What changed in this filing

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Item 1. Business

2021-03-15 compared with 2020-03-16 · 249 added, 197 removed, 507 unchanged (47% of the section changed)

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“Church Street Capital” or “CSC” refer to our wholly owned subsidiary, Church Street Capital, LLC.

We are Capital Bancorp, Inc., a bank holding company and a Maryland corporation, operati ng primarily through our wholly owned subsidiary, Capital Bank, N.A., a commercial-focused community bank based in the Washington, D.C.

We are Capital Bancorp, Inc., a bank holding company and a Maryland corporation established in 1998, operating primarily through our wholly owned subsidiary, Capital Bank, N.A., a commercial-focused community bank based in the Washington, D.C.

and Baltimore metropolitan areas.

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In addition to the three divisions of Capital Bank, Church Street Capital also operates as a wholly owned subsidiary of Capital Bancorp, Inc.

CSC originates and services a portfolio of mezzanine loans with certain characteristics that do not meet Capital Bank’s general underwriting standards and thereby command a higher rate of return.

CSC originates and services a portfolio of mezzanine loans with certain characteristics that do not meet Capital Bank’s general underwriting standards, but command a higher rate of return.

Until recently, 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.

In 2019, CSC more typically retained 100% of the exposures.

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.

CSC sells participations for the remainder of the balance to other real estate investors (including certain of the Company’s and the Bank’s directors) and high net worth individuals.

All participations sold to directors were sold on terms no less favorable than terms generally available to unaffiliated third parties.

All participations sold to directors were sold on terms no less favorable than terms generally available to

unaffiliated third parties.

For additional information on participations sold to our directors, please see “Certain Relationships and Related Party Transactions—Loan Participations with the Bank.” At December 31, 2020, the net portfolio of retained loans for CSC amounted to approximately $4.6 million.

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As of December 31, 2020, our Commercial Banking division accounted for approximately 86.6%, or $1.6 billion, of Capital Bank’s total assets.

The Commercial Banking division operates out of four full service banking locations in the Washington, D.C.

Metropolitan Statistical Area (“MSA”) and its full service banking location of Columbia, Maryland in the Baltimore, Maryland MSA.

Additionally, we have two loan production offices located throughout the Washington, D.C.

The Commercial Banking division operates out of four full service banking locations 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 one loan production offices located in the Washington, D.C.

and Baltimore metropolitan areas.

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Construction lending is a core competency of our Commercial Banking division.

Construction loans have increased to $198.7 million as of December 31, 2019 , compared to $157.6 million for the same period in 2018 , a 26.1% increase.

Construction loans have increased to $224.9 million as of December 31, 2020, compared to $198.7 million at December 31, 2019, a 13.2% increase.

As a percent of total gross loans, construction loans have increased to 17.1% from 16.9% for the same period reported.

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Our construction lending team consists of long-term employees of Capital Bank who are responsible for sourcing and structuring all construction loans that are originated.

In addition to its loan officers, our Commercial Banking division currently has a team of ten business development officers concentrating on continuing to diversify Capital Bank’s funding sources away from wholesale funding and towards core deposit funding by focusing on core deposits and treasury management.

In addition to its loan officers, our Commercial Banking division currently has a team of business development officers concentrating on continuing to diversify Capital Bank’s funding sources away from wholesale funding and towards core deposit funding by focusing on core deposits and treasury management.

These business development officers, in conjunction with our recently introduced incentive program based upon core deposit capture from lending customers, have successfully reduced Capital Bank’s net non-core funding dependence ratio from 17.4% at December 31, 2018 to 13.0% at December 31, 2020.

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Capital Bank Home Loans Division

Capital Bank Home Loans (formerly Church Street Mortgage) originates conventional and government-guaranteed residential mortgage loans on a national basis, for sale into the secondary market and in certain, limited circumstances for our loan portfolio.

Capital Bank Home Loans(“CBHL”), formerly known as Church Street Mortgage, originates conventional and government-guaranteed residential mortgage loans on a national basis, for sale into the secondary market and in certain, limited circumstances for our loan portfolio.

Loans sold into the secondary market are sold servicing released.

Loans retained for our portfolio are generally adjustable rate mortgage loans on primary residences within Capital Bank’s operating markets to individuals who own businesses where Capital Bank may also pursue a commercial lending relationship and has a vested interest in maintaining full control of the lending relationship.

