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What changed in Capital Bancorp Inc's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Capital Bancorp Inc's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+411 added−314 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-15)

Top changes in Capital Bancorp Inc's 2023 10-K

411 paragraphs added · 314 removed · 238 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

40 edited+20 added−5 removed62 unchanged
Biggest changeIncrease scale in our consumer fee-based platforms through delivery of high value products and services • Utilize our customer acquisition system, Apollo, and leverage our investment in a new core processing system, together with our expertise in data, analytics and marketing, to deliver new products and services and grow our secured credit card business; • Retain OpenSky ® customers that “graduate” from our secured credit product through the limited use of partially and fully unsecured credit products; and • Expand our purchase-oriented mortgage loan sales both in-market and in adjacent markets through the hiring of qualified mortgage originators and continue to improve on our direct to consumer marketing channels.
Biggest changeIncrease scale in our consumer fee-based platforms through delivery of high value products and services • Utilize our customer acquisition system, Apollo, and leverage our investment in a new core processing system, together with our expertise in data, analytics and marketing, to deliver new products and services and grow our secured credit card business; • Retain OpenSky ™ customers that “graduate” from our secured credit product through the limited use of partially and fully unsecured credit products; and • Expand our purchase-oriented mortgage loan sales both in-market and in adjacent markets through the hiring of qualified mortgage originators and continue to improve on our direct to consumer marketing channels. 8 Pursue acquisitions opportunistically • Seek strategic acquisitions in the Washington, D.C., Baltimore, Maryland, and surrounding metropolitan areas; • Evaluate specialty finance company opportunities where we can add value through increasing interest and fee income and leveraging our management’s expertise and existing strategic assets; and • Use our management’s and Board’s expertise to structure transactions that minimize the integration and execution risk for the Bank.
We have adopted the following strategies that we believe will continue to drive growth while maintaining consistent profitability and enhancing shareholder value: Deliver premium advice-based solutions that drive organic loan and core deposit growth with corresponding net interest margin • Serve as financial partners to our customers, helping them to grow their businesses through advice-based financial solutions; • Endeavor to provide comprehensive loan and deposit solutions to our customers that are tailored to their needs, and leverage data, analytics, and financial technology to improve the customer experience; • Scale our consumer fee-based platforms by investing in fintech capabilities and digital marketing to deliver high impact products and services and differentiated customer experience; • Capitalize on market dislocation from recent in-market acquisitions to continue to attract top sales talent, and acquire new commercial banking relationships from local competitors; and 7 • Selectively add banking centers where sales teams have already proved an ability to capture market share and leverage customer relationships.
We have adopted the following strategies that we believe will continue to drive growth while maintaining consistent profitability and enhancing shareholder value: Deliver premium advice-based solutions that drive organic loan and core deposit growth with corresponding net interest margin • Serve as financial partners to our customers, helping them to grow their businesses through advice-based financial solutions; • Endeavor to provide comprehensive loan and deposit solutions to our customers that are tailored to their needs, and leverage data, analytics, and financial technology to improve the customer experience; • Scale our consumer fee-based platforms by investing in fintech capabilities and digital marketing to deliver high impact products and services and differentiated customer experience; • Capitalize on market dislocation from recent in-market acquisitions to continue to attract top sales talent, and acquire new commercial banking relationships from local competitors; and • Selectively add banking centers where sales teams have already proved an ability to capture market share and leverage customer relationships.
The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to decline to open accounts for those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering, 11 tax evasion or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S. persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships.
The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to decline to open accounts for those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering, tax evasion or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S. persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships.
An institution’s record in meeting the requirements of the CRA is based on a performance-based evaluation system, and is made publicly available and is taken into consideration in evaluating any applications it files with federal regulators to engage in certain activities, including approval of a branch or other deposit facility, mergers and acquisitions, office relocations, and expansions into non-banking activities.
An institution’s record in meeting the 11 requirements of the CRA is based on a performance-based evaluation system, and is made publicly available and is taken into consideration in evaluating any applications it files with federal regulators to engage in certain activities, including approval of a branch or other deposit facility, mergers and acquisitions, office relocations, and expansions into non-banking activities.
The GLBA requires disclosures to consumers on policies and procedures regarding the disclosure of such non-public personal information and, except as otherwise required by law, prohibits disclosing such information except as provided in the Bank’s policies and procedures. We have implemented privacy policies addressing these restrictions that are distributed regularly to all existing and new customers of the Bank.
The GLBA requires disclosures to consumers on policies and procedures regarding the disclosure of such non-public personal information and, except as otherwise required by law, prohibits disclosing such information except as provided in the Bank’s policies and procedures. We 13 have implemented privacy policies addressing these restrictions that are distributed regularly to all existing and new customers of the Bank.
The addition of the unsecured card allows for an uninterrupted experience for OpenSky ® customers who can now more easily continue in their journey from a secured to unsecured credit card. OpenSky ® cards operate on a fully digital and mobile platform with all marketing and application procedures conducted through its website or mobile application.
The addition of the unsecured card allows for an uninterrupted experience for OpenSky ™ customers who can now more easily continue in their journey from a secured to unsecured credit card. OpenSky ™ cards operate on a fully digital and mobile platform with all marketing and application procedures conducted through its website or mobile applications.
Moreover, bank regulatory agencies appear to be increasingly aggressive in responding to concerns and trends identified in examinations, which could result in higher frequency initiation of enforcement actions against financial institutions to address credit quality, liquidity, risk management and capital adequacy, as well as other safety and soundness concerns. Regulation of Capital Bancorp, Inc.
Moreover, bank regulatory agencies appear to be increasingly aggressive in responding to concerns and trends identified in examinations, which could result in higher frequency initiation of enforcement actions against financial institutions to address credit quality, liquidity, risk management and capital adequacy, as well as other safety and soundness concerns. 10 Regulation of Capital Bancorp, Inc.
If, as a result of an examination of our Bank, the regulators should determine that the financial condition, capital resources, asset quality, 10 earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators.
If, as a result of an examination of our Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators.
Capital Bank Home Loans and OpenSky ® both leverage Capital Bank’s national banking charter to operate as national consumer business lines; Capital Bank Home Loans acts as our residential mortgage origination platform and OpenSky ® provides nationwide, digitally-based, unsecured credit cards as well as secured credit cards to under-banked populations and those looking to rebuild their credit scores.
Capital Bank Home Loans and OpenSky ™ both leverage Capital Bank’s national banking charter to operate as national consumer business lines; Capital Bank Home Loans acts as our residential mortgage origination platform and OpenSky ™ provides nationwide, digitally-based, unsecured 5 credit cards as well as secured credit cards to under-banked populations and those looking to rebuild their credit scores.
As each customer’s secured account ages, we obtain credit scores to baseline their improvement as an input into any decision to extend unsecured credit. The unsecured credit card was added, for qualifying customers, in the fourth quarter of 2021 to expand the OpenSky ® product offering.
As each customer’s secured account ages, we obtain credit scores to baseline the customer’s improvement as an input into any decision to extend unsecured credit. The unsecured credit card was added, for qualifying customers, in the fourth quarter of 2021 to expand the OpenSky ™ product offering.
Notification to the FRB is required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly and/or cumulative twelve‑month net earnings are 12 insufficient to fund the dividend amount, among other requirements.
Notification to the FRB is required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements.
In November 2021, the federal bank regulatory agencies issued a joint rule establishing computer-security incident notification requirements for banking organizations and their service providers. This rule requires new notification requirements where a banking organization experiences a computer-security incident. State regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations.
In November 2021, the federal bank regulatory agencies issued a joint rule establishing computer-security incident notification requirements for banking organizations and their service providers. This rule requires new notification requirements when a banking organization experiences a computer-security incident. State regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations.
In order to obtain a secured credit card from us, the customer must select a credit line amount that they are willing to secure with a matching deposit amount. A deposit equal to the full credit limit of the card is made into a noninterest-bearing demand account with the Bank.
In order to obtain a secured credit card from us, the customer must select a credit line amount that the customer is willing to secure with a matching deposit amount. A deposit equal to the full credit limit of the card is made into a noninterest-bearing demand account with the Bank.
Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14, Capital Standards” for additional regulatory capital information, including the Bank’s and Company’s Leverage Ratio as of December 31, 2022.
Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14, Capital Standards” for additional regulatory capital information, including the Bank’s and Company’s Leverage Ratio as of December 31, 2023.
After accessing the web site, the filings are available upon selecting “Investor Relations.” Reports available include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.
After accessing the website, the filings are available upon selecting “Investor Relations.” Reports available include the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.
As of December 31, 2022, approximately 12.7% of our secured credit card portfolio was delinquent by 30 days or more. Capital Bank evaluates its OpenSky ® customers using analytics that track consumer behaviors and score each customer on risk and behavior metrics.
As of December 31, 2023, approximately 12.3% of our secured credit card portfolio was delinquent by 30 days or more. Capital Bank evaluates its OpenSky ™ customers using analytics that track consumer behaviors and score each customer on risk and behavior metrics.
The Company prides itself on being a values-driven organization, where employees are empowered to share Ideas that keep the organization connected.
The Company prides itself on being a values-driven organization, where employees are empowered to share Ideas that keep the organization on track.
These real-time monitoring capabilities give our management insight into the credit trends of our portfolio on a consumer-by-consumer basis, allowing us to identify potential fraud situations and mitigate any associated losses, as well as to obtain insights into how to optimize the profitability and life cycle of each account. The model utilizes data proprietary to Capital Bank.
These real-time monitoring capabilities give our management insight into the credit trends of our portfolio on a consumer-by-consumer basis, allowing us to identify potential fraud situations and mitigate any associated losses, as well as to obtain insights into how to optimize the profitability and life cycle of each account.
Essential to this mission is our commitment to provide long-term, sustainable financial and social value to our stakeholders, including the communities we serve, our shareholders and our employees. 8 Employees and Human Capital Resources At December 31, 2022, we employed 329 persons, of which 270 were employed on a full-time basis.
Essential to this mission is our commitment to provide long-term, sustainable financial and social value to our stakeholders, including the communities we serve, our shareholders and our employees. Employees and Human Capital Resources At December 31, 2023, we employed 299 persons, of which 277 were employed on a full-time basis.
