Capital Bancorp(CBNK) - 2025 Q2 - Quarterly Report

PART I - CONSOLIDATED FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis of Capital Bancorp, Inc. Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements of Capital Bancorp, Inc. and its subsidiaries, including balance sheets, income statements, comprehensive income statements, statements of changes in stockholders' equity, cash flow statements, and accompanying notes, providing a detailed view of the Company's financial performance and position for the periods ended June 30, 2025 Consolidated Balance Sheets The Consolidated Balance Sheets provide a snapshot of the Company's financial position, showing a notable increase in total assets, portfolio loans, deposits, and stockholders' equity from December 31, 2024, to June 30, 2025 | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :--------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | :------- | | Total assets | $3,388,662 | $3,206,911 | $181,751 | 5.7% | | Portfolio loans receivable, net | $2,692,361 | $2,581,511 | $110,850 | 4.3% | | Total deposits | $2,940,738 | $2,761,939 | $178,799 | 6.5% | | Total stockholders' equity | $380,035 | $355,139 | $24,896 | 7.0% | | Allowance for credit losses | $47,447 | $48,652 | $(1,205) | (2.5%) | Consolidated Statements of Income The Consolidated Statements of Income reveal significant growth in net income for both the three and six months ended June 30, 2025, driven by increased interest and noninterest income, despite higher noninterest expenses | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | % Change | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | :------- | | Net income | $13,136 | $8,205 | 60.1% | | Total interest income | $64,586 | $50,615 | 27.6% | | Total noninterest income | $13,106 | $6,890 | 90.2% | | Total noninterest expenses | $39,572 | $29,493 | 34.2% | | Basic earnings per share | $0.79 | $0.59 | 33.9% | | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | % Change | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | :------- | | Net income | $27,068 | $14,767 | 83.3% | | Basic earnings per share | $1.63 | $1.06 | 53.8% | Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income show a substantial increase in comprehensive income for both the three and six months ended June 30, 2025, primarily due to higher net income and an increase in unrealized gains on available-for-sale investment securities | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | % Change | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | :------- | | Comprehensive income | $14,231 | $8,725 | 63.1% | | Unrealized gain on investment securities available-for-sale (net of tax) | $1,095 | $520 | 110.6% | | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | % Change | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | :------- | | Comprehensive income | $30,425 | $14,750 | 106.3% | | Unrealized gain on investment securities available-for-sale (net of tax) | $3,357 | $(17) | N/A | Consolidated Statements of Changes in Stockholders' Equity This statement details the movements in stockholders' equity, reflecting increases from net income and unrealized gains on investment securities, partially offset by cash dividends and share repurchases, leading to an overall increase in total stockholders' equity | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | | Total stockholders' equity | $380,035 | $355,139 | | Retained earnings | $261,093 | $237,843 | | Accumulated other comprehensive loss | $(8,112) | $(11,469) | - Cash dividends to stockholders were $0.10 per share for both the three months ended March 31, 2025, and June 30, 2025[10] - Shares repurchased and retired totaled 93,170 shares during the three months ended June 30, 2025, and 22,185 shares during the three months ended March 31, 2025[10] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows illustrate the Company's cash generation and usage across operating, investing, and financing activities, showing an overall increase in cash and cash equivalents for the six months ended June 30, 2025 | Cash Flow Activity | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | % Change | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | :------- | | Net cash provided by operating activities | $18,368 | $9,486 | 93.6% | | Net cash used in investing activities | $(121,361) | $(123,145) | (1.4%) | | Net cash provided by financing activities | $172,267 | $196,206 | (12.3%) | | Net increase in cash and cash equivalents | $69,274 | $82,547 | (16.1%) | | Cash and cash equivalents, end of period | $274,606 | $136,511 | 101.2% | Notes to Unaudited Consolidated Financial Statements These notes provide essential details and explanations for the unaudited consolidated financial statements, covering the Company's business nature, recent acquisition, investment securities, loan servicing, portfolio loans, leases, goodwill, fair value measurements, segment reporting, and subsequent events Note 1 - Nature of Business and Basis of Presentation This note describes Capital Bancorp, Inc. as a Maryland corporation and bank holding company for Capital Bank, N.A., operating through four divisions: Commercial Banking, OpenSky™, Windsor Advantage, LLC, and Capital Bank