The following table presents, for the periods indicated, certain loan origination data for Capital Bank Home Loans.

The following table presents, for the periods indicated, certain loan origination data for CBHL.

Years Ended December 31,

(Dollars are in thousands)

2020 2019 2018 2017 2016

Mortgage Metrics:

Loans held for sale originations

Loans held for sale proceeds net of mortgage banking revenue

Origination of loans held for sale

$ 1,308,912 $ 593,189 $ 337,122 $ 418,912 $ 853,674

Net proceeds of loans held for sale (1)

$ 1,272,788 $ 540,686 $ 344,940 $ 441,960 $ 844,464

Purchase volume as a % of originations

Gross proceeds from the sale of loans

31.90 % 51.89 % 79.43 % 52.50 % 18.79 %

Mortgage banking revenue

$ 40,649 $ 15,955 $ 9,477 $ 10,377 $ 15,373

Gain on sale as a % of loans sold

Historically, Capital Bank Home Loans has relied heavily on refinance origination volume as opposed to purchase origination volume.

3.02 % 2.95 % 2.75 % 2.01 % 1.82 %

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(1) Net proceeds of loans held for sale is the origination of loans held for sale less mortgage banking revenue.

Historically, CBHL has relied heavily on refinance origination volume as opposed to purchase origination volume.

In 2019, as a result of increases in the interest rate environment, purchase origination volume exceeded refinance origination volume.

However, in 2019, the interest rate environment decreased and the Company experienced a 27.5% decline in purchase origination volume year over year.

Purchase origination volume was 51.9% for the year ended December 31, 2019 , compared to 79.4% at December 31, 2018 .

Approximately 67.2% of Capital Bank Home Loan loans originations by volume occur within Capital Bank’s operating markets in Maryland, Virginia and Washington, D.C.

However, in 2020, market interest rates decreased and the Company experienced a 20.0% decline in purchase origination volume year over year.

Purchase origination volume was 31.9% for the year ended December 31, 2020, compared to 51.9% for the year ended December 31, 2019.

Approximately 67.2% 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 occur primarily through a consumer direct channel utilizing consumer marketing, including through social media applications.

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A deposit equal to the full credit limit of the card is made, using a debit card, check, wire or Western Union transfer, into a noninterest bearing demand account with the Bank.

When the account is opened the deposit is required to be maintained throughout the life of the card.

Once the account is opened, the deposit is required to be maintained throughout the life of the card.

The customer’s funding of the deposit account is collateral and it is not a consideration in the credit card approval process, but is a prerequisite to activating the credit line.

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OpenSky ® secured credit cards have floating interest rates, which are beneficial in a rising rate environment, and we believe the OpenSky ® secured credit card product may provide a counter-cyclical benefit as more people enter its target segment of credit rebuilders during an economic downturn.

At December 31, 2019 , we had $0.9 million of unsecured unused lines of credit and $3.1 million of outstanding unsecured credit card advances.

Credit Card Loans and Deposits ($ in millions)

Open Credit Card Accounts and

At December 31, 2020, we had $92.5 million of unused unsecured lines of credit and $5.7 million of outstanding unsecured credit card advances.

Credit Card Loans and Deposits ($ in millions) Open Credit Card Accounts and

Average Monthly Account Openings

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See “Risk Factors—Risks Related to Our Business—Delinquencies and credit losses from our OpenSky ® credit card division could adversely affect our business, financial condition and results of operations.”

OpenSky®’s cards operate on a fully digital and mobile platform with all marketing and application procedures conducted through its website or mobile application.

OpenSky ® cards operate on a fully digital and mobile platform with all marketing and application procedures conducted through its website or mobile application.

Given the secured nature of the cards, credit checks are not required at the time of application;

however, as each customer’s account ages, we obtain credit scores to baseline their improvement as an input into any decision to extend unsecured credit in the future.

COVID-19 Pandemic

The outbreak of COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on economic conditions and created uncertainty in financial markets.

In early March 2020, the Company began preparing for potential disruptions and government limitations on activity in the markets in which we serve.

Our team activated our Business Continuity Program and was able to quickly execute on multiple initiatives to adjust our operations to protect the health and safety of our employees and clients.