Our Business Strategy Regulations, technology and competition have fundamentally impacted the economics of the banking sector. We believe that by using technology-enabled strategies and advice-based solutions, we can deliver attractive shareholder returns in excess of our cost of capital.
The model utilizes data proprietary to Capital Bank. 7 Our Business Strategy Regulations, technology and competition have fundamentally impacted the economics of the banking sector. We believe that by using technology-enabled strategies and advice-based solutions, we can deliver attractive shareholder returns in excess of our cost of capital.
Given the secured nature of the cards, credit checks are not required at the time of application. 6 The partially secured credit card uses our proprietary scoring model, which considers among other things, credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis), to offer certain customers an unsecured line in excess of their secured line of credit.
The partially secured credit card uses our proprietary scoring model, which considers among other things, credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis), to offer certain existing customers an unsecured line in excess of their secured line of credit.
We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the Bank Holding Company Act of 1956 (“BHC Act”). The Federal Reserve may conduct examinations of BHCs and their subsidiaries.
We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the Bank Holding Company Act of 1956 (“BHC Act”). The Federal Reserve may conduct examinations of BHCs and their subsidiaries. The Bank’s deposits are insured by the FDIC, through the Deposit Insurance Fund (“DIF”).
Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC. The Bank has implemented policies and procedures to comply with the foregoing requirements. Federal Home Loan Bank Membership The Bank is a member of the FHLB. Each member of the FHLB is required to maintain a minimum investment in the Class B stock of the FHLB.
Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC. The Bank has implemented policies and procedures to comply with the foregoing requirements. 12 Federal Home Loan Bank Membership The Bank is a member of the FHLB.
Commercial Banking Division The Commercial Banking division operates out of four full service banking locations, each of which is in the Washington, D.C. Metropolitan Statistical Area (“MSA”), and its full service banking location in Columbia, Maryland in the Baltimore, Maryland MSA.
Commercial Banking Division The Commercial Banking division operates out of four full service banking locations, each of which is in the Washington, D.C. Metropolitan Statistical Area (“MSA”), and its full service banking location in Columbia, Maryland in the Baltimore, Maryland MSA. Additionally, we have two loan production offices, one located in the Washington, D.C. area and one in Columbia, Maryland.
None of our employees are represented by any collective bargaining unit or are a party to a collective bargaining agreement. We believe the relationship with our employees to be excellent and we were recently named a Best Bank to Work For by American Banker for the fourth consecutive year.
None of our employees are represented by any collective bargaining unit or are a party to a collective bargaining agreement. We believe the relationship with our employees to be excellent and we have been named a Best Bank to Work For by American Banker for four of the past five years.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. 13 Deposit Insurance The Bank is a national banking association, regulated by the OCC.
Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements.
Once the customer’s deposit account has been funded, the credit line is activated and the collateral funds are generally available to absorb any losses on the account that may occur.
Once the customer’s deposit account has been funded, the credit line is activated and the collateral funds are generally available to absorb any losses on the account that may occur. Given the secured nature of the cards, credit checks are not required at the time of application.
Because the extent of any obligation to increase the level of investment in the FHLB depends entirely upon the occurrence of a future event, the Company is unable to determine the extent of future required potential payments to the FHLB.
Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase the level of investment in the FHLB depends entirely upon the occurrence of a future event, the Company is unable to determine the extent of future required potential payments to the FHLB.
We cannot predict whether or when potential legislation or new regulations will be enacted, and if enacted, the effect that new legislation or any implemented regulations and supervisory policies would have on our financial condition and results of operations.
Legislative and regulatory initiatives, which necessarily impact the regulation of the financial services industry, are introduced from time to time. We cannot predict whether or when potential legislation or new regulations will be enacted, and if enacted, the effect that new legislation or any implemented regulations and supervisory policies would have on our financial condition and results of operations.
OpenSky ® Secured Credit Card Division The OpenSky ® Division provides secured, partially secured and unsecured credit cards on a nationwide basis. The secured credit cards require a minimum initial deposit of $200 and maximum initial deposits of $3,000 per card and $10,000 per individual and are focused on under-banked populations and those looking to rebuild their credit scores.
The secured credit cards require a minimum initial deposit of $200 and permit maximum initial deposits of $3,000 per card and $10,000 per individual. This business line focuses on under-banked populations and those looking to rebuild their credit scores.
In addition, we are committed to developing our staff through internal/external training programs, availability of a robust online training resource, and continuing to implement leadership development programs for all levels of leadership within the organization. Available Information The Company provides access to its SEC filings through its web site at www.capitalbankmd.com.
In addition, we are committed to developing our staff through internal/external training programs, including through use of online training resources and by affording all levels of leadership within the organization to participate in leadership development programs. 9 Available Information The Company provides access to its SEC filings through its website at www.capitalbankmd.com.
This may signal that additional regulatory action on this issue will be forthcoming in 2023. Anti-Terrorism, Money Laundering Legislation and OFAC The Bank is subject to the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”).
Anti-Terrorism, Money Laundering Legislation and OFAC The Bank is subject to the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”).
Construction lending is a core competency of our Commercial Banking division. Our construction loan portfolio provides Capital Bank with short duration and higher yield loans. Our construction lending is focused on commercial and residential construction projects within the Washington, D.C. and Baltimore-Columbia-Towson, Maryland metropolitan operating areas, with limited exposure to suburban subdivision tract development.
Our construction lending is focused on commercial and residential construction projects within the Washington, D.C. and Baltimore-Columbia-Towson, Maryland metropolitan operating areas, with limited exposure to suburban subdivision tract development.
The Board of Directors of the FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency.
Each member of the FHLB is required to maintain a minimum investment in the Class B stock of the FHLB. The Board of Directors of the FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements.
Additionally, we have two loan production offices, 5 one located in the Washington, D.C. area and one in Columbia, Maryland. Our Commercial Banking division’s commercial loan officers and commercial real estate loan officers provide commercial and industrial, or C&I, commercial real estate and construction lending solutions to business clients in Capital Bank’s operating markets.
Our Commercial Banking division’s commercial loan officers and commercial real estate loan officers provide commercial and industrial, or C&I, commercial real estate, including lender finance loans, and construction lending solutions to business clients in Capital Bank’s operating markets.
The Company’s and the Bank’s regulators generally have broad discretion to impose restrictions and limitations on our operations. Bank regulation is intended to protect depositors and consumers and not shareholders. This supervisory framework could materially and adversely impact the conduct and profitability of our activities.
As a result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank as well as all other FDIC insured institutions. The Company’s and the Bank’s regulators generally have broad discretion to impose restrictions and limitations on our operations. Bank regulation is intended to protect depositors and consumers and not shareholders.
In 2022, as the mortgage refinance market continued to contract in response to increasing market interest rates, CBHL continued to focus on purchase originations. Purchase origination volume was 80.6 percent for the year ended December 31, 2022, compared to 42.3 percent for the year ended December 31, 2021.
In 2023, as the mortgage refinance market continued to contract in response to increasing market interest rates, CBHL continued to focus on purchase originations.
To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the text of the applicable statutory and regulatory provisions. Legislative and regulatory initiatives, which necessarily impact the regulation of the financial services industry, are introduced from time to time.
This supervisory framework could materially and adversely impact the conduct and profitability of our activities. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the text of the applicable statutory and regulatory provisions.
Our Bank received an “outstanding” rating in its most recent CRA evaluation which was in 2021. In April 2018, the U.S.
Our Bank received an “outstanding” rating in its most recent CRA evaluation which was in 2021. In October 2023, the OCC, together with the FRB and FDIC, issued a joint final rule to modernize the CRA regulatory framework.
Approximately 69.7 percent of CBHL loan originations by volume occur within Capital Bank’s operating markets in Maryland, Virginia and Washington, D.C. The remainder of originations are national in scope and derive primarily through a consumer direct channel utilizing consumer marketing, including through social media applications.
Purchase origination volume was 91.7% for the year ended December 31, 2023, compared to 80.6% for the year ended December 31, 2022. 6 Approximately 62.8% of CBHL loan originations by volume occur within Capital Bank’s operating markets in Maryland, Virginia and Washington, D.C.
Removed
Initially, CSC typically sold participation interests in these loans to third parties (including to certain of the Company’s and Bank's directors), and retained exposure of as little as 10 percent. Beginning in 2019, CSC more typically retained 100% of the exposures. In all cases CSC had retained servicing of the loans, thereby maintaining a relationship with the customer.
Added
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. Construction lending is a core competency of our Commercial Banking division. Our construction loan portfolio provides Capital Bank with short duration, higher yield loans.
Removed
Pursue acquisitions opportunistically • Seek strategic acquisitions in the Washington, D.C., Baltimore, Maryland, and surrounding metropolitan areas; • Evaluate specialty finance company opportunities where we can add value through increasing interest and fee income and leveraging our management’s expertise and existing strategic assets; and • Use our management’s and Board’s expertise to structure transactions that minimize the integration and execution risk for the Bank.
Added
The remainder of originations are national in scope and originate primarily through a consumer direct channel that utilizes consumer marketing, including through social media applications. OpenSky ™ Secured Credit Card Division The OpenSky ™ Division provides secured, partially secured and unsecured credit cards on a nationwide basis.
Removed
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”), through the Deposit Insurance Fund (“DIF”). As a 9 result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank as well as all other FDIC insured institutions.
Added
The final rule is intended, among other things, to adapt to changes in the banking industry, including the expanded role of mobile and online banking, and to tailor performance standards to account for differences in bank size and business models.
Removed
Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s regulations to reduce their complexity and associated burden on banks, and in December 2019, the FDIC and the OCC proposed for public comment rules to modernize the agencies' regulations under the CRA.
Added
The final rule introduces new tests under which the performance of banks with over $2 billion in assets will be assessed. The new rule also includes data collection and reporting requirements, some of which are applicable only to banks with over $10 billion in assets.
Removed
In September 2020, the Federal Reserve released for public comment its proposed rules to modernize CRA regulations. As of this issuance, the Federal Reserve has not moved forward in the rulemaking process. In July 2021, the Federal Reserve, FDIC, and the OCC issued an interagency statement committing to joint agency action on CRA.
