asset mix to result in a stronger net interest margin.

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

Net interest margin on a tax-equivalent basis was 3.90% for the three months ended September 30, 2023 compared to 4.25% for the three months ended September 30, 2022. The decrease in net interest margin on a tax-equivalent basis primarily reflects higher funding costs and a shift in the mix of earnings assets, partially offset by higher loan yields. Tax-equivalent net interest spread was 2.71% for the three months ended September 30, 2023 compared to 3.68% for the three months ended September 30, 2022. The difference between the tax-equivalent net interest margin and tax-equivalent net interest spread was 119 basis points in the three months ended September 30, 2023 compared to 57 basis points in the three months ended September 30, 2022 driven by the increase in interest expense outpacing the increase in average assets.

During the three months ended September 30, 2023, net interest income increased by $0.1 million, or 0.1%, to $29.9 million from $29.8 million during the three months ended September 30, 2022. Average total earning assets were $3.06 billion in the three months ended September 30, 2023 compared to $2.81 billion in the three months ended September 30, 2022. Total interest income increased by $14.4 million, or 42.5%, to $48.3 million in the three months ended September 30, 2023 from $33.9 million in the three months ended September 30, 2022 driven by higher yields from new loan production at favorable interest rates. Average total loans decreased to $2.27 billion in the three months ended September 30, 2023 from $2.40 billion in the three months ended September 30, 2022, primarily as the result of a $6.1 million decrease in average real estate loans, a $93.5 million decrease in average commercial loans and an $34.4 million decrease in average consumer loans. The yield on total loans increased 1.76%.

Average investment securities decreased $62.8 million as the result of a $37.2 million decrease in tax-exempt investments and a $25.6 million decrease in taxable investments during three months ended September 30, 2023, compared to three months ended September 30, 2022. The yield on tax-exempt securities increased six basis points and the taxable securities yield increased 50 basis points.

Average interest-bearing liabilities increased by $638.5 million for three months ended September 30, 2023 from three months ended September 30, 2022. The increase was primarily the result of average balance increases of $462.0 million in certificates of deposit and $279.1 million in money market checking deposits.

Average interest-bearing deposits were $1.96 billion for the three months ended September 30, 2023 and $1.27 billion for the three months ended September 30, 2022. Total interest expense increased by $14.4 million, caused primarily by a $14.5 million increase in deposit interest. The result was a 243 basis point increase in the cost of interest-bearing liabilities, primarily driven by increases in interest rates and liquidity actions taken during the third quarter of 2023 in response to market conditions.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

Net interest margin on a tax-equivalent basis was 4.03% for the nine months ended September 30, 2023 compared to 3.84% for the nine months ended September 30, 2022. The increase in net interest margin on a tax-equivalent basis primarily reflects higher loan yield and a shift in the mix of earnings assets, partially offset by higher funding costs. Tax-equivalent net interest spread was 2.80% for the nine months ended September 30, 2023 compared to 3.48% for the nine months ended September 30, 2022. The difference between the tax-equivalent net interest margin and tax-equivalent net interest spread was 123 basis points in the nine months ended September 30, 2023 compared to 36 basis points in the nine months ended September 30, 2022. This was driven by the driven by the increase in interest expense outpacing the increase in average assets.

During the nine months ended September 30, 2023, net interest income increased by $13.8 million, or 17.6%, to $92.2 million from $78.4 million during the nine months ended September 30, 2022. This increase is largely due to strong loan growth at favorable interest rates, primarily driven by the Company's strategic lending partnership growth vehicle and broad-based growth throughout CoRe banking business, as well as the effects of higher interest rates on earning assets, including investment securities and interest bearing deposits with other banks, partially offset by an increase in cost of funds. Average total earning assets were $3.09 billion in the nine months ended September 30, 2023 compared to $2.76 billion in the nine months ended September 30, 2022. Total interest income increased by $54.9 million, or 64.4%, to $140.1 million in the nine months ended September 30, 2023 from $85.3 million in the nine months ended September 30, 2022 driven by higher yields from new loan production at favorable interest rates. Average total loans increased to $2.34 billion in the nine months ended September 30, 2023 from $2.10 billion in the nine months ended September 30, 2022, primarily as the result of a $157.7 million increase in average real estate loans and a $47.3 million increase in average commercial loans. The yield on total loans increased 172 basis points.

Average investment securities decreased $33.7 million as the result of a $17.6 million decrease in tax-exempt investments and an $16.1 million decrease in taxable investments during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The yield on tax-exempt securities increased 14 basis points and the taxable securities yield increased 116 basis points.