Currently, a significant portion of our workforce is working remotely without materially impacting our productivity while continuing to provide a high level of customer service.

Since the beginning of the crisis, we have been in close contact with our clients, assessing the

level of impact on their businesses, and providing relief programs according to each client’s specific situation and qualifications.

Currently, three of the Company’s branches are open and two remain temporarily closed.

We have enhanced awareness of digital banking offerings and limited the number of customers in the branch and have taken steps to comply with various government directives regarding “social distancing,” as well as enhanced cleaning and disinfecting of all surface areas to protect our clients and employees.

Small Business Administration’s Paycheck Protection Program

We were able to quickly establish our process for participating in the Small Business Administration’s Paycheck Protection Program (“SBA-PPP”) that enabled our clients to utilize this valuable resource.

SBA- PPP loans are designed to provide assistance for small businesses during the COVID-19 pandemic to help meet the costs associated with payroll, mortgage interest, rent and utilities.

These loans are 100% guaranteed by the SBA and, under certain circumstances, forgiveness of the loan, by the SBA, is granted to the borrower.

Forgiveness is based on the small business maintaining or quickly rehiring their employees and maintaining salary levels for their employees.

SBA-PPP loans do not require any collateral or personal guarantees.

Through December 31, 2020, approximately $238.7 million of SBA-PPP loans have been originated in the first and second rounds of the program.

These efforts have allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals.

Short-term Modifications for Borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company is providing loan modifications where appropriate, including potential interest only payments or payment deferrals for clients that are adversely affected by the COVID-19 pandemic.

Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs.

In accordance with interagency guidance issued in April 2020, these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, such as payment deferrals, fee waivers and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented.

Loans on which we deferred payments on a short-term basis for commercial and consumer loans were $30.5 million at December 31, 2020.

Our Business Strategy

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• 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;

Expand expertise in the non-profit, basic industries, fiduciary and community lending groups while building a greater presence in the government contracting sector;

• Endeavor to provide comprehensive loan and deposit solutions to our customers that are tailored to their needs, 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, such as our Fiduciary Banking Team and the leader of our Business Banking group, and acquire new commercial banking relationships from local competitors;

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Leverage technology to improve the customer experience and loyalty and deliver operational efficiencies

Use solution structuring and customized technology implementation as differentiators to add value to clients with complex needs and further our relationships within our existing customer base;

• Use solution structuring and customized technology implementation as differentiators to add value to clients with complex needs and enhance our relationships within our existing customer base;

• Deploy technologies that better support our lending associates and simplify our processes;

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Overall, the Washington, D.C.

MSA ranks third out of the largest 25 MSAs (ranked by population) in income levels with a current median household income of approximately $102.260 thousand , which is approximately 61.9% higher than the national average.

MSA ranks third out of the largest 25 MSAs (ranked by

population) in income levels with a current median household income of approximately $107 thousand, which is approximately 62.1% higher than the national average.

Additionally, the Washington, D.C.

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We expect our strategies to benefit from the continued growth in population and high income of our market area’s residents.

Unemployment Rate (Dec 2019)

(Actual) Population

2010-2020 Projected

2019-2025 Median

2020 HH Income

2012-2020 Unemployment Rate (May 2020)

Washington D.C.

MSA 6,346,402 12.60 % 4.07 % $ 107,029 32.66 % 8.9 %

Baltimore, Maryland MSA 2,812,251 3.75 1.17 84,221 32.77 9.7

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Counties of Operation (1)

2,548,906 8.90 2.70 356,348 24.87 25.4

United States 330,342,293 7.00 3.10 66,010 33.14 13.0

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According to the Bureau of Economic Analysis, the Washington, D.C.

MSA has a large and diversified economy, with an annual gross domestic product of nearly $541 billion .

MSA has a large and diversified economy, with an annual gross domestic product of nearly $559.1 million.

When combined with the Baltimore, Maryland MSA, the Washington, D.C.

and Baltimore metropolitan areas in which we operate has a combined gross domestic product of more than $746 billion , and this combined GDP has grown approximately 27% between 2010 and 2018 .

and Baltimore metropolitan areas in which we operate has a combined gross domestic product of more than $774.5 million, and this combined GDP has grown approximately 32% between 2010 and 2020.

The Washington, D.C.

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The high volume of tourists contributed to $8.2 billion of spending in the area in 2019, an increase of 4.1% from 2018.