Added
Most provisions of the final rule will become effective on January 1, 2026, and the data reporting requirements will become effective on January 1, 2027.
Added
In July 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents experienced and describe the material aspects of their nature, scope and timing. The rules, which supersede previously interpreted guidance published in February 2018, also require annual disclosures describing a company’s cybersecurity risk management, strategy and governance.
Added
These SEC rules, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity and Item 1C. Cybersecurity for a further discussion of the Company’s risk management strategies and governance processes related to cybersecurity.
Added
Interchange Fees Under the Durbin Amendment to the Dodd-Frank Act, the FRB adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
Added
Interchange fees or “swipe” fees are charges that merchants pay to the Company and other card-issuing banks for processing electronic payment transactions.
Added
The FRB has ruled that for financial institutions with assets of $10 billion or more the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction.
Added
The FRB also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
Added
In October 2023, the Federal Reserve issued a proposal under which the maximum permissible interchange fee for an electronic debit transaction would be the sum of 14.4 cents per transaction and 4 basis points multiplied by the value of the transaction.
Added
While financial institutions with less than $10 billion in assets, like the Company, are exempt, there is concern that these requirements will eventually be pushed down to all financial institutions, which would negatively impact the Company’s non-interest income. 14 Consumer Financial Protection Bureau The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy Provisions of the Gramm-Leach-Bliley Act, and certain other statutes.
Added
The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes.
Added
The CFPB has authority to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products.
Added
In January 2024, the CFPB proposed rules that would subject (with certain exceptions) overdraft services provided by financial institutions with more than $10 billion in assets to the provisions of the Truth in Lending Act and other consumer financial protection laws.
Added
Although the CFPB excluded banks with under $10 billion in assets from this rule, the Company is currently evaluating the potential impact of the proposed rules and monitoring developments with respect thereto based on the CFPB’s apparent concern around deposit-related fee assessment.
Added
On March 5, 2024, the CFPB issued a final rule amending provisions in Regulation Z that govern credit card late fee charges to lower the safe harbor amount for past due fees that a credit card issuer can charge on consumer credit card accounts from up to $41 to $8 and eliminates a higher safe harbor dollar amount for late fees for subsequent violations of the same type.
Added
This rule only applies to card issuers, that together with their affiliates, have one million or more open credit card accounts. Smaller card issuers, like the Bank, may continue to charge a higher safe harbor threshold for credit card late fees and automatically increase the safe harbor dollar amount based on the Consumer Price Index.
Added
Although the final rule exempts smaller card issuers, the Company will continue to monitor penalty fee policies, particularly as the CFPB and other regulators have demonstrated a focus on regulating so-called junk fees. Deposit Insurance The Bank is a national banking association, regulated by the OCC.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

61 edited+59 added−21 removed92 unchanged
Biggest changeIn addition, we may be required to fund additional amounts to complete a project, incur taxes, maintenance and compliance costs for a foreclosed property and may have to hold the property for an indeterminate period of time, any of which could materially and adversely affect our business, financial condition and results of operations. 16 Because a significant portion of our loan portfolio held for investment is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
Biggest changeIn addition, we may be required to fund additional amounts to complete a project, incur taxes, maintenance and compliance costs for a foreclosed property and may have to hold the property for an indeterminate period of time, any of which could materially and adversely affect our business, financial condition and results of operations.
Temporary layoffs, staffing freezes, salary reductions or furloughs of government employees or government contractors could have adverse impacts on other businesses in the Company’s market and the general economy of the greater Washington, D.C. metropolitan area, and may indirectly lead to a loss of revenues by the Company’s customers, including vendors and lessors to the federal government and government contractors or to their employees, as well as a wide variety of commercial and retail businesses and the local housing market.
Temporary layoffs, staffing freezes, salary reductions or furloughs of government employees or government contractors could have adverse impacts on other businesses in the Company’s market and the general economy of the greater Washington, D.C. metropolitan area, and may indirectly lead to a loss of revenues by the Company’s customers, including vendors and lessors to the federal government and government contractors or to their employees, as well as to a wide variety of commercial and retail businesses and the local housing market.
Unexpected deterioration in the credit quality of our commercial real estate loan portfolio could require us to increase our allowance for loan losses, which would reduce our profitability and could have a material and adverse effect on our business, financial condition and results of operations.
Unexpected deterioration in the credit quality of our commercial real estate loan portfolio could require us to increase our allowance for credit losses, which would reduce our profitability and could have a material adverse effect on our business, financial condition and results of operations.
A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations, as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage, any of which could have a material and adverse effect on our business, financial condition and results of operations.
A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations, as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage, any of which could have a material adverse effect on our business, financial condition and results of operations.
An inability to raise funds through deposits, borrowings, sales of our investment securities, sales of loans or other sources could materially and adversely impact our ability to originate loans, invest in securities, meet our expenses or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material and adverse effect on our business, financial condition and results of operations.
An inability to raise funds through deposits, borrowings, sales of our investment securities, sales of loans or other sources could materially and adversely impact our ability to originate loans, invest in securities, meet our expenses or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.
Interchange fees are the subject of significant and intense legal, regulatory and legislative focus globally, and the resulting decisions, regulations and legislation may have a material and adverse impact on our business, financial condition and results of operations.
Interchange fees are the subject of significant and intense legal, regulatory and legislative focus globally, and the resulting decisions, regulations and legislation may have a material adverse impact on our business, financial condition and results of operations.
The existence of credit and market risk associated with our derivative instruments could materially and adversely affect our mortgage banking revenue and, therefore, could have a material and adverse effect on our business, financial condition and results of operations. We are subject to interest rate risk as fluctuations in interest rates may adversely affect our earnings.
The existence of credit and market risk associated with our derivative instruments could materially and adversely affect our mortgage banking revenue and, therefore, could have a material adverse effect on our business, financial condition and results of operations. We are subject to interest rate risk as fluctuations in interest rates may adversely affect our earnings.
An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material and adverse effect on our results of operations and cash flows.
An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows.
Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have a material and adverse effect on our business, financial condition and results of operations.
Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition and results of operations.
These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have a material and adverse effect on our business, financial condition and results of operations.
These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have a material adverse effect on our business, financial condition and results of operations.
These actions include the power to enjoin “unsafe or unsound” 24 practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties against us, the Bank or their respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance.
These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties against us, the Bank or their respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance.
Under these arrangements, we originate single-family mortgages that are priced and underwritten to conform to previously agreed criteria before loan funding and are delivered to the investor shortly after funding. Disruptions in the secondary market may not only affect us but also the ability and desire of mortgage investors and other banks to purchase residential mortgage loans that we originate.
Under these arrangements, we originate single-family mortgages that are priced and underwritten to conform to previously agreed criteria before loan funding and are delivered to the investor shortly after funding. 22 Disruptions in the secondary market may not only affect us but also the ability and desire of mortgage investors and other banks to purchase residential mortgage loans that we originate.
Any resulting loss in income to us could have a material and adverse effect on our business, financial condition and results of operations. 21 By engaging in derivative transactions, we are exposed to additional credit and market risk. As part of our mortgage banking activities, we enter into interest rate lock agreements with the consumer.
Any resulting loss in income to us could have a material adverse effect on our business, financial condition and results of operations. By engaging in derivative transactions, we are exposed to additional credit and market risk. As part of our mortgage banking activities, we enter into interest rate lock agreements with the consumer.
We compete with commercial banks, savings banks, credit unions, nonbank financial services companies and other 23 financial institutions operating within or near the areas we serve. In addition, many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business.
We compete with commercial banks, savings banks, credit unions, nonbank financial services companies and other financial institutions operating within or near the areas we serve. In addition, many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business.
ITEM 1A. RISK FACTORS. Ownership of our common stock involves certain risks. The risks and uncertainties described below are not the only ones we face. You should carefully consider the risks described below, as well as all other information contained in this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS. Ownership of our common stock involves certain risks. The risks and uncertainties described below are not the only ones we face. You should carefully consider the risks described below, as well as all other 15 information contained in this Annual Report on Form 10-K.
In addition, we may not have adequate insurance coverage to compensate for losses from a cybersecurity event. 18 Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not accurately describe the net value of the asset.
In addition, we may not have adequate insurance coverage to compensate for losses from a cybersecurity event. Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not accurately describe the net value of the asset.
We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on other, potentially more expensive and less 19 stable funding sources. Consequently, the occurrence of any of these events could have a material and adverse effect on our business, financial condition and results of operations.
We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources. Consequently, the occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
Account balances in excess of 20 established credit limits happen as a result of certain VISA membership policies that allow cardholders to incur certain charges even if they exceed their card limits, which include, but are not limited to, rental car charges, gas station charges and hotel deposits.
Account balances in excess of established credit limits happen as a result of certain VISA membership policies that allow cardholders to incur certain charges even if they exceed their card limits, which include, but are not limited to, rental car charges, gas station charges and hotel deposits.
If any of these valuations are inaccurate, our combined and consolidated financial statements may not reflect the correct value of our OREO, and our allowance for loan losses may not reflect accurate loan impairments. This could have a material, adverse effect on our business, financial condition or results of operations.
If any of these valuations are inaccurate, our combined and consolidated financial statements may not reflect the correct value of our OREO, and our allowance for credit losses may not reflect accurate loan impairments. This could have a material, adverse effect on our business, financial condition or results of operations.
Despite efforts to ensure the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate all security breaches, nor may we be able to implement sufficient preventive measures against such security breaches, which may expose us to material losses and other material, adverse consequences.
Despite efforts to ensure the integrity of our systems and implement controls, processes, policies and other protective measures, we may not be able to anticipate 20 all security breaches, nor may we be able to implement sufficient preventive measures against such security breaches, which may expose us to material losses and other material adverse consequences.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid in a timely manner or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid in a timely 17 manner or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure.
These laws include the BHC Act and the Change in Bank Control Act (“CBCA”). These laws could delay or prevent an acquisition. 26 Our common stock is not insured by any governmental entity. Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity.
These laws include the BHC Act and the Change in Bank Control Act (“CBCA”). These laws could delay or prevent an acquisition. Our common stock is not insured by any governmental entity. Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity.