Average interest-bearing liabilities increased by $616.7 million for the nine months ended September 30, 2023 from the nine months ended September 30, 2022. The increase was primarily the result of average balance increases of $450.0 million in certificates of deposit, $38.5 million in negotiable order of withdrawal accounts, $87.9 million in money market checking accounts and $29.5 million in saving accounts.

The cost of interest-bearing liabilities increased to 3.30% in the nine months ended September 30, 2023 from 0.70% in the nine months ended September 30, 2022. This increase is primarily the result of an increase of 275 basis points in the cost of deposits, as well as the cost of the senior term loan, which was entered into during October 2022. Average interest-bearing deposits were $1.83 billion for the nine months ended September 30, 2023 and $1.22 billion for the nine months ended September 30, 2022. Total interest expense increased by $41.0 million, primarily driven by increases in interest rates and liquidity actions taken during 2023 in response to market conditions.

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

The provision for credit losses, which is a product of management’s analysis, is recorded in response to inherent losses in the loan portfolio. Release of allowance and credit loss provisions were $0.2 million for the three months ended September 30, 2023 and $5.1 million for the three months ended September 30, 2022, respectively. The decrease in credit loss provision is the result of both decreasing loss rates and loan segment balances across the entire loan portfolio, specifically concentrated within the subprime automobile segment. Subsequent to our latest sale of subprime automobile loans, we have a total of $11.2 million of such loans outstanding at September 30, 2023.

Further discussion on new accounting standards is included in Note 1 – Nature of Operations and Basis of Presentation accompanying the consolidated financial statements included elsewhere in this report.

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

Total loans decreased $42.0 million during the three months ended September 30, 2023, compared to an increase of $256.3 million in the three months ended September 30, 2022. The decline in loan balances compared to the prior quarters primarily reflects amortization of the loan portfolio and the slowing of loan originations as part of steps we have taken to manage liquidity in light of events within the banking industry during the first half 2023. The commercial loan portfolio increased by $5.1 million during the three months ended September 30, 2023, as compared to an increase of $61.8 million in the three months ended September 30, 2022, while the residential mortgage loan portfolio decreased by $23.8 million during the three months ended September 30, 2023, as compared to a $161.4 million increase during the three months ended September 30, 2022. Additionally, our consumer loan portfolio decreased by $21.4 million during the three months ended September 30, 2023, while it increased by $33.4 million in the three months ended September 30, 2022. Net charge-offs totaled $5.9 million and $1.3 million during the three months ended September 30, 2023 and 2022, respectively.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

Total loans decreased $102.2 million during the nine months ended September 30, 2023 versus an increase of $601.6 million in the nine months ended September 30, 2022. The commercial loan portfolio decreased by $37.8 million during the nine months ended September 30, 2023, as compared to an increase of $210.7 million in the nine months ended September 30, 2022, while the residential mortgage loan portfolio increased by $40.8 million during the nine months ended September 30, 2023, while increasing by $294.1 million in the nine months ended September 30, 2022. Additionally, our consumer loan portfolio decreased by $101.2 million during the nine months ended September 30, 2023, while it increased by $97.0 million in the nine months ended September 30, 2022. In addition, net charge-offs during the nine months ended September 30, 2023 totaled $8.8 million compared to net charge-offs of $3.3 million in the nine months ended September 30, 2022.

Noninterest Income

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

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

Noninterest income for the three months ended September 30, 2023 and 2022 totaled $5.8 million and $5.5 million, respectively. The increase in noninterest income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily the result of an increase of $0.3 million in equity method investment income and an increase of $0.8 million in other operating income, partially offset by a decrease of $1.0 million in gain on sale of loans.

Gain on sale of loans decreased $1.0 million, primarily as a result of losses on the sale of subprime automobile loans as we reduce that portfolio during the three months ended September 30, 2023. Equity method investment income increased $0.3 million due to income from our equity method investment in Warp Speed, which was purchased in October 2022, partially offset by a loss from our equity method investment in ICM.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

Noninterest income for the nine months ended September 30, 2023 and 2022 totaled $15.3 million and $24.1 million, respectively. The decrease in noninterest income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily the result of decreases of $4.8 million in gain on sale of loans, $2.2 million in gain on sale of available-for-sale securities and $1.9 million in equity method investment gains.

Gain on sale of loans decreased $4.8 million, primarily as a result of losses on the sale of subprime automobile loans as we reduced that portfolio. Gain on sale of available-for-sale securities decreased $2.2 million due to losses on the sale of securities as a result of repositioning our investment portfolio during the first quarter of 2023. The $1.9 million decrease in equity method investment gains reflected an in substance sale of an equity method investment from our portfolio during third quarter of 2022.