D.C’s total visitor volume in 2018 reached a record high and is expected to continue to increase by 2 to 4% each year through 2021 .

D.C’s total visitor volume in 2019 reached a record high;

however, due to COVID-19 it drastically declined in 2020.

The recovery in tourism is expected to be slow.

The tourism industry supports 78,266 jobs in Washington, D.C

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MSA by market share are not headquartered in the region), we believe that we have the ability to continue our historical growth by serving the middle market businesses and their owners in the Washington, D.C.

and Baltimore, Maryland MSAs who prefer high quality service and local decision making that is unavailable at larger, out-of-market banking institutions.

and Baltimore, Maryland MSAs who prefer personalized service and local decision making that may be unavailable at some of the larger, out-of-market banking institutions.

With its unique demographic characteristics, scale and robust economic activity, we believe that the Washington, D.C.

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We maintain a diversified loan portfolio with various types of loan products and customer characteristics, and a focus on variable rate, shorter term and higher yielding products.

Our lending services cover residential and commercial real estate loans, on an owner and non-owner-occupied basis, construction loans, commercial business loans.

Our lending services cover residential and commercial real estate loans, on an owner and non-owner-occupied basis, construction loans and commercial business loans.

Secured credit card lines are substantially secured by a deposit at the Bank in an amount equal to the full credit limit of the credit card.

Lending activities originate from the efforts of our bankers, with an emphasis on lending to individuals, professionals, small- to medium-sized businesses and commercial companies located in our market areas.

The following table presents the composition of our total loan portfolio, by category, as of December 31, 2019 .

LOAN PORTFOLIO COMPOSITION

Loan Composition

(Dollars in thousands)

Percentage of

The following table presents the composition of our portfolio loans, by category, as of December 31, 2020.

PORTFOLIO LOAN PORTFOLIO COMPOSITION

Portfolio Loan Composition

(Dollars in thousands) Amount Percentage of

Residential $ 437,860 33 %

Commercial 392,550 30

Construction 224,904 17

Subtotal real estate 1,055,314 80

Commercial 157,127 12

Credit card 102,186 8

Other consumer 1,649 —

Total $ 1,316,276 100.0 %

Residential Real Estate Loans .

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Our residential real estate lending products are offered primarily to customers within our geographic markets.

Our 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.

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

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

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

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

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

As of December 31, 2019 , we had approximately $165.4 million of owner-occupied commercial real estate loans, representing approximately 47.5% of our commercial real estate portfolio.

As of December 31, 2020, we had approximately $200.3 million of owner-occupied commercial real estate loans, representing approximately 15.2% of our total loan portfolio.

Commercial real estate loan terms are generally extended for 10 years or less and amortize generally over 25 years or less.

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According to our 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.

Loan proceeds are disbursed based on the completion of certain milestones and only after the project has been inspected by an experienced construction lender or third-party inspector.

In general, loan proceeds are disbursed based on the completion of certain milestones and only after the project has been inspected by an experienced construction lender or third-party inspector.

Commercial Business Loans .

In addition to our other loan products, we provide 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, underwritten based on each borrower’s ability to service debt from income.

We typically take as collateral 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.

Other than lines of credit, our commercial loans generally have fixed interest rates and five or seven year terms depending on the type and size of the loan, the financial strength of the borrower/guarantor and the age, type and value of the collateral.

ability to service debt from income.

We typically take as collateral 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.

Other than lines of credit, our commercial loans generally have fixed interest rates and five to seven year terms depending on the type and size of the loan, the financial strength of the borrower/guarantor and the age, type and value of the collateral.

Credit Cards .

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Credit Policies and Procedures

We maintain asset quality through an emphasis on local market knowledge, long-term customer relationships, consistent and thorough underwriting, and a conservative credit culture.

We strive to maintain asset quality through an emphasis on local market knowledge, long-term customer relationships, consistent and thorough underwriting, and a conservative credit culture.

Our lending policies do not provide for any loans that are highly speculative, subprime or that have high loan-to-value ratios.

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The Bank’s concentration management program couples quantitative data with a qualitative approach to provide an in-depth understanding of its loan portfolio concentrations.

