What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-03-17 compared with 2024-03-15 · 233 added, 268 removed, 575 unchanged (47% of the section changed)

3 unchanged sentences

Non-GAAP Financial Measures

This document contains non-GAAP financial measures denoted throughout our MD&A by reference to “non-GAAP.” We believe these non-GAAP financial measures provide useful information to investors because they are used by management to evaluate our operating performance and make day-to-day operating decisions.

In addition, we believe our non-GAAP results in any given reporting period reflect our on-going financial performance in that period and, accordingly, are useful to consider in addition to our GAAP financial results.

2 unchanged sentences

Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by such companies.

We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly

comparable GAAP measures.

We caution investors not to place undue reliance on such non-GAAP financial measures, but to consider them with the most directly comparable GAAP measures.

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.

3 unchanged sentences

Net income of $31.0 million for the year ended December 31, 2024 decreased $4.9 million, or 13.7% when compared to the prior year.

Net interest income of $141.5 million increased $0.9 million from the prior year primarily due to increased average balances of $235.9 million in portfolio loans combined with a 71 basis point increase in yield for portfolio loans, offset by significant increases in the cost of funding.

The net interest margin decreased 32 basis points to 6.60% for the year ended December 31, 2023 compared to 6.92% for the prior year as the elevated interest rate environment increased the overall cost of interest-bearing liabilities decreasing the net interest spread to 5.25% for the year ended December 31, 2023 compared to 6.46% for the prior year.

Net interest margin, as adjusted (non-GAAP, excluding credit card and SBA-PPP loans), was 3.96% for the year ended December 31, 2023, compared to 3.93% for the prior year.

For the year ended December 31, 2023, average interest earning assets increased $112.0 million, or 5.5%, to $2.1 billion as compared to the same period in 2022, and the average yield on interest earning assets increased 113 basis points.

Net income of $40.1 million as adjusted excludes the impact of $3.3 million after-tax merger-related expenses, $3.2 million after-tax impact from the Initial IFH ACL Provision on non-PCD loans and a $2.6 million non-recurring equity and debt investment write-down that was nondeductible for tax purposes (non-GAAP) for the year ended December 31, 2024.

There were no adjustments made to net income for the year ended December 31, 2023.

Net interest income of $154.7 million increased $13.2 million from the prior year primarily due to increased average balances of $325.7 million in portfolio loans, partially offset by higher funding costs primarily resulting from the additional average deposit volume funding the loan growth.

Interest income included $0.7 million and interest expense included $1.4 million from net purchase accounting amortization resulting from the IFH acquisition.

For more information on the computation of non-GAAP financial measures, see “Non-GAAP Financial Measures and Reconciliations.”

The net interest margin decreased 38 basis points to 6.22% for the year ended December 31, 2024 compared to 6.60% for the prior year.

The elevated interest rate environment increased the yield on cash, investments, and commercial bank loan yields but was offset by a slightly lower loan yield from OpenSky credit card loans.

The overall cost of interest-bearing liabilities decreased the net interest spread to 4.81% for the year ended December 31, 2024 compared to 5.25% for the prior year.

Core net interest margin, excluding credit card loans (as adjusted, non-GAAP), was 4.00% for the year ended December 31, 2024, compared to 3.96% for the prior year.

For the year ended December 31, 2024, average interest earning

assets increased $342.4 million, or 16.0%, to $2.5 billion as compared to the same period in 2023, and the average yield on interest earning assets increased 3 basis points.

The yield on portfolio loans, as adjusted (non-GAAP, excluding credit card loans) was 7.03% for the year ended December 31, 2024, compared to 6.65% for the prior year.

1 unchanged sentence

For additional details, see “Non-GAAP Financial Measures and Reconciliations.”

For the year ended December 31, 2023, the provision for credit losses was $9.6 million, an increase of $3.0 million from the prior year, attributable primarily to the credit card portfolio.

For the year ended December 31, 2024, the provision for credit losses was $17.7 million, an increase of $8.1 million from the prior year.

The variance included the Initial IFH non-PCD ACL Provision of $4.2 million and $4.5 million from organic commercial portfolio loan growth, partially offset by a $0.6 million reduction from the OpenSky TM credit card portfolio.

Net charge-offs for the year ended December 31, 2024 were $9.0 million, or 0.42% of average portfolio loans, compared to $8.5 million, or 0.47% of average portfolio loans, for the same period in 2023.

The $9.0 million in net charge-offs during the year ended December 31, 2024 was comprised primarily of credit card portfolio net charge-offs, with $3.6 million related to secured and partially secured cards while $3.4 million was related to unsecured cards.

For the year ended December 31, 2023, noninterest income of $25.0 million decreased $4.4 million, or 15.0%, from the same period in 2022.

The decrease was primarily driven by the decline in credit card fees of $4.7 million as the number of open customer accounts declined to 525,314 at December 31, 2023 from 533,855 year over year, which resulted in lower interchange and other fee income recognized compared to the prior year.

For the year ended December 31, 2023, noninterest expense of $110.8 million increased $1.7 million, or 1.5%, from the same period in 2022.

The increase was primarily driven by a $5.9 million, or 13.7%, increase in salaries and employee benefits and a $0.8 million, or 16.6%, increase in occupancy and equipment, partially offset by a $3.7 million, or 12.7%, decrease in data processing expense and a $1.7 million, or 15.8%, decrease in professional fees due to a reduction in third party consulting fees.

The decrease in data processing expense was the result of a contract renegotiation entered into in the first quarter 2022 in the OpenSky ™ Division as well as fewer average open cards during the period.

For the year ended December 31, 2024, noninterest income of $31.4 million increased $6.4 million, or 25.8%, from the same period in 2023.

This increase was primarily driven by contributions from the IFH acquisition, including government loan servicing revenue (Windsor) of $4.0 million, government lending revenue (gain on sale) of $2.3 million and revenue from loan servicing rights of $1.0 million, offset by a non-recurring equity and debt write-down of $2.6 million related to an IFH investment.

Other income increased $0.9 million primarily related to a previous investment in an SBIC, while credit card fees declined $1.3 million.

For the year ended December 31, 2024, noninterest expense of $126.2 million increased $15.5 million, or 14.0%, from the same period in 2023, largely due to the IFH acquisition.

The increase was primarily driven by a $7.3 million, or 14.9%, increase in salaries and employee benefits, a $3.9 million increase in merger-related expenses, a $2.6 million, or 45.3%, increase in occupancy and equipment primarily related to increased contract expense from the IFH acquisition, and a $2.0 million, or 7.8%, increase in data processing expense, partially offset by a $1.4 million, or 15.4%, decrease in professional fees due to a reduction in third party consulting fees.

On October 1, 2024, in connection with the IFH acquisition, the Company acquired total assets of $559.4 million, net of purchase accounting adjustments, including gross loans of $373.5 million, loans held for sale of $41.7 million and goodwill and intangible assets of $37.2 million while liabilities assumed totaled $475.9 million including total deposits of $459.0 million.

For the year ended December 31, 2024, the acquisition of IFH resulted in an increase in average assets of $134.3 million, an increase in average interest earning assets of $121.8 million, an increase in average gross loans of $105.0 million, and an increase in average total deposits of $117.4 million.

Total assets at December 31, 2024 were $3.2 billion, an increase of $980.7 million, or 44.1%, from the balance at December 31, 2023.

Net portfolio loans, which exclude mortgage loans held for sale and SBA-PPP loans, totaled $1.9 billion at December 31, 2023, an increase of $174.1 million, or 10.1%, compared

to $1.7 billion at December 31, 2022.

Net portfolio loans, which exclude mortgage loans held for sale, totaled $2.6 billion at December 31, 2024, an increase of $726.9 million, or 38.2%, compared to $1.9 billion at December 31, 2023.

Total liabilities at December 31, 2024 were $2.9 billion, an increase of $880.5 million, or 44.7%, from the balance at December 31, 2023.

Total liability growth was primarily due to a $137.9 million increase in deposits partially offset by a decrease in Federal Home Loan Bank advances of $85.0 million when comparing December 31, 2023 to December 31, 2022.

Total liability growth was primarily due to a $865.9 million increase in deposits partially offset by a decrease in other borrowed funds of $15.0 million when comparing December 31, 2024 to December 31, 2023.

Stockholders’ equity increased to $355.1 million as of December 31, 2024, compared to $254.9 million at December 31, 2023.

1 unchanged sentence

Average deposits of $2.2 billion for the year ended December 31, 2024 increased $304.4 million, or 16.3%, as compared to the prior year.

