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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-15 · 463 added, 252 removed, 380 unchanged (65% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated.

This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes.

Executive Summary

The following summary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in its entirety.

Net income for the year ended December 31, 2022 increased $1.8 million, or 4.6% when compared to the prior year, due primarily to an increase in average balances in the loan portfolio, an increase in credit card interest, and a decrease in data processing.

These positive factors were offset by an increase in rates for all interest-bearing liabilities, a decrease in mortgage banking revenue, a decrease in credit card fees, an increase in the provision for loan losses, and increases in salaries and employee benefits and advertising.

During the year ended December 31, 2022, continued focus on growing the Company’s commercial real estate loan portfolio, specifically owner-occupied properties, led to growth of the Bank’s commercial real estate loan portfolio by $108.2 million, of which $87.6 million was owner-occupied.

Our credit card portfolio declined by $12.7 million in comparison to December 31, 2021;

however, increases in interest rates helped to offset the impact of the declining balance and corresponding credit card fees.

The decrease in data processing expenses was primarily due to a contract renegotiation entered into in the first quarter of 2022.

The net interest margin was 6.92% for the year ended December 31, 2022 compared to 5.86% for the prior year.

Primarily driving this margin expansion were increases in average portfolio loan balances of $208.7 million and a 73 basis point increase in the loan yield on the portfolio loans, while the average interest rates across all interest-bearing liabilities only increased 35 basis points.

Leading the increase in average portfolio balances was commercial real estate with an average balance increase of $156.9 million when comparing the year ended December 31, 2022 to December 31, 2021.

Increasing interest rates contributed to sharp increases in the cost of funds associated with our interest-bearing deposit portfolio and resulted in a 22 basis point increase between 2021 and 2022.

The increase in rates for money market accounts was the most significant contributor to the over-all increase in our cost of funds.

Total assets grew by $68.4 million while total liabilities grew by $42.2 million when comparing year end 2022 to 2021.

Total asset growth was primarily due to an increase in portfolio loans held for investment of $203.4 million and investment securities available for sale of $68.0 million, offset by net

SBA-PPP run off of $106.1 million.

Total liability growth was due, in part, to an increase in Federal Home Loan Bank advances of $85.0 million when comparing December 31, 2022 to December 31, 2021.

The Bank’s OpenSky ® Division continued to exceed management’s expectations during 2022 despite headwinds brought on by significant interest rate increases and economic uncertainty.

OpenSky ® had a record year of profitability in 2022, resulting in an increase of $8.4 million in net income for the segment.

Average credit card loan balances increased in 2022 compared to 2021, and that increase, coupled with the increase in interest rates, accounted for $15.1 million growth in interest income compared to the year ended December 31, 2021.

Normal customer attrition and aggressive marketing and product strategies by fintech and credit card companies offering unsecured subprime credit cards have contributed to the continued decline in the total number of OpenSky ® accounts, particularly in late 2022.

Active customer accounts decreased by 127 thousand when comparing the year end balance 2022 to 2021, leading to a decline in revenues earned from interchange and other fees.

Ultimately, outstanding year end credit card balances decreased $12.7 million, net of reserves, while the noninterest-bearing deposits associated therewith decreased by $42.1 million to $187.4 million at December 31, 2022 from $229.5 million at December 31, 2021.

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.

We further believe the presentation of non-GAAP results increases comparability of period-to-period results.

Other companies may use similarly titled non-GAAP financial measures that may be calculated differently from the way we calculate such measures.

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.

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.

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

Financial Performance

The following summary should be read in conjunction with the MD&A section in its entirety.

Net income of $35.9 million for the year ended December 31, 2023 decreased $5.9 million, or 14.2% 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.

The yield on portfolio loans, as adjusted (non-GAAP, excluding credit card loans) was 6.66% for the year ended December 31, 2023, compared to 5.31% for the prior year.

Compared to the same period in the prior year, average interest-bearing liabilities increased $209.1 million, or 19.7%, while the average cost of interest-bearing liabilities increased 234 basis points to 3.29% from 0.95%.

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.

Net charge-offs for the year ended December 31, 2023 were $8.5 million, or 0.47% of average portfolio loans, compared to $5.4 million, or 0.34% of average portfolio loans, for the same period in 2022.

The $8.5 million in net charge-offs during the year ended December 31, 2023 was comprised primarily of credit card portfolio net charge-offs, with $5.5 million related to secured and partially secured cards while $1.4 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.

Total assets at December 31, 2023 were $2.2 billion, an increase of $102.5 million, or 4.8%, from the balance at December 31, 2022.

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.

Total liabilities at December 31, 2023 were $2.0 billion, an increase of $71.7 million, or 3.8%, from the balance at December 31, 2022.

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.

Stockholders’ equity increased to $254.9 million as of December 31, 2023, compared to $224.0 million at December 31, 2022.

Deposits were $1.9 billion at December 31, 2023, an increase of $137.9 million, or 7.8%, from the balance at December 31, 2022.

Average deposits of $1.9 billion for the year ended December 31, 2023 increased $100.4 million, or 5.7%, 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.

Gross unsecured loan balances of $30.8 million at December 31, 2023 increased $4.0 million, or 15.0%, compared to $26.8 million at December 31, 2022.

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.

The steepening of the yield curve in 2022 resulted in continued decline in home loan sales and home loan refinances.

Gain on sale margins, down slightly from 2.79% for the twelve months ended December 31, 2021, remained strong at 2.34% for the twelve months ended December 31, 2022.

Historically-low housing inventory, shortages in new home building materials, and fluctuating interest rates are likely to continue suppressing origination volumes into 2023.

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

The accounting and reporting policies of the Company are in accordance with U.S.

GAAP and conform to general practices within the banking industry.

The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and other items.

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

Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

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 Board of Directors of the Company.

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

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 allowance for loan losses.

The Company provides additional information on its allowance for loan losses 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 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.”