Home Loans. It outlines the basis of presentation for the unaudited interim consolidated financial statements, adherence to GAAP, and recent accounting standard adoptions - Capital Bancorp, Inc. operates through four divisions: Commercial Banking, OpenSky™, Windsor Advantage, LLC, and Capital Bank Home Loans (CBHL)[13][15][17] - The Company adopted ASU 2023-07, 'Segment Reporting,' effective December 31, 2024, requiring enhanced segment disclosures[19] - Future accounting pronouncements include ASU 2023-09 (Income Taxes) for fiscal years beginning after December 15, 2024, and ASU 2024-03 (Expense Disaggregation) for fiscal years beginning after December 15, 2026[20][21] Note 2 - Acquisition This note details the acquisition of Integrated Financial Holdings, Inc. (IFH) on October 1, 2024, including the consideration paid, assets acquired, and liabilities assumed, and the subsequent integration of banking systems. A measurement period adjustment increased goodwill - The Company completed its acquisition of Integrated Financial Holdings, Inc. (IFH) on October 1, 2024, and successfully converted IFH's banking systems and operations onto Capital Bank's platforms during the first quarter of 2025[25] - A $1.4 million increase in goodwill at June 30, 2025, resulted from a revised estimate of adjusted servicing assets and other liabilities post-acquisition[26] | Merger-Related Expenses (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :------------------------------------- | :------------------------------- | :------------------------------- | | Merger-related expenses | $1,398 | $83 | | Merger-Related Expenses (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------- | :------------------------------- | :------------------------------- | | Merger-related expenses | $2,664 | $795 | Note 3 - Investment Securities This note provides a breakdown of investment securities available-for-sale by type, amortized cost, fair value, and unrealized gains/losses, along with maturity profiles and credit quality assessments. Management determined no allowance for credit losses was required for securities in an unrealized loss position | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Total Investment securities available-for-sale (Amortized Cost) | $239,598 | $238,969 | | Total Investment securities available-for-sale (Fair Value) | $228,923 | $223,630 | | Gross Unrealized Gains | $366 | $74 | | Gross Unrealized Losses | $(11,041) | $(15,413) | - Management determined no allowance for credit losses was required on available-for-sale debt securities in an unrealized loss position at June 30, 2025, as there was no intent to sell, nor was it more likely than not that the Company would be required to sell before recovering the amortized cost basis, and no credit-related declines in fair value were identified[28][34] | Contractual Maturity (June 30, 2025) | Amortized Cost (in thousands) | Fair Value (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------ | | Within one year | $53,783 | $52,945 | | One to five years | $68,916 | $65,438 | | Five to ten years | $35,857 | $31,924 | | Beyond ten years | $4,517 | $3,430 | Note 4 - Loan Servicing This note details the activity and fair value changes of loan servicing rights, which saw a decrease primarily due to the refinement of valuation assumptions post-acquisition | Loan Servicing Rights (in thousands) | June 30, 2025 | December 31, 2024 | | :----------------------------------- | :------------ | :---------------- | | Balance at end of period | $2,221 | $5,511 | | Additions | $968 | $5,096 | | Other changes in fair value | $(4,258) | $415 | - The decrease in loan servicing rights was primarily due to the refinement of assumptions used in the valuation of servicing assets post-acquisition[35] - Fair value at June 30, 2025, was determined using a discount rate of 13.5%, a weighted average prepayment speed of 16.4%, and a weighted average default rate of 0.8%[35] Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses This note provides a detailed breakdown of portfolio loans by major categories, changes in the Allowance for Credit Losses (ACL), loan delinquency status, nonaccrual loans, and credit quality indicators. It also covers loan modifications and outstanding loan commitments, highlighting an increase in nonaccrual loans and net charge-offs | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Portfolio loans receivable, gross | $2,748,063 | $2,637,228 | | Allowance for credit losses | $47,447 | $48,652 | | Total nonaccrual loans | $36,167 | $30,241 | | Provision for Credit Losses (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :----------------------------------------- | :------------------------------- | :------------------------------- | | Provision for credit losses | $4,081 | $3,417 | | Provision for Credit Losses (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------------- | :------------------------------- | :------------------------------- | | Provision for credit losses | $6,327 | $6,144 | | Net Charge-Offs (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :------------------------------- | :------------------------------- | :------------------------------- | | Total net charge-offs | $5,088 | $1,935 | | Net