Rising interest rates have resulted in some customers moving balances from noninterest-bearing deposit accounts to interest-bearing deposit accounts.

As a result of the migration, average noninterest-bearing deposit balances decreased $127.0 million to $655.0 million, or 35.1% of total average deposits for the year ended December 31, 2023, as compared to $782.0 million, or 44.3% of total average deposits for the prior year.

The Bank’s OpenSky ™ Division contributed $29.3 million of income before taxes for the year ended December 31, 2023, a decrease of $2.2 million for the segment from the prior year.

Average OpenSky ™ loan balances, net of reserves and deferred fees of $114.5 million for the year ended December 31, 2023 decreased $12.0 million, or 9.5%, as compared to the prior year.

OpenSky ™ loan balances, net of reserves, of $123.3 million at December 31, 2023 decreased by $5.1 million, or 4.0%, compared to $128.4 million at December 31, 2022.

Corresponding deposit balances of $173.9 million at December 31, 2023 decreased $13.6 million, or 7.2%, compared to $187.4 million at December 31, 2022.

Average noninterest-bearing deposit

balances increased $20.3 million to $675.4 million, or 31.1% of total average deposits for the year ended December 31, 2024, as compared to $655.0 million, or 35.1% of total average deposits for the prior year.

The Bank’s OpenSky ™ Division, including shared service and corporate allocations contributed $17.3 million of income before taxes for the year ended December 31, 2024, a decrease of $1.8 million for the segment from the prior year.

Average OpenSky ™ loan balances, net of reserves and deferred fees of $115.6 million for the year ended December 31, 2024 increased $1.1 million, or 1.0%, as compared to the prior year.

OpenSky ™ loan balances, net of reserves, of $127.8 million at December 31, 2024 increased by $4.4 million, or 3.6%, compared to $123.3 million at December 31, 2023.

Corresponding non-interest bearing deposit balances of $166.4 million at December 31, 2024 decreased $7.5 million, or 4.3%, compared to $173.9 million at December 31, 2023.

Gross unsecured loan balances of $42.4 million at December 31, 2024 increased $11.6 million, or 37.7%, compared to $30.8 million at December 31, 2023.

For the year ended December 31, 2023, noninterest income of $17.3 million decreased $4.6 million due to a decline in credit card fees as compared to the prior year.

Active customer accounts of 525,314 at December 31, 2023 decreased from 533,855 at December 31, 2022 leading to a decline in revenues earned from interchange and other fees.

The Bank’s Capital Bank Home Loans division contributed a net loss before taxes of $0.8 million for the year ended December 31, 2023 as compared to a net loss before taxes of $3.0 million in the prior year.

The Bank’s Capital Bank Home Loans division saw a decline in mortgage originations during the year ended December 31, 2023 when compared to the prior year.

A rising interest rate environment dampened home loan sales and home loan refinances.

Gain on sale margins, were up from 2.34% for the twelve months ended December 31, 2022, to 2.76% for the twelve months ended December 31, 2023.

Historically-low housing inventory and increasing interest rates are likely to continue suppressing origination volumes.

Critical Accounting Policies

For the year ended December 31, 2024, noninterest income of $16.1 million decreased $1.2 million due primarily to a decline in credit card fees as compared to the prior year.

The Bank’s Capital Bank Home Loans division including shared service and corporate allocations contributed a net loss before taxes of $2.5 million for the year ended December 31, 2024 as compared to a net loss before taxes of $3.0 million in the prior year.

The Bank’s Capital Bank Home Loans division saw an increase in mortgage originations during the year ended December 31, 2024 when compared to the prior year.

An elevated interest rate environment dampened home loan sales and home loan refinances.

Gain on sale margins were down from 2.76% for the twelve months ended December 31, 2023 to 2.59% for the twelve months ended December 31, 2024.

The Bank’s Windsor Advantage division, including shared service and corporate allocations, contributed net income before taxes of $1.9 million for the year ended December 31, 2024 following the acquisition of IFH on October 1, 2024.

Gross government loan servicing revenue (Windsor) totaled $4.6 million, including $0.6 million of Capital Bank related servicing fees, during the fourth quarter 2024.

Windsor's total servicing portfolio was $2.5 billion at December 31, 2024.

Critical Accounting Estimates

The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry.

2 unchanged sentences

The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as deemed necessary.

Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Company’s Board of Directors.

Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.

The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations.

Accordingly, the Company’s significant accounting policies are discussed in detail in “Note 1 - Nature of Business and Basis of Presentation” in the “Notes to the Consolidated Financial Statements” contained in Part II, Item 8 "Financial Statements and Supplementary Data.”

The critical accounting and reporting policies include the Company’s accounting for the ACL.

The critical accounting and reporting estimates include the Company’s accounting for the ACL.

The Company provides additional information on its ACL in “Note 1 - Nature of Business and Basis of Presentation” in the “Notes to the Consolidated Financial Statements” contained in Part II, Item 8 "Financial Statements and Supplementary Data.”

We account for business combinations under ASC 805, Business Combinations using the acquisition method of accounting and record the identifiable assets acquired, liabilities assumed and consideration

paid at fair value at the acquisition date.

The excess of consideration paid over the fair value of the net assets acquired is recorded as goodwill.

The fair values are preliminary estimates subject to adjustments during the measurement period, which does not exceed one year after acquisition.

The application of business combination principles, including the determination of the fair value of net assets acquired, requires the use of significant estimates and assumptions under ASC 820, Fair Value Measurement.

See Note 2 - Business Combination in the “Notes to the Consolidated Financial Statements” to the Consolidated Financial Statements.

Determining estimated fair value requires a significant amount of judgment and estimates.

If our assumptions change, or errors are determined in its calculations, the fair value could materially change resulting in an adjustment to our goodwill or identifiable net assets acquired, including identified intangible assets.

As of December 31, 2024, the Company believes that the fair value of the assets acquired, liabilities assumed and consideration paid at fair value at the acquisition date was appropriately determined in accordance with GAAP.

Recent Accounting Pronouncements

10 unchanged sentences

Provision for credit losses 17,720 9,610 84.4 %

Release of credit losses on unfunded commitments (101) — 0.0 %

Provision for (release of) credit losses on unfunded commitments 385 (101) (481.2) %

Net interest income after provision for credit losses 136,641 132,017 3.5 %

4 unchanged sentences

Net income $ 30,972 $ 35,871 -13.7 %

Net income of $35.9 million for the year ended December 31, 2023 decreased $5.9 million, compared to net income of $41.8 million for the year ended December 31, 2022.

The increase in net interest income was primarily due to the increase in average loans outstanding in the loan portfolio year over year offset by significant increases in the cost of funding.

The increase in the provision for credit losses was primarily related to credit card portfolio net charge-offs.

Noninterest income decreased year over year primarily driven by a decline in credit card fees of $4.7 million as the number of open accounts declined resulting in lower comparable interchange and other fee income recognized in 2023.

Noninterest expense remained stable increasing 1.5% year over year as salaries and employee benefits increased $5.9 million partially offset by a $3.7 million decrease in data processing expense and a $1.7 million decrease in professional fees.

Net income for the year ended December 31, 2024 was $31.0 million compared to net income of $35.9 million for the same period in 2023, a 13.7% decrease.

Net income was $40.1 million as adjusted to exclude the impact of $3.3 million after-tax merger-related expenses, $3.2 million after-tax impact from the Initial IFH ACL Provision on non-PCD loans and a $2.6 million non-recurring equity and debt investment write-down that was nondeductible for tax purposes (non-GAAP), for the year ended December 31, 2024.

Net interest income increased $13.2 million, or 9.3%, to $154.7 million when comparing the year ended December 31, 2024 to the year ended December 31, 2023, primarily due to increased average balances of $325.7 million in portfolio loans, partially offset by higher funding costs primarily resulting from the additional average deposit volume funding loan growth.

For more information on the computation of non-GAAP financial measures, see “Non-GAAP Financial Measures and Reconciliations.”

The provision for credit losses for the year ended December 31, 2024 was $17.7 million, an increase of $8.1 million, or 84.4%, from the provision for credit losses for the year ended December 31, 2023.

variance included the initial IFH ACL provision of $4.2 million on non-PCD loans and $4.5 million from organic commercial portfolio loan growth, partially offset by $0.6 million from OpenSky credit card portfolio.

Net charge-offs for the year ended December 31, 2024 were $9.0 million, or 0.42% of average portfolio loans, compared to $8.5 million, or 0.47% of average loans for the same period in 2023.