Recent Accounting Pronouncements

9 unchanged sentences

Net interest income 141,526 140,607 0.7 %

Provision for loan losses 6,631 3,359 97.4 %

Net interest income after provision

133,976 113,334 18.2 %

Provision for credit losses 9,610 6,631 44.9 %

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

Net interest income after provision for credit losses 132,017 133,976 -1.5 %

Noninterest income 24,975 29,372 -15.0 %

3 unchanged sentences

Net income $ 35,871 $ 41,804 -14.2 %

Net income for the year ended December 31, 2022 was $41.8 million, compared to net income for the year ended December 31, 2021 of $40.0 million.

The increase in net interest income was primarily due to the increase in average loans outstanding in the loan portfolio year over year, an increase in credit card interest income, and a reduction in data processing expenses.

Year over year growth in portfolio loan volumes contributed $24.4 million to the increase in net interest income, with $15.1 million attributable to the credit card portfolio, which benefited from increased interest rates and an increase in average credit card balances.

Data processing expenses decreased $9.8 million primarily due to contract renegotiations completed in the first quarter of 2022.

Offsetting factors included a decrease in mortgage banking revenue of $16.0 million and an increase in the cost of interest-bearing liabilities of $3.5 million when comparing 2022 to 2021.

The increased cost of interest-bearing liabilities was the result of the increase in market interest rates.

The provision for loan losses increased $3.3 million due to economic uncertainty, particularly in respect of the credit card portfolio.

A decrease in overall credit card accounts led to the reduction in credit card fees of $5.9 million for the year ended December 31, 2022 in comparison to 2021.

Advertising increased $1.4 million due primarily to increased competition for credit card customers.

Salaries and employee benefits increased $5.1 million for the year ended December 31, 2022 in comparison to 2021 as the Company increased its overall headcount by 60, hiring commercial lending teams as well as senior management officials and staff at the Bank.

Professional fees increased $4.0 million, primarily in consequence of efforts to enhance the Bank’s regulatory compliance function and its technology infrastructure.

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 Interest Income and Net Margin Analysis

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

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 FHLB, and subordinated notes.

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 of 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 annualized divided by average interest earning assets for the same period.

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.

6 unchanged sentences

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, 2023 and 2022.

Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown.

Weighted average yields are derived by dividing income by the average balance of the related assets, and weighted average rates are derived by dividing expense by the average balance of the related liabilities, for the periods shown.

Average outstanding balances are derived by utilizing average daily balances for the time periods shown.

15 unchanged sentences

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

Portfolio loans (1)(2)

Portfolio loans receivable (1)(2)

1,815,595 174,348 9.60 1,579,661 140,496 8.89

21 unchanged sentences

(1) Includes nonaccrual loans.

(2) Interest income includes amortization of deferred loan fees, net of deferred loan costs.

(3) For the twelve months ended December 31, 2022 and 2021, SBA-PPP loans and credit card loans accounted for 299 and 226 basis points of the reported net interest margin, respectively.

(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.

Rate/Volume Analysis of Net Interest Income

10 unchanged sentences

Federal funds sold (63) 93 30 2 42 44

Investment securities 1,542 360 1,902 1,239 (521) 718

Investment securities available for sale (67) 970 903 1,542 360 1,902

Restricted investments (32) 103 71 85 24 109

Loans held for sale (261) 208 (53) (1,500) 711 (789)

SBA-PPP loans (18,738) 14,602 (4,136) 1,316 1,818 3,134

Portfolio loans excluding credit card loans 10,326 3,127 13,453 4,752 (4,806) (54)

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

Portfolio loans receivable excluding credit card loans 16,514 19,590 36,104 10,326 3,127 13,453

Credit card loans (6,413) 4,161 (2,252) 7,093 8,003 15,096

8 unchanged sentences

Net interest income $ (5,930) $ 6,849 $ 919 $ (2,215) $ 26,129 $ 23,914

When comparing the years ended December 31, 2022 to 2021, the greatest positive impact to total interest income was the increased market interest rate affecting all interest earning assets.

On a stand-alone basis, the credit card portfolio contributed an increase of $15.1 million due to market interest rate increases and increased average credit card balances when comparing the year over year 2022 to 2021 figures.

While credit card balances declined as of December 31, 2022 compared to 2021, average credit card loan balances maintained a consistent balance until late 2022, when credit card balances declined, likely due to the lapse of certain government stimulus programs.

SBA-PPP loans continued to be forgiven in 2022 resulting in reduced interest income of $4.1 million when compared to 2021.

Volume increases in portfolio loans excluding credit cards accounted for an increase of $10.3 million in interest income for the year ended December 31, 2022, while interest rates accounted for an increase of $3.1 million for the same period.

The increase in rates paid on the deposit portfolio increased interest expense by $3.1 million due to the increase in market interest rates between the years ended December 31, 2022 and 2021.

Provision for Loan Losses

The provision for loan losses represents the amount of expense charged to current earnings to fund the allowance for loan losses.

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

Those factors include historical losses, 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 detailed description of the factors taken into account by our management in determining the allowance for loan losses see “Financial Condition— Allowance for Loan Losses.”

For the year ended December 31, 2022, the Company recorded a provision for loan losses of $6.6 million, compared to $3.4 million for the previous year.

The increase in the provision for 2022 compared to 2021 was primarily associated with the credit card portfolio.

See additional discussion regarding the Company’s allowance for loan losses and reserve for off-balance sheet credit exposures at December 31, 2022 in “Financial Condition— Allowance for Loan Losses.”

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

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.

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.

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 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.

See additional discussion regarding the Company’s ACL and reserve for unfunded commitments credit exposures at December 31, 2023 in “Financial Condition - Allowance for Credit Losses.”

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 and annual renewal fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method or (ii) late fees assessed on delinquent accounts.

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.

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

8 unchanged sentences

4,896 4,866 0.6

Gain on sale of investment securities available for sale, net — 153 (100.0)

Other income 1,842 1,767 4.2

1 unchanged sentence

$ 24,975 $ 29,372 (15.0) %

The Bank’s OpenSky ® Division active customer accounts decreased by 127 thousand when comparing the 2022 year end levels to 2021 year end levels.