Charge-Offs (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------- | :------------------------------- | :------------------------------- | | Total net charge-offs | $7,532 | $3,922 | - The Company made 9 loan modifications totaling $1,974 thousand in amortized cost basis during the six months ended June 30, 2025, for borrowers experiencing financial difficulty[42] | Outstanding Loan Commitments (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------------------ | :------------ | :---------------- | | Unused lines of credit | $394,352 | $403,029 | | Letters of credit | $3,122 | $3,122 | | Total credit extension commitments | $400,188 | $408,865 | Note 6 - Leases This note outlines the Company's operating lease activities for branch and back-office operations, detailing Right of Use (ROU) assets and lease liabilities, and future minimum lease payments. Net lease assets and liabilities decreased from December 31, 2024, to June 30, 2025 | Lease Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Net lease ROU asset | $4,420 | $5,268 | | Net lease liability | $5,033 | $5,872 | - The Company's operating leases have remaining terms ranging from one to eight years, including extension options[62] - The historical weighted average discount rate used for lease calculations was 5.11% at June 30, 2025[61] Note 7 - Goodwill and Intangible Assets This note details the changes in goodwill, primarily due to a measurement period adjustment related to the IFH acquisition, and provides a summary of acquired amortizing intangible assets and their scheduled amortization | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | Goodwill | $22,478 | $21,126 | | Total amortized intangible assets (Net Carrying Amount) | $15,295 | $15,817 | - Goodwill increased by $1.352 million due to a measurement period adjustment related to the IFH acquisition[64] - Amortization expense was $261 thousand for the three months ended June 30, 2025, and $522 thousand for the six months ended June 30, 2025[67] Note 8 - Fair Value This note explains the Company's fair value measurement hierarchy (Level 1, 2, 3) and methods used for various financial instruments, including investment securities, loans held for sale, loan servicing assets, and individually evaluated loans for credit loss. Most recurring fair value measurements are categorized as Level 1 or Level 2 - The Company categorizes financial instruments measured at fair value into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[70][71] | Recurring Fair Value Measurements (June 30, 2025, in thousands) | Total | Level 1 | Level 2 | Level 3 | | :------------------------------------------------- | :---- | :------ | :------ | :------ | | Investment securities available-for-sale | $228,923 | $135,501 | $93,422 | $0 | | Loans held for sale | $20,925 | $0 | $20,925 | $0 | | Loan servicing assets | $2,221 | $0 | $2,221 | $0 | - Individually evaluated loans for credit loss, measured on a nonrecurring basis, totaled $33.366 million at June 30, 2025, and are categorized as Level 3 fair values[80][82] Note 9 - Segments This note identifies the Company's four reportable segments—Commercial Banking, OpenSky™, Windsor Advantage™, and Capital Bank Home Loans (CBHL)—and provides detailed financial performance and asset information for each segment, highlighting the impact of the IFH acquisition on segment reporting - The Company's four reportable segments are Commercial Banking, OpenSky™, Windsor Advantage™, and Capital Bank Home Loans (CBHL)[94] | Segment Performance (Three Months Ended June 30, 2025, in thousands) | Net Income (Loss) Before Taxes | Total Assets | | :---------------------------------------------------- | :----------------------------- | :----------- | | Commercial Bank | $13,821 | $3,211,421 | | OpenSky™ | $2,790 | $129,397 | | Windsor Advantage™ | $1,166 | $25,936 | | CBHL | $(678) | $21,908 | | Segment Performance (Six Months Ended June 30, 2025, in thousands) | Net Income (Loss) Before Taxes | Total Assets | | :---------------------------------------------------- | :----------------------------- | :----------- | | Commercial Bank | $28,804 | $3,211,421 | | OpenSky™ | $5,865 | $129,397 | | Windsor Advantage™ | $2,112 | $25,936 | | CBHL | $(1,385) | $21,908 | - The Corporate reportable segment was restructured prior to January 1, 2025, with its activities now associated with the Commercial Bank for comparability[99] Note 10 - Subsequent Events This note reports the Board of Directors' declaration of a $0.12 per share dividend in July 2025, representing a 20% increase from the prior quarterly dividend - In July 2025, the Board of Directors declared a $0.12 per share dividend, a 20% increase from the prior quarterly dividend, payable on August 27, 2025[112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, offering insights into net income drivers, interest income and margin analysis, credit loss provisions, noninterest income and expenses, income tax, and overall financial health. It also includes reconciliations of non-GAAP financial measures PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This statement serves as a cautionary note regarding forward-looking statements within the report, emphasizing that such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from projections - The report contains forward-looking statements that are subject to risks and uncertainties, including general economic conditions, geopolitical events, regulatory changes, and operational risks[115][116][121] - Readers are advised to consider risk factors detailed in Item 1A of the Annual Report on Form 10-K for December 31, 2024, and other SEC filings[119] Critical Accounting Estimates This section states that the Company's financial statements are prepared in accordance with GAAP, requiring management estimates and judgments that can materially affect reported amounts. Critical accounting policies are discussed in the Annual Report on Form 10-K - The Company's financial position and results of operations are affected by management's application of GAAP, including estimates, assumptions, and judgments[122] - Significant accounting policies are discussed in detail in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2024[123] Overview This overview reaffirms Capital Bancorp, Inc. as a Maryland-based bank holding company operating through Capital Bank, N.A., with four divisions: Commercial Banking, OpenSky™, Windsor Advantage™, and Capital Bank Home Loans (CBHL). It also mentions the recent IFH acquisition and the Bank's 'well capitalized' status - Capital Bancorp, Inc. operates primarily through Capital Bank, N.A., with four divisions: Commercial Banking, OpenSky™, Windsor Advantage™, and Capital Bank Home Loans (CBHL)[124][125] - The Company completed its acquisition of Integrated Financial Holdings, Inc. (IFH) on October 1, 2024[125] - As of June 30, 2025, the Company and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as 'well capitalized'[128] Results of Operations This section analyzes the Company's operational performance, highlighting significant increases in net income, net interest income, and noninterest income, largely driven by organic growth and the IFH acquisition. It also details changes in credit loss provisions and noninterest expenses Non-GAAP Financial Measures This sub-section explains that non-GAAP financial measures are used by management to evaluate operating performance and enhance comparability, while cautioning investors to consider them alongside GAAP results due to potential calculation differences - Non-GAAP financial measures are used by management to evaluate operating performance and increase comparability of period-to-period results[129] - Investors are cautioned not to place undue reliance on non-GAAP measures but to consider them with the most directly comparable GAAP measures[130] Net Income Net income saw substantial growth for both the three and six months ended June 30, 2025, primarily due to organic growth and the IFH acquisition, with significant increases in net interest income and noninterest income | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Net income | $13,136 | $8,205 | 60.1% | | Net interest income | $47,646 | $37,057 | 28.6% | | Noninterest income | $13,106 | $6,890 | 90.2% | | Noninterest expenses | $39,572 | $29,493 | 34.2% | | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Net income | $27,068 | $14,767 | 83.3% | | Net interest income | $93,693 | $72,065 | 30.0% | | Noninterest income | $25,655 | $12,862 | 99.5% | | Noninterest expenses | $77,625 | $58,980 | 31.6% | - Net income, adjusted to exclude merger-related expenses (non-GAAP), was $14.2 million for Q2 2025, up from $8.3 million in Q2 2024[133] Net Interest Income and Net Margin Analysis This analysis focuses on the Company's net interest income, net interest margin, and net interest spread. While the overall net interest margin decreased due to the IFH acquisition, the Commercial Bank's net interest margin improved, and interest income benefited significantly from volume growth in earning assets | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change (bps) | | :-------------------- | :------------------------------- | :------------------------------- | :----------- | | Net interest margin | 6.04% | 6.46% | (42) | | Commercial Bank net interest margin (non-GAAP) | 4.36% | 3.90% | 46 | | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | Change (bps) | | :-------------------- | :------------------------------- | :------------------------------- | :----------- | | Net interest margin | 6.04% | 6.35% | (31) | | Commercial Bank net interest margin (non-GAAP) | 4.33% | 3.84% | 49 | - Average interest earning assets increased by $856.4 million (37.1%) to $3.2 billion for the three months ended June 30, 2025, compared to the same period in 2024[148] - Volume growth in the loan portfolio (excluding credit card loans) contributed $13.1 million to the increase in interest income for Q2 2025[154] Provision for Credit Losses The provision for credit losses increased for both the three and six months ended June 30, 2025, primarily due to higher OpenSky™ volumes and specific reserves for collateral-dependent loans. Net charge-offs also rose significantly | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Provision for credit losses | $4,081 | $3,417 | 19.4% | | Net charge-offs (annualized % of average portfolio loans) | 0.75% | 0.39% | 92.3% | | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Provision for credit losses | $6,327 | $6,144 | 3.0% | | Net charge-offs (annualized % of average portfolio loans) | 0.57% | 0.40% | 42.5% | - The increase in provision for credit losses for Q2 2025 was primarily driven by $0.6 million higher provision from OpenSky™ due to higher volumes in the secured and unsecured portfolio[157] - The Allowance for Credit Losses (ACL) as a percent of portfolio loans decreased to 1.73% at June 30, 2025, from 1.85% at December 31, 2024[158] Noninterest Income Noninterest income significantly increased for both the three and six months ended June 30, 2025, primarily due to contributions from the IFH acquisition, particularly in government loan servicing and lending revenue. Credit card fees remained stable, while mortgage banking revenue saw a slight decline | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Total noninterest income | $13,106 | $6,890 | 90.2% | | Government loan servicing and packaging revenue | $3,644 | $0 | 100.0% | | Government lending revenue | $3,112 | $0 | 100.0% | | Credit card fees | $4,298 | $4,330 | (0.7%) | | Mortgage banking revenue | $1,754 | $1,990 | (11.9%) | | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Total noninterest income | $25,655 | $12,862 | 99.5% | | Government loan servicing and packaging revenue | $7,212 | $0 | 100.0% | | Government lending revenue | $4,208 | $0 | 100.0% | | Credit card fees | $8,020 | $8,211 | (2.3%) | | Mortgage banking revenue | $3,585 | $3,443 | 4.1% | - The increase in noninterest income was primarily due to contributions from the businesses acquired through the IFH acquisition[160] - The reserve for potential losses on mortgage loans sold was $2.3 million at June 30, 2025, with no repurchases during the six months ended June 30, 2025[164][165] Noninterest Expense Noninterest expenses increased substantially for both the three and six months ended June 30, 2025, driven mainly by higher salaries and employee benefits, merger-related expenses, and occupancy costs, partially offset by a decrease in advertising expenses | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Total noninterest expense | $39,572 | $29,493 | 34.2% | | Salaries and employee benefits | $18,460 | $13,272 | 39.1% | | Merger-related expenses | $1,398 | $83 | 1584.3% | | Occupancy and equipment | $2,995 | $1,864 | 60.7% | | Advertising | $1,371 | $2,072 | (33.8%) | | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Total noninterest expense | $77,625 | $58,980 | 31.6% | | Salaries and employee benefits | $36,527 | $26,179 | 39.5% | | Merger-related expenses | $2,664 | $795 | 235.1% | | Occupancy and equipment | $5,905 | $3,477 | 69.8% | | Advertising | $3,150 | $4,104 | (23.2%) | Income Tax Expense Income tax expense increased for both the three and six months ended June 30, 2025, but the effective tax rate decreased. This reduction was attributed to lower non-deductible merger and equity compensation costs, coupled with increased benefits from tax optimization strategies | Metric (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Income tax expense | $3,963 | $2,728 | 45.3% | | Effective tax rate | 23.2% | 25.0% | (1.8 pp) | | Metric (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :------- | | Income tax expense | $8,328 | $4,790 | 73.9% | | Effective tax rate | 23.5% | 24.5% | (1.0 pp) | - The decrease in the effective tax rate was due to a reduction in non-deductible merger and equity compensation costs, along with an increase in benefits from tax optimization strategies, including investments eligible for Low Income Housing Tax Credits[171] Financial Condition This section provides a comprehensive review of the Company's financial condition, detailing changes in assets, liabilities, and equity. It covers investment securities, the loan portfolio, nonperforming assets, allowance for credit losses, deposits, borrowings, liquidity, and capital resources Summary of Financial Condition A high-level overview of the Company's financial position shows increases in total assets, portfolio loans, deposits, and stockholders' equity from December 31, 2024, to June 30, 2025, alongside an increase in tangible book value per share | Metric (in thousands, except per share data) | June 30, 2025 | December 31, 2024 | $ Change | % Change | | :----------------------------------------- | :------------ | :---------------- | :------- | :------- | | Total assets | $3,388,662 | $3,206,911 | $181,751 | 5.7% | | Portfolio loans receivable, net of deferred fees and costs | $2,739,808 | $2,630,163 | $109,645 | 4.2% | | Deposits | $2,940,738 | $2,761,939 | $178,799 | 6.5% | | Total stockholders' equity | $380,035 | $355,139 | $24,896 | 7.0% | | Tangible book value per share | $20.64 | $19.10 | N/A | 8.1% | Investment Securities The Company's investment strategy focuses on U.S. Treasuries, MBS, government agency bonds, asset-backed securities, and high-quality municipal and corporate bonds to manage liquidity and supplement interest income. Management confirmed no credit-related declines in fair value for these securities - 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[174] - Management determined there were no credit-related declines in fair value for available-for-sale debt securities in an unrealized loss position at June 30, 2025[177][179] - All municipal bonds held by the Company were investment grade at June 30, 2025 (AAA - 76%, AA+ - 24%)[178] Portfolio Loans Receivable The Company's loan portfolio consists primarily of real estate, commercial and industrial, and credit card loans. It provides details on the contractual maturities and rate characteristics of these loans, along with LTV ratios for commercial real estate segments - The loan portfolio includes residential, commercial, and construction real estate loans, commercial and industrial loans, and credit card loans[180] - Credit card loans are offered nationwide through the OpenSky™ division, with approximately $86.4 million in secured and partially secured balances protected by savings deposits at June 30, 2025[187] | Contractual Maturities of Portfolio Loans (June 30, 2025, in thousands) | Amount | | :----------------------------------------------------- | :----- | | One Year or Less | $1,031,795 | | One to Five Years | $828,602 | | Five Years to Fifteen Years | $490,563 | | After Fifteen Years | $397,103 | | Total portfolio loans, gross | $2,748,063 | - Non-owner-occupied commercial real estate loans totaled $495.341 million with a weighted average LTV of 54.3% at June 30, 2025. Owner-occupied commercial real estate loans totaled $436.421 million with a weighted average LTV of 59.9%[193][195] Nonperforming Assets This section outlines the Company's policies for classifying nonaccrual loans and charge-offs, along with its credit quality indicators (pass/watch, special mention, substandard, doubtful, loss). It emphasizes proactive credit review and risk management to maintain asset quality - Loans are generally placed on nonaccrual status when 90 days past due or earlier if collection of principal or interest is in doubt[197] - Loans are charged off when determined to be uncollectible, typically after 180 days past due (or 120 days for credit cards), unless well-secured and in the process of collection[198] - The Company uses a risk grading matrix to assign credit quality indicators: pass/watch, special mention, substandard, doubtful, or loss[200] - At June 30, 2025, the recorded investment in individually assessed loans was $39.8 million, requiring a specific reserve of $6.5 million[204] Allowance for Credit Losses This section discusses the methodology for maintaining the Allowance for Credit Losses (ACL), which reflects management's estimate of expected credit losses. It presents key ACL ratios and its allocation by loan category, noting a decrease in the overall ACL coverage ratio - The ACL is management's estimate of expected credit losses and risks inherent in the loan portfolio, based on risk classifications, historical loss rates, portfolio changes, and economic factors[205] | ACL Ratios | June 30, 2025 | December 31, 2024 | | :--------------------------------- | :------------ | :---------------- | | Allowance for credit losses to period end portfolio loans | 1.73% | 1.85% | | Nonaccrual loans to total portfolio loans | 1.32% | 1.15% | | Allowance for credit losses to nonaccrual loans | 131% | 161% | - Total charge-offs for the six months ended June 30, 2025, were primarily comprised of credit card charge-offs, resulting from portfolio aging and the shift to partially secured and unsecured exposures[209] | ACL Allocation (June 30, 2025, in thousands) | Amount | Percent of Total ACL | | :------------------------------------------- | :----- | :------------------- | | Residential Real Estate | $6,772 | 14% | | Commercial Real Estate | $14,262 | 30% | | Construction | $3,410 | 7% | | Commercial and Industrial | $16,249 | 35% | | Credit Card | $6,749 | 14% | | Other Consumer | $5 | 0% | Total Liabilities Total liabilities increased from December 31, 2024, to June 30, 2025, primarily driven by growth in the deposit portfolio - Total liabilities increased by $156.9 million from December 31, 2024, to June 30, 2025, primarily due to a $178.8 million growth in the deposit portfolio[213] Deposits Deposits are a major funding source, with a variety of products offered. Credit card customers contribute significantly to low-cost deposits, and a large portion of deposits are insured or protected | Deposit Category (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------ | :------------ | :---------------- | | Total deposits | $2,940,738 | $2,761,939 | | Noninterest-bearing demand accounts | $836,979 | $810,928 | | Total Interest-bearing deposits | $2,103,759 | $1,951,011 | - Noninterest-bearing deposits represented 28.5% of total deposits at June 30, 2025[217] - Credit card customers accounted for $168.9 million (20.2%) of total noninterest-bearing deposit balances at June 30, 2025[214] - Insured and protected deposits were approximately $2.1 billion (69.9% of the portfolio) as of June 30, 2025[217] Borrowings The Company utilizes various short-term and long-term borrowings, including FHLB advances, junior subordinated debentures, and subordinated notes, to supplement deposits and fund its lending and investment activities. Total borrowings remained stable - Total borrowings of $34.1 million at June 30, 2025, remained consistent with December 31, 2024[220] - Outstanding FHLB advances were $22.0 million at June 30, 2025, with an available borrowing capacity of $628.0 million[221] - Other borrowed funds amounted to $12.1 million, consisting of Floating Rate Junior Subordinated Deferrable Interest Debentures ($2.1 million) and subordinated notes ($10.0 million)[222][223][224] Liquidity Liquidity is managed through a robust risk management process, ensuring the Bank can meet its cash and collateral obligations. Key funding sources include core deposits and various borrowing capacities from FHLB, Federal Reserve, and correspondent banks - The Company maintains an adequate level of liquidity through a risk management process that identifies, measures, monitors, and controls liquidity risk[227][228] - Available borrowing capacity at June 30, 2025, included $628.0 million from the FHLB, $122.6 million from the Federal Reserve Bank of Richmond, and $76.0 million from other correspondent banks[230] - Cash and cash equivalents totaled $274.6 million at June 30, 2025[230] Capital Resources Stockholders' equity increased due to net income, despite share repurchases. The Company and Bank remain in compliance with all regulatory capital requirements, with the Bank classified as 'well capitalized,' although unrealized losses on investment securities impact accumulated other comprehensive loss - Stockholders' equity increased by $24.9 million for the period ended June 30, 2025, primarily due to net income of $27.1 million[231] - The Company repurchased 93,170 shares in Q2 2025 for $2.5 million, with $11.9 million remaining under the authorized stock repurchase plan[231] - Accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities (net of deferred income tax) amounted to $8.1 million at June 30, 2025[232] - Both the Company and the Bank were in compliance with all applicable regulatory capital requirements and the Bank was classified as 'well capitalized' at June 30, 2025[237] | Company Regulatory Capital Ratios (June 30, 2025) | Actual Ratio | Minimum Capital Adequacy | To Be Well Capitalized | | :------------------------------------------------ | :----------- | :----------------------- | :--------------------- | | Tier 1 leverage ratio | 10.90% | 4.00% | 5.00% | | Tier 1 capital ratio | 13.66% | 6.00% | 8.00% | | Common equity tier 1 capital ratio | 13.58% | 4.50% | 6.50% | | Total capital ratio | 15.30% | 8.00% | 10.00% | Contractual Obligations The Company has contractual obligations related to debt and lease agreements, which are continuously monitored and managed as part of its liquidity strategy - The Company has contractual obligations to make future payments on debt and lease agreements[241] - These obligations are considered in the Company's liquidity monitoring and management[241] Off-Balance Sheet Items The Company engages in off-balance sheet transactions, primarily commitments to extend credit and issue letters of credit, which involve credit and interest rate risks. These are managed with the same rigorous credit policies as on-balance sheet instruments - Off-balance sheet items include commitments to extend credit and issue letters of credit, which carry elements of credit risk and interest rate risk[242] - The Company's exposure to credit loss is represented by the contractual amounts of these commitments, which are subject to the same credit policies as on-balance sheet instruments[242][245] | Total Credit Extension Commitments (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------------------------ | :------------ | :---------------- | | Unfunded lines of credit | $394,352 | $403,029 | | Letters of credit | $3,122 | $3,122 | | Commitment to fund other investments | $2,714 | $2,714 | | Total | $400,188 | $408,865 | Impact of Inflation Given that most of the Company's assets and liabilities are monetary, interest rates have a more significant impact on its performance than general inflation, although operating expenses are sensitive to inflationary changes - Interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation, as substantially all assets and liabilities are monetary in nature[249] - Most other operating expenses are sensitive to changes in levels of inflation[249] Non-GAAP Financial Measures and Reconciliations This section provides detailed reconciliations of various non-GAAP financial measures, including Core Net Income, Core EPS, Core Return on Average Assets/Equity, Core Efficiency Ratio, Commercial Bank Net Interest Margin/Loan Yield, PPNR, and Tangible Book Value per Share, to their most directly comparable GAAP measures | Core Earnings Metrics (in thousands, except per share data) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $27,068 | $14,767 | | Add: Merger-Related Expenses, net of tax | $2,034 | $600 | | Core Net Income | $29,102 | $15,367 | | Earnings per share - Diluted | $1.60 | $1.06 | | Core Earnings per share - Diluted | $1.72 | $1.10 | | Return on Average Assets | 1.68% | 1.28% | | Core Return on Average Assets | 1.80% | 1.33% | | Efficiency Ratio | 65.04% | 69.45% | | Core Efficiency Ratio | 62.81% | 68.51% | | Commercial Bank Net Interest Margin | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------------------------- | :----------------------------- | :----------------------------- | | Commercial Bank Net Interest Margin | 4.33% | 3.84% | | Commercial Bank Portfolio Loans Receivable Yield | 7.14% | 7.00% | | Tangible Book Value per Share (in thousands, except share and per share data) | June 30, 2025 | December 31, 2024 | | :-------------------------------------------------------------------------- | :------------ | :---------------- | | Tangible Common Equity | $342,262 | $318,196 | | Period End Shares Outstanding | 16,581,990 | 16,662,626 | | Tangible Book Value per Share | $20.64 | $19.10 | | Return on Average Tangible Common Equity (Six Months Ended June 30, 2025) | 16.82% | 11.37% | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the Company's primary market risk, interest rate volatility, and how it is managed through balance sheet structuring and oversight by the Asset/Liability Management Committee (ALCO). It presents results from Earnings at Risk (EAR) and Economic Value of Equity (EVE) simulations under various interest rate shock scenarios - The Company's primary component of market risk is interest rate volatility, managed by the Bank's Asset/Liability Management Committee (ALCO) through balance sheet structuring[264][267] - The Company does not enter into leveraged derivatives, financial options, or financial futures contracts for the purpose of reducing interest rate risk[266] - At June 30, 2025, the Company was in an asset-sensitive position for periods less than one year, with rate-sensitive assets exceeding rate-sensitive liabilities[268][271] | Earnings at Risk (June 30, 2025) | -400 bps | -300 bps | -200 bps | -100 bps | Flat | +100 bps | +200 bps | +300 bps | +400 bps | | :------------------------------- | :------- | :------- | :------- | :------- | :--- | :------- | :------- | :------- | :------- | | Impact on Net Interest Income (12-month horizon) | (13.6)% | (10.3)% | (7.3)% | (3.8)% | 0.0% | 4.1% | 8.2% | 12.1% | 16.1% | | Economic Value of Equity (June 30, 2025) | -400 bps | -300 bps | -200 bps | -100 bps | Flat | +100 bps | +200 bps | +300 bps | +400 bps | | :--------------------------------------- | :------- | :------- | :------- | :------- | :--- | :------- | :------- | :------- | :------- | | Impact on Economic Value of Equity | (25.3)% | (15.4)% | (8.0)% | (3.2)% | 0.0% | 2.0% | 3.1% | 4.6% | 5.7% | Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures, concluding they were effective as of June 30, 2025. No material changes to internal control over financial reporting were reported during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2025[277] - There have been no material changes in the Company's internal control over financial reporting during the fiscal quarter ended June 30, 2025[278] PART II - OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, defaults, mine safety, other disclosures, and a list of exhibits Item 1. LEGAL PROCEEDINGS. The Company is not currently involved in any legal proceedings that are expected to have a material adverse impact on its results of operations or financial condition - The Company is not presently a party to any legal proceedings which are believed to have a material adverse impact on its results of operations or financial condition[279] Item 1A. RISK FACTORS. There are no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 - There are no material changes to the risk factors as previously disclosed under Item 1A in the Annual Report on Form 10-K for the year ended December 31, 2024[280] Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. This section reports no unregistered sales of equity securities and details the Company's stock repurchase program, including shares repurchased during the quarter and the remaining authorization - There were no unregistered sales of the Company's stock during the year-to-date period ended June 30, 2025[281] - The Company is authorized to repurchase up to $15 million (or 483,559 shares) of its Common Stock under a program expiring on February 28, 2026[282] | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------------------ | :----------------------------- | :--------------------------- | | April 1, 2025 to April 30, 2025 | 93,170 | $26.66 | - As of June 30, 2025, $11.9 million remained authorized for repurchase under the stock repurchase program[284] Item 3. DEFAULTS UPON SENIOR SECURITIES. The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[285] Item 4. MINE SAFETY DISCLOSURES. This item is not applicable to the Company's operations - Mine Safety Disclosures are not applicable to the Company[286] Item 5. OTHER INFORMATION. During the quarter ended June 30, 2025, no officer or director of the Company adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements - No officer or director adopted or terminated any Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025[287] Item 6. EXHIBITS. This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including merger agreements, organizational documents, employment agreements, and various certifications - Exhibits include the Agreement and Plan of Merger and Reorganization (2.1), Amended and Restated Articles of Incorporation (3.1), Amended and Restated Bylaws (3.2), Employment Agreements (10.1, 10.2), Rule 13a-14(a) Certifications (31.1, 31.2), Section 1350 Certification (32.1), and XBRL financial statements (101, 104)[288]