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Commercial Bank

• Strong Portfolio Loan Growth - Portfolio loans, excluding credit cards, increased by $271.3 million, or 19.3%, to $1.7 billion, gross, at March 31, 2023 compared to March 31, 2022. This growth was mainly due to a 29.9% increase in residential real estate loans of $125.7 million. Also contributing to the growth was a 16.9% increase in commercial real estate loans of $95.5 million, of which $68.1 million was owner occupied, and a 24.6% increase in commercial and industrial loans of $43.8 million, when comparing the quarter ended March 31, 2023 to the quarter ended March 31, 2022. Business loans, comprised of commercial and industrial, SBA, and owner occupied real estate, represent 43% of our total commercial portfolio.

• Credit Metrics - Non-performing assets ("NPAs") increased 45 basis points to 0.73% of total assets at March 31, 2023 compared to 0.28% at March 31, 2022 as a result of an increase in nonaccrual loans at March 31, 2023 to $16.3 million compared to $6.0 million at March 31, 2022. The increase in NPAs was primarily the result of a March 2023 downgrade of a single $8.2 million, well-collateralized multi-unit residential real estate loan.

OpenSky^®

• Revenues - Despite a decrease in active customer accounts, rising interest rates led to increased OpenSky^® interest income. However, a decline in credit card fees resulted in a $523.4 thousand decrease in OpenSky^® revenue from the same period of 2022. Total revenue was $20.3 million for the quarter ended March 31, 2023. Aggressive marketing and product strategies by competitors offering unsecured subprime credit cards has challenged our ability to maintain and grow the number of active OpenSky^® accounts and has adversely impacted noninterest income. Management believes it is taking a prudent approach to credit, product and marketing strategies towards subprime customers.

• Loan Balances - OpenSky^® loan balances decreased by 9% or $10.9 million to $112.9 million compared to $123.7 million in the first quarter of 2022. Corresponding deposit balances decreased 16.1% or $35.5 million from $220.4 million at March 31, 2022 to $184.8 million at March 31, 2023. Gross unsecured loan balances stood at $25.8 million and $16.2 million at March 31, 2023 and 2022, respectively.

• OpenSky^® Credit - Card delinquencies and utilization remained stable in the first quarter when compared to the prior year quarter. The Company has tightened credit standards in segments most susceptible to economic pressures. The provision for credit losses increased $707.4 thousand compared to the first quarter of 2022.

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_{⁽¹⁾ Annualized for the quarterly periods
⁽²⁾ Refer to Appendix for reconciliation of non-GAAP measures.
⁽³⁾ Loans are reflected net of deferred fees and costs.}

Operating Results - Comparison of Three Months Ended March 31, 2023 and 2022

For the three months ended March 31, 2023, net interest income increased $1.2 million, or 3.5%, to $34.5 million from the same period in 2022, primarily due to higher yields on portfolio loans offset by significant increases in the cost of funding. The net interest margin was 6.65% for the three months ended March 31, 2023, a decrease of 14 basis points from the three months ended March 31, 2022 as the increase in the costs of deposits and borrowed funds outpaced the increase in portfolio loan yields, including credit cards. Net interest margin, excluding credit card and SBA-PPP loans, remained flat at 3.81% for the first quarter of 2023 compared to 3.82% for the same period in 2022.

For the three months ended March 31, 2023, average interest earning assets increased $113.6 million, or 5.7%, to $2.1 billion as compared to the same period in 2022, and the average yield on interest earning assets increased 136 basis points. Compared to the same period in the prior year, average interest-bearing liabilities increased $189.1 million, or 18.1%, and the average cost of interest-bearing liabilities increased to 2.93%, a 251 basis point increase from 0.42%.

The provision for credit losses was $1.7 million for the three months ended March 31, 2023, an increase from $1.0 million when compared to the same period in 2022. Contributors to the increase in provision were loan portfolio growth and an increase in credit card losses. Net charge-offs for the first quarter of 2023 were $2.6 million, or 0.61% on an annualized basis of average portfolio loans, compared to $0.9 million, or 0.24% on an annualized basis of average loans for the first quarter of 2022. A majority of the $2.6 million in net charge-offs during the quarter were related to the credit card portfolio with $1.1 million related to partially secured cards and $563 thousand related to unsecured cards.

For the quarter ended March 31, 2023, noninterest income was $6.0 million, a decrease of $2.3 million, or 27.3%, from $8.3 million in the prior year quarter. Credit card fees declined by $1.7 million as the number of active customer accounts declined year over year, which resulted in lower interchange and other income recognized compared to the prior year quarter. The elevated interest rate environment continues to put pressure on the mortgage market, resulting in declines in home loan sales and home loan refinances, which has resulted in a $0.6 million decrease in mortgage banking revenue compared to the prior year quarter.