The decrease in accounts was due to waning COVID-19 consumer patterns, a return to more normalized seasonal trends in 2022 and aggressive marketing by competitors.

These headwinds led to decreased fees of $5.9 million during 2022.

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

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, down slightly from 2.79% for the twelve months ended December 31, 2021, remained strong at 2.34% for the twelve months ended December 31, 2022.

Historically-low housing inventory, shortages in new home building materials, and fluctuating interest rates are likely to continue suppressing origination volumes into 2023.

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.

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 reserve was $1.2 million at December 31, 2022 and 2021.

The Bank repurchased one loan in December 2022 for $463 thousand and one loan for $205 thousand during 2021.

The reserve was $1.0 million at December 31, 2023 and $1.2 million at December 31, 2022.

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

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

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services.

The largest component of noninterest expense is salaries and employee benefits.

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.

7 unchanged sentences

5,673 4,865 16.6

Professional services 11,012 6,996 57.4

Professional fees 9,270 11,012 (15.8)

Data processing

3 unchanged sentences

1,633 1,702 (4.1)

Other real estate expense, net

(183) 368 (149.7)

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

Operational losses 4,613 4,469 3.2

Outside service providers 1,932 3,338 (42.1)

Other operating

2 unchanged sentences

$ 110,767 $ 109,114 1.5 %

During 2022, data processing expenses decreased $9.8 million primarily due to a contract renegotiation entered into in the first quarter of 2022.

When compared to the year ended December 31, 2021, salaries and employee benefits increased due to the addition of new employees 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.

An increase in advertising expense was attributable to enhanced marketing for the commercial bank segment as well as OpenSky ® during 2022 as the Company focused on retaining high-quality customers and faced increasing competition in the credit card market.

Professional fees associated with the commercial bank segment increased as the Company continued to build out its regulatory compliance function and its technology infrastructure.

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.

Other operating expenses increased $1.7 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.

Income Tax Expense

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

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

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.

A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

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Investment securities available for sale 208,329 252,481 (44,152) (17.5)

Mortgage loans held for sale 7,481 7,416 65 0.9

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 1,902,643 1,728,592 174,051 10.1

Total deposits 1,758,072 1,797,137 (39,065) (2.2)

Borrowings 119,062 34,062 85,000 249.5

Allowance for credit losses 28,610 26,385 2,225 8.4

Deposits 1,895,996 1,758,072 137,924 7.8

FHLB borrowings 22,000 107,000 (85,000) (79.4)

Other borrowed funds 27,062 12,062 15,000 124.4

Total stockholders’ equity 254,860 224,015 30,845 13.8

Tangible common equity (1)

254,860 224,015 30,845 13.8

Equity to total assets at end of period 11.45 % 10.55 % 8.5

Average number of basic shares outstanding 14,025 13,799 1.6

Average number of diluted shares outstanding 14,362 14,081 2.0

Total assets at December 31, 2022 reflected an increase from the December 31, 2021 balance due primarily to growth in the commercial real estate loan portfolio, which was accompanied by decreases in the credit card portfolio, increases in borrowings, and decreases in deposits during 2022 when compared to 2021, as well as a reduction in SBA-PPP loans as a result of payoffs during 2022.

Weighted average number of basic shares outstanding 14,003 14,025 (0.2)

Weighted average number of diluted shares outstanding 14,081 14,362 (2.0)

Common shares outstanding 13,923 14,139 (1.5)

Book value per share $ 18.31 $ 15.84 15.6

Tangible book value per share (1)

$ 18.31 $ 15.84 15.6

Dividends per share $ 0.28 $ 0.22 27.3

(1) see “Non-GAAP Financial Measures and Reconciliations” for a reconciliation of non-GAAP measures

Total assets at December 31, 2023 increased $102.5 million from the balance at December 31, 2022.

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.

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.

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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 high-quality mortgage-backed securities, government agency bonds, asset-backed securities and high-quality municipal and corporate bonds.

During early 2022, management invested a portion of its excess liquidity into U.S.

Treasuries as the spread between treasuries and other investment portfolios continued to contract.

To 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.

The asset-backed securities are comprised of student loan collateral issued by the Federal Family Education Loan Program, which includes a minimum of a 97% government repayment guarantee, as well as additional support in excess of the government guaranteed portion.

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, 2023 and the amortized cost and carrying value of those securities as of the indicated dates.

The weighted average yields were calculated by multiplying the book value 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.

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.

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

One Year or Less More Than One Year Through Five Years More Than Five Years Through Ten Years More Than Ten Years Total

At December 31, 2022 Book Value Weighted Average Yield Book Value Weighted Average Yield Book Value Weighted Average Yield Book Value Weighted Average Yield Book Value Fair Value Weighted Average Yield

At December 31, 2023 Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Fair Value Weighted Average Yield

(in thousands)

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Municipal — — 895 4.91 506 2.54 10,298 1.91 11,699 9,372 2.17

Corporate bonds — — — — 5,000 4.31 — — 5,000 4,600 4.31

Corporate — — — — 5,000 4.31 — — 5,000 4,413 4.31

Asset-backed securities — — — — — — 7,069 3.38 7,069 7,045 3.38

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Total $ 39,918 1.44 % $ 115,629 1.64 % $ 39,994 2.34 % $ 30,138 3.17 % $ 225,679 $ 208,329 1.94 %

Portfolio Loans

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.

Further, management reviewed the Company’s holdings as of December 31, 2023 and concluded there were no credit-related declines in fair value.

Additional information related to the types of securities held at December 31, 2023, other than securities issued or guaranteed by U.S.

Government entities or agencies, is as follows:

Corporate Securities – There have been no payment defaults on any of the Company’s holdings of corporate debt securities.