Net charge-offs were comprised, in part, of OpenSky credit card portfolio loans of $3.6 million related to secured and partially secured while $3.4 million was related to unsecured cards.

For the year ended December 31, 2024, noninterest income was $31.4 million, an increase of $6.4 million, or 25.8%, from $25.0 million in the prior year period primarily driven by contributions from the IFH acquisition.

Government loan servicing revenue (Windsor) totaled $4.0 million, government lending revenue totaled $2.3 million and loan servicing rights totaled $1.0 million, offset by a non-recurring equity and debt write-down of $2.6 million related to an IFH investment.

Mortgage banking revenue of $7.1 million increased $2.3 million, primarily due to an increase in home loan sales while credit card fees of $16.0 million declined $1.3 million from lower interchange and other fee income recognized compared to the prior year.

Noninterest expense was $126.2 million for the year ended December 31, 2024, as compared to $110.8 million for the year ended December 31, 2023, an increase of $15.5 million, or 14.0% largely due to the IFH acquisition.

The change includes increases in salaries and employee benefits expenses of $7.3 million, or 14.9%, merger-related expenses of $3.9 million, advertising expenses of $0.2 million, other operating expenses of $0.8 million and data processing expense of $2.0 million, partially offset by decreases in professional fees of $1.4 million and other operational losses of $0.9 million.

Net Interest Income and Net Margin Analysis

Net interest income is our largest component of revenue and driver of net income.

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets.

Interest earning assets are composed primarily of loans, loans held for sale, investment securities, and interest-bearing deposits with banks.

The cost of funds represents interest expense on deposits and borrowings, which consist of federal funds purchased, advances from the Federal Home Loan Bank (“FHLB”), advances from the Federal Reserve Bank’s Bank Term Funding Program (“BTFP”) and subordinated notes.

Noninterest-bearing deposits and capital also provide sources of funding.

We analyze our ability to maximize income generated from interest earning assets and control the

interest expenses associated with our liabilities, measured as net interest income, through our net interest margin and net interest spread.

We analyze our ability to maximize income generated from interest earning assets and control the interest expenses associated with our liabilities, measured as net interest income, through our net interest margin and net interest spread.

Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period.

Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest-bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest earning assets or pay on interest-bearing liabilities, as well as in the volume and mix of interest earning assets, interest-bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest income, net interest margin and net interest spread.

Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.

Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in the Washington, D.C.

and Baltimore metropolitan areas, as well as developments affecting the real estate, technology, government services, hospitality and tourism and financial services sectors within our target markets and throughout the Washington, D.C.

and Baltimore metropolitan areas.

Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of net interest income and net interest margin.

The table below presents the average balances and weighted average rates of the major categories of the Company’s assets, liabilities and stockholders’ equity for the years ended December 31, 2024 and 2023.

13 unchanged sentences

Federal funds sold 57 3 5.26 1,597 74 4.63

Investment securities 245,466 4,815 1.96 248,869 3,912 1.57

Investment securities available-for-sale 228,909 5,441 2.38 245,466 4,815 1.96

Restricted investments 5,563 373 6.71 5,016 346 6.90

Loans held for sale 12,121 569 4.69 5,755 382 6.64

SBA-PPP loans receivable 1,373 30 2.18 29,831 3,477 11.66

Portfolio loans receivable (1)(2)

22 unchanged sentences

(1) Includes nonaccrual loans.

(2) For the years ended December 31, 2023 and 2022, collectively, portfolio loans yield excluding credit card loans was 6.66% and 5.31%, respectively.

(3) For the years ended December 31, 2023 and 2022, SBA-PPP loans and credit card loans accounted for 264 and 299 basis points of the reported net interest margin, respectively.

(2) For the years ended December 31, 2024 and 2023, portfolio loans yield excluding credit card loans was 7.03% and 6.65%, respectively.

(3) For the years ended December 31, 2024 and 2023, credit card loans accounted for 222 and 264 basis points of the reported net interest margin, respectively.

The net interest margin decreased 38 basis points to 6.22% for the year ended December 31, 2024 from the same period in 2023.

Net interest margin, excluding credit card loans, was 4.00% and 3.96%, respectively, for years ended December 31, 2024 and 2023.

For more information on the computation of non-GAAP financial measures, see “Non-GAAP Financial Measures and Reconciliations.”

For the year ended December 31, 2024, average interest earning assets increased $342.4 million, or 16.0%, to $2.5 billion as compared to the same period in 2023, and the average yield on interest earning assets increased 3 basis points.

Compared to the same period in the prior year, average interest-bearing liabilities increased $288.5 million, or 22.7%, while the average cost of interest-bearing liabilities increased 47 basis points to 3.76% from 3.29%.

Rate/Volume Analysis of Net Interest Income

13 unchanged sentences

Loans held for sale 299 (112) 187 (261) 208 (53)

SBA-PPP loans receivable (620) (2,827) (3,447) (18,738) 14,602 (4,136)

Portfolio loans receivable excluding credit card loans 22,773 6,470 29,243 14,597 18,060 32,657

9 unchanged sentences

Net interest income $ 12,247 $ 973 $ 13,220 $ (7,227) $ 8,146 $ 919

When comparing the years ended December 31, 2023 to 2022, the largest positive impact to total interest income was the effect of increases in market interest rates on substantially all interest earning assets.

Growth in the loan portfolio, excluding credit cards, contributed $16.5 million to the increase in interest income, while the heightened interest rates on portfolio loans contributed $19.6 million for the year ended December 31, 2023 compared to the prior year.

On a standalone basis, interest income attributable to the credit card portfolio declined by $2.2 million year over year primarily due to a decrease in open customer accounts and corresponding late charges and credit card loan balances, partially offset by higher interest income as a result of the rising rate environment.

During the year ended December 31, 2022, $109.3 million of SBA-PPP loans were forgiven by the SBA which accelerated the recognition of $3.1 million of deferred fee income.

In comparison, during the year ended December 31, 2023, $1.5 million of SBA-PPP loan principal was forgiven and $16 thousand of deferred fee income was recognized.

Increased interest rates also contributed $20.6 million to increased interest expense, including $15.7 million from increased rates on money market accounts comparing the year ended December 31, 2023 to the prior year, substantially offsetting the increase in total interest income.

The increase in the amount of time deposits contributed an additional $8.5 million to the increase in interest expense.

Rising interest rates have resulted in some customers moving balances from noninterest-bearing deposit accounts to interest-bearing deposit accounts which increased interest expense.

The average balance of noninterest-bearing deposits of $655.0 million for the year ended December 31, 2023 decreased $127.0 million from $782.0 million for the prior year.

The average balance of interest-bearing

deposits of $1.2 billion for the year ended December 31, 2023 increased $227.4 million from $982.1 million for the prior year.

When comparing the years ended December 31, 2024 to 2023, the largest positive impact to total interest income was the growth in interest earning assets, strengthened in part by the IFH acquisition.

Growth (change due to volume) in the loan portfolio, excluding credit cards, contributed $22.8 million to the increase in interest income, while elevated interest rates on portfolio loans contributed $6.5 million for the year ended December 31, 2024 compared to the prior year.

On a standalone basis, interest income attributable to the credit card portfolio declined by $1.3 million year over year primarily due to a reduction in yield.

The variance in interest expense year over year was primarily impacted by growth in interest-bearing liabilities, augmented in part by the IFH acquisition.

Growth in interest bearing liabilities contributed $12.3 million to increased interest expense, including $9.5 million from growth in time deposits, partially offsetting the increase in total interest income.

Provision for Credit Losses

The provision for credit losses represents the amount of expense charged to current earnings to fund the ACL.

The amount for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio.

Those factors include historical losses, forecasted cash flows, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.

For a description of the factors taken into account by our management in determining the ACL, see “Financial Condition— Allowance for Credit Losses.”

For the year ended December 31, 2023, the provision for credit losses was $9.6 million, an increase of $3.0 million from the recorded provision for loan losses of $6.6 million for the year ended December 31, 2022.

For the year ended December 31, 2024, the provision for credit losses was $17.7 million, an increase of $8.1 million from the recorded provision for credit losses of $9.6 million for the year ended December 31, 2023.

The variance included the Initial IFH ACL provision on non-PCD loans of $4.2 million and $4.5 million from organic commercial portfolio loan growth, partially offset by a $0.6 million reduction from the OpenSky TM credit card portfolio.

Although the majority of OpenSky ™ credit cards are secured, losses may occur.