Credit card loan balances, net of reserves, decreased by $10.9 million to $112.9 million as of March 31, 2023 from $123.7 million at March 31, 2022. The related deposit account balances decreased 16.1% to $184.8 million at March 31, 2023 when compared to $220.4 million at March 31, 2022 reflecting the reduction in the number of active customer accounts. During the first quarter of 2023, the number of OpenSky^® credit card accounts declined by 7 thousand, net, compared to a 30 thousand net decrease in accounts for the same period in 2022.

The efficiency ratio for the three months ended March 31, 2023 decreased to 64.7%, compared to 65.1% for the three months ended March 31, 2022 as noninterest expense remained flat while interest income increased.

Noninterest expense was $26.2 million for the three months ended March 31, 2023, as compared to $27.1 million for the three months ended March 31, 2022, a decrease of $0.9 million, or 3.3%. The decrease was primarily driven by lower data processing expenses and advertising expenses of $1.7 million and $1.1 million, respectively, attributable to data processing contract renegotiations completed in the first quarter 2022 and lower marketing costs for the OpenSky^® and Commercial Bank segments, offset by increased salaries and employee benefits of $2.2 million.

Financial Condition

Total assets at March 31, 2023 were $2.2 billion, an increase of $122.8 million or 5.8% from the balance at March 31, 2022 and an increase of $121.6 million or 5.7% from December 31, 2022. Net portfolio loans, which exclude mortgage loans held for sale and SBA-PPP loans, totaled $1.8 billion as of March 31, 2023, an increase of $259.9 million, or 17.0% as compared to $1.5 billion at March 31, 2022, and an increase of $83.9 million, or 4.9% from the balance at December 31, 2022.

The Company recorded a provision for credit losses of $1.7 million during the three months ended March 31, 2023, which increased the allowance for credit losses to $26.2 million, or 1.5% of total loans at March 31, 2023, representing a decrease of $169 thousand or 0.6% from the balance at December 31, 2022. Nonperforming assets, which were comprised solely of nonperforming loans as of March 31, 2023, were $16.3 million, or 0.73% of total assets, up from $6.0 million, or 0.28% of total assets, at March 31, 2022. Nonperforming assets increased $6.5 million from $9.8 million or 0.46% of total assets as of December 31, 2022. Included in nonperforming loans at March 31, 2023 were troubled debt restructurings of $287.6 thousand.

Special mention loans at March 31, 2023 decreased by $8.5 million to $29.5 million from $38.0 at December 31, 2022 due to the downward migration to nonaccrual of an $8.2 million, well-collateralized multi unit residential real estate loan.

Deposits were $1.9 billion for the period ended March 31, 2023, an increase of $81.7 million from the balance at March 31, 2022 and an increase from the balance at December 31, 2022 of $186.3 million. Rising interest rates have resulted in some customers moving balances from noninterest-bearing deposit accounts to interest bearing deposit accounts. This migration has impacted average noninterest-bearing deposit balances which decreased $128.7 million when compared to March 31, 2022 and decreased $127.9 million when compared to December 31, 2022. These deposits represented 36.3% of total deposits at March 31, 2023 compared to 44.3% at March 31, 2022. Uninsured deposits were approximately $888.9 million as of March 31, 2023, representing 45.7% of the Company's deposit portfolio, compared to $915.0 million, or 49.1%, at March 31, 2022, and $784.6 million, or 44.6% at December 31, 2022.

Stockholders’ equity increased to $234.5 million as of March 31, 2023 compared to $201.5 million at March 31, 2022 and $224.0 million at December 31, 2022. The first quarter of 2023 increase was primarily attributable to earnings during the period of $9.7 million. Shares repurchased and retired in 2023 as part of the Company's stock repurchase program total 146,937 shares at a weighted average price of $18.48, for a total cost of $2.7 million including commissions. As of March 31, 2023, the Bank's capital ratios continued to exceed the regulatory requirements for a “well-capitalized” institution.

The following table shows the average outstanding balance of each principal category of our assets, liabilities and stockholders’ equity, together with the average yields on our assets and the average costs of our liabilities for the periods indicated. Such yields and costs are calculated by dividing the annualized income or expense by the average daily balances of the corresponding assets or liabilities for the same period.

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_{⁽¹⁾   Annualized.
⁽²⁾   Includes nonaccrual loans.
⁽³⁾   For the three months ended March 31, 2023 and March 31, 2022, collectively, SBA-PPP loans and credit card loans accounted for 283 and 297 basis points of the reported net interest margin, respectively.}

The Company’s reportable segments represent business units with discrete financial information whose results are regularly reviewed by management. The four segments include Commercial Banking, Capital Bank Home Loans (the Company’s mortgage loan division), OpenSky^® (the Company’s credit card division) and the Corporate Office. The following schedule presents financial information for each reportable segment for the three and twelve months ended March 31, 2023 and March 31, 2022.

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_{⁽¹⁾   Noninterest expense includes $5.9 million and $7.6 million in data processing expense in OpenSky’s^® segment for the three months ended March 31, 2023 and 2022, respectively.
⁽²⁾   The Corporate segment invests idle cash in revenue producing assets including interest bearing cash accounts, loan participations and other appropriate investments for the Company.}