There are 5 securities all of which are subordinated debt of other financial institutions with face amounts ranging from $0.5 million to $2 million.

Municipal Securities – All of the Company’s holdings of municipal bonds were investment grade and there have been no payment defaults.

Summary ratings information at December 31, 2023, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows:

AAA – 82% of the portfolio;

Asset-backed Securities – There were 3 investment grade asset-backed securities, and there have been no payment defaults on these securities.

As such, it is deemed the above listed securities are not in an unrealized loss position due to credit-related issues and no further analysis is warranted as of December 31, 2023.

Portfolio Loans Receivable

Our primary source of income is derived from interest earned on loans.

Our portfolio loans consist of loans secured by real estate as well as commercial business loans, credit card loans, substantially all of which are secured by corresponding deposits at the Bank and, to a limited extent, other consumer loans.

Our portfolio loans consist of loans secured by real estate as well as commercial business loans, credit card loans secured by corresponding deposits at the Bank and, to a limited extent, other consumer loans.

Our loan customers primarily consist of small- to medium-sized businesses, professionals, real estate investors, small residential builders and individuals.

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Residential Real Estate Loans .

We offer one-to-four family mortgage loans primarily on owner-occupied primary residences and, to a lesser extent, investor-owned residences.

Residential loans are originated through our commercial sales teams and our Capital Bank Home Loan division.

Our residential loans also include home equity lines of credit.

Our owner-occupied residential real estate loans usually have fixed rates for five to seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years.

Our investor residential real estate loans are generally based on 25-year terms with a balloon payment due after five years.

In general, the required minimum debt service coverage ratio is 1.15.

Residential real estate loans have represented a growing portion of our loan portfolio.

One-to-four family mortgage loans are primarily secured by owner-occupied primary and secondary residences and, to a lesser extent, investor-owned residences.

Residential loans are originated through the commercial sales teams and Capital Bank Home Loans division.

Residential loans also include home equity lines of credit.

Owner-occupied residential real estate loans usually have fixed rates for five or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years.

Investor residential real estate loans are generally based on 25-year terms with a balloon payment due after five years.

Generally, the required minimum debt service coverage ratio is 115%.

Commercial Real Estate Loans .

The Company originates both owner-occupied and non-owner-occupied commercial real estate loans.

Commercial real estate loans are originated on owner-occupied and non-owner-occupied properties.

These loans may be adversely affected by conditions in the real estate markets or in the general economy.

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

Business equity lines of credit totaling $14.1 million as of December 31, 2023 and $12.3 million as of December 31, 2022, are included in the commercial real estate loan category.

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 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.

The primary sources of repayment are the operating incomes of the borrowers and the collection of the finance receivables securing the loans.

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.

The interest rates on our commercial real estate loans generally have an initial fixed rate terms that adjust typically at 5 years.

Origination fees are routinely charged for our services.

The Company generally requires personal guarantees from the principal owners of the business, supported by a review of the principal owners’ personal financial statements and global debt service obligations.

The interest rates on commercial real estate loans generally have initial fixed rate terms that adjust typically at five years.

Origination fees are routinely charged for services.

Personal guarantees from the principal owners of the business are generally required, supported by a review of the principal owners’ personal financial statements and global debt service obligations.

The properties securing the portfolio are diverse in type.

This diversity helps reduce the exposure to adverse economic events that affect any single industry.

This diversity may help reduce the exposure to adverse economic events that affect any single industry.

Construction Loans .

Our construction loans are offered within our Washington, D.C.

and Baltimore, Maryland metropolitan operating areas to builders primarily for the construction of single-family homes, condominium and townhouse conversions or renovations and, to a lesser extent, to individuals.

construction loans typically have terms of 12 to 18 months with the goal of transitioning the borrowers to permanent financing or re-underwriting and selling into the secondary market through Capital Bank Home Loan.

According to our underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, should not exceed 75% for investor-owned and 80% for owner-occupied properties.

Exceptions are sometimes made.

We conduct semi-annual stress testing of our construction loan portfolio and closely monitor underlying real estate conditions as well as our borrower’s trends of sales valuations as compared to underwriting valuations as part of our ongoing risk management efforts.

Borrowers’ progress is monitored during the course of construction buildout, including for adherence to construction milestones and completion timelines.

Commercial Business Loans .

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

Construction loans are offered within the Company’s Washington, D.C.

and Baltimore, Maryland metropolitan operating areas to builders, primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals.

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.

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.

The Company performs a stress test of the construction loan portfolio at least once a year, and underlying real estate conditions are monitored as well as trends in sales outcomes versus underwriting valuations as part of ongoing risk management efforts.

The borrowers’ progress in construction buildout is monitored against the original underwriting guidelines for construction milestones and completion timelines.

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.

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

Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment, and we generally obtain a personal guaranty from the borrower or other principal.

Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment.

Personal guaranties from the borrower or other principal are generally obtained.

Credit Cards .

Through our OpenSky ® credit card division, the Company provides 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 majority of the 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.

In addition, using our proprietary scoring model, which considers credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis), the Bank offers certain customers an unsecured increase to their existing line or an unsecured card.

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.

For the partially secured lines of credit, the Bank offers certain customers an unsecured line in excess of their secured line of credit by using a proprietary scoring model, which considers credit score and repayment history (typically a minimum of six months of on-time payments, but ultimately determined on a case-by-case basis).

Partially secured and unsecured credit cards are only extended to existing secured card customers who have demonstrated sound credit behaviors.

Approximately $95.3 million and $109.4 million in secured and partially secured credit card balances were protected by savings deposits held by the Company as of December 31, 2023 and December 31, 2022, respectively.

Unsecured balances were $30.8 million and $26.8 million, respectively, at the same dates.

Other Consumer Loans .

To a very limited extent and typically as an accommodation to existing customers, we offer personal consumer loans such as term loans, car loans or boat loans.

The repayment of loans is a source of additional liquidity for us.

To a limited extent and typically as an accommodation to existing customers, personal consumer loans, such as term loans, car loans and boat loans are offered.