Some losses result from identity fraud, payment fraud and funding fraud.

In addition, losses are sometimes incurred when customers exceed established credit limits as a consequence of certain VISA membership policies that allow cardholders to incur certain charges, such as, for example, rental car charges, gas station charges and hotel deposits, that may exceed card limits.

Finally, losses to our credit card portfolio may arise if cardholders cease to maintain the account in good standing with timely payments.

The ACL as a percent of portfolio loans was 1.50% at December 31, 2023.

The ACL at December 31, 2022, prior to the adoption of CECL, represented 1.53% of portfolio loans.

The ACL as a percent of portfolio loans was 1.85% at December 31, 2024 as compared to 1.50% at December 31, 2023.

While the legacy Capital Bank portfolio credit metrics are relatively consistent with prior year, the increase in the ACL provision year-over-year is attributable to the IFH acquisition, most notably a few PCD loans that required elevated ACL coverage and are not consistent with the current product offering and stronger underwriting at IFH at the time of the acquisition.

The maintenance of a high-quality loan portfolio, with an adequate allowance for expected credit losses, will continue to be a primary objective for the Company.

1 unchanged sentence

Noninterest Income

Our primary sources of recurring noninterest income are credit card fees, such as interchange fees and statement fees, and mortgage banking revenue.

Noninterest income does not include (i) loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method or (ii) annual and renewal fees related to our credit card portfolio, which are generally recognized over the twelve month life of the related loan as an adjustment to yield using the interest method and late fees.

A primary source of recurring noninterest income are credit card fees, such as interchange fees and statement fees, mortgage banking revenue and Windsor Advantage fee income in connection with its servicing, processing and packaging of SBA and USDA loans for its financial institution clients.

Noninterest income does not include (i) loan origination fees to the extent they exceed the direct loan origination costs, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method or (ii) annual, renewal and late fees related to our credit card portfolio, which are generally recognized over the twelve month life of the related loan as an adjustment to yield using the interest method.

The following table presents, for the periods indicated, the major categories of noninterest income:

8 unchanged sentences

7,146 4,896 46.0

Government lending revenue 2,301 —

Government loan servicing and packaging revenue 3,993 —

Loan servicing rights (government guaranteed) 1,013 —

Non-recurring equity and debt investment write-down (2,620) —

Other income 2,695 1,842 46.3

1 unchanged sentence

$ 31,410 $ 24,975 25.8 %

For the year ended December 31, 2023, noninterest income of $25.0 million decreased $4.4 million, or 15.0%, from the same period in 2022.

Credit card fees of $17.3 million decreased $4.7 million as compared to the year ended December 31, 2022, as the number of open customer accounts declined to 525,314 at December 31, 2023 from 533,855 at December 31, 2022.

Service charges on deposit accounts increased $0.2 million reflecting fee income generated from an increase in deposit balances and relationships.

The Bank’s Capital Bank Home Loans division saw a decline in mortgage originations during the year ended December 31, 2023 when compared to the prior year ended December 31, 2022.

A rising interest rate environment dampened home loan sales and home loan refinances.

Gain on sale margins, were up from 2.34% for the twelve months ended December 31, 2022 to 2.76% for the twelve months ended December 31, 2023.

Historically-low housing inventory and increasing interest rates are likely to continue suppressing origination volumes.

For the year ended December 31, 2024, noninterest income of $31.4 million increased $6.4 million, or 25.8%, from the same period in 2023 primarily due to contributions from the IFH acquisition.

Government loan servicing revenue (Windsor Advantage) totaled $4.0 million, government lending revenue totaled $2.3 million and revenue from loan servicing rights totaled $1.0 million, offset by a non-recurring equity and debt write-down of $2.6 million related to a legacy IFH investment.

In December of 2024 the Company became aware of certain financial conditions at a legacy IFH investment which indicated the need to evaluate the investment for impairment.

Based upon the Company’s financial evaluation of a legacy IFH investment it was determined that the value of the Company’s investment in a legacy IFH investment was impaired and a write-down of the investment value was required.

The Company does not hold any additional equity securities nor does the Company plan to enter into equity security arrangements in the future, therefore the Company does not expect any future deferred tax benefits associated with the impairment.

Mortgage banking revenue of $7.1 million, for the year ended December 31, 2024, increased $2.3 million due to an increase in home loan sales as compared to the prior year.

For the year ended December 31, 2024, credit card fees of $16.0 million declined $1.3 million as a result of lower interchange and other fee income recognized compared to the prior year.

The Bank’s Capital Bank Home Loans division experienced an increase of 48.7% in mortgage originations during the year ended December 31, 2024 when compared to the same period in the prior year.

Origination volumes increased $98.0 million, to $299.1 million, for the year ended December 31, 2024, when compared to $201.1 million for the same period in the prior year.

Gain on sale margins were down from 2.76% for the twelve months ended December 31, 2023 to 2.59% for the year ended December 31, 2024.

Mortgage loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale.

The Bank considers these potential recourse provisions to be a risk and has established a reserve under generally accepted accounting principles for possible repurchases.

The Bank has established a reserve under generally accepted accounting principles for possible repurchases.

The reserve was $2.3 million at December 31, 2024 and $1.0 million at December 31, 2023.

The Bank repurchased one loan in November 2023 for $597 thousand and one loan in December 2022 for $463 thousand.

The Bank repurchased one loan totaling $296 thousand during the year ended December 31, 2024.

The Bank repurchased one loan totaling $597 thousand during the year ended December 31, 2023.

The Bank does not originate “sub-prime” mortgage loans and has no exposure to this market segment.

Noninterest Expense

Generally, noninterest expense is comprised of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services, with the largest component being salaries and employee benefits.

Noninterest expense also includes operational expenses, such as occupancy and equipment expenses, professional fees, advertising expenses, loan processing expenses and other general and administrative expenses, including FDIC assessments, communications, travel, meals, training, supplies and postage.

13 unchanged sentences

2,431 1,633 48.9

Foreclosed real estate expense, net 7 (183) (103.8)

Foreclosed real estate expenses, net 2 7 (71.4)

Merger-related expenses 3,930 —

Operational losses 3,714 4,613 (19.5)

Outside service providers 1,878 1,932 (2.8)

Regulatory assessment expenses 1,937 1,649 17.5

Other operating

2 unchanged sentences

$ 126,219 $ 110,767 14.0 %

For the year ended December 31, 2023, noninterest expense of $110.8 million increased $1.7 million, or 1.5%, from the same period in 2022.

The increase was primarily driven by a $5.9 million, or 13.7%, increase in salaries and employee benefits due in part to growth in headcount in our commercial and commercial real estate lending groups as well as additional positions in executive management as the Company continues to put in place the requisite human capital for its continued growth.

For the year ended December 31, 2024, noninterest expense of $126.2 million increased $15.5 million, or 14.0%, from the same period in 2023, primarily from the IFH acquisition.

The increase was primarily driven by a $7.3 million, or 14.9%, increase in salaries and employee benefits due largely to the acquisition of IFH.

Merger-related expenses were $3.9 million.

Occupancy and equipment expense increased $2.6 million, or 45.3%, primarily related to increased contract expense from the IFH acquisition of $0.5 million and software depreciation of $0.4 million.

Other operating expenses increased $0.8 million including an increase in insurance related expenses and other miscellaneous expenses.

Further, occupancy and equipment expense increased $0.8 million, or 16.6%.

Data processing expense decreased $3.7 million, or 12.7%, and outside service providers expense decreased $1.4 million, or 42.1%, as fees related to card services was lower as card usage declined, and professional fees decreased $1.7 million, or 15.8%, due to a reduction in third party consulting fees.

Data processing expense increased $2.0 million, or 7.8%, outside service providers expense decreased $0.1 million, or 2.8% and professional fees decreased $1.4 million, or 15.4%, due to a reduction in third party consulting fees.

Income Tax Expense

The amount of income tax expense we incur is influenced by our pre-tax income and our nondeductible expenses.

The amount of income tax expense we incur is influenced by our pre-tax income, our tax exempt revenue and our nondeductible expenses.

Deferred tax assets and liabilities are reflected at enacted tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled.

2 unchanged sentences

Our effective tax rates for those periods were 26.0% and 22.4%, respectively.

The elevated tax rate in 2024 resulted from the non-deductibility of a non-recurring equity and debt investment write down, in a legacy IFH investment, along with certain merger-related expenses.

In December of 2024 the Company became aware of certain financial conditions in a legacy IFH investment which indicated the need to evaluate the investment for impairment.