Noninterest Expense

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

Noninterest expense was $30.7 million and $28.2 million in the three months ended September 30, 2023 and 2022, respectively. The increase from the prior period primarily reflects higher other operating expenses, specifically higher professional fees related to recent actions taken in response to the market events in March 2023 and to enhance risk management and compliance-related infrastructure. This increase was partially offset by a decrease in travel, entertainment, dues and subscriptions expenses. Approximately 52% and 61% of noninterest expense for the three months ended September 30, 2023 and 2022, respectively, was related to personnel costs. Personnel costs are a significant part of our noninterest expense as such costs are critical to financial services organizations.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

Noninterest expense was $89.3 million and $83.4 million in the nine months ended September 30, 2023 and 2022, respectively. The increase from the prior period primarily reflects higher other operating expenses, specifically higher professional fees related to recent actions taken in response to the market events in March 2023 and to enhance risk management and compliance-related infrastructure. This increase was partially offset by a decrease in occupancy expense. Approximately 54% and 62% of noninterest expense for the nine months ended September 30, 2023 and 2022, respectively, was related to personnel costs. Personnel costs are a significant part of our noninterest expense, as such costs are critical to financial 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 to continue to provide services and support from Chartwell for three years following the sale.

Return on Assets and Equity

Assets

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

Our return on average assets was 0.5% for the three months ended September 30, 2023, compared to 0.4% for the three months ended September 30, 2022. The increased return in the three months ended September 30, 2023 is the result of a $1.2 million increase in earnings, while average total assets increased by $300.9 million, mainly as the result of a $450.6 million increase in average interest-bearing deposits with banks, partially offset by a $130.0 million decrease in average total loans.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

Our return on average assets was 0.9% for the nine months ended September 30, 2023, compared to 0.4% for the nine months ended September 30, 2022. The increased return for the nine months ended September 30, 2023 is the result of a $14.8 million increase in earnings, while average total assets increased by $384.1 million, mainly as the result of a $233.0 million increase in average total loans and a $131.8 million increase in average interest-bearing deposits with banks.

Equity

Three Months Ended September 30, 2023 vs. Three Months Ended September 30, 2022

Our return on average stockholders’ equity was 5.8% for the three months ended September 30, 2023, compared to 4.2% for the three months ended September 30, 2022. The increased return in the three months ended September 30, 2023 is a result of an $1.2 million increase in earnings, while average equity increased by $8.8 million.

Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

Our return on average stockholders’ equity was 11.4% for the nine months ended September 30, 2023, compared to 4.4% for the nine months ended September 30, 2022. The increased return for the nine months ended September 30, 2023 is a result of a $14.8 million increase in earnings, while average equity increased by $12.3 million.

Statement of Financial Condition

Cash and Cash Equivalents

Cash and cash equivalents totaled $587.1 million at September 30, 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, including equity securities, totaled $352.4 million at September 30, 2023, compared to $418.6 million at December 31, 2022. The following table presents a summary of the investment securities portfolio as of the periods shown. The available-for-sale securities are reported at estimated fair value.

(Dollars in thousands)

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. 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.

Our equity securities are primarily made up of investments in private entities within the Fintech industry and these investments may not be as liquid as our investments in other types of securities.

Loans

Our loan portfolio totaled $2.27 billion as of September 30, 2023 and $2.37 billion as of December 31, 2022. The Bank’s lending is primarily focused in North Central West Virginia and Northern Virginia. The portfolio consists principally of commercial lending, retail lending, which includes single-family residential mortgages, and consumer lending.

For more information regarding our loans, see Note 3 – Loans and Allowance for Credit Losses accompanying the consolidated financial statements included elsewhere in this report.

Loan Concentration

At September 30, 2023 and December 31, 2022, commercial and non-residential real estate loans comprised the largest component of the loan portfolio. A large portion of commercial loans are secured by real estate and they are diverse with respect to geographical location and industry. Loans that are not secured by real estate are typically secured by accounts receivable, mortgages or equipment. While the loan concentration is in commercial loans, the commercial portfolio is comprised of loans to many different borrowers in numerous different industries, generally located in our primary market areas. Additionally, within the commercial portfolio, loans within the healthcare industry, which include loans to physicians, nursing homes and pharmacies, represent 23% of our total loan portfolio as of September 30, 2023.

Allowance for Credit Losses

The ACL was $24.3 million, or 1.07% of loans receivable, at September 30, 2023, compared to $23.8 million, or 1.00% of loans receivable, at December 31, 2022. The increase in the ACL of $0.4 million was primarily impacted by two items, the adoption of ASC 326 and significant loan sales within subprime auto subcategory, within the Consumer loans segment. The adoption of ASC 326 required an increase in the allowance for credit losses of $8.9 millions of January 1, 2023. However, two significant loan sales in the Consumer segment, and subsequent loss rate adjustments, have generated a decrease of $8.2 million. Additionally, over the nine months ended September 30, 2023, changes to the loan portfolio balances, qualitative factor adjustments and expected loss forecasts within the expected credit loss calculation resulted in allowance increases of $0.7 million and $0.4 million million to the Other Construction and C&I portfolio segments, respectively. These increases have been offset by Individually Analyzed loans experiencing an allowance decrease of $1.1 million. All other segments combined experienced an allowance decrease of $0.2 million. While Bank management's expectations are that the markets in which it lends will experience an economic decline over the next 12 to 24 months, most increases in estimated loss rates have been offset by decreases in loan balances in the nine months ending September 30, 2023. This results in marginally higher allocation rates, against significantly lower loan balances, resulting in an overall lower allowance needed for the entire portfolio. The decreases to the allowance for credit losses totaled $8.5 million and combined with net charge offs to date of $8.8 million, resulted in total credit loss provision of $0.3 million over the nine months ended September 30, 2023.

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.

Funding Sources

The Bank considers a number of alternatives including, but not limited to, deposits, short-term borrowings and long-term borrowings when evaluating funding sources. Traditional deposits remain the most significant source of funds, totaling $3.04 billion, or 97.3% of funding sources at September 30, 2023. This same information at December 31, 2022 reflected $2.57 billion in deposits representing 92.9% of funding sources. Borrowings, consisting of subordinated debt, senior term loan and FHLB and other borrowings represented 2.6% of funding sources at September 30, 2023, versus 6.7% at December 31, 2022. Repurchase agreements, which are available to large corporate customers, represented 0.1% of funding sources at September 30, 2023 and 0.4% at December 31, 2022.

At September 30, 2023, noninterest-bearing balances totaled $1.09 billion, compared to $1.23 billion at December 31, 2022, or 36.0% and 47.9%, respectively, of total deposits. Interest-bearing deposits totaled $1.94 billion at September 30, 2023, compared to $1.34 billion at December 31, 2022, or 64.0% and 52.1%, respectively, of total deposits.

The following table presents the balance of each of the deposit categories as of the periods shown:

(Dollars in thousands)

Average interest-bearing deposits were $1.96 billion during the three months ended September 30, 2023, compared to $1.27 billion during the same time period in 2022 and average noninterest-bearing deposits were $975.2 million during the three months ended September 30, 2023 compared to $1.32 billion during the same time period in 2022.

Average interest-bearing deposits were $1.83 billion during the nine months ended September 30, 2023 compared to $1.22 billion during the same time period in 2022 and average noninterest-bearing deposits were $1.11 billion during the nine months ended September 30, 2023 compared to $1.35 billion during the same time period in 2022.

We utilize a custodial deposit transference structure for certain deposit programs whereby we, acting as custodian of account holder funds, places 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 has 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 September 30, 2023 and $724.0 million at December 31, 2022 and represent gaming, banking-as-a-service and digital asset clients.

Along with traditional deposits, the Bank has access to both short-term borrowings from FHLB, Federal Reserve Bank 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.

Deposit Concentration

Our four primary Fintech deposit verticals are gaming, payments, banking-as-a-service and digital assets, with deposits totaling $451.5 million, $326.7 million, $252.3 million and $225.2 million as of September 30, 2023, respectively, compared to $652.1 million, $213.0 million, $138.7 million and $121.6 million as of December 31, 2022, respectively. Of the gaming deposits, $322.5 million is with our three largest clients at September 30, 2023.

Capital Resources

During the nine months ended September 30, 2023, stockholders’ equity increased $10.0 million to $271.4 million. This increase consists of net income of $23.3 million, stock based compensation of $2.8 million and $0.2 million related to the redemption of noncontrolling interests partially offset by the impact to retained earnings of adopting ASC 326 of $6.6 million, cash dividends paid of $6.5 million, other comprehensive loss of $2.5 million and minimum tax withholding on restricted stock units issued of $0.7 million.

The growth in assets of $368.7 million in the nine months ended September 30, 2023 outpaced the growth in stockholders' equity, and the equity to assets ratio decreased from 8.5% at December 31, 2022 to 7.9% at September 30, 2023. We paid dividends to common shareholders of $6.5 million and $6.2 million in the nine months ended September 30, 2023 and 2022, respectively, compared to earnings of $23.3 million and $8.5 million in the nine months ended September 30, 2023 and 2022, respectively, resulting in the dividend payout ratio decreasing to 27.7% in the nine months ended September 30, 2023 from 72.7% in the nine months ended September 30, 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 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 to the consolidated financial statements and accompanying notes contained in the 2022 Form 10-K.

The optional community bank leverage ratio (“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 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 September 30, 2023 was 10.4%, which is above the well-capitalized standard of 9%. Management believes that capital continues to provide a strong base for profitable growth.

Liquidity

Maintenance of a sufficient level of liquidity is a primary objective of the ALCO. Liquidity, as defined by the ALCO, is the ability to meet anticipated operating cash needs, loan demand and deposit withdrawals without incurring a sustained negative impact on net interest income. It is our policy to optimize the funding of the balance sheet, continually balancing the stability and cost factors of various funding sources. We believe liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and non-traditional funding sources and the portions of the investment and loan portfolios that mature within one year. These sources of funds should enable us to meet cash obligations as they come due.

The main source of liquidity for the Bank comes through deposit growth. Liquidity is also provided from cash generated from investment maturities, principal payments from loans and income from loans and investment securities. For the nine months ended September 30, 2023, cash from operating, investing and financing activities totaled $39.5 million, $155.2 million and $352.2 million, respectively. Significant changes in cash flows during the quarter include inflows from the net increase in deposits of $468.4 million, net maturities/paydowns of available-for-sale investment securities of $75.1 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 $70.4 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.

Current Economic Conditions

We consider our primary market area for CoRe banking services to be comprised of North Central West Virginia and Northern Virginia. We consider our Fintech banking market to be customers located throughout the entire United States.

We believe that the current economic climate in our primary market areas reflect economic climates that are consistent with the general national economic climate. Unemployment in the United States was 3.8% for September 2023 and 3.3% for September 2022.

Commitments and Contingent Liabilities

In the ordinary course of business, we offer financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by us upon extension of credit, varies and is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third-party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Our policy for obtaining collateral, and the nature of such collateral, is substantially the same as that involved in making commitments to extend credit.

Concentration of Credit Risk

We grant a majority of our commercial, financial, agricultural, real estate and installment loans to customers throughout the North Central West Virginia and Northern Virginia markets. Collateral for loans is primarily residential and commercial real estate, personal property and business equipment. We evaluate the credit worthiness of each of our customers on a case-by-case basis and the amount of collateral it obtains is based upon management’s credit evaluation.

Contingent Liability

The Bank is involved in various legal actions arising in the ordinary course of business. In the opinion of management and counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

Off-Balance Sheet Commitments

The Bank has entered into certain agreements that represent off-balance sheet arrangements that could significantly impact the consolidated financial statements and could have a significant impact in future periods. Specifically, the Bank has entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. In addition, the Bank utilizes letters of credit issued by the FHLB to collateralize certain public funds deposits.

Commitments to extend credit, including loan commitments, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

Critical Accounting Policies and Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires us to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.

Beginning January 1, 2023, we adopted ASU 2016-13. For accounting policies and underlying accounting assumptions used in estimating our allowance for credit losses under ASU 2016-13, refer to Note 1 – Nature of Operations and Basis of Presentation.

Except as related to the adoption of ASU 2016‑13, there have been no significant changes to our critical accounting policies and estimates or in the underlying accounting assumptions and estimates used in these critical accounting policies from those disclosed in the consolidated financial statements and accompanying notes contained in the 2022 Form 10-K.

Recent Accounting Pronouncements and Developments

Recent accounting pronouncements and developments applicable us are described further in Note 1 – Nature of Operations and Basis of Presentation accompanying the consolidated financial statements included elsewhere in this report.

Our market risk is composed primarily of interest rate risk. The ALCO is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and coordinate our sources, uses and pricing of funds.

Credit Risk

We have counter-party risk which may arise from the possible inability of third-party investors to meet the terms of their forward sales contracts. We work with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. We monitor the financial condition of these third parties on an annual basis and we do not currently expect these third parties to fail to meet their obligations.

As of September 30, 2023, we carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

Beginning January 1, 2023, we adopted ASU 2016-13. We implemented changes to the policies, processes and controls over the estimation of the allowance for credit losses to support the adoption of ASU 2016-13. While many controls in operation under this new pronouncement mirror controls under prior GAAP, there were some new controls implemented.

During the three months ended September 30, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our operations are subject to many risks that could adversely affect our future financial condition and performance, including the risk factors that are described in the 2022 Form 10-K. There have been no material changes in our risk factors from those disclosed.