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.

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

Commercial 76,670 73,610 62,324 7,617 220,221

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

Credit card 123,331 — — — 123,331

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Construction 11,453 50,367 61,820

Commercial 99,332 44,220 143,552

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.

Nonperforming Assets

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.

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We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt.

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

Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.

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.

Any loan which the Bank deems to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss.

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

Factors for charge-off that may be considered include:

repayments deemed to be extended out beyond reasonable time frames, customer bankruptcy and lack of assets, and/or collateral deficiencies.

Consumer credit card balances are moved into the charge off queue after they become more than 90 days past due and are charged off not later than 120 days after they become past due.

Loans that are past due for 180 days or more are charged off unless the loan is well secured and in the process of collection.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 introduces guidance to change the accounting for loan losses and modifies the impairment model for certain debt securities.

This ASU introduced a new model known as CECL.

CECL changes the impairment model for most financial assets, and requires the use of an “expected credit loss” model for financial instruments measured at amortized

cost and certain other instruments, such as off-balance sheet credit exposures, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities.

The Company adopted this guidance on January 1, 2023 using the modified retrospective approach, which has impacted our loan loss policies and will have an impact on the Company’s provision for credit losses in the periods after adoption, which could differ materially from historical trends.

For additional information on ASU 2016-13, refer to “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 Company believes its disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets.

There are several procedures in place to assist the Company in maintaining the overall quality of our loan portfolio.

The Company has established underwriting guidelines to be followed by our bankers, and monitor our delinquency levels for any negative or adverse trends.

Otherwise, loans that are past due for 180 days or more are charged off unless the loan is well secured and in the process of collection.

The Company believes its approach to lending and the management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets.

The Company has established underwriting guidelines to be followed by our bankers, and routinely monitors our delinquency levels for any negative or adverse trends.

There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit.

From a credit risk standpoint, we grade watchlist and problem loans into one of five categories:

From a credit risk standpoint, we grade watchlist and problem loans into one of five credit quality indicators:

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.

Credits ratings are reviewed regularly.

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

Our methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

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.

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.

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

A special mention loan has potential weaknesses deserving of management’s attention.

If uncorrected, such weaknesses may, at a future date, impair the repayment prospects for the asset or our credit position.

Loans that are deemed special mention, substandard, doubtful or loss are listed in the Bank’s Problem Loan Status Report.

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The Special Asset Committee reviews the Problem Loan Status Report on a quarterly basis for borrowers with an overall loan exposure in excess of $250,000.

A special mention loan has potential weaknesses deserving of management’s attention.

If uncorrected, such weaknesses may result in deterioration of the repayment prospects for the asset or in our credit position at some future date.

Special mention loans at December 31, 2022 increased by $13.5 million compared to December 31, 2021.

The increase is attributable, in part, to the reclassification of the Bank’s $18.4 million participation interest in two commercial loans that are secured by the same collateral.

The borrowers, an individual and a related entity, breached a negative covenant and thereafter agreed, in consideration of a forbearance agreement and an extension of the maturity date of each loan, to increase the applicable interest rate and to provide enhanced reporting to the lead bank.

Interest payments are current on both loans.

The lead bank is in discussions with the borrowers regarding a plan for full repayment of the loans.

At December 31, 2022, the recorded investment in impaired loans was $9.4 million, $458 thousand of which required a specific reserve of $372 thousand compared to a recorded investment in impaired loans of $11.3 million including $336 thousand requiring a specific reserve of $218 thousand at December 31, 2021.

Impaired loans also include certain loans that have been modified as troubled debt restructurings (“TDRs”).

At December 31, 2022, the Company had one loan amounting to $288 thousand that was considered to be a TDR, compared to five loans amounting to $534 thousand at December 31, 2021.

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s estimate of the loan losses and risks inherent in our loan portfolio.

The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all.

In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined.

The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

The following table presents key ratios for the allowance for loan losses and nonaccrual loans for the periods indicated:

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

The $16.0 million of individually assessed loans at December 31, 2023 included a single multi-unit residential real estate loan secured by four properties with a balance of $7.6 million at December 31, 2023.

Allowance for Credit Losses

We maintain an ACL that represents management’s estimate of expected credit losses and risks inherent in our loan portfolio.

The balance of the ACL is based on internally assigned risk classifications of loans, historical loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loss rates.

A major consideration in the determination of the allowance for credit loss on the credit card portfolio is based on historical loss experience in that portfolio.

The Company calculates the credit card ACL collectively, applying segmentation based on collateral positions:

secured, partially secured, and unsecured.

The following table presents key ratios for the ACL and nonaccrual loans for the periods indicated:

For the Years Ended December 31,

Allowance for loan losses to period end portfolio loans (1)

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

(in thousands) 2022 2021 2022 2021 2022 2021

2023 2022 2023 2022 2023 2022

(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)

Residential 0.96 % 1.13 % 1.99 % 0.88 % 48 % 128 %

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(1) Allowance calculation excludes SBA-PPP loans.

Total charge-offs for the year ended December 31, 2023 and December 31, 2022 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:

For the Years Ended December 31,

Net Charge-offs Average Loans Percent of average portfolio loans Net Charge-offs Average Loans Percent of average portfolio loans

(in thousands) 2022 2021

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

Residential $ 670 $ 544,552 0.12 % $ — $ 434,714 — %

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Total $ 8,473 $ 1,815,595 0.47 % $ 5,427 $ 1,579,661 0.34 %

The allowance for loan losses at December 31, 2022 included specific reserves of $372 thousand set aside for impaired loans.

The allowance for loan losses at December 31, 2021 included specific reserves of $218 thousand set aside for impaired loans.

Total charge-offs for the years ended December 31, 2022 and 2021 were primarily due to credit card charge-offs resulting primarily from the aging of the portfolio

and partially from the shift from an almost exclusively secured card portfolio to a partially secured card portfolio as we launched an unsecured card available only to existing qualifying customers.