The Company does not hold any additional equity securities, therefore the Company does not expect any future deferred tax benefits associated with the impairment.

Financial Condition

1 unchanged sentence

December 31, Change expressed in:

(in thousands) 2023 2022 Dollars Percent

(in thousands, except per share data) 2024 2023 Dollars Percent

Total assets $ 3,206,911 $ 2,226,176 $ 980,735 44.1 %

1 unchanged sentence

Mortgage loans held for sale 21,270 7,481 13,789 184.3

Small Business Administration (“SBA”) Payroll Protection Program (“PPP”) loans receivable, net of fees and costs 645 2,163 (1,518) (70.2)

Portfolio loans receivable, net of deferred fees and costs 2,630,163 1,903,288 726,875 38.2

16 unchanged sentences

Total assets at December 31, 2024 increased $980.7 million from the balance at December 31, 2023.

Net portfolio loans, which exclude mortgage loans held for sale and SBA-PPP loans, totaled $1.9 billion as of December 31, 2023, an increase of $174.1 million, or 10.1%, from $1.7 billion at December 31, 2022.

Net portfolio loans, which exclude mortgage loans held for sale, totaled $2.6 billion as of December 31, 2024, an increase of $726.9 million, or 38.2%, from $1.9 billion at December 31, 2023.

Investment Securities

The Company uses its securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements.

Management classifies investment securities as either held to maturity or available for sale based on our intentions and the Company’s ability to hold such securities until maturity.

In determining such classifications, securities that management has the positive intent and the Company has the ability to hold until maturity are classified as held to maturity and carried at amortized cost.

All other securities are designated as available for sale and carried at estimated fair value with unrealized gains and losses included in stockholders’ equity on an after-tax basis.

For the years presented, all securities were classified as available for sale.

To supplement interest income earned on our loan portfolio, the Company invests in U.S.

To manage liquidity and supplement interest income earned on our loan portfolio, the Company invests in U.S.

Treasuries, high-quality mortgage-backed securities (“MBS”), government agency bonds, asset-backed securities and high-quality municipal and corporate bonds.

1 unchanged sentence

The following tables summarize the contractual maturities, without consideration of call features or pre-refunding dates, and weighted-average yields of investment securities at December 31, 2024 and the amortized cost and carrying value of those securities as of the indicated dates.

The weighted average yields were calculated by multiplying the amortized cost of each individual security by its yield, dividing that figure by the portfolio total, and then summing the value of these results to arrive at the weighted average yield.

average yield.

Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.

10 unchanged sentences

Total $ 25,911 2.37 % $ 135,887 2.32 % $ 31,675 2.49 % $ 45,496 4.09 % $ 238,969 $ 223,630 2.71 %

As described in “Note 3 - Investment Securities” to the “Notes to the Consolidated Financial Statements” at December 31, 2023 management determined the Company does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at December 31, 2023 before it is able to recover the amortized cost basis.

As described in “Note 3 - Investment Securities” in the “Notes to the Consolidated Financial Statements” at December 31, 2024, management determined the Company does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at December 31, 2024 before it is able to recover the amortized cost basis.

Further, management reviewed the Company’s holdings as of December 31, 2024 and concluded there were no credit-related declines in fair value.

28 unchanged sentences

Business equity lines of credit are commercial purpose lines of credit primarily secured by the business owners residential properties.

Lender finance loans totaling $11.1 million as of December 31, 2023 are included in the commercial real estate loan category.

Lender finance loans totaling $28.6 million as of December 31, 2024 are also included in the commercial real estate loan category.

Lender finance loans are loans to companies used to purchase finance receivables or extend finance receivables to the underlying obligors and are secured primarily by the finance receivables held by our borrowers.

1 unchanged sentence

Commercial loans that are secured by owner-occupied commercial real estate and primarily collateralized by operating cash flows are included in the commercial real estate loan category.

As of December 31, 2023, there were approximately $307.9 million of owner-occupied commercial real estate loans, representing approximately 16.1% of the loan portfolio.

In prior reporting periods, the Company classified certain commercial real estate loans as owner-occupied that should have been classified as non-owner-occupied.

For the reporting periods ended December 31, 2022 and March 31, 2023, the Company disclosed owner-occupied commercial real estate loans of $387.7 million and $377.4 million, respectively.

Based on the revised classification metrics, the correct amount of owner-occupied commercial real estate loans at December 31, 2022 and March 31, 2023 was $300.8 million and $300.0 million, respectively.

Commercial real estate loan terms are generally extended for 10 years or less and amortize generally over 25 years or less.

8 unchanged sentences

Construction loans typically have terms of 12 to 18 months.

The Company frequently

transitions the end purchaser to permanent financing or re-underwriting and sale into the secondary market through Capital Bank Home Loans.

The Company frequently transitions the end purchaser to permanent financing or re-underwriting and sale into the secondary market through Capital Bank Home Loans.

According to underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, cannot exceed 75% for investor-owned and 80% for owner-occupied properties, although exceptions are sometimes made.

2 unchanged sentences

Commercial and Industrial .

In addition to other loan products, general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products, are offered, primarily in target markets, and underwritten based on each borrower’s ability to service debt from income.

In addition to other loan products, general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit, government guaranteed loans and solar energy related loans and other loan products, are offered, primarily in target markets, and underwritten based on each borrower’s ability to service debt from income.

These loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower.

2 unchanged sentences

Credit Cards .

Through the OpenSky ™ credit card division, the Company offers secured, partially secured, and unsecured credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores through a fully digital and mobile platform.

Through the OpenSky ™ credit card division, the Company offers secured, partially secured, and unsecured credit cards on a nationwide basis to under-banked populations and those

looking to rebuild their credit scores through a fully digital and mobile platform.

The secured lines of credit are secured by a noninterest-bearing demand account at the Bank in an amount equal to the full credit limit of the credit card.

6 unchanged sentences

Purchased Credit Deterioration .

There were no loans purchased with credit deterioration during the year ended December 31, 2023.

The repayment of loans is a source of additional liquidity for the Company.

The following table details contractual maturities of our portfolio loans, along with an analysis of loans maturing after one year categorized by rate characteristic.

Loans with adjustable interest rates are shown as maturing in the period during which the contract is due.

The table does not reflect the effects of possible prepayments.

As of December 31, 2023

or Less One to

Five Years Over

Five Years to Fifteen Years After Fifteen Years

(in thousands) Amount Amount Amount Amount Total

Residential $ 117,425 $ 217,048 $ 86,505 $ 152,126 $ 573,104

Commercial 141,436 269,138 270,613 3,042 684,229

Construction 228,288 53,293 8,527 — 290,108

Commercial and industrial 50,384 98,518 75,825 13,821 238,548

Credit card 123,331 — — — 123,331

Other consumer 384 325 241 — 950

Total portfolio loans, gross $ 661,248 $ 638,322 $ 441,711 $ 168,989 $ 1,910,270

Loans above maturing after one year categorized by rate characteristic:

Predetermined Interest Rates Floating or Variable Rates Total

Residential $ 267,422 $ 188,257 $ 455,679

Commercial 345,988 196,805 542,793

Construction 11,453 50,367 61,820

Commercial and industrial 101,723 86,441 188,164

Other consumer 541 25 566

Total portfolio loans, gross $ 727,127 $ 521,895 $ 1,249,022

In addition to the portfolio loans shown above, gross SBA-PPP loans receivable, which totaled $0.7 million at December 31, 2023, mature in the one to five year time-frame and carry a fixed rate of interest.

Multi-family loans totaled $157.3 million at December 31, 2023 and are included in the real estate residential loan category.

At December 31, 2023, the Company has approximately $52.9 million in multi-family loans in the District of Columbia with tenants that could have some form of rent stabilization or rent control.

Under the Rent Control Act in the District of Columbia, properties built prior to 1975 limit rent increases to no more than annually unless a unit becomes vacant, and increases are generally limited to the Consumer Price Index plus 2% not to exceed 10%.

Further, there must be at least 30 days’ notice of rent increase.

The Company does not have any multi-family loans in New York City or New York state.