The Bank’s routine commercial real estate portfolio analysis includes concentration trends by portfolio product type, overall commercial real estate growth trends, pool correlations, risk rating trends, policy and/or underwriting exceptions, non-performing trends, stress testing, market and submarket analysis and changing economic conditions.

The Bank’s routine commercial real estate portfolio analysis tracks concentration trends by portfolio product type, overall commercial real estate growth trends, pool correlations, risk rating trends, policy and/or underwriting exceptions, non-performing trends, stress testing, market and submarket analysis and changing economic conditions.

The portfolio concentration limits set forth in the Bank’s Credit Underwriting Guidelines are reviewed and approved by the Loan Committee of the Bank’s board of directors at least annually and are based on risk profile, strategic portfolio diversification goals, quality of the portfolio segment, overall budgeted growth goals and comparisons to our peers.

Concentration levels are monitored by management and reported to the Bank’s board of directors monthly.

Concentration levels are monitored by management and reported to the Bank’s board of directors periodically.

Loan Approval Process .

As of December 31, 2019 , the Bank had a legal lending limit of approximately $19.3 million for loans secured without readily marketable collateral, and its “in-house” lending limit was $15.0 million for the same period.

As of December 31, 2020, the Bank had a legal lending limit of approximately $24.3 million for loans secured without readily marketable collateral, and its “in-house” lending limit was $15.0 million.

The Bank’s lending activities are governed by written underwriting policies and procedures that have been approved by the Loan Committee of the Bank’s board of directors.

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The lending authority hierarchy varies depending on loan amount, collateral type and total borrower exposure.

A multi-tiered group level approach based on experience, capability and management position dictates lending authorities for senior management and loan officers.

A multi-tiered

group level approach based on experience, capability and management position dictates lending authorities for senior management and loan officers.

We conduct weekly loan meetings, attended by substantially all of our loan officers, related loan production staff and credit administration staff at which asset quality and delinquencies are reviewed.

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We believe this program motivates loan officers to focus on the origination and maintenance of high quality credits consistent with our strategic focus on asset quality.

It is our policy to discuss each loan that has one or more past due payment at our weekly meetings with all lending personnel.

It is our policy to discuss each loan that has one or more past due payments at our weekly meetings with all lending personnel.

Our policies require rapid notification of delinquency and prompt initiation of collection actions.

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Residential Mortgage Origination

We originate residential mortgages for sale on the secondary market through Capital Bank Home Loans, the mortgage division of our Bank.

We originate residential mortgages for sale on the secondary market through CBHL, the mortgage division of our Bank.

We have developed a scalable platform for mortgage originations within this division and believe that we have significant opportunities to grow the business.

We sell substantially all mortgage loans we originate with servicing released to various investors in the secondary market.

We sell substantially all mortgage

loans we originate with servicing released to various investors in the secondary market.

As a result of recent changes in the interest rate environment, our mortgage division is currently undergoing a transition from being heavily weighted toward refinance volume to being more weighted toward purchase volume and niche products with relatively higher margins.

As part of this effort, we have established our

Community Lending Group, which focuses on first-time home buyers, and our Renovation Group, which focuses on originating renovation focused loans, within the division, as well as hiring several new originators focused primarily on purchase originations.

At December 31, 2019 , we had a dedicated team of 40 mortgage loan officers to service this line of business.

As part of this effort, we have established our Community Lending Group, which focuses on first-time home buyers, and our Renovation Group, which focuses on originating renovation focused loans, within the division, as well as hiring several new originators focused primarily on purchase originations.

At December 31, 2020, we had a dedicated team and three mortgage loan offices to service this line of business.

We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of invested principal, with a secondary focus on yield and returns.

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Our investment portfolio is comprised primarily of U.S.

government agency securities, high quality corporate debt, mortgage-backed securities backed by government-sponsored entities and equity securities.

government agency securities, high quality corporate and municipal debt, mortgage-backed securities backed by government-sponsored entities and equity securities.

Our investment policy is reviewed annually by our Asset/Liability Management Committee, or ALCO, and subsequently ratified by our board of directors.

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These competitors attempt to gain market share through their financial product mix, pricing strategies and banking center locations.

Other important competitive factors in our industry and markets include office locations and hours, quality of customer service, community reputation, continuity of personnel and services, capacity and willingness to extend credit, and ability to offer sophisticated banking products and services.

banking products and services.