Additionally, there are economic challenges facing the overall industry that have also impacted the provisioning for our credit card portfolio.

As the loan portfolio and allowance for loan losses review processes continue to evolve, there may be changes to elements of the allowance and this may have an effect on the overall level of the allowance.

As the loan portfolio and ACL review processes continue to evolve, there may be changes to elements of the allowance and this may influence the overall level of the allowance maintained.

Historically, the Bank has enjoyed a high-quality loan portfolio with relatively low levels of net charge-offs and low delinquency rates.

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

Although we believe we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.

The following table shows the allocation of the allowance for loan losses among loan categories as of the dates indicated.

The maintenance of a high-quality portfolio will continue to be a priority.

Although we believe we have established our ACL in accordance with GAAP and that the ACL is currently adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for credit losses will be subject to ongoing evaluations of the risks in our loan portfolio.

The following table shows the allocation of the ACL among loan categories as of the dates indicated.

The total allowance is available to absorb losses from any loan category.

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Other consumer 12 — 11 —

Total allowance for loan losses $ 26,385 100 % $ 25,181 100 %

Total allowance for credit losses $ 28,610 100 % $ 26,385 100 %

_______________

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Total Liabilities

Total liabilities at December 31, 2022 saw an increase from its December 31, 2021 balance due to growth in borrowed funds.

Offsetting this increase were decreases in the deposits portfolio as well as other liabilities.

Deposits are the major source of funding for the Company.

We offer a variety of deposit products including interest-bearing and noninterest-bearing demand, savings, money market and time accounts, all of which we actively market at competitive pricing.

We generate deposits from our customers on a relationship basis and through the efforts of our commercial lending officers and our business banking officers.

During the year ended December 31, 2022, competition and a challenging deposit environment

have driven a reduction in low cost interest-bearing deposits and an increase in money market accounts as customers reallocate balances to take advantage of higher rates on those accounts.

Our credit card customers are a significant source of noninterest-bearing deposits.

As of December 31, 2022 and 2021, our credit card customers accounted for $187.4 million and $229.5 million, or 27.8% and 29.1%, respectively, of our total noninterest-bearing deposit balances.

In addition to retail deposits, the Company had $131.8 million of wholesale time deposits at December 31, 2022 compared to no balance at December 31, 2021.

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.

Deposits are a major source of funding for the Company.

We offer a variety of deposit products including interest-bearing demand, savings, money market and time accounts, all of which we actively market at competitive pricing.

We generate deposits from our customers on a relationship basis and through the efforts of our commercial and business banking officers.

Our credit card customers are a significant source of low cost deposits.

As of December 31, 2023 and December 31, 2022, our credit card customers accounted for $173.9 million and $187.4 million, or 28.2% and 27.8%, respectively, of our total noninterest-bearing deposit balances.

Major categories of interest-bearing deposits are as follows:

Interest-Bearing Deposits

At December 31, 2023

(in thousands) 2023 2022

Interest-bearing demand accounts $ 199,308 $ 207,836

Money market accounts 663,129 574,978

Savings 5,211 7,530

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

Other time deposits 286,228 197,124

Total Interest-bearing deposits $ 1,278,623 $ 1,083,759

The Company had $142.4 million in brokered deposits at December 31, 2023 compared to $131.1 million at December 31, 2022.

Deposits securing our OpenSky ™ card lines of credit and deposits from title companies represent the largest concentrations in the deposit portfolio.

As of December 31, 2023, these concentrations represented 9% and 12% of deposits, respectively.

As of December 31, 2022, these deposits represented 11% and 13% of deposits, respectively.

The following table presents the average balances and average rates paid on deposits for the periods indicated:

For the years Ended December 31,

(in thousands)

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Interest-bearing demand accounts $ 201,194 0.15 % $ 253,923 0.07 %

Savings 5,768 0.14 8,917 0.06

Money market accounts

642,013 3.66 553,388 0.82

Savings accounts

8,917 0.06 6,470 0.05

Certificates of deposit

165,854 1.75 269,262 1.53

Time deposits 360,464 4.39 165,854 1.75

Total Interest-bearing deposits 1,209,439 3.28 % 982,082 0.77 %

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$ 1,864,452 2.13 % $ 1,764,053 0.43 %

Deposit costs increased materially during 2022.

Average rates were 0.32% during 2021 and 0.43% in 2022.

The increase in noninterest-bearing deposits partially offset the increase in rates.

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.

Noninterest-bearing deposits represented 32.6% of total deposits at December 31, 2023 compared to 38.4% at December 31, 2022.

Uninsured deposits were approximately $789.4 million as of December 31, 2023, representing 41.6% of the Company's deposit portfolio, compared to $784.6 million, or 44.6%, at December 31, 2022.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

The following table presents the maturities of our certificates of deposit as of December 31, 2023.

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Total $ 120,765 $ 126,962 $ 102,932 $ 60,316 $ 410,975

As of December 31, 2022 and 2021, approximately $834.5 million and $972.4 million, respectively, of our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements.

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.

FHLB Advances .

The FHLB allows us to borrow up to 25% of our assets on a blanket floating lien status collateralized by certain securities and loans.

As of December 31, 2022, approximately $522.0 million in real estate loans were pledged as collateral for our FHLB borrowings.

Of the $522.0 million in loans pledged to the FHLB, our total borrowing capacity at December 31, 2022 was $330.8 million.

None of our investment securities were pledged with the FHLB as of December 31, 2022.

As of December 31, 2023, approximately $556.1 million in real estate loans were pledged as collateral to the FHLB and our total borrowing capacity from the FHLB was $313.5 million.

As of December 31, 2023, no investment securities were pledged with the FHLB.

We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.

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The Company has also issued junior subordinated debentures and other subordinated notes.

At December 31, 2022, these other borrowings amounted to $12.1 million.

At December 31, 2022, our junior subordinated debentures amounted to $2.1 million.