The following tables present non owner-occupied and owner-occupied commercial real estate loans and multi-family loans and the weighted average loan-to-value (“LTV”) and fixed rate maturities by year and loan type:

Non-owner-occupied commercial real estate loans, including multi-family

As of December 31, 2023

(in thousands) Amount Average Loan Size Weighted Average LTV (1)

% of Non Owner-Occupied Commercial Real Estate Loans % of Total Portfolio Loans, Gross

Multi-family $ 157,257 $ 1,991 49.8 % Not Applicable 8.2 %

Retail $ 103,508 $ 1,568 54.0 % 29.5 % 5.4 %

Mixed use 75,780 1,067 48.8 % 21.6 % 4.0 %

Industrial 63,015 1,167 47.1 % 17.9 % 3.3 %

Hotel 60,307 3,769 44.8 % 17.2 % 3.2 %

Office 13,416 516 54.2 % 3.8 % 0.7 %

35,090 1,595 49.3 % 10.0 % 1.8 %

Total non-owner-occupied commercial real estate loans $ 351,116 $ 1.377 49.6 % 100.0 % 18.4 %

Total portfolio loans, gross $ 1,910,270

Scheduled maturities of fixed rate non owner-occupied commercial real estate loans, including multi-family

As of December 31, 2023

(in thousands) 2024 2025 2026 2027 2028 and Onwards Total

Multi-family $ 7,690 $ 8,687 $ 17,908 $ 23,265 $ 39,296 $ 96,846

Retail $ 18,156 $ 856 $ 11,432 $ 14,806 $ 11,439 $ 56,689

Mixed use 11,754 3,857 22,601 9,346 13,455 61,013

Industrial 2,557 8,333 7,674 9,702 12,377 40,643

Hotel 3,251 — — 3,607 21,141 27,999

Office 1,260 1,998 583 3,061 2,937 9,839

Other 10,185 — 4,967 2,480 8,513 26,145

Total fixed rate non owner-occupied commercial real estate loans $ 47,163 $ 15,044 $ 47,257 $ 43,002 $ 69,862 $ 222,328

Owner-occupied commercial real estate loans

As of December 31, 2023

(in thousands) Amount Average Loan Size Weighted Average LTV (1)

% of Owner-Occupied Commercial Real Estate Loans % of Total Portfolio Loans, Gross

Industrial $ 79,908 $ 1,332 46.8 % 26.0 % 4.2 %

Office 42,482 664 47.7 % 13.8 % 2.2 %

Retail 42,373 799 54.4 % 13.8 % 2.2 %

Mixed use 17,872 1,117 62.7 % 5.8 % 0.9 %

125,276 2,983 56.4 % 40.6 % 6.6 %

Total owner-occupied commercial real estate loans $ 307,911 $ 1,310 52.8 % 100.0 % 16.1 %

Total portfolio loans, gross $ 1,910,270

Scheduled maturities of fixed rate owner-occupied commercial real estate loans

As of December 31, 2023

(in thousands) 2024 2025 2026 2027 2028 and Onwards

Industrial $ 5,623 $ — $ 10,200 $ 7,432 $ 35,104

Office 145 2,974 889 2,310 26,231

Retail 6,090 1,045 1,054 4,776 19,958

Mixed use — — 1,122 906 9,334

Other 25,879 2,564 5,484 10,525 28,506

Total fixed rate owner-occupied commercial real estate loans $ 37,737 $ 6,583 $ 18,749 $ 25,949 $ 119,133

(1) Weighted average LTV is calculated by reference to the most recent available appraisal of the property securing each loan.

(2) Other non-owner-occupied commercial real estate loans include a land loan of $9.0 million, skilled nursing loans of $9.9 million, special purpose loans of $6.4 million, and other loans of $9.7 million.

(3) Other owner-occupied commercial real estate loans include special purpose loans of $51.5 million, skilled nursing loans of $45.5 million, and other loans of $28.3 million.

Acquired loans, including those acquired in a business combination, are evaluated to determine if they have experienced more-than-insignificant deterioration in credit quality since origination.

When the condition exists, these loans are referred to as purchased credit deteriorated, or PCD.

An allowance is recognized for a PCD loan by adding it to the purchase price or fair value in a business combination.

There is no provision for credit losses recognized upon acquisition of a PCD loan since the initial allowance is established through purchase accounting.

After initial recognition, the accounting for a PCD loan follows the credit loss model that applies to the loan category.

Purchased financial loans that do not have a more-than-significant deterioration in credit quality since origination are accounted for in a manner consistent with originated loans.

An allowance for credit losses is recorded with a corresponding charge to provision for credit losses.

Subsequent to the acquisition date, the methods utilized to estimate the required ACL for these loans is similar to the method used for organically originated loans.

Nonperforming Assets

4 unchanged sentences

When the interest accrual is discontinued, all unpaid accrued interest is reversed from income.

Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured.

Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured.

Loans are generally charged-off in part or in full when management determines the loan to be uncollectible.

8 unchanged sentences

pass/watch, special mention, substandard, doubtful or loss.

The classifications of loans reflect a judgment about the risks of default and loss associated with each loan.

Credit ratings are reviewed regularly and adjusted regularly to reflect the degree of risk and loss that our management believes to be appropriate for each credit.

The classifications of loans reflect

a judgment about the risks of default and loss associated with each loan.

Credit ratings are reviewed regularly and then adjusted regularly to reflect the degree of risk and loss that our management believes to be appropriate for each credit.

Our lending policy requires the routine monitoring of past due reports, daily overdraft reports, monthly maturing loans, monthly risk rating reports and internal loan review reports.

The lending and credit management of the Bank meet periodically to review loans rated pass/watch.

The focus of each meeting is to identify and promptly determine any necessary required action within this loan

population, which consists of loans that, although considered satisfactory and performing to terms, may exhibit special risk features that warrant management’s attention.

The focus of each meeting is to identify and promptly determine any necessary required action within this loan population, which consists of loans that, although considered satisfactory and performing to terms, may exhibit special risk features that warrant management’s attention.

Management is intent on maintaining a strong credit review function and risk rating process.

The Company has an experienced credit administration function, which provides independent analysis of credit requests and the management of problem credits.

The Credit Department has developed and implemented analytical procedures for evaluating credit requests, has refined the Company’s risk rating system, and continues to adapt and enhance the monitoring of the loan portfolio.

The credit department has developed and implemented analytical procedures for evaluating credit requests, has refined the Company’s risk rating system, and continually endeavors to adapt and enhance the monitoring of the loan portfolio.

The loan portfolio analysis process is intended to contribute to the identification of weaknesses before they become more severe.

5 unchanged sentences

At December 31, 2024, the recorded investment in individually assessed loans was $34.9 million, requiring a specific reserve of $9.3 million.

At December 31, 2022, prior to the adoption of CECL, the Company carried a recorded investment in impaired loans of $9.4 million, $0.5 million of which required a specific reserve of $0.4 million.

At December 31, 2023, the recorded investment in individually assessed loans was $16.0 million, requiring a specific reserve of $0.4 million.

The $34.9 million of individually assessed loans at December 31, 2024 included a single multi-unit residential real estate loan secured by four properties with a balance of $7.6 million at December 31, 2024.

8 unchanged sentences

2024 2023 2024 2023 2024 2023

(in thousands) Allowance for credit losses to period end portfolio loans (1)

Nonaccrual loans to total portfolio loans Allowance for credit losses to nonaccrual loans (1)

(in thousands) Allowance for credit losses to period end portfolio loans Nonaccrual loans to total portfolio loans Allowance for credit losses to nonaccrual loans

Residential 1.01 % 0.96 % 1.26 % 1.99 % 80 % 48 %

5 unchanged sentences

Total 1.85 % 1.50 % 1.15 % 0.84 % 161 % 178 %

_____________

(1) Allowance calculation excludes SBA-PPP loans.

Total charge-offs for the year ended December 31, 2024 and December 31, 2023 were primarily comprised of credit card charge-offs resulting both from the aging of the portfolio and the shift from an almost exclusively secured card portfolio to a portfolio that also includes partially secured and unsecured exposures.

Commercial and industrial loans experienced net charge-offs for year ended December 31, 2023 of $0.1 million.

Commercial real estate loans experienced net charge-offs for the year ended December 31, 2023 of $0.8 million.

The following table presents a summary of the net charge-off (recovery) of loans as a percentage of average loans for the periods indicated:

The following table presents a summary of the net charge-offs (recovery) of loans as a percentage of average loans for the periods indicated:

For the Years Ended December 31,

(in thousands) Net Charge-offs (Recoveries) Average Loans Percent of average portfolio loans Net Charge-offs Average Loans Percent of average portfolio loans

(in thousands) Net Charge-offs Average Loans Percent of average portfolio loans Net Charge-offs Average Loans Percent of average portfolio loans

Residential $ 907 $ 616,739 0.15 % $ 670 $ 544,552 0.12 %

22 unchanged sentences

_______________

(1) Loan category as a percentage of total portfolio loans which excludes SBA-PPP loans.