While we seek to remain competitive with respect to fees charged, interest rates and pricing, we believe that our broad and sophisticated commercial banking product suite, our high quality customer service culture, our positive reputation and long-standing community relationships will enable us to compete successfully within our markets and enhance our ability to attract and retain customers.

Our Employees

As of December 31, 2019 , we employed 230 full-time equivalent persons.

None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement.

We consider our relations with our employees to be good.

Employees and Human Capital Resources

At December 31, 2020, we employed 247 persons, of which 239 were employed on a full-time basis.

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 were recently named a Best Bank to Work For by American Banker.

Our ability to attract and retain employees is a key to our success.

We offer a competitive total rewards program to our employees and monitor the competitiveness of our compensation and benefits programs in our various market areas.

The Company prides itself on being a values-driven organization, where employees are empowered to share Ideas that keep the organization connected.

Our company core values guide each team member to:

• Act as an Owner

• Practice Balanced Risk Management

• Challenge the Norm

• Leverage the Team

We believe that these values enable our success with our customers and have helped us build a fun, vibrant and accountability driven culture.

In addition, we are committed to developing our staff through internal/external training programs, availability of an unlimited online training resource, and continuing to implement leadership development programs to all levels of leadership within the organization.

The safety, health and wellness for our employees is a top priority and consists of policies, procedures, guidelines, and mandates all tasks be conducted in a safe and efficient manner complying with all local, state and federal safety and health regulations.

Since the onset of the COVID-19 pandemic, we successfully moved to a virtual-workplace and today have 85% of our people working remotely.

Those that have remained in the office by necessity or desire are subject to policies and procedures put in place to protect them including a full stock of PPE.

The organization has continually provided guidelines to employees to promote healthy habits and ways to stay connected while working remotely.

Available Information

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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 particular statutory and regulatory provisions.

Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal levels.

The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on us, are difficult to ascertain.

A change in applicable laws and regulations, or in the manner such laws or regulations are interpreted by regulatory agencies or courts, may have a material effect on our business, operations, and earnings.

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.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), by way of example, contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets.

The Dodd-Frank Act made extensive changes in the regulation of financial institutions and their holding companies.

Some of the changes brought about by the Dodd-Frank Act have been modified by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the “Regulatory Relief Act”), signed into law on May 24, 2018.

The Dodd-Frank Act has increased the regulatory burden and compliance costs of the Company.

Moreover, bank regulatory agencies can be more aggressive in responding to concerns and trends identified in examinations, which could result in an increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, and capital adequacy, as well as other safety and soundness concerns.

Regulation of Capital Bancorp, Inc.

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Further, under the BHC Act, our activities and those of any nonbank subsidiary are limited to:

(i) those activities that the Federal

Reserve determines to be so closely related to banking as to be a proper incident thereto, and (ii) investments in companies not engaged in activities closely related to banking, subject to quantitative limitations on the value of such investments.

(i) those activities that the Federal Reserve determines to be so closely related to banking as to be a proper incident thereto, and (ii) investments in companies not engaged in activities closely related to banking, subject to quantitative limitations on the value of such investments.

Prior approval of the Federal Reserve may be required before engaging in certain activities.

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The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices and other violations of law.

Because our Bank’s deposits are insured by the FDIC to the maximum extent provided by law, it is also subject to certain FDIC regulations, and the FDIC has backup examination authority and some enforcement powers over our Bank.

Because our Bank’s deposits are insured by the

FDIC to the maximum extent provided by law, it is also subject to certain FDIC regulations, and the FDIC has backup examination authority and some enforcement powers over our Bank.

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.

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Regulatory Relief Act

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”), which amends parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) as well as other laws that involve regulation of the financial industry.

On May 24, 2018, President Trump signed into law the Regulatory Relief Act, which amends parts of the Dodd-Frank Act as well as other laws that involve regulation of the financial industry.

While the Regulatory Relief Act keeps in place fundamental aspects of the Dodd-Frank Act’s regulatory framework, it does make regulatory changes that are favorable to depository institutions with assets under $10 billion, such as the Bank and to BHCs with total consolidated assets of less than $10 billion, such as the Company.

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implementation of the Basel III standards, which are generally less onerous.

BHCs subject to the Policy also have less extensive regulatory reporting requirements than larger organizations filing.