The junior subordinated debentures were issued in June of 2006, mature on June 15, 2036, and may be redeemed prior to that date under certain circumstances.

The principal amount of the debentures has not changed since issuance, and they accrue interest at a floating rate equal to the three-month LIBOR plus 1.87%.

On November 30, 2020, the Company issued $10.0 million in subordinated notes due in 2030 to replace the outstanding higher yielding $13.5 million issuance.

At December 31, 2023, these other borrowings amounted to $12.1 million, consisting of Floating Rate Junior Subordinated Deferrable Interest Debentures and subordinated notes.

At December 31, 2023, our Floating Rate Junior Subordinated Deferrable Interest Debentures amounted to $2.1 million.

The Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Floating Rate Debentures”) were issued in June of 2006, mature on June 15, 2036, and may be redeemed prior to that date under certain circumstances.

The principal amount of the Floating Rate Debentures has not changed since issuance, and they accrue interest at a floating rate equal to the three-month CME Term SOFR plus a spread adjustment of 0.26161% (or 26.161 basis points) plus 187 basis points, payable quarterly.

As of December 31, 2023, the rate for the Floating Rate Debentures was 7.52%.

On November 30, 2020, the Company issued $10.0 million in subordinated notes due in 2030 (the “Notes”).

The Notes have a ten year term and have a fixed rate of 5.00% for the first five years;

thereafter, the rate resets quarterly to a benchmark rate, being the three-month term SOFR, plus 490 basis points.

The notes may be redeemed, in part or whole, upon the occurrence of certain events.

thereafter, the rate resets quarterly to a benchmark rate, which is expected to be the three-month SOFR, plus 490 basis points.

The Notes may be redeemed in part or in whole, upon the occurrence of certain events.

Federal Reserve Bank of Richmond .

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Certain commercial loans are pledged under this arrangement.

We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan.

No advances were outstanding under this facility as of December 31, 2022.

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.

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.

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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 and 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 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.

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a diverse mix of existing and potential future funding sources;

holding liquid marketable securities, free of legal, regulatory or operational impediments, that can be used to meet liquidity needs in situations of stress;

contingency funding plans that address potential adverse liquidity events and emergency cash

flow requirements;

and internal controls and internal audit processes believed to be sufficient to determine the adequacy of the institution’s liquidity risk management process.

holding liquid marketable securities that can be used to meet liquidity needs in situations of stress;

contingency funding plans that address potential adverse liquidity events and emergency cash flow requirements;

and internal controls and internal audit processes believed to be sufficient to assure the adequacy of the institution’s liquidity risk management process.

We expect funds to be available from a number of basic banking activity sources, including the core deposit base, the repayment and maturity of loans and investment security cash flows.

Other potential funding sources include brokered certificates of deposit, deposit listing services, CDARS, borrowings from the FHLB and other lines of credit.

Deposits securing our OpenSky ® card lines of credit and deposits from title companies represent the largest concentrations in the deposit portfolio.

As of December 31, 2022, these concentrations represent 11% and 13% of deposits, respectively.

As of December 31, 2021, these deposits represented 13% and 18% of deposits, respectively.

We have an available borrower custody arrangement with the Federal Reserve Bank of Richmond which allows us to borrow on an eligible collateralized basis.

As of December 31, 2022, we had $223.8 million of available borrowing capacity from the FHLB, $21.4 million of available borrowing capacity from the Federal Reserve Bank of Richmond and available lines of credit of $76.0 million with other correspondent banks.

Cash and cash equivalents were $80.4 million at December 31, 2022 and $183.4 million at December 31, 2021.

Accordingly, at December 31, 2022, our liquidity resources were at sufficient levels to fund loans and meet other cash needs as necessary.

As of December 31, 2023, we had $291.5 million of available borrowing capacity from the FHLB, $16.6 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 $48.7 million at December 31, 2023.

Cash and cash equivalents were $54.0 million at December 31, 2023.

Capital Resources

Stockholders’ equity increased $26.1 million for the year ended December 31, 2022 largely due to net income of $41.8 million for the year.

Stock options exercised, shares issued as compensation, shares sold and stock-based compensation increased common stock and additional paid-in capital by $3.1 million.

These increases were more than offset by net unrealized losses on available for sale securities of $15.7 million.

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.

Shares repurchased and retired for the year ended December 31, 2023 as part of the Company's stock repurchase program totaled 475,346 shares at an average price of $18.57, for a total cost of $8.8 million including commissions.

The Company’s total stockholders’ equity is affected by fluctuations in the fair values of investment securities available for sale.

The difference between amortized cost and fair value of investment securities, net of deferred income tax, is included in accumulated other comprehensive loss within stockholders’ equity.

Accumulated other comprehensive loss is excluded from the Bank’s and Company’s regulatory capital ratios.

The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $13.1 million at December 31, 2023 and $16.8 million at December 31, 2022.

Changes in accumulated other comprehensive loss are excluded from earnings and directly increase or decrease stockholders’ equity.

To the extent unrealized losses on investment securities available for sale result from credit losses, unrealized losses are recorded as a charge against earnings.

The investment securities section of the MD&A and Notes 1 and 3 to the consolidated financial statements provide additional information concerning management’s evaluation of investment securities available for sale for credit losses at December 31, 2023.

The Company uses several indicators of capital strength.

The most commonly used measure is average common equity to average assets (computed as average equity divided by average total assets), which was 10.22% at December 31, 2022 and 8.82% at December 31, 2021.

The most commonly used measure is common equity to total assets (computed as equity divided by total assets), which was 11.45% at December 31, 2023 and 10.55% at December 31, 2022.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

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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.

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, 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 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.

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However, we intend to monitor and control our growth relative to our earnings in order to remain in compliance with all regulatory capital standards applicable to us.

The following table presents the regulatory capital ratios for the Company (as if such requirements applied to the Company) and the Bank as of the dates indicated.

The following table presents the regulatory capital ratios for the Company and the Bank as of the dates indicated.