(1) Loan category as a percentage of total portfolio loans.

Total Liabilities

Total liabilities at December 31, 2023 increased $71.7 million from December 31, 2022, primarily due to growth in the deposit portfolio of $137.9 million, partially offset by an $85.0 million reduction in FHLB advances.

Total liabilities at December 31, 2024 increased $880.5 million from December 31, 2023, primarily due to the IFH acquisition.

Deposits are a major source of funding for the Company.

8 unchanged sentences

Interest-bearing demand accounts $ 238,881 $ 199,308

Money market accounts 663,129 574,978

Savings 13,488 5,211

Certificates of deposit of $250,000 or more 124,747 96,291

Other time deposits 286,228 197,124

Money market accounts 816,708 663,129

Customer time deposits 548,901 268,619

Brokered time deposits 333,033 142,356

Total Interest-bearing deposits $ 1,951,011 $ 1,278,623

17 unchanged sentences

$ 2,168,900 2.59 % $ 1,864,452 2.13 %

Deposit costs increased 170 basis points during the year ended December 31, 2023 owing in large part to a series of interest rate increases implemented by the Federal Reserve beginning in early 2022 and the migration of some relationships from interest-bearing demand accounts and savings accounts to higher rate money market accounts and time deposits.

In addition, average noninterest-bearing deposit balances decreased $127.0 million when compared to December 31, 2022, largely due to the decision by some depositors to move balances from noninterest-bearing deposit accounts to interest-bearing deposit accounts.

Deposit costs increased 46 basis points during the year ended December 31, 2024 due, in large part, to a series of interest rate increases implemented by the Federal Reserve beginning in early 2022 and continuing into 2023 and the corresponding mix shift from low and no interest bearing deposits to higher rate money market accounts and time deposits.

However, average noninterest-bearing deposit balances increased $20.3 million when compared to December 31, 2023, as growth in the number of customer accounts and corresponding balances outpaced the decision by some depositors to move balances from noninterest-bearing deposit accounts to interest-bearing deposit accounts.

Noninterest-bearing deposits represented 29.4% of total deposits at December 31, 2024 compared to 32.6% at December 31, 2023.

8 unchanged sentences

We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.

Despite the uncertain market conditions during the first quarter of 2023 following the closures of Silicon Valley Bank and Signature Bank, our total borrowings decreased during the year ended December 31, 2023 to $49.1 million from $119.1 million at December 31, 2022 as our deposits increased during the year.

Total borrowings decreased during the year ended December 31, 2024 to $34.1 million from $49.1 million at December 31, 2023.

FHLB Advances .

19 unchanged sentences

Certain commercial loans are pledged under this arrangement.

Federal Reserve’s Bank Term Funding Program.

On March 12, 2023, in response to liquidity concerns in the banking system, the Federal Deposit Insurance Corporation, Federal Reserve and U.S.

Department of Treasury, collaboratively approved certain actions with a stated intention to reduce stress across the financial system, support financial stability and minimize any impact on business, households, taxpayers, and the broader economy.

Among other actions, the Federal Reserve Board has created a new BTFP to make additional funding available to eligible depository institutions to help assure institutions can meet the needs of their depositors.

Eligible institutions may obtain liquidity against a wide range of collateral, at par value.

BTFP advances can be requested through at least March 11, 2024.

At December 31, 2023, the Company had $15.0 million of BTFP borrowings.

In January 2024, the Company paid off the $15.0 million of BTFP borrowings.

During the first quarter of 2023, we established a line of credit under the Federal Reserve Bank’s Bank Term Funding Program (“BTFP”).

As of March 31, 2024, participation in the BTFP had concluded and the Company had no outstanding balances under the BTFP at December 31, 2024.

Other Borrowings.

The Company also has lines of credit of $76.0 million available with other correspondent banks at December 31, 2023, as well as access to certificate of deposit funding through a financial network which the Bank strives to limit to 15% of the Bank’s assets.

The Company also has available lines of credit of $76.0 million with other correspondent banks at December 31, 2024, as well as access to certificate of deposit funding through financial intermediaries.

There were no outstanding balances on the lines of credit from correspondent banks at December 31, 2024.

Liquidity is defined as the Bank’s capacity to meet its cash and collateral obligations at a reasonable cost.

Maintaining an adequate level of liquidity depends on the Bank’s ability to meet both expected and unexpected cash flows and collateral needs efficiently without adversely affecting either daily operations or the financial condition of the Bank.

Maintaining an adequate level of liquidity depends on the Bank’s ability to meet both expected and unexpected cash flows and collateral needs efficiently and without adversely affecting either daily operations or the financial condition of the Bank.

Liquidity risk is the risk that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding.

The Bank’s obligations, and the funding sources used to meet them, depend significantly on our business mix, balance sheet structure and the cash flow profiles of our on- and off-balance sheet obligations.

In managing our cash flows, management regularly addresses situations that can give rise to increased liquidity risk.

In managing our cash flows, management endeavors to anticipate situations that can give rise to increased liquidity risk.

These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity) and contingent liquidity events.

5 unchanged sentences

strategies, policies, procedures, and limits used to manage and mitigate liquidity risk;

liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are believed to be commensurate with the complexity and business activities of the Bank;

liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are believed to be commensurate with the

complexity and business activities of the Bank;

active management of intraday liquidity and collateral;

6 unchanged sentences

As of December 31, 2024, we had $485.5 million of available borrowing capacity from the FHLB, $20.6 million of available borrowing capacity from the Federal Reserve Bank of Richmond Borrower in Custody program and available lines of credit of $76.0 million with other correspondent banks.

At December 31, 2023, the Company also had $150.0 million available through the BTFP, which provides funding collateralized by designated investment securities.

Further, unpledged investment securities available as collateral for potential additional borrowings totaled $131.4 million at December 31, 2024.

1 unchanged sentence

Capital Resources

Stockholders’ equity increased $30.8 million for the year ended December 31, 2023 compared to December 31, 2022 largely due to net income of $35.9 million for the year ended December 31, 2023.

Stockholders’ equity increased $100.3 million for the year ended December 31, 2024 compared to December 31, 2023 largely due to the common stock issued in connection with the IFH acquisition of $70.9 million and net income of $31.0 million for the year ended December 31, 2024.

In connection with the acquisition of IFH, the Company temporarily suspended repurchases under its stock repurchase program during the first quarter of 2024.

Shares repurchased and retired for the year ended December 31, 2024, as part of the Company's stock repurchase program, totaled 67,869 shares at an average price of $20.62, for a total cost of $1.4 million including commissions.

10 unchanged sentences

Failure to meet minimum capital requirements can precipitate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial condition.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

accounting practices.

The capital amounts and classifications are also subject to qualitative judgments by the regulators.

1 unchanged sentence

The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

In July 2013, federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with certain standards that were developed by Basel III and certain provisions of the Dodd-Frank Act.

The final rule applies to all depository institutions and bank holding companies and savings and loan holding companies with total consolidated assets of more than $1 billion.

The Bank was required to implement the new Basel III capital standards (subject to the phase-in for certain parts of the new rules) as of January 1, 2015.

In August of 2018 the Regulatory Relief Act directed the Federal Reserve Board to revise the Small BHC Policy Statement to raise the total consolidated asset limit in the Small BHC Policy Statement from $1 billion to $3 billion.

The Company is currently exempt from the consolidated capital requirements.

The ability of the Company to continue to grow is dependent on its earnings and those of the Bank, and the ability to obtain additional funds for contribution to the Bank’s capital, through additional borrowings, through the sale of additional common stock or preferred stock, or through the issuance of additional qualifying capital instruments, such as subordinated debt.

The capital levels required to be maintained by the Company and Bank may be impacted as a result of the Bank’s concentrations in commercial real estate loans.

See “Risks Related to the Regulation of Our Industry” in Part I, Item 1A - Risk Factors.

As of December 31, 2023, the Bank was in compliance with all applicable regulatory capital requirements to which it was subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations.

See “Risks Related to Our Operations and the Regulation of Our Industry” in Part I, Item 1A - Risk Factors.

As of December 31, 2024, the Company and the Bank were in compliance with all applicable regulatory capital requirements to which it was subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations.

As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings.