BHCs subject to the Policy also have less extensive regulatory reporting requirements than apply to larger organizations.

Management believes the Corporation meets the conditions of the Federal Reserve’s Policy and is therefore excluded from consolidated capital requirements at December 31, 2019;

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These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and must not involve more than the normal risk of repayment or present other unfavorable features.

Loans to such persons and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, together with all other outstanding loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit.

Federal regulations also prohibit loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution.

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Federal banking agencies have issued guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.

The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that appropriately balance risk and rewards in a manner that does not encourage imprudent risk-taking, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

by strong corporate governance, including active and effective oversight by the organization’s board of directors.

In accordance with the Dodd-Frank Act, the federal banking agencies prohibit incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions (generally institutions that have over $1 billion in assets) and are deemed to be excessive, or that may lead to material losses.

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Our deposits are insured up to applicable limits by the DIF of the FDIC.

The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006.

Deposit insurance is mandatory.

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This methodology assigns a specific assessment rate to each institution based on the institution’s leverage capital, supervisory ratings, and information from the institution’s call report.

methodology, the assessment rate schedules used to determine assessments due from insured depository institutions become progressively lower when the reserve ratio in the DIF exceeds 2% and 2.5%.

Under this methodology, the assessment rate schedules used to determine assessments due from insured depository institutions become progressively lower when the reserve ratio in the DIF exceeds 2% and 2.5%.

The Dodd-Frank Act also raised the limit for federal deposit insurance to $250,000 for most deposit accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.

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The specific limits depend upon a number of factors, including the bank’s recent earnings, recent dividends, level of capital, and regulatory status.

The regulators are authorized, and under certain circumstances are required, to determine that the payment of dividends or other distributions by a bank would be an unsafe or unsound practice and to prohibit that payment.

The regulators are authorized, and under certain circumstances are required, to determine the payment of dividends or other distributions by a bank would be an unsafe or unsound practice and to prohibit that payment.

For example, the FDIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized.

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Capital Adequacy Guidelines

In December 2010, the Basel Committee on Banking Supervision released its final framework for strengthening international capital and liquidity regulation, or Basel III.

Basel III requires banks to maintain a higher level of capital than previously required, with a greater emphasis on common equity.

The Dodd-Frank Act imposed generally applicable capital requirements with respect to BHCs and their bank subsidiaries and mandated that the federal banking regulatory agencies adopt rules and regulations to implement the Basel III requirements.

In July 2013, the federal banking agencies adopted a final rule, or the Basel III Final Rule, implementing these standards.

Under the Basel III Final Rule, trust preferred securities are excluded from Tier I capital unless such securities were issued prior to May 19, 2010 by a BHC with less than $15 billion in assets, subject to certain limits.

The Dodd-Frank Act additionally provides for countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

Under the Basel III Final Rule, which implements this concept, banks must maintain a capital conservation buffer consisting of additional common equity Tier 1 capital equal to 2.5% of risk-weighted assets above each of the required minimum capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying certain

discretionary bonuses.

This new capital conservation buffer requirement began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increased by this amount each year until it became fully implemented at 2.5% in January 2019.

For purposes of calculating risk-weighted assets, the Basel III Final Rule is designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposures, and to minimize disincentives for holding liquid assets.

Under this rule, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights.

The resulting capital ratios represent capital as a percentage of total risk-weighted assets, which reflect on- and off-balance sheet items.

For this purpose, certain off-balance sheet items are assigned certain credit conversion factors to convert them to asset-equivalent amounts to which an appropriate risk-weighting will apply.

Those computations result in the total risk-weighted assets.

Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property, which carry a 50% risk weighting.

Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category.

Exceptions include municipal or state revenue bonds, which have a 50% risk weighting, and direct obligations of the United States Treasury or obligations backed by the full faith and credit of the United States government, which have a 0% risk weighting.

In converting off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are assigned a 100% credit conversion factor.

Transaction-related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) are assigned a 50% credit conversion factor.

Short-term commercial letters of credit are assigned a 20% credit conversion factor, and certain short-term unconditionally cancelable commitments are assigned a 0% credit conversion factor.

Minimum capital standards under the Basel III Final Rule for banks of our size took effect on January 1, 2015 with a phase-in period that generally extended through January 1, 2019 for certain of the changes.