(in thousands) Actual Minimum Capital

Adequacy To Be Well

Capitalized Full Phase In

December 31, 2022 Amount Ratio Amount Ratio Amount Ratio Amount Ratio

Tier 1 leverage ratio (to average assets) $ 242,829 11.24 % $ 86,442 4.00 % N/A N/A N/A N/A

December 31, 2023 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

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

Tier 1 leverage ratio (to average assets) $ 199,846 9.47 % $ 84,416 4.00 % $ 105,521 5.00 % N/A N/A

Tier 1 leverage ratio (to average assets) $ 228,794 10.51 % $ 87,068 4.00 % $ 108,835 5.00 %

Tier 1 capital (to risk-weighted assets) 228,794 13.56 101,251 6.00 135,001 8.00

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December 31, 2022

Tier 1 leverage ratio (to average assets) $ 201,040 9.73 % $ 82,683 4.00 % N/A N/A N/A N/A

Tier 1 leverage ratio (to average assets) $ 242,829 11.24 % $ 86,442 4.00 % N/A N/A

Tier 1 capital (to risk-weighted assets) 242,829 15.13 96,315 6.00 N/A N/A

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Total capital ratio (to risk-weighted assets) 262,217 16.33 128,421 8.00 N/A N/A

Tier 1 leverage ratio (to average assets) $ 169,384 8.36 % $ 81,070 4.00 % $ 101,338 5.00 % N/A N/A

Tier 1 leverage ratio (to average assets) $ 199,846 9.47 % $ 84,416 4.00 % $ 105,521 5.00 %

Tier 1 capital (to risk-weighted assets) 199,846 12.95 92,574 6.00 123,432 8.00

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Subordinated debt — — — 12,062 12,062

BTFP borrowings 15,000 — — — 15,000

Total $ 366,822 $ 83,199 $ 1,136 $ 13,265 $ 464,422

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We are not aware of any accounting loss to be incurred by funding these commitments;

however, we maintain an allowance for off-balance sheet credit risk which is recorded in other liabilities on the consolidated balance sheet.

however, we maintain a reserve for unfunded commitments and certain off-balance sheet credit risks which is recorded in other liabilities on the consolidated balance sheet.

Our commitments associated with outstanding letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized below.

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Unfunded lines of credit $ 336,472 $ 345,063

Commitments to originate residential loans held for sale

Letters of credit 4,641 5,105

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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.

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Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this report have been prepared in accordance with GAAP.

The consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K have been prepared in accordance with GAAP.

GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature.

Unlike many industrial companies, substantially all of the Company’s assets and liabilities are monetary in nature.

As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation.

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However, most other operating expenses are sensitive to changes in levels of inflation.

Non-GAAP Financial Measures and Reconciliations

The Company has presented the following non-GAAP financial measures because it believes that 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.

We further believe the presentation of non-GAAP results increases comparability of period-to-period results.

Other companies may use similarly titled non-GAAP financial measures that may be calculated differently from the way we calculate such measures.

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.

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

Net Income $ 35,871 $ 41,804

SBA-PPP Loan Income

Net Income, as Adjusted $ 35,841 $ 38,327

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

Return on Average Assets, as Adjusted 1.64% 1.87%

Net Interest Margin, as Adjusted Year Ended

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

Net Interest Income $ 141,526 $ 140,607

Credit Card Loan Income

61,096 63,348

SBA-PPP Loan Income

Net Interest Income, as Adjusted $ 80,400 $ 73,782

Average Interest Earning Assets 2,145,209 2,033,242

Average Credit Card Loans

114,450 126,473

Average SBA-PPP Loans

Total Average Interest Earning Assets, as Adjusted $ 2,029,386 $ 1,876,938

Net Interest Margin, as Adjusted 3.96% 3.93%

Portfolio Loans Receivable Yield, as Adjusted Year Ended

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

Portfolio Loans Receivable Interest Income $ 174,348 $ 140,496

Credit Card Loan Income 61,096 63,348

Portfolio Loans Receivable Interest Income, as Adjusted $ 113,252 $ 77,148

Average Portfolio Loans Receivable 1,815,595 1,579,661

Average Credit Card Loans 114,450 126,473

Total Average Portfolio Loans Receivable, as Adjusted $ 1,701,145 $ 1,453,188

Portfolio Loans Receivable Yield, as Adjusted 6.66% 5.31%

Pre-tax, Pre-Provision Net Revenue ("PPNR") Year Ended

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

$ 35,871 $ 41,804

Income Tax Expense 10,354 12,430

Provision for Credit Losses 9,610 6,631

Release of Credit Losses on Unfunded Commitments (101) —

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

Allowance for Credit Losses to Total Portfolio Loans Year Ended

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

Allowance for Credit Losses $ 28,610 $ 26,385

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

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

Total Portfolio Loans $ 1,902,643 $ 1,728,592

Allowance for Credit Losses to Total Portfolio Loans 1.50% 1.53%

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

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

Total Nonperforming Assets $ 16,042 $ 9,756

Total Assets 2,226,176 2,123,655

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 Loans to Total Portfolio Loans Year Ended

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

Total Nonperforming Loans $ 16,042 $ 9,756

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

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

Total Portfolio Loans $ 1,902,643 $ 1,728,592

Nonperforming Loans to Total Portfolio Loans 0.84% 0.56%

Net Charge-offs to Average Portfolio Loans Year Ended

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

Total Net Charge-offs $ 8,473 $ 5,427

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 $ 1,815,595 $ 1,579,661

Net Charge-offs to Average Portfolio Loans 0.47% 0.34%

Tangible Book Value per Share Year Ended

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

Total Stockholders' Equity $ 254,860 $ 224,015

Preferred Equity

Intangible Assets

Tangible Common Equity $ 254,860 $ 224,015

Period End Shares Outstanding 13,922,532 14,138,829

Tangible Book Value per Share $ 18.31 $ 15.84

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