4 unchanged sentences

December 31, 2024 Amount Ratio Amount Ratio Amount Ratio

Tier 1 leverage ratio (to average assets) $ 270,019 12.14 % $ 89,004 4.00 % N/A N/A

Tier 1 capital (to risk-weighted assets) 270,019 15.55 104,175 6.00 N/A N/A

Tier 1 leverage ratio (to average assets) $ 346,840 11.07 % $ 125,348 4.00 % $ 156,685 5.00 %

Tier 1 capital (to risk-weighted assets) 346,840 13.83 150,512 6.00 200,683 8.00

Common equity tier 1 capital ratio (to risk-weighted assets)

267,957 15.43 78,132 4.50 N/A N/A

Total capital ratio (to risk-weighted assets) 301,817 17.38 138,900 8.00 N/A N/A

344,778 13.74 112,884 4.50 163,055 6.50

Total capital ratio (to risk-weighted assets) 388,425 15.48 200,683 8.00 250,853 10.00

Tier 1 leverage ratio (to average assets) $ 283,828 9.17 % $ 123,818 4.00 % $ 154,772 5.00 %

24 unchanged sentences

Subordinated debt — — — 12,062 12,062

BTFP borrowings 15,000 — — — 15,000

Total $ 751,022 $ 128,133 $ 30,238 $ 13,270 $ 922,663

20 unchanged sentences

If the commitment is funded, we would be entitled to seek recovery from the customer from the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities.

Our policies generally require that letter of credit arrangements contain security and debt covenants similar to

those contained in loan agreements.

Our policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

We believe the credit risk associated with issuing letters of credit is substantially the same as the risk involved in extending loan facilities to our customers.

6 unchanged sentences

The amount of collateral obtained, if considered necessary by us, upon extension of credit is based on management’s credit evaluation of the customer.

We enter into forward commitments for the delivery of mortgage loans in our current pipeline.

Interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitments to fund the loans.

These commitments to fund mortgage loans to be sold into the secondary market, along with the interest rate lock commitments and forward commitments for the future delivery of mortgage loans to third party investors, are considered derivatives.

The commitment to fund other investments reflects an obligation to make an investment in a Small Business Investment Company.

14 unchanged sentences

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our results reported under GAAP.

Return on Average Assets, as Adjusted Year Ended

(in thousands) December 31, 2023 December 31, 2022

Earnings Metrics, as Adjusted Year Ended

(in thousands, except per share data) December 31, 2024 December 31, 2023

Net Income $ 30,972 $ 35,871

SBA-PPP Loan Income

Merger-Related Expenses, net of tax 3,308 —

Non-Recurring Equity and Debt Investment Write-Down 2,620 —

IFH Non-PCD ACL Provision, Net of Tax 3,169 —

Net Income, as Adjusted $ 40,069 $ 35,871

Average Total Assets 2,188,299 2,077,801

Average SBA-PPP Loans 1,373 29,831

Average Total Assets, as Adjusted $ 2,186,926 $ 2,047,970

Weighted Average Common Shares - Diluted 14,640 14,081

Earnings per Share - Diluted $ 2.12 $ 2.55

Earnings per share - Diluted, as Adjusted $ 2.74 $ 2.55

Average Assets $ 2,554,049 $ 2,188,299

Return on Average Assets 1.21 % 1.64 %

Return on Average Assets, as Adjusted 1.57 % 1.64 %

Average Equity $ 287,420 $ 240,519

Return on Average Equity 10.78 % 14.91 %

Return on Average Equity, as Adjusted 13.94 % 14.91 %

Net Interest Income (a) $ 154,746 $ 141,526

Noninterest Income 31,410 24,975

Total Revenue $ 186,156 $ 166,501

Noninterest Expense $ 126,219 $ 110,767

Efficiency Ratio (1)

67.80 % 66.53 %

Noninterest Income $ 31,410 $ 24,975

Non-Recurring Equity and Debt Investment Write-Down 2,620 —

Noninterest Income, as Adjusted (b) $ 34,030 $ 24,975

Total Revenue, as Adjusted (a) + (b) $ 188,776 $ 166,501

Noninterest Expense $ 126,219 $ 110,767

Merger-Related Expenses 3,930 —

Noninterest Expense, as Adjusted $ 122,289 $ 110,767

Efficiency Ratio, as Adjusted (1)

64.78 % 66.53 %

_______________

(1) The efficiency ratio is calculated by dividing noninterest expense by total revenue (net interest income plus noninterest income).

Net Interest Margin, as Adjusted Year Ended

3 unchanged sentences

59,821 61,096

SBA-PPP Loan Income

Net Interest Income, as Adjusted $ 94,925 $ 80,430

2 unchanged sentences

115,581 114,450

Average SBA-PPP Loans

Total Average Interest Earning Assets, as Adjusted $ 2,372,026 $ 2,030,759

14 unchanged sentences

Provision for Credit Losses 17,720 9,610

Release of Credit Losses on Unfunded Commitments (101) —

Pre-tax, Pre-Provision Net Revenue ("PPNR") $ 55,734 $ 60,865

Provision for (Release of) Credit Losses on Unfunded Commitments 385 (101)

PPNR $ 59,937 $ 55,734

PPNR, as Adjusted Year Ended

(in thousands) December 31, 2024 December 31, 2023

$ 30,972 $ 35,871

Income Tax Expense 10,860 10,354

Provision for Credit Losses 17,720 9,610

Provision for (Release of) Credit Losses on Unfunded Commitments 385 (101)

Merger-Related Expenses 3,930 —

Non-Recurring Equity and Debt Investment Write-Down 2,620 —

PPNR, as Adjusted $ 66,487 $ 55,734

Allowance for Credit Losses to Total Portfolio Loans Year Ended

1 unchanged sentence

Allowance for Credit Losses $ 48,652 $ 28,610

Total Loans 1,903,288 1,730,755

SBA-PPP Loans, net of fees and costs 645 2,163

Total Portfolio Loans $ 2,630,163 $ 1,903,288

Allowance for Credit Losses to Total Portfolio Loans 1.85% 1.50%

Nonperforming Assets to Total Assets, net SBA-PPP Loans Year Ended

Nonperforming Assets to Total Assets Year Ended

(in thousands) December 31, 2024 December 31, 2023

1 unchanged sentence

Total Assets $ 3,206,911 $ 2,226,176

SBA-PPP Loans, net of fees and costs 645 2,163

Total Assets, net SBA-PPP Loans $ 2,225,531 $ 2,121,492

Nonperforming Assets to Total Assets, net SBA-PPP Loans 0.72% 0.46%

Nonperforming Assets to Total Assets 0.94% 0.72%

Nonperforming Loans to Total Portfolio Loans Year Ended

1 unchanged sentence

Total Nonperforming Loans $ 30,241 $ 16,042

Total Loans 1,903,288 1,730,755

SBA-PPP Loans, net of fees and costs 645 2,163

Total Portfolio Loans $ 2,630,163 $ 1,903,288

3 unchanged sentences

Total Net Charge-Offs $ 9,003 $ 8,473

Total Average Loans 1,816,968 1,609,492

Average SBA-PPP Loans, net of fees and costs 1,373 29,831

Total Average Portfolio Loans $ 2,142,638 $ 1,816,968

1 unchanged sentence

Tangible Book Value per Share Year Ended

(in thousands, except per share amounts) December 31, 2023 December 31, 2022

(in thousands, except share and per share data) December 31, 2024 December 31, 2023

Total Stockholders' Equity $ 355,139 $ 254,860

4 unchanged sentences

Tangible Book Value per Share $ 18.77 $ 18.31

Return on Average Tangible Common Equity Year Ended

(in thousands) December 31, 2024 December 31, 2023

$ 30,972 $ 35,871

Intangible Amortization, Net of Tax 198 —

Net Tangible Income $ 31,170 $ 35,871

Average Equity 287,420 240,519

Average Intangible Assets 6,951 —

Net Average Tangible Common Equity $ 280,469 $ 240,519

Return on Average Equity 10.78 % 14.91 %

Return on Average Tangible Common Equity 11.11 % 14.91 %

Core Return on Average Tangible Common Equity Year Ended

(in thousands) December 31, 2024 December 31, 2023

Net Income, as Adjusted $ 40,069 $ 35,871

Intangible Amortization, Net of Tax 198 —

Net Tangible Income, as Adjusted $ 40,267 $ 35,871

Core Return on Average Equity, as Adjusted 14.01 % 14.91 %

Core Return on Average Tangible Common Equity, as Adjusted 14.36 % 14.91 %

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis