Capital Bancorp Inc

Previous wording

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 unaudited consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The results for the three months ended March 31, 2024 are not necessarily indicative of the results expected for the year ending December 31, 2024.

Current wording

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 unaudited consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The results for the three and six months ended June 30, 2024 are not necessarily indicative of the results expected for the year ending December 31, 2024.

Previous wording

We are Capital Bancorp, Inc., a bank holding company and a Maryland corporation incorporated in 1998, operating primarily through our wholly-owned subsidiary, Capital Bank, N.A., a commercial-focused community bank based in the Washington D.C. and Baltimore metropolitan areas. The Bank is headquartered in Rockville, Maryland and received its charter in 1999 and began operations in 1999. We serve businesses, not-for-profit associations, entrepreneurs and others throughout the Washington, D.C. and Baltimore, Maryland metropolitan areas through four commercial bank branches, one mortgage office, and two loan production offices.

Current wording

We are Capital Bancorp, Inc., a bank holding company and a Maryland corporation incorporated in 1998, operating primarily through our wholly-owned subsidiary, Capital Bank, N.A., a commercial-focused community bank based in the Washington D.C. and Baltimore metropolitan areas. The Bank is headquartered in Rockville, Maryland, received its charter in 1999 and began operations the same year. We serve businesses, not-for-profit associations, entrepreneurs and others throughout the Washington, D.C. and Baltimore, Maryland metropolitan areas through four commercial bank branches, one mortgage office, and two loan production offices.

Previous wording

In accordance with the terms of the Merger Agreement, IFHI’s shareholders will have the right to receive (i) 1.115 shares of the Company’s common stock, and (II) subject to certain adjustments, $5.36 in cash, as well as cash in lieu of fractional shares of the Company’s common stock. Closing of the transaction, which is expected to occur in the fourth quarter of 2024, is contingent upon shareholder approval and receipt of all necessary regulatory approvals, along with the satisfaction of other customary closing conditions. IFHI is headquartered in Raleigh, North Carolina with $548 million in total assets, $400 million in gross loans and $436 million in total deposits as of December 31, 2023. IFHI operates one banking office located in North Riverside, Illinois.

Current wording

On July 9, 2024, the Company received regulatory approval from the Federal Reserve Bank of Richmond, acting on delegated authority from the Board of Governors of the Federal Reserve System for the Merger. Closing of the transaction, which is expected to occur in the fourth quarter of 2024, is contingent upon shareholder approval and approval of the Office of the Comptroller of the Currency, along with the satisfaction of other customary closing conditions. IFHI is headquartered in Raleigh, North Carolina with $548 million in total assets, $400 million in gross loans and $436 million in total deposits as of December 31, 2023. IFHI operates one banking office located in North Riverside, Illinois.

Previous wording

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

Current wording

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.

Previous wording

Net income for the three months ended March 31, 2024 was $6.6 million, compared to net income of $9.7 million for the same period in 2023, a 32.6% decrease. Net income, as adjusted (non-GAAP, excluding merger-related expenses), was $7.1 million for the three months ended March 31, 2024. Net interest income increased by $0.5 million, or 1.5%, to $35.0 million when comparing the three months ended March 31, 2024 to the three months ended March 31, 2023, primarily due to increased average balances of $174.7 million in portfolio loans partially offset by significant increases in the cost of funding. For more information on the computation of non-GAAP financial measures, see “Non-GAAP Financial Measures and Reconciliations.”

Current wording

Net income for the three months ended June 30, 2024 was $8.2 million, compared to net income of $7.3 million for the same period in 2023, a 12.1% increase. Net income, as adjusted to exclude the impact of merger-related expenses (non-GAAP, excluding merger-related expenses), was $8.3 million for the three months ended June 30, 2024. Net interest income increased by $1.7 million, or 4.9%, to $37.1 million when comparing the three months ended June 30, 2024 to the three months ended June 30, 2023, primarily due to increased average balances of $190.0 million in portfolio loans partially offset by significant increases in the cost of funding. For more information on the computation of non-GAAP financial measures, see “Non-GAAP Financial Measures and Reconciliations.”

Previous wording

The provision for credit losses for the three months ended March 31, 2024 was $2.7 million, an increase of $1.1 million from the same period in 2023. Net charge-offs for the three months ended March 31, 2024 were $2.0 million, or 0.41% on an annualized basis of average portfolio loans, compared to $2.6 million, or 0.61% on an annualized basis of average loans for the same period in 2023. Of the $2.0 million in net charge-offs during the quarter, $1.2 million related to secured and partially secured cards in the credit card portfolio and $0.5 million related to unsecured cards.

Current wording

The provision for credit losses for the three months ended June 30, 2024 was $3.4 million, an increase of $0.6 million from the same period in 2023. Net charge-offs for the three months ended June 30, 2024 were $1.9 million, or 0.39% on an annualized basis of average portfolio loans, compared to $1.6 million, or 0.35% on an annualized basis of average loans for the same period in 2023. Of the $1.9 million in net charge-offs during the quarter, $0.9 million related to secured and partially secured cards in the credit card portfolio and $0.6 million related to unsecured cards.

Previous wording

For the three months ended March 31, 2024, noninterest income of $6.0 million decreased $0.1 million, or 0.9%, from the same period in 2023. Credit card fees of $3.9 million decreased $0.3 million primarily related to lower interchange and other fee income.

Current wording

For the three months ended June 30, 2024, noninterest income of $6.9 million increased $0.2 million, or 3.0%, from the same period in 2023. Credit card fees of $4.3 million decreased $0.4 million primarily related to lower interchange and other fee income.

Previous wording

Noninterest expense was $29.5 million for the three months ended March 31, 2024, as compared to $26.2 million for the three months ended March 31, 2023, an increase of $3.3 million. The change includes increases in advertising expense of $1.5 million, merger-related expenses of $0.7 million, other operating expense of $0.5 million, occupancy and equipment expenses of $0.4 million, salaries and employee benefits expenses of $0.4 million and data processing expense of $0.2 million, partially offset by a decrease professional fees of $0.4 million.

Current wording

Noninterest expense was $29.5 million for the three months ended June 30, 2024, as compared to $29.6 million for the three months ended June 30, 2023. The change includes decreases in professional fees of $0.8 million, advertising expenses of $0.6 million, operational losses of $0.4 million and loan processing expenses of $0.2 million. Offsetting increases include salaries and employee benefits expenses of $1.1 million, occupancy and equipment expenses of $0.3 million, data processing expense of $0.2 million, other operating expense of $0.2 million and merger-related expenses of $0.1 million.

Previous wording

Noninterest expense was $29.5 million for the three months ended March 31, 2024, as compared to $26.2 million for the three months ended March 31, 2023. The change includes increases in advertising expense of $1.5 million, merger-related expenses of $0.7 million, other operating expense of $0.5 million, occupancy and equipment expenses of $0.4 million, salaries and employee benefits expenses of $0.4 million and data processing expense of $0.2 million, partially offset by a decrease in professional fees of $0.4 million.

Current wording

Noninterest expense was $59.0 million for the six months ended June 30, 2024, as compared to $55.8 million for the six months ended June 30, 2023, an increase of $3.2 million, or 5.7%. The change includes increases in salaries and employee benefits expenses of $1.5 million, or 6.0%, advertising expenses of $0.9 million, merger-related expenses of $0.8 million, occupancy and equipment expenses of $0.7 million and other operating expenses of $0.7 million partially offset by a decrease in professional fees of $1.3 million.

Previous wording

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 three months ended March 31, 2024 and 2023. 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. Average outstanding balances are derived by utilizing average daily balances for the time period shown. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yield/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

Current wording

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 three and six months ended June 30, 2024 and 2023. 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. Average outstanding balances are derived by utilizing average daily balances for the time period shown. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yield/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

Previous wording

(3)For the three months ended March 31, 2024 and 2023, collectively, portfolio loans yield excluding credit card loans was 6.96% and 6.30%, respectively.

Current wording

(3)For the three months ended June 30, 2024 and 2023, collectively, portfolio loans yield excluding credit card loans was 7.04% and 6.65%, respectively.

Previous wording

(4)For the three months ended March 31, 2024 and 2023, collectively, credit card loans accounted for 239 and 284 basis points of the reported net interest margin, respectively.

Current wording

(4)For the three months ended June 30, 2024 and 2023, collectively, credit card loans accounted for 246 and 257 basis points of the reported net interest margin, respectively.

Previous wording

For the three months ended March 31, 2024, average interest earning assets increased $150.7 million, or 7.2%, to $2.3 billion as compared to the same period in 2023, and the average yield on interest earning assets increased to 8.63%, a 26 basis point increase from 8.37%. Compared to the same period in the prior year, average interest-bearing liabilities increased $144.0 million, or 11.7%, and the average cost of interest-bearing liabilities increased to 3.90%, a 97 basis point increase from 2.93%.

Current wording

For the three months ended June 30, 2024, average interest earning assets increased $170.1 million, or 8.0%, to $2.3 billion as compared to the same period in 2023, and the average yield on interest earning assets increased to 8.82%, a 36 basis point increase from 8.46%. Compared to the same period in the prior year, average interest-bearing liabilities increased $164.4 million, or 13.2%, and the average cost of interest-bearing liabilities increased to 3.86%, a 73 basis point increase from 3.13%.

Previous wording

The net interest margin decreased 41 basis points to 6.24% for the three months ended March 31, 2024 from the same period in 2023 as interest income on credit cards decreased $1.4 million. Net interest margin, excluding credit card loans, increased to 3.85% for the three months ended March 31, 2024, compared to 3.81% for the same period in 2023. For more information on the computation of non-GAAP financial measures, see “Non-GAAP Financial Measures and Reconciliations.”

Current wording

The net interest margin decreased 29 basis points to 6.35% for the six months ended June 30, 2024 from the same period in 2023. Net interest margin, excluding credit card loans, was 3.93% for the six months ended June 30, 2024, compared to 3.94% for the same period in 2023. For more information on the computation of non-GAAP financial measures, see “Non-GAAP Financial Measures and Reconciliations.”

Previous wording

Total interest income was impacted by the effect of increases in market interest rates and growth in average balances when comparing the three months ended March 31, 2024 to the same period in 2023. The loan portfolio, excluding credit cards, continued to experience growth through the three months ended March 31, 2024, which contributed an additional $6.1 million in interest income. On a standalone basis, interest income attributable to the credit card portfolio decreased by $1.4 million when comparing the three months ended March 31, 2024 to the three months ended March 31, 2023, as credit card loan balances and corresponding late charges declined. Increased interest rates also contributed $2.5 million to increased interest expense, including $1.7 million from increased rates on money market accounts comparing the three months ended March 31, 2024 to the prior year, substantially offsetting the increase in total interest income. The increase in the amount of time deposits contributed an additional $1.6 million to the increase in interest expense.

Current wording

Total interest income was impacted by the effect of growth in average portfolio loan balances and increases in market interest rates when comparing the three months ended June 30, 2024 to the same period in 2023. The loan portfolio, excluding credit cards, continued to experience growth through the three months ended June 30, 2024, which contributed an additional $4.9 million in interest income. Total interest expense was impacted by growth in average balances of time deposits and money market accounts contributing $1.2 million and $0.5 million in interest expense and increased rates on time deposits and money market accounts, which contributed an additional $0.7 million and $1.1 million of interest expense.

Previous wording

For the three months ended March 31, 2024, the provision for credit losses was $2.7 million, an increase of $1.1 million from the same period in 2023. Net charge-offs for the three months ended March 31, 2024 were $2.0 million, or 0.41% on an annualized basis of average portfolio loans, compared to $2.6 million, or 0.61% on an annualized basis of average portfolio loans for the same period in 2023. Of the $2.0 million in net charge-offs during the quarter, $1.2 million related to secured and partially secured cards in the credit card portfolio and $0.5 million related to unsecured cards.

Current wording

For the three months ended June 30, 2024, the provision for credit losses was $3.4 million, an increase of $0.6 million from the same period in 2023. Net charge-offs for the three months ended June 30, 2024 were $1.9 million, or 0.39% on an annualized basis of average portfolio loans, compared to $1.6 million, or 0.35% on an annualized basis of average portfolio loans for the same period in 2023. Of the $1.9 million in net charge-offs during the quarter, $0.9 million related to secured and partially secured cards in the credit card portfolio and $0.6 million related to unsecured cards.

Previous wording

The ACL as a percent of portfolio loans was 1.49% at March 31, 2024 as compared to 1.50% at December 31, 2023. 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 March 31, 2024 in “Financial Condition - Allowance for Credit Losses.”

Current wording

The ACL as a percent of portfolio loans was 1.53% at June 30, 2024 as compared to 1.50% at December 31, 2023. 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 June 30, 2024 in “Financial Condition - Allowance for Credit Losses.”

Previous wording

For the three months ended March 31, 2024, credit card fees of $3.9 million declined by $0.3 million as compared to the three months ended March 31, 2023, primarily related to lower interchange and other fee income. Mortgage banking revenue increased $0.3 million for the three months ended March 31, 2024 due to an increase in home loan sales as compared to the prior year.

Current wording

Mortgage banking revenue of $2.0 million increased $0.7 million for the three months ended June 30, 2024 due to an increase in salable originations as compared to the prior year. Mortgage banking revenue of $3.4 million for the six months ended June 30, 2024 increased $1.0 million due to an increase in home loan sales as compared to the prior year. For the three months ended June 30, 2024, credit card fees of $4.3 million declined by $0.4 million as compared to the three months ended June 30, 2023, primarily related to lower interchange and other fee income. For the six months ended June 30, 2024, credit card fees of $8.2 million declined $0.7 million as the number of open customer accounts declined to 537,734 at June 30, 2024 from 540,058 year over year, which resulted in lower interchange and other fee income recognized compared to the prior year.

Previous wording

The Bank’s CBHL division experienced an increase of 17.2% in mortgage originations during the three months ended March 31, 2024 when compared to the same period in the prior year. Origination volumes increased $7.6 million, to $52.1 million, in the first quarter of 2024, when compared to

Current wording

The Bank’s CBHL division experienced an increase of 34.0% in mortgage originations during the three months ended June 30, 2024 when compared to the same period in the prior year. Origination volumes increased $20.9 million, to $82.4 million, in the second quarter of 2024, when compared to $61.5 million in the second quarter of 2023. Gain on sale margins increased from 2.56% for the three months ended June 30, 2023, to 2.61% for the three months ended June 30, 2024.

Previous wording

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 has established a reserve under GAAP for possible repurchases. The reserve was $1.0 million at March 31, 2024 and December 31, 2023. The Bank did not repurchase any loans during the three months ended March 31, 2024 or 2023. The Bank does not originate “sub-prime” mortgage loans and has no exposure to this market segment.

Current wording

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 has established a reserve under GAAP for possible repurchases. The reserve was $0.9 million and $1.0 million at June 30, 2024 and December 31, 2023, respectively. The Bank repurchased one loan totaling $0.3 million during the six months ended June 30, 2024. The Bank did not repurchase any loans during the six months ended June 30, 2023. The Bank does not originate “sub-prime” mortgage loans and has no exposure to this market segment.

Previous wording

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.

Current wording

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 expenses. 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.

Previous wording

Income tax expense was $2.1 million for the three months ended March 31, 2024 compared to $2.9 million for the three months ended March 31, 2023. Our effective tax rates increased from 23.0% for the three months ended March 31, 2023 to 23.9% for the three months ended March 31, 2024, primarily attributable to the application of differing state income tax rates.

Current wording

Income tax expense was $2.7 million and $4.8 million for the three and six months ended June 30, 2024 compared to $2.3 million and $5.2 million for the same periods, respectively, in 2023. Our effective tax rates increased from 23.6% for the three months ended June 30, 2023 to 25.0% for the three months ended June 30, 2024, and from 23.3% for the six months ended June 30, 2023 to 24.5% for the six months ended June 30, 2024, reflective of an increase in the weighted average state income tax rate.

Previous wording

Total assets at March 31, 2024 increased $98.1 million from the balance at December 31, 2023. Net portfolio loans, which exclude mortgage loans held for sale, totaled $2.0 billion as of March 31, 2024, an increase of $61.2 million, or 3.2%, from $1.9 billion at December 31, 2023. Mortgage loans held for sale increased $2.8 million, or 37.7%, when comparing the period end balances at March 31, 2024 to December 31, 2023.

Current wording

Total assets at June 30, 2024 increased $212.4 million from the balance at December 31, 2023. Net portfolio loans, which exclude mortgage loans held for sale, totaled $2.0 billion as of June 30, 2024, an increase of $118.3 million, or 6.2%, from $1.9 billion at December 31, 2023. Mortgage loans held for sale increased $11.7 million, or 156.9%, when comparing the period end balances at June 30, 2024 to December 31, 2023.

Previous wording

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. Business equity lines of credit totaling $14.8 million as of March 31, 2024 and $14.1 million as of December 31, 2023, 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 $13.5 million as of March 31, 2024 and $11.1 million as of December 31, 2023, are also included in the commercial real estate loan category. Lender finance loans are loans to companies used to purchase finance receivables or extend finance receivables to the underlying obligors and are secured primarily by the finance receivables held by our borrowers. 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 March 31, 2024, there were approximately $330.8 million of owner-occupied commercial real estate loans, representing approximately 16.8% of the loan portfolio as compared to $307.9 million, or 16.1% of the loan portfolio at December 31, 2023. 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 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 may help reduce the exposure to adverse economic events that affect any single industry.

Current wording

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. Business equity lines of credit totaling $3.0 million as of June 30, 2024 and $14.1 million as of December 31, 2023, 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 $33.3 million as of June 30, 2024 and $11.1 million as of December 31, 2023, are also included in the commercial real estate loan category. Lender finance loans are loans to companies used to purchase finance receivables or extend finance receivables to the underlying obligors and are secured primarily by the finance receivables held by our borrowers. 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 June 30, 2024, there were approximately $319.4 million of owner-occupied commercial real estate loans, representing approximately 15.8% of the loan portfolio as compared to $307.9 million, or 16.1% of the loan portfolio at December 31, 2023. 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 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 may help reduce the exposure to adverse economic events that affect any single industry.

Previous wording

Credit Cards. Through the OpenSky™ credit card division, the Company offers secured, partially secured, and unsecured credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores through a fully digital and mobile platform. 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 $85.7 million and $95.3 million in secured and partially secured credit card balances were protected by savings deposits held by the Company as of March 31, 2024 and December 31, 2023, respectively. Unsecured balances were $28.5 million and $30.8 million, respectively, at the same dates.

Current wording

Credit Cards. Through the OpenSky™ credit card division, the Company offers secured, partially secured, and unsecured credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores through a fully digital and mobile platform. 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 $91.0 million and $95.3 million in secured and partially secured credit card balances were protected by savings deposits held by the Company as of June 30, 2024 and December 31, 2023, respectively. Unsecured balances were $33.6 million and $30.8 million, respectively, at the same dates.

Previous wording

Purchased Credit Deterioration. There were no loans purchased with credit deterioration during the three months ended March 31, 2024 or the three months ended March 31, 2023.

Current wording

Purchased Credit Deterioration. There were no loans purchased with credit deterioration during the three and six months ended June 30, 2024 or three and six months ended June 30, 2023.

Previous wording

Multi-family loans totaled $153.4 million at March 31, 2024 and are included in the real estate residential loan category. At March 31, 2024, the Company has approximately $52.2 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.

Current wording

Multi-family loans totaled $156.7 million at June 30, 2024 and are included in the real estate residential loan category. At June 30, 2024, the Company had approximately $56.1 million in multi-family loans in the District of Columbia secured by properties 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.

Previous wording

(2)Other non-owner-occupied commercial real estate loans include a land loan of $8.9 million, skilled nursing loans of $9.9 million, special purpose loans of $6.4 million, and other loans of $12.2 million.

Current wording

(2)Other non-owner-occupied commercial real estate loans include a land loan of $12.0 million, skilled nursing loans of $9.9 million, special purpose loans of $6.3 million, and other loans of $9.9 million.

Previous wording

(3)Other owner-occupied commercial real estate loans include special purpose loans of $56.9 million, skilled nursing loans of $62.3 million, and other loans of $27.9 million.

Current wording

(3)Other owner-occupied commercial real estate loans include special purpose loans of $58.3 million, skilled nursing loans of $53.8 million, and other loans of $27.5 million.

Previous wording

At March 31, 2024, the recorded investment in individually assessed loans was $14.4 million, requiring a specific reserve of $0.9 million. At December 31, 2023, the recorded investment in individually assessed loans was $16.0 million, requiring a specific reserve of $0.4 million. The $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. During the three months ended March 31, 2024 the near complete resolution of a single nonperforming asset from $7.6 million at December 31, 2023 to $0.6 million at March 31, 2024 was partially offset by a $5.4 million increase in nonperforming assets comprised of $2.4 million of residential real estate secured loans and $3.0 million of non-owner-occupied commercial real estate loans that the Company is proactively managing toward resolution.

Current wording

At June 30, 2024, the recorded investment in individually assessed loans was $15.1 million, requiring a specific reserve of $1.1 million. At December 31, 2023, the recorded investment in individually assessed loans was $16.0 million, requiring a specific reserve of $0.4 million. The $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.

Previous wording

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.

Current wording

A major consideration in the determination of the ACL 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.

Previous wording

Total charge-offs for the quarters ended March 31, 2024 and March 31, 2023 were primarily due to 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 the quarter ended March 31, 2024 of $0.1 million. Residential real estate loans experienced net charge-offs for the quarter ended March 31, 2024 of $0.2 million. There were $0.9 million charge-offs for the commercial real estate loan portfolio for the quarter ended March 31, 2023. The following tables present a summary of the net charge-offs (recovery) of loans as a percentage of average loans for the periods indicated:

Current wording

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

Previous wording

Total liabilities at March 31, 2024 increased $93.5 million from December 31, 2023, primarily due to growth in the deposit portfolio of $109.7 million, partially offset by a $15.0 million reduction in other borrowed funds.

Current wording

Total liabilities at June 30, 2024 increased $199.4 million from December 31, 2023, primarily due to growth in the deposit portfolio of $204.4 million.

Previous wording

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 March 31, 2024 and December 31, 2023, our credit card customers accounted for $171.8 million and $173.9 million, or 25.8% and 28.2%, respectively, of our total noninterest-bearing deposit balances.

Current wording

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 June 30, 2024 and December 31, 2023, our credit card customers accounted for $173.5 million and $173.9 million, or 25.3% and 28.2%, respectively, of our total noninterest-bearing deposit balances.

Previous wording

Deposit costs increased 51 basis points during the three months ended March 31, 2024 owing in large part to a series of interest rate increases implemented by the Federal Reserve beginning in early 2022 and the corresponding move from savings accounts to higher rate money market accounts and time deposits. In addition, average noninterest-bearing deposit balances decreased $17.9 million when compared to December 31, 2023, largely due to the decision by some depositors to move balances from noninterest-bearing deposit accounts to interest-bearing deposit accounts.

Current wording

Deposit costs increased 49 basis points during the six months ended June 30, 2024 due, in large part, to a series of interest rate increases implemented by the Federal Reserve beginning in early 2022 and the corresponding move from savings accounts to higher rate money market accounts and time deposits. In addition, average noninterest-bearing deposit balances decreased $9.9 million when compared to December 31, 2023, largely due to the decision by some depositors to move balances from noninterest-bearing deposit accounts to interest-bearing deposit accounts.

Previous wording

At March 31, 2024, the Company had $463.0 million in total time deposits, an increase of $52.0 million from December 31, 2023. Total brokered time deposits of $160.6 million at March 31, 2024 increased $18.3 million from $142.4 million at December 31, 2023. Total brokered time deposits as a percentage of total deposits was 8.0% at March 31, 2024.

Current wording

At June 30, 2024, the Company had $473.1 million in total time deposits, an increase of $62.1 million from December 31, 2023. Total brokered time deposits of $155.1 million at June 30, 2024 increased $12.8 million from $142.4 million at December 31, 2023. Total brokered time deposits as a percentage of total deposits was 7.4% at June 30, 2024.

Previous wording

As of March 31, 2024 and December 31, 2023, based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements, approximately $855.7 million or 42.7% and $789.4 million or 41.6%, respectively, of the deposit portfolio was uninsured. Uninsured deposits are comprised of the portion of account balances that are in excess of FDIC insurance limits.

Current wording

As of June 30, 2024 and December 31, 2023, based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements, approximately $923.7 million, or 44.0%, and $789.4 million, or 41.6%, respectively, of the deposit portfolio was uninsured. Uninsured deposits are comprised of the portion of account balances that are in excess of FDIC insurance limits.

Previous wording

Deposits securing our OpenSky™ card lines of credit and deposits from title companies represent the largest concentrations in the deposit portfolio. As of March 31, 2024, these deposits represented 9% and 13% of deposits, respectively. As of December 31, 2023, these concentrations were 9% and 12% of deposits.

Current wording

Deposits securing our OpenSky™ card lines of credit and deposits from title companies represent the largest concentrations in the deposit portfolio. As of June 30, 2024, these deposits represented 8% and 17% of deposits, respectively. As of December 31, 2023, these concentrations were 9% and 12% of deposits.

Previous wording

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 March 31, 2024, approximately $544.1 million in real estate loans were pledged as collateral to the FHLB and our total borrowing capacity from the FHLB was $469.7 million. As of March 31, 2024, 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. As of March 31, 2024, we had $22.0 million in outstanding advances and $447.7 million in available borrowing capacity from the FHLB.

Current wording

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 June 30, 2024, approximately $569.0 million in real estate loans were pledged as collateral to the FHLB and our total borrowing capacity from the FHLB was $496.3 million. As of June 30, 2024, 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. As of June 30, 2024, we had $32.0 million in outstanding advances and $464.3 million in available borrowing capacity from the FHLB.

Previous wording

At March 31, 2024, 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 bps) plus 187 basis points, payable quarterly. As of March 31, 2024, the rate for the Floating Rate Debentures was 7.52%.

Current wording

At June 30, 2024, 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 bps) plus 187 basis points, payable quarterly. As of June 30, 2024, the rate for the Floating Rate Debentures was 7.47%.