Our inability to manage the amount of costs or the risks associated with the ownership of real estate, or write-downs in the value of OREO, could have a material and adverse effect on our business, financial condition and results of operations.
Our inability to manage the amount of costs 21 or the risks associated with the ownership of real estate, or write-downs in the value of OREO, could have a material adverse effect on our business, financial condition and results of operations.
Should such loan repurchases become a material issue, our earnings and asset quality could be adversely impacted, which could materially and adversely impact our business, financial condition and results of operations. Delinquencies and credit losses from our OpenSky ® credit card division could adversely affect our business, financial condition and results of operations.
Should loan repurchases become a material issue, our earnings and asset quality could be adversely impacted, which could materially and adversely impact our business, financial condition and results of operations. Delinquencies and credit losses from our OpenSky ™ credit card division could adversely affect our business, financial condition and results of operations.
We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest earning assets, or vice versa.
We expect that we will 24 periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest earning assets, or vice versa.
We maintain an allowance for loan losses, which we believe to be adequate to cover credit losses inherent in our OpenSky ® portfolio, but we cannot be certain that the allowance will be sufficient to cover actual credit losses.
We maintain an allowance for credit losses, which we believe to be adequate to cover credit losses inherent in our OpenSky ™ portfolio, but we cannot be certain that the allowance will be sufficient to cover actual credit losses.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, enforcement actions and fines and other penalties, any of which could adversely affect our results of operations, regulatory capital levels and the price of our securities.
Our failure to comply with these laws and regulations, even if the failure follows good faith efforts or reflects a difference in interpretation, could subject us to restrictions on our business activities, enforcement actions and fines and other penalties, any of which could adversely affect our results of operations, regulatory capital levels and the price of our securities.
If real estate values decline, it is more likely that we would be required to increase our allowance for loan losses, which would adversely affect our business, financial condition and results of operations.
If real estate values decline, it is more likely that we would be required to increase our allowance for credit losses, which would adversely affect our business, financial condition and results of operations.
As of December 31, 2022 we had outstanding approximately $10.0 million in aggregate principal amount of subordinated notes and $2.1 million in aggregate principal amount of junior subordinated debentures.
As of December 31, 2023 we had outstanding approximately $10.0 million in aggregate principal amount of subordinated notes and $2.1 million in aggregate principal amount of junior subordinated debentures.
A downturn in the local economy generally could make it more difficult for our borrowers to repay their loans and may lead to loan losses that are not offset by operations in other markets; it may also reduce the ability of our depositors to make or maintain 14 deposits with us.
A downturn in the local economy generally could make it more difficult for our borrowers to repay their loans and may lead to loan losses that would not be offset by operations in other markets; it may also reduce the ability of our depositors to make or maintain deposits with us.
In addition, we rely on appraisals and other valuation techniques to establish the value of our other real estate owned, or OREO, and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments.
In addition, we rely on appraisals and other valuation techniques to establish the value of our other real estate owned (“OREO”) and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments.
Investment in our common stock is subject to risk, including possible loss. 27 ITEM 1B UNRESOLVED STAFF COMMENTS None.
Investment in our common stock is subject to risk, including possible loss. 29 ITEM 1B UNRESOLVED STAFF COMMENTS None.
As of December 31, 2022, approximately 88.2% of our loans held for investment (measured by dollar amount) were made to borrowers who live or conduct business in the Washington, D.C. and Baltimore metropolitan areas. Therefore, our success depends upon the general economic conditions in this area, which we cannot predict with any degree of certainty.
As of December 31, 2023, approximately 86.8% of our loans held for investment (measured by dollar amount) were made to borrowers who live or conduct business in the Washington, D.C. and Baltimore metropolitan areas. Therefore, our success depends upon the general economic conditions in this area, which we cannot predict with any degree of certainty.
If credit losses from our OpenSky ® portfolio exceed our allowance for loan losses, our revenues will be reduced by the excess of such credit losses. The inability of our OpenSky ® credit card division to continue its growth rate could adversely affect our earnings.
If credit losses from our OpenSky ™ portfolio exceed our allowance for credit losses, our net income will be reduced by the excess of such credit losses. 23 The inability of our OpenSky ™ credit card division to continue its growth rate could adversely affect our earnings.
For example, in the event a card becomes more than 120 days past due, the credit card balance is recovered against any corresponding deposit account and a charge-off is recorded for any related fees, accrued interest or other charges in excess of the deposit account balance.
For example, in the event a secured card becomes more than 90 days past due, or an unsecured card becomes more than 150 days past due, the credit card balance is recovered against any corresponding deposit account and a charge-off is recorded for any related fees, accrued interest or other charges in excess of the deposit account balance.
In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult for you to sell your shares at the volume, prices and times desired.
Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult for you to sell your shares in the volume and at prices and times desired.
As such, we are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional operating costs.
Banking is highly regulated under federal and state law. As such, we are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional operating costs.
We have several large depositor relationships, the loss of which could force us to fund our business through more expensive and less stable sources. As of December 31, 2022, our 10 largest non-brokered depositors accounted for $389.9 million in deposits, or approximately 22.2% of our total deposits.
We have several large depositor relationships, the loss of which could force us to fund our business through more expensive and less stable sources. As of December 31, 2023, our 10 largest non-brokered depositors accounted for $267.7 million in deposits, or approximately 14.1% of our total deposits.
As of December 31, 2022, the fair value of our available-for-sale investment securities portfolio was $252 million, which included unrealized losses of $22.4 million and no unrealized gains. Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio.
As of December 31, 2023, the fair value of our available-for-sale investment securities portfolio was $208 million, which included unrealized losses of $17.4 million and unrealized gains of $17 thousand. Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio.
A failure to measure and limit the credit risk associated with our loan portfolio effectively could lead to unexpected losses and have a materially adverse effect on our business, financial condition and results of operations. Change in accounting standards or interpretation of new or existing standards may affect our financial condition and results of operations.
A failure to measure and limit the credit risk associated with our loan portfolio effectively could lead to unexpected losses and have a materially adverse effect on our business, financial condition and results of operations.
Significant adverse changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets resulting in inadequate collateral coverage that may expose us to credit losses and could materially and adversely affect our business, financial condition and results of operations.
Significant adverse changes in the economy or local market conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets resulting in inadequate collateral coverage that may expose us to credit losses and could materially and adversely affect our business, financial condition and results of operations. 19 System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.
As of December 31, 2022, our directors, directors of the Bank, our named executive officers and their respective family members and affiliated entities beneficially owned an aggregate of 5,499,792 shares, or approximately 38.9% of our issued and outstanding common stock.
As of December 31, 2023, our directors, directors of the Bank, our named executive officers and their respective family members and affiliated entities beneficially owned an aggregate of 5,147,875 shares, or approximately 37.0% of our issued and outstanding common stock.
The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired.
The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may affect the market price and trading volume of our common stock, most of which are outside of our control.
Because a significant portion of our loan portfolio depends on commercial real estate, a change in the regulatory capital requirements applicable to us or a decline in our regulatory capital could limit our ability to leverage our capital as a result of these policies, which could have a material and adverse effect on our business, financial condition and results of operations.
Because a significant portion of our loan portfolio depends on commercial real estate, a change in the regulatory capital requirements applicable to us or a decline in our regulatory capital could limit our ability to leverage our capital as a result of these policies, which could have a material adverse effect on our business, financial condition and results of operations. 27 We cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio.
We may incur additional indebtedness in the future to increase our capital resources or if our total capital ratio or the total capital ratio of the Bank falls below the required minimums. Furthermore, our common stock is subordinate to any series of preferred stock we may issue in the future.
We may incur additional indebtedness in the future to increase our capital resources or if our total capital ratio or the total capital ratio of the Bank falls below the required minimums.
There are many factors that may affect the market price and trading volume of our common stock, most of which are outside of our control. 25 The stock market and the market for financial institution stocks has experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies.
The stock market and the market for financial institution stocks has experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur.
Compliance with the Dodd-Frank Act and its implementing regulations has and may continue to result in additional operating and compliance costs that could have a material and adverse effect on our business, financial condition, results of operations and growth prospects.
Compliance with the Dodd-Frank Act and its implementing regulations has and may continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Federal and state regulatory agencies frequently adopt changes to their regulations or change the manner in which existing regulations are applied.
We cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio. Management has implemented controls to monitor our commercial real estate lending concentrations, but we cannot predict the extent to which regulatory guidelines will impact our operations or capital requirements.
Management has implemented controls to monitor our commercial real estate lending concentrations, but we cannot predict the extent to which regulatory guidelines will impact our operations or capital requirements.
Implementation and testing of controls related to our computer systems, security monitoring, and retaining and training personnel required to operate our systems also entail significant costs. 17 We face security risks, including denial of service attacks, hacking, malware intrusion and data corruption attempts, and identity theft that could result in the disclosure of confidential information, materially and adversely affect our business or reputation, and create significant legal and financial exposure.
We face security risks, including denial of service attacks, hacking, malware intrusion and data corruption attempts, and identity theft that could result in the disclosure of confidential information, materially and adversely affect our business or reputation, and create significant legal and financial exposure.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.
In addition, some laws and regulations may be subject to litigation or other challenges that delay or modify their implementation and impact on us. 26 Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.
Provisions in our governing documents and Maryland law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.
Furthermore, our common stock is subordinate to any series of preferred stock we may issue in the future. 28 Provisions in our governing documents and Maryland law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.
Risks Related to the Regulation of Our Industry We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could adversely affect us. Banking is highly regulated under federal and state law.
Our inability to compete successfully in the markets in which we operate could have a material adverse effect on our business, financial condition or results of operations. 25 Risks Related to the Regulation of Our Industry We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could adversely affect us.
Any damage or failure that causes an interruption in our operations could have a materially, adverse effect on our financial condition and results of operations. Our operations are also dependent upon our ability to protect our computer systems and network infrastructure, including our digital, mobile and internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems.
Our operations are also dependent upon our ability to protect our computer systems and network infrastructure, including our digital, mobile and internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems.
We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates continue to increase or economic and market conditions deteriorate. 22 We invest a portion of our total assets (11.9% as of December 31, 2022) in investment securities with the primary objectives of providing a source of liquidity, providing an appropriate return on funds invested and managing interest rate risk.
We invest a portion of our total assets (9.4% as of December 31, 2023) in investment securities with the primary objectives of providing a source of liquidity, providing an appropriate return on funds invested and managing interest rate risk.
Our credit card portfolio has increased and certain corresponding fees have been a significant portion of our income. We do not know if we will be able to retain existing customers or attract new customers, or that we will be able to increase account balances for new or existing customers.
We do not know if we will be able to retain existing customers or attract new customers, or that we will be able to increase account balances for new or existing customers.
If we are required to materially increase our level of allowance for loan losses for any reason, such increase could materially and adversely affect our business, financial condition and results of operations. The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair our borrowers’ ability to repay loans.
The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair our borrowers’ ability to repay loans.
Thus, an increase in the amount of nonperforming assets would have a material and adverse impact on net interest income.
Thus, an increase in the amount of nonperforming assets would have a material adverse impact on net interest income. We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates continue to increase or economic and market conditions deteriorate.
At December 31, 2022, the Bank’s construction to total capital ratio was 108.6% which exceeded the 100% regulatory guideline threshold set forth in clause (iii) above. As a result, we are deemed to have a concentration in commercial real estate lending under applicable regulatory guidelines.
At December 31, 2023, the Bank’s construction to total capital ratio was 107% which exceeded the 100% regulatory guideline threshold set forth in clause (iii) above and the Bank’s non-owner-occupied commercial real estate (including construction) loans to total capital ratio was 304% which exceeded the 300% regulatory guideline threshold set forth in clause (iv) above.
Any increase in the allowance for credit losses, or expenses incurred to determine the appropriate level of the allowance for credit losses, may have a materially adverse effect on our financial condition and results of operations. Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
Our Allowance for Credit Losses may prove to be insufficient to absorb life-time losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.
Our inability to compete successfully in the markets in which we operate could have a material and adverse effect on our business, financial condition or results of operations.
Our computer systems and network infrastructure could be vulnerable to hardware and cybersecurity issues. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations.
This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions.
These updates entail significant costs and create risks associated with implementing new systems and integrating them with existing ones, including business interruptions. Implementation and testing of controls related to our computer systems, security monitoring, and retaining and training personnel required to operate our systems also entail significant costs.
Removed
From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC change accounting regulations and reporting standards that govern the preparation of our financial statements. In addition, the FASB, SEC, bank regulators and the outside independent auditors may revise their previous interpretations regarding existing accounting regulations and the application of these accounting standards.
Added
Adverse developments affecting financial institutions or the financial services industry generally, such as actual events or concerns involving liquidity, defaults or non-performance, could adversely affect our operations and liquidity.
Removed
These changes can be difficult to predict and can materially impact how to record and report our financial condition and results of operations. In some cases, there could be a requirement to apply a new or revised accounting standard retroactively, resulting in the restatement of prior period financial statements.
Added
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds, including the resulting media coverage, have in the past and may in the future lead to market-wide liquidity problems and eroded customer confidence in the banking system.
Removed
The implementation of the Current Expected Credit Loss accounting standard could require us to increase our allowance for credit losses and may have a material adverse effect on our financial condition and results of operations. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Added
For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation (“DFPI”), on March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services and on May 1, 2023, First Republic Bank was closed by the DFPI, and in each case the FDIC was appointed as receiver for the failed institution.
Removed
ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss model, or CECL. ASU 2016-13 became effective for the Company on January 1, 2023. This standard requires earlier recognition of expected credit losses on loans and certain other instruments, compared to the incurred loss model.
Added
These banks had elevated levels of uninsured deposits, which may be less likely to remain at the bank over time and less stable as a source of funding than insured deposits. These failures led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions.
Removed
At the adoption date, we expect a change to the Allowance for Loan Losses of less than $1.0 million based on the expected performance of the economy at the transition date. Implementing the CECL 15 framework requires us to increase the data the Company must collect and review to determine the appropriate level of the allowance for credit losses.
Added
These events have led to a greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of their deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management.
Removed
Subsequent to the adoption date, the implementation of CECL may result in greater volatility in the level of the allowance for credit losses, depending on various factors and assumptions applied in the model, such as the forecasted economic conditions in the foreseeable future and loan payment behaviors.
Added
In connection with high-profile bank failures, uncertainty and concern has been, and may in the future be further, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns.
Removed
We maintain an allowance for loan losses that represents management’s judgment of probable losses and risks inherent in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral.
Added
While the Department of the Treasury, the FRB, and the FDIC have made statements ensuring that depositors of recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.
Removed
The determination of the appropriate level of our allowance for loan losses is inherently highly subjective and requires management to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes.
Added
In addition, the banking operating environment and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could materially and adversely impact the trading prices of our common stock and potentially our results of operations.
Removed
System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses. Our computer systems and network infrastructure could be vulnerable to hardware and cybersecurity issues.
Added
Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of our company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits.
Removed
Uncertainty about the future of LIBOR may adversely affect our business. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021.

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Item 2. Properties

Properties — owned and leased real estate

2 edited+0 added−0 removed1 unchanged
Biggest changeTruman Parkway Suite 100 Annapolis, MD 21401 Leased 11/30/26 Mortgage Office 818 Connecticut Ave Suite 900 Washington, D.C. 20006 Sub-Leased Month-to-month LPO 10700 Parkridge Boulevard Suite 180 Reston, VA 20191 Leased 11/30/23 Commercial Branch, Mortgage Office, and OpenSky ® Headquarters 1400 W Street, NW Suite 170 Washington, DC 20009 Leased 2/28/2033 Commercial Branch 28
Biggest changeTruman Parkway Suite 100 Annapolis, MD 21401 Leased 11/30/2026 Mortgage Office 10700 Parkridge Boulevard Suite 180 Reston, VA 20191 Leased 5/31/2024 Commercial Branch, Mortgage Office, and OpenSky ™ Headquarters 1400 W Street, NW Suite 170 Washington, DC 20009 Leased 2/28/2033 Commercial Branch 1900 Campus Commons Drive Suite 130 Reston, VA 20191 Leased 9/30/2031 Commercial Branch, Mortgage Office, and OpenSky ™ Headquarters 1104 Kenilworth Drive Suite 210 Towson, MD 21204 Leased 1/31/2027 LPO 32
Location Owned/Leased Lease Expiration Type of office One Church Street Suite 100 Rockville, MD 20850 Leased 6/30/24 Commercial Branch 2275 Research Blvd. Suite 600 Rockville, MD 20850 Sub-Leased 9/30/24 Corporate 6711 Columbia Gateway Drive Suite 170 Columbia, MD 21046 Leased 11/30/27 Commercial Branch/Mortgage Office 110 Gibraltar Road Suite 130 Horsham, PA 19044 Leased 8/31/25 OpenSky ® Operations 185 Harry S.
Location Owned/Leased Lease Expiration Type of office One Church Street Suite 100 Rockville, MD 20850 Leased 12/31/2026 Commercial Branch 2275 Research Blvd. Suite 600 Rockville, MD 20850 Sub-Leased 10/31/2024 Corporate 6711 Columbia Gateway Drive Suite 170 Columbia, MD 21046 Leased 11/30/2027 Commercial Branch/LPO 110 Gibraltar Road Suite 130 Horsham, PA 19044 Leased 8/31/2026 OpenSky ™ Operations 185 Harry S.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeOn July 25, 2022, the Company announced a new stock repurchase program. Under the new program, the Company is authorized to repurchase up to $10.0 million of its outstanding common stock, par value $0.01 per share (“Common Stock”). The program will expire on December 31, 2023. For the year ended December 31, 2022 there were no stock repurchases.
Biggest changeOn July 25, 2022, the Company announced a new stock repurchase program. Under the new program, the Company is authorized to repurchase up to $10.0 million of its outstanding common stock, or 500,000 shares of Common Stock, par value $0.01 per share (“Common Stock”).
As a general matter, the payment of dividends is at the discretion of the Company’s board of directors, based on such factors as operating results, financial condition, capital adequacy, regulatory requirements, and stockholder return.
As a general matter, the payment of dividends is at the discretion of the Company’s board of directors, based on such factors as operating results, financial condition, capital adequacy and regulatory requirements.
Various statutory provisions restrict the amount of dividends that the Bank can pay without regulatory approval. Equity Compensation Plan Information The following table provides information as of December 31, 2022, with respect to options and RSUs outstanding and shares available for future awards under the Company’s active equity incentive plans.
Various statutory provisions restrict the amount of dividends that the Bank can pay without regulatory approval. Equity Compensation Plan Information The following table provides information as of December 31, 2023, with respect to options and restricted stock units (“RSUs”) outstanding and shares available for future awards under the Company’s active equity incentive plans.
Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders: Capital Bancorp, Inc. 2017 Stock and Incentive Compensation Plan 811,160 $ 15.37 896,462 Equity compensation plans not approved by security holders — — — Total 811,160 $ 14.77 896,462 30 Unregistered Sales and Issuer Repurchases of Common Stock There were no unregistered sales of the Company’s stock during the year ended December 31, 2022.
Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders: Capital Bancorp, Inc. 2017 Stock and Incentive Compensation Plan 550,718 $ 19.21 792,846 Equity compensation plans not approved by security holders — — — Total 550,718 $ 19.21 792,846 34 Unregistered Sales and Issuer Repurchases of Common Stock There were no unregistered sales of the Company’s stock during the year ended December 31, 2023.
As of March 14, 2023, there were approximately 152 holders of record of our common stock. Dividends Commencing with the third quarter of 2021, shareholders have received quarterly cash dividends on shares of common stock which totaled $3.1 million in 2022.
As of March 13, 2024, there were approximately 158 holders of record of our common stock. Dividends Commencing with the third quarter of 2021, shareholders have received quarterly cash dividends on shares of common stock. Dividends paid in 2023 totaled $3.9 million.
Added
On April 13, 2023, the Company announced approval of up to an additional $5.0 million or 175,000 shares of Common Stock incremental to the July 2022 announcement. The program will expire on December 31, 2024. There were no stock repurchases by the Company under the repurchase program announced on July 25, 2022, prior to the quarter ended March 31, 2023.
Added
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.
Added
During the three months ended December 31, 2023, the Company repurchased Common Stock under the stock repurchase program as reflected in the following table.
Added
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs October 1, 2023 to October 31, 2023 19,830 $ 19.75 405,749 $ 7,615,183 November 1, 2023 to November 30, 2023 53,562 20.40 459,311 6,522,616 December 1, 2023 to December 31, 2023 16,035 21.86 475,346 6,172,016

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeNoninterest 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.
Biggest changeNoninterest 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. 42 The following table presents, for the periods indicated, the major categories of noninterest income: Years Ended December 31, (in thousands) 2023 2022 % Change Noninterest income: Service charges on deposit accounts $ 964 $ 767 25.7 % Credit card fees 17,273 21,972 (21.4) Mortgage banking revenue 4,896 4,866 0.6 Other income 1,842 1,767 4.2 Total noninterest income $ 24,975 $ 29,372 (15.0) % 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.
Securities The Company uses its securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. Management classifies investment securities as either held to maturity or available for sale based on our intentions and the Company’s ability to hold such securities until maturity.
Investment Securities The Company uses its securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. Management classifies investment securities as either held to maturity or available for sale based on our intentions and the Company’s ability to hold such securities until maturity.
In general, we place loans on nonaccrual status when they become 90 days past due. 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.
In general, we place loans on nonaccrual status when they become 90 days past due. 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 the interest accrual is discontinued, all unpaid accrued interest is reversed from income.
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.
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.
Unlike many industrial companies, substantially all of our 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. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services.
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. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services.
In August of 2018 the Regulatory Relief Act directed the Federal Reserve Board to revise the Small BHC 48 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.
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 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. A rising interest rate environment dampened home loan sales and home loan refinances.
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.
Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations.
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.
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 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.
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.
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.
As of December 31, 2022, the Bank was in compliance with all applicable regulatory capital requirements to which it was subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings.
As of December 31, 2023, the Bank was in compliance with all applicable regulatory capital requirements to which it was subject, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of common equity Tier 1, Tier 1, and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1,250%.
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. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.
Nonperforming Assets 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. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.
The Company also has lines of credit of $76.0 million available with other correspondent banks at December 31, 2022, as well as access to certificate of deposit funding through a financial network which the Bank strives to limit to 15% of the Bank’s assets.
The Company also has 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.
Financial Statements and Supplementary Data - Notes to Financial Statements - Note 1. Summary of Significant Accounting Policies.” Results of Operations for the Years Ended December 31, 2022 and 2021 Net Income The following table sets forth the principal components of net income for the periods indicated.
Financial Statements and Supplementary Data - Notes to Financial Statements - Note 1. Summary of Significant Accounting Policies.” Results of Operations for the Years Ended December 31, 2023 and 2022 Net Income The following table sets forth the principal components of net income for the periods indicated.
There were no outstanding balances on the lines of credit from correspondent banks at December 31, 2022. Liquidity Liquidity is defined as the Bank’s capacity to meet its cash and collateral obligations at a reasonable cost.
There were no outstanding balances on the lines of credit from correspondent banks at December 31, 2023. Liquidity Liquidity is defined as the Bank’s capacity to meet its cash and collateral obligations at a reasonable cost.
Our liquidity monitoring and management consider both present and future demands for and sources of liquidity. The following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as of December 31, 2022.
Our liquidity monitoring and management consider both present and future demands for and sources of liquidity. The following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as of December 31, 2023.
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, 2022 and 2021.
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.
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.
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.
Critical elements of our liquidity risk management include: corporate governance consisting of oversight by the board of directors and active involvement by management; strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are believed to be commensurate with the complexity and business activities of the Bank; active management of intraday liquidity and collateral; 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 47 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.
Critical elements of our liquidity risk management include: corporate governance consisting of oversight by the board of directors and active involvement by management; strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are believed to be commensurate with the complexity and business activities of the Bank; active management of intraday liquidity and collateral; a diverse mix of existing and potential future funding sources; 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.
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.
Critical Accounting Policies The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry.
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. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
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.
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 loan customers primarily consist of small- to medium-sized businesses, professionals, real estate investors, small residential builders and individuals.
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.
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 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.
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 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 related disclosures.
Our lending activities, outside of credit cards, are principally directed to our market area consisting of the Washington, D.C. and Baltimore, Maryland metropolitan areas. 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.
Our lending activities, outside of credit cards, are principally directed to our market area consisting of the Washington, D.C. and Baltimore, Maryland metropolitan areas. Residential Real Estate Loans . One-to-four family mortgage loans are primarily secured by owner-occupied primary and secondary residences and, to a lesser extent, investor-owned residences.
Impact of Inflation Our consolidated financial statements and related notes included elsewhere in this report 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.
Impact of Inflation 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.
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". 32 Recent Accounting Pronouncements For a discussion of Recent Accounting Pronouncements, see “Part II, Item 8.
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 For a discussion of Recent Accounting Pronouncements, see “Part II, Item 8.
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.
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.” 37 The critical accounting and reporting policies include the Company’s accounting for the ACL.
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 36 portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.
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.
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. 49 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.
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. 58 The following table presents the regulatory capital ratios for the Company and the Bank as of the dates indicated.
(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. 35 Rate/Volume Analysis of Net Interest Income The rate/volume table below presents the composition of the change in net interest income for the periods indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest-bearing liabilities, and the changes in net interest income due to changes in interest rates.
(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. 40 Rate/Volume Analysis of Net Interest Income The rate/volume table below presents the composition of the change in net interest income for the periods indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest-bearing liabilities, and the changes in net interest income due to changes in interest rates.
Lines of credit generally have variable interest rates. Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, we would be required to fund the commitment.
Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, we would be required to fund the commitment.
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.
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.
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.
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.
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 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.
Income tax expense was $12.4 million for 2022 compared to $13.9 million for 2021. Our effective tax rates for those periods were 22.9% and 25.8%, respectively. 38 Financial Condition The following table summarizes the Company’s financial condition at the dates indicated.
Income tax expense was $10.4 million for 2023 compared to $12.4 million for 2022. Our effective tax rates for those periods were 22.4% and 22.9%, respectively. 44 Financial Condition The following table summarizes the Company’s financial condition at the dates indicated.
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.
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.
Treasuries as the spread between treasuries and other investment portfolios continued to contract. 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, 2022 and the amortized cost and carrying value of those securities as of the indicated dates.
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.
December 31, 2022 2021 (in thousands) Amount Percent (1) Amount Percent (1) Real estate: Residential $ 5,481 21 % $ 5,612 22 % Commercial 8,098 31 8,566 34 Construction 3,782 14 4,699 19 Commercial and Industrial 2,935 11 2,637 10 Credit card 6,078 23 3,655 15 Other consumer 11 — 12 — Total allowance for loan losses $ 26,385 100 % $ 25,181 100 % _______________ (1) Loan category as a percentage of total portfolio loans which excludes SBA-PPP loans.
December 31, 2023 2022 (in thousands) Amount Percent (1) Amount Percent (1) Real estate: Residential $ 5,518 19 % $ 5,481 21 % Commercial 10,316 36 8,098 31 Construction 2,271 8 3,782 14 Commercial and Industrial 4,406 16 2,935 11 Credit card 6,087 21 6,078 23 Other consumer 12 — 11 — Total allowance for credit losses $ 28,610 100 % $ 26,385 100 % _______________ (1) Loan category as a percentage of total portfolio loans which excludes SBA-PPP loans.
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.
For the years presented, all securities were classified as available for sale. 45 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.
Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect actual future cash funding requirements.
Our commitments associated with outstanding letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect actual future cash funding requirements.
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.
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, 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.
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.
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. 53 The following table shows the allocation of the ACL among loan categories as of the dates indicated.
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.
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.
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.
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 Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
The Company uses several indicators of capital strength. 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. 57 The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
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. Other Consumer Loans .
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).
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. The steepening of the yield curve in 2022 resulted in continued decline in home loan sales and home loan refinances.
The Bank’s Capital Bank Home Loans division saw a decline in mortgage originations during the year ended December 31, 2023 when compared to the prior year. A rising interest rate environment dampened home loan sales and home loan refinances.
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. 51 We seek to minimize our exposure to loss under letters of credit and credit commitments by subjecting them to the same credit approval and monitoring procedures as we do for on-balance sheet instruments.
We seek to minimize our exposure to loss under letters of credit and credit commitments by subjecting them to the same credit approval and monitoring procedures as we do for on-balance sheet instruments.
Ratings are adjusted regularly to reflect the degree of risk and loss that our management believes to be appropriate for each credit.
The classifications of loans reflect a judgment about the risks of default and loss associated with each loan. Credit ratings are reviewed regularly and adjusted regularly to reflect the degree of risk and loss that our management believes to be appropriate for each credit.
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. Commercial Real Estate Loans . The Company originates both owner-occupied and non-owner-occupied commercial real estate loans.
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 . Commercial real estate loans are originated on owner-occupied and non-owner-occupied properties.
Management has established a risk management process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is integrated into our risk management processes.
Because of its critical importance to the viability of the Bank, liquidity risk management is integrated into our risk management processes.
ITEM 7. 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 discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction 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.
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 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.
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.
Personal guaranties from the borrower or other principal are generally obtained. 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.
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.
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.
The following table details contractual maturities of our portfolio loans, along with an analysis of loans maturing after one year categorized by rate characteristic. Loans with adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments.
Loans with adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments.
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. Our commitments associated with outstanding letters of credit and commitments to extend credit expiring by period as of the date indicated are summarized below.
We are not aware of any accounting loss to be incurred by funding these commitments; 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.
The Bank does not originate “sub-prime” mortgage loans and has no exposure to this market segment 37 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.
Noninterest Expense Generally, noninterest expense is comprised of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services, with the largest component being salaries and employee benefits.
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. We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.
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. As of December 31, 2023, we had $22.0 million in outstanding advances and $291.5 million in available borrowing capacity from the FHLB. 55 Other borrowed funds .
Net interest margin is a ratio calculated as net interest income annualized 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.
Net interest spread is the difference between average interest rates earned on interest earning assets and average interest rates paid on interest-bearing liabilities.
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 44 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.
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.
Any loan which the Bank deems to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. 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.
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. 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 following table presents key ratios for the allowance for loan losses 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 Real estate: Residential 1.13 % 1.40 % 0.88 % 0.71 % 128 % 198 % Commercial 1.22 1.54 0.24 — 518 34,606 Construction 1.59 1.84 1.19 3.06 133 60 Commercial and Industrial 1.33 1.50 0.32 0.38 417 390 Credit card 4.73 2.59 — — — — Other consumer 0.88 1.13 — — — — Total 1.53 % 1.65 % 0.56 % 0.70 % 270 % 220 % _____________ (1) Allowance calculation excludes SBA-PPP loans.
The Company calculates the credit card ACL collectively, applying segmentation based on collateral positions: secured, partially secured, and unsecured. 52 The following table presents key ratios for the ACL and nonaccrual loans for the periods indicated: For the Years Ended December 31, 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) Real estate: Residential 0.96 % 1.13 % 1.99 % 0.88 % 48 % 128 % Commercial 1.51 1.22 0.09 0.24 1,773 518 Construction 0.78 1.59 1.13 1.19 69 133 Commercial and Industrial 1.85 1.33 0.32 0.32 569 417 Credit card 4.94 4.73 — — — — Other consumer 1.26 0.88 — — — — Total 1.50 % 1.53 % 0.84 % 0.56 % 178 % 270 % _____________ (1) Allowance calculation excludes SBA-PPP loans.
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.
The Company frequently 47 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.
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. Credit Cards .
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.
Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. 34 AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS Years Ended December 31, 2022 2021 ($ in thousands) Average Outstanding Balance Interest Income/ Expense Average Yield/ Rate Average Outstanding Balance Interest Income/ Expense Average Yield/ Rate Assets Interest earning assets: Interest-bearing deposits $ 156,751 $ 2,007 1.28 % $ 228,420 $ 283 0.12 % Federal funds sold 2,959 44 1.49 2,850 — — Investment securities 248,869 3,912 1.57 150,750 2,010 1.33 Restricted investments 5,475 275 5.02 3,774 166 4.40 Loans held for sale 9,696 435 4.49 43,126 1,224 2.84 SBA-PPP loans receivable 29,831 3,477 11.66 190,588 7,613 3.99 Portfolio loans (1)(2) 1,579,661 140,496 8.89 1,370,988 111,947 8.17 Total interest earning assets 2,033,242 150,646 7.41 1,990,496 123,243 6.19 Noninterest earning assets 44,559 45,348 Total assets $ 2,077,801 $ 2,035,844 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Interest-bearing demand accounts $ 253,923 $ 174 0.07 % $ 289,285 $ 202 0.07 % Savings 8,917 5 0.06 6,470 3 0.05 Money market accounts 553,388 4,529 0.82 482,225 1,484 0.31 Time deposits 165,854 2,903 1.75 269,262 4,119 1.53 Borrowed funds 77,556 2,428 3.13 34,214 742 2.17 Total interest-bearing liabilities 1,059,638 10,039 0.95 1,081,456 6,550 0.61 Noninterest-bearing liabilities: Noninterest-bearing liabilities 23,797 24,128 Noninterest-bearing deposits 781,971 750,760 Stockholders’ equity 212,395 179,500 Total liabilities and stockholders’ equity $ 2,077,801 $ 2,035,844 Net interest spread 6.46 % 5.58 % Net interest income $ 140,607 $ 116,693 Net interest margin (3) 6.92 % 5.86 % _______________ (1) Includes nonaccrual loans.
Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. 39 AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS Years Ended December 31, 2023 2022 ($ in thousands) Average Outstanding Balance Interest Income/ Expense Average Yield/ Rate Average Outstanding Balance Interest Income/ Expense Average Yield/ Rate Assets Interest earning assets: Interest-bearing deposits $ 70,407 $ 3,211 4.56 % $ 156,751 $ 2,007 1.28 % Federal funds sold 1,597 74 4.63 2,959 44 1.49 Investment securities 245,466 4,815 1.96 248,869 3,912 1.57 Restricted investments 5,016 346 6.90 5,475 275 5.02 Loans held for sale 5,755 382 6.64 9,696 435 4.49 SBA-PPP loans receivable 1,373 30 2.18 29,831 3,477 11.66 Portfolio loans receivable (1)(2) 1,815,595 174,348 9.60 1,579,661 140,496 8.89 Total interest earning assets 2,145,209 183,206 8.54 2,033,242 150,646 7.41 Noninterest earning assets 43,090 44,559 Total assets $ 2,188,299 $ 2,077,801 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Interest-bearing demand accounts $ 201,194 $ 298 0.15 % $ 253,923 $ 174 0.07 % Savings 5,768 8 0.14 8,917 5 0.06 Money market accounts 642,013 23,510 3.66 553,388 4,529 0.82 Time deposits 360,464 15,809 4.39 165,854 2,903 1.75 Borrowed funds 59,302 2,055 3.47 77,556 2,428 3.13 Total interest-bearing liabilities 1,268,741 41,680 3.29 1,059,638 10,039 0.95 Noninterest-bearing liabilities: Noninterest-bearing liabilities 24,026 23,797 Noninterest-bearing deposits 655,013 781,971 Stockholders’ equity 240,519 212,395 Total liabilities and stockholders’ equity $ 2,188,299 $ 2,077,801 Net interest spread 5.25 % 6.46 % Net interest income $ 141,526 $ 140,607 Net interest margin (3) 6.60 % 6.92 % _______________ (1) Includes nonaccrual loans.
These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity and asset/liability management.
These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity) and contingent liquidity events.
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.
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.
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 60 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.
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.
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.
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.
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.
Year Ended December 31, 2022 Year Ended December 31, 2021 Compared to Compared to December 31, 2021 December 31, 2020 Change Due To Interest Variance Change Due To Interest Variance (In thousands) Volume Rate Volume Rate Interest Income: Interest-bearing deposits $ (918) $ 2,642 $ 1,724 $ 144 $ (205) $ (61) Federal funds sold 2 42 44 — (4) (4) Investment securities 1,542 360 1,902 1,239 (521) 718 Restricted investments 85 24 109 (11) (67) (78) Loans held for sale (1,500) 711 (789) (1,186) (200) (1,386) 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) Credit card loans 7,093 8,003 15,096 22,064 1,659 23,723 Total interest income (2,108) 29,511 27,403 28,318 (2,326) 25,992 Interest Expense: Interest-bearing demand accounts (24) (4) (28) 65 (519) (454) Savings 2 — 2 1 (3) (2) Money market accounts 582 2,463 3,045 6 (3,308) (3,302) Time deposits (1,810) 594 (1,216) (440) (1,518) (1,958) Borrowed funds 1,357 329 1,686 (179) (737) (916) Total interest expense 107 3,382 3,489 (547) (6,085) (6,632) Net interest income $ (2,215) $ 26,129 $ 23,914 $ 28,865 $ 3,759 $ 32,624 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.
Year Ended December 31, 2023 Year Ended December 31, 2022 Compared to Compared to December 31, 2022 December 31, 2021 Change Due To Interest Variance Change Due To Interest Variance (In thousands) Volume Rate Volume Rate Interest Income: Interest-bearing deposits $ (3,937) $ 5,141 $ 1,204 $ (918) $ 2,642 $ 1,724 Federal funds sold (63) 93 30 2 42 44 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 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 Total interest income 5,121 27,439 32,560 (2,108) 29,511 27,403 Interest Expense: Interest-bearing demand accounts (79) 203 124 (24) (4) (28) Savings (4) 7 3 2 — 2 Money market accounts 3,244 15,737 18,981 582 2,463 3,045 Time deposits 8,527 4,379 12,906 (1,810) 594 (1,216) Borrowed funds (637) 264 (373) 1,357 329 1,686 Total interest expense 11,051 20,590 31,641 107 3,382 3,489 Net interest income $ (5,930) $ 6,849 $ 919 $ (2,215) $ 26,129 $ 23,914 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.
Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are, in management’s opinion, reasonably assured. Loans are generally charged-off in part or in full when management determines the loan to be uncollectible.
December 31, (in thousands) 2022 2021 Unfunded lines of credit $ 345,063 $ 360,386 Commitments to originate residential loans held for sale — 1,385 Letters of credit 5,105 5,105 Commitment to fund other investments 4,365 6,352 Total credit extension commitments $ 354,533 $ 373,228 Unfunded lines of credit represent unused credit facilities to our current borrowers.
December 31, (in thousands) 2023 2022 Unfunded lines of credit $ 336,472 $ 345,063 Letters of credit 4,641 5,105 Commitment to fund other investments 3,874 4,365 Total credit extension commitments $ 344,987 $ 354,533 Unfunded lines of credit represent unused credit facilities to our current borrowers. Lines of credit generally have variable interest rates.
(in thousands) Actual Minimum Capital Adequacy To Be Well Capitalized Full Phase In of Basel III December 31, 2022 Amount Ratio Amount Ratio Amount Ratio Amount Ratio The Company Tier 1 leverage ratio (to average assets) $ 242,829 11.24 % $ 86,442 4.00 % N/A N/A N/A N/A Tier 1 capital (to risk-weighted assets) 242,829 15.13 96,315 6.00 N/A N/A 136,447 8.50 % Common equity tier 1 capital ratio (to risk-weighted assets) 240,767 15.00 72,237 4.50 N/A N/A 112,368 7.00 Total capital ratio (to risk-weighted assets) 262,217 16.33 128,421 8.00 N/A N/A 168,552 10.50 The Bank 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 capital (to risk-weighted assets) 199,846 12.95 92,574 6.00 123,432 8.00 131,147 8.50 % Common equity tier 1 capital ratio (to risk-weighted assets) 199,846 12.95 69,431 4.50 100,289 6.50 108,003 7.00 Total capital ratio (to risk-weighted assets) 219,234 14.21 123,432 8.00 154,290 10.00 162,005 10.50 December 31, 2021 The Company 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 capital (to risk-weighted assets) 201,040 14.43 83,596 6.00 N/A N/A 118,428 8.50 % Common equity tier 1 capital ratio (to risk-weighted assets) 198,978 14.28 62,697 4.50 N/A N/A 97,529 7.00 Total capital ratio (to risk-weighted assets) 228,574 16.41 111,462 8.00 N/A N/A 146,294 10.50 The Bank 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 capital (to risk-weighted assets) 169,384 12.53 81,097 6.00 108,130 8.00 114,888 8.50 % Common equity tier 1 capital ratio (to risk-weighted assets) 169,384 12.53 60,823 4.50 87,856 6.50 94,614 7.00 Total capital ratio (to risk-weighted assets) 186,397 13.79 108,130 8.00 135,162 10.00 141,921 10.50 50 Contractual Obligations We have contractual obligations to make future payments on debt and lease agreements.
(in thousands) Actual Minimum Capital Adequacy To Be Well Capitalized December 31, 2023 Amount Ratio Amount Ratio Amount Ratio The Company 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 Common equity tier 1 capital ratio (to risk-weighted assets) 267,957 15.43 78,132 4.50 N/A N/A Total capital ratio (to risk-weighted assets) 301,817 17.38 138,900 8.00 N/A N/A The Bank 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 Common equity tier 1 capital ratio (to risk-weighted assets) 228,794 13.56 75,938 4.50 109,688 6.50 Total capital ratio (to risk-weighted assets) 249,984 14.81 135,001 8.00 168,751 10.00 December 31, 2022 The Company 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 Common equity tier 1 capital ratio (to risk-weighted assets) 240,767 15.00 72,237 4.50 N/A N/A Total capital ratio (to risk-weighted assets) 262,217 16.33 128,421 8.00 N/A N/A The Bank 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 Common equity tier 1 capital ratio (to risk-weighted assets) 199,846 12.95 69,431 4.50 100,289 6.50 Total capital ratio (to risk-weighted assets) 219,234 14.21 123,432 8.00 154,290 10.00 59 Contractual Obligations We have contractual obligations to make future payments on debt and lease agreements.
The following table shows the allocation of the allowance for loan losses among loan categories as of the dates indicated. The total allowance is available to absorb losses from any loan category.
The total allowance is available to absorb losses from any loan category.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeThe following table summarizes the results of our EAR analysis in simulating the change in net interest income and fair value of equity over a 12-month horizon as of December 31, 2022: IMPACT ON NET INTEREST INCOME UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK Earnings at Risk -300 bps -200 bps -100 bps Flat +100 bps +200 bps +300 bps December 31, 2022 (4.8) % (3.3) % (1.6) % 0.0 % 2.3 % 5.5 % 8.8 % Utilizing an economic value of equity (“EVE”) approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model.
Biggest changeThe following table summarizes the results of our EAR analysis in simulating the change in net interest income and fair value of equity over a 12-month horizon as of December 31, 2023: IMPACT ON NET INTEREST INCOME UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK Earnings at Risk -400 bps -300 bps -200 bps -100 bps Flat +100 bps +200 bps +300 bps +400 bps December 31, 2023 0.7 % (1.4) % (2.2) % (1.4) % 0.0 % 1.3 % 2.5 % 3.7 % 4.9 % Utilizing an economic value of equity (“EVE”) approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model.
Our exposure to interest rate risk is managed by the Bank’s Asset/Liability Management Committee (“ALCO”) in accordance with policies approved by our board of directors. The committee formulates strategies based on perceived levels of interest rate risk.
Our exposure to interest rate risk is managed by the Bank’s Asset/Liability Management Committee (“ALCO”) in accordance with policies approved by our board of directors. The ALCO formulates strategies based on perceived levels of interest rate risk.
We also use economic value-based methodologies to measure the degree to which the economic values of the Bank’s positions change under different interest rate scenarios. The economic-value approach focuses on a longer-term time horizon and endeavors to capture all future cash flows expected from existing assets and liabilities.
We also use economic value-based methodologies to estimate the degree to which the economic values of the Bank’s positions change under different interest rate scenarios. The economic-value approach focuses on a longer-term time horizon and endeavors to capture all future cash flows expected from existing assets and liabilities.
These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to mitigate the inherent risk while at the same time maximizing income.
These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings.
The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings.
We endeavor to hedge the interest rate risks of our available for sale mortgage pipeline by using mortgage-backed securities, and short positions. Based on the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
We endeavor to hedge the interest rate risks of our available for sale mortgage pipeline by using MBS, and short positions. Based on the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
The economic value model utilizes a static approach in that the analysis does not incorporate new business; rather, the analysis shows a snapshot in time of the risk inherent in the balance sheet. 55
The economic value model utilizes a static approach in that the analysis does not incorporate new business; rather, the analysis shows a snapshot in time of the risk inherent in the balance sheet. 67
Because of the inherent use of these estimates and assumptions in the model, our actual results may, and very likely will, differ from our static EAR results. In addition, static EAR results do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior.
Because of the inherent use of these estimates and assumptions in the model, our actual results may, and very likely will, differ from our static earnings at risk (“EAR”) results. In addition, static EAR results do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior.
We use quarterly Earnings at Risk (“EAR”) simulations to assess the impact of changing interest rates on our earnings under a variety of scenarios and time horizons. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as non-parallel changes such as changing slopes and twists of the yield curve.
We use quarterly EAR simulations to assess the impact of changing interest rates on our earnings under a variety of scenarios and time horizons. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as non-parallel changes such as changing slopes and twists of the yield curve.
Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest earning assets and interest-bearing liabilities and an interest rate shock simulation model.
Additionally, the ALCO reviews liquidity, capital planning, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest earning assets and interest-bearing liabilities and an interest rate shock simulation model.
The following table illustrates the results of our EVE analysis as of December 31, 2022.
The following table illustrates the results of our EVE analysis as of December 31, 2023.
ECONOMIC VALUE OF EQUITY ANALYSIS UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK Economic Value of Equity -300 bps -200 bps -100 bps Flat +100 bps +200 bps +300 bps December 31, 2022 (7.0) % (3.3) % (1.1) % 0.0 % (0.2) % (0.9) % (0.9) % 53 Interest Rate Sensitivity and Market Risk As a financial institution, our primary component of market risk is interest rate volatility.
ECONOMIC VALUE OF EQUITY ANALYSIS UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK Economic Value of Equity -400 bps -300 bps -200 bps -100 bps Flat +100 bps +200 bps +300 bps +400 bps December 31, 2023 (9.8) % (4.5) % (1.1) % (0.1) % 0.0 % (0.7) % (2.0) % (2.8) % (4.0) % 65 Interest Rate Sensitivity and Market Risk As a financial institution, our primary component of market risk is interest rate volatility.
Removed
For a bank with an asset-sensitive position, or positive gap, rising interest rates would generally be expected to have a positive effect on net interest income, and falling interest rates would generally be expected to have the opposite effect. 54 INTEREST SENSITIVITY GAP December 31, 2022 Within One Month After One Month Through Three Months After Three Through Twelve Months Within One Year Greater Than One Year Total (in thousands) Assets Interest earning assets Loans (1) $ 397,979 $ 346,564 $ 248,165 $ 992,708 $ 719,078 $ 1,711,786 Securities 9,828 7,448 59,390 76,666 183,177 259,843 Interest-bearing deposits at other financial institutions 39,764 — — 39,764 19,963 59,727 Federal funds sold 20,688 — — 20,688 — 20,688 Total earning assets $ 468,259 $ 354,012 $ 307,555 $ 1,129,826 $ 922,218 $ 2,052,044 Liabilities Interest-bearing liabilities Interest-bearing deposits $ 11,755 $ 23,510 $ 105,797 $ 141,062 $ 649,282 $ 790,344 Time deposits 3,991 36,826 140,637 181,454 111,961 293,415 Total Interest-bearing deposits 15,746 60,336 246,434 322,516 761,243 1,083,759 FHLB Advances 35,000 50,000 — 85,000 22,000 107,000 Other borrowed funds — — — — 12,062 12,062 Total Interest-bearing liabilities $ 50,746 $ 110,336 $ 246,434 $ 407,516 $ 795,305 $ 1,202,821 Period gap $ 417,513 $ 243,676 $ 61,121 $ 722,310 $ 126,913 $ 849,223 Cumulative gap $ 417,513 $ 661,189 $ 722,310 $ 722,310 $ 849,223 Ratio of cumulative gap to total earning assets 20.35 % 32.22 % 35.20 % 35.20 % 41.38 % _______________ (1) Includes loans held for sale.
Added
For a bank with an asset-sensitive position, or positive gap, rising interest rates would generally be expected to have a positive effect on net interest income, and falling interest rates would generally be expected to have the opposite effect. 66 INTEREST SENSITIVITY GAP December 31, 2023 Within One Month After One Month Through Three Months After Three Through Twelve Months Within One Year Greater Than One Year or Non-Sensitive Total (in thousands) Assets Interest earning assets Loans (1) $ 351,769 $ 471,678 $ 319,530 $ 1,142,977 $ 767,792 $ 1,910,769 Securities 3,756 21,571 28,444 53,771 158,911 212,682 Interest-bearing deposits at other financial institutions 39,044 — — 39,044 — 39,044 Federal funds sold 407 — — 407 — 407 Total earning assets $ 394,976 $ 493,249 $ 347,974 $ 1,236,199 $ 926,703 $ 2,162,902 Liabilities Interest-bearing liabilities Interest-bearing deposits $ 13,138 $ 26,277 $ 116,536 $ 155,951 $ 711,697 $ 867,648 Time deposits 69,921 50,844 229,894 350,659 60,316 410,975 Total Interest-bearing deposits 83,059 77,121 346,430 506,610 772,013 1,278,623 FHLB Advances 15,000 — — 15,000 7,000 22,000 Other borrowed funds — — — — 27,062 27,062 Total Interest-bearing liabilities $ 98,059 $ 77,121 $ 346,430 $ 521,610 $ 806,075 $ 1,327,685 Period gap $ 296,917 $ 416,128 $ 1,544 $ 714,589 $ 120,628 $ 835,217 Cumulative gap $ 296,917 $ 713,045 $ 714,589 $ 714,589 $ 835,217 Ratio of cumulative gap to total earning assets 13.73 % 32.97 % 33.04 % 33.04 % 38.62 % _______________ (1) Includes loans held for sale and loans made under the SBA-PPP loan program.

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