As discussed under “—Prompt Corrective Action,” depository institutions and depository holding companies with less than $10 billion in total consolidated assets, such as the Company and the Bank, will be deemed to satisfy both the leverage and risk-based capital requirements, provided they satisfy a new “Community Bank Leverage Ratio” required to be promulgated by the Federal Banking agencies.

Under the Basel III Final Rule, the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%.

While there was previously no required ratio of “Common Equity Tier 1 Capital” (“CET1”) (which generally consists of common stock, retained earnings, certain qualifying capital instruments issued by consolidated subsidiaries, and Accumulated Other Comprehensive Income, subject to certain adjustments and deductions for items such as goodwill, other intangible assets, reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the appropriate regulator) to risk-weighted assets, a required minimum ratio of 4.5% became effective on January 1, 2015 as well.

The required ratio of “Tier 1 Capital” (consisting generally of CET1 and qualifying preferred stock) to risk-weighted assets is 6%.

The remainder of total capital, or Tier 2 Capital, may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) preferred stock not qualifying as Tier 1 Capital, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f) certain subordinated debt and intermediate-term preferred stock up to 50% of Tier 1 Capital.

Total Capital is the sum of Tier 1 Capital and Tier 2 Capital.

As of January 1, 2019, the Bank is required to maintain a minimum Tier 1 leverage ratio of 4.0%, a minimum CET1 to risk-weighted assets ratio of 7%, a Tier 1 capital to risk-weighted assets ratio of 8.5% and a minimum total capital to risk-weighted assets ratio of 10.5%.

The Basel III Final Rule also includes minimum leverage ratio requirements for banking organizations, calculated as the ratio of Tier 1 Capital to adjusted average consolidated assets.

Prior to the effective date of the Basel III Final Rule, banks and BHCs meeting certain specified criteria, including having the highest regulatory rating and not experiencing significant growth or expansion, were permitted to maintain a minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets equal to 3%.

Other banks and BHCs generally were required to maintain a minimum leverage ratio between 4% and 5%.

Under the Basel III Final Rule, as of January 1, 2015, the required minimum leverage ratio for all banks is 4%.

As an additional means of identifying problems in the financial management of depository institutions, the federal banking regulatory agencies have established certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator.

The standards relate generally to operations and management, asset quality, interest rate exposure, and executive compensation.

The agencies are authorized to take action against institutions that fail to meet such standards.

The requirements of the Dodd-Frank Act are still in the process of being implemented over time and most will be subject to regulations implemented over the course of several years.

In addition, the Regulatory Relief Act modifies several provisions in the Dodd-Frank Act, but are subject to implementing regulations.

Given the uncertainty associated with the way the provisions of the Dodd-Frank Act and the Regulatory Relief Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear.

On September 27, 2017, the federal banking agencies proposed a rule intended to reduce the regulatory compliance burden, particularly on community banking organizations, by simplifying several requirements in the Basel III-based capital rules.

Specifically, the proposed rule simplifies the capital treatment for certain acquisition, development, and construction loans, mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest.

In 2017, the federal banking agencies adopted an extension of the transition period for application of the Basel III-based capital rules to certain investments, effectively freezing the capital treatment of affected investments until the changes proposed in the September 2017 proposal are finalized and effective.

In addition, the Regulatory Relief Bill addressed the capital treatment of certain acquisition, development and construction loans.

See “—Commercial Real Estate Construction Guidelines.”

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel IV.

Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal agencies.

These agencies may establish higher minimum requirements if, for example, a banking organization previously has received special attention or has a high susceptibility to interest rate risk.

Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items.

Under the Dodd-Frank Act, the Federal Reserve must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions.

The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements.

Effective as of January 1, 2015, the Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expands the scope of the adjustments as compared to existing regulations.

Beginning January 1, 2016, financial institutions are required to maintain a minimum “capital conservation buffer” to avoid restrictions on capital distributions such as dividends and equity repurchases and other payments such as discretionary bonuses to executive officers.

The minimum capital conservation buffer has been phased-in over a four year transition period with minimum buffers of 0.625%, 1.25%, 1.875%, and 2.50% during 2016, 2017, 2018, and 2019, respectively.

As fully phased-in on January 1, 2019, Basel III subjects banks to the following risk-based capital requirements:

• a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer, or 7%;

• a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%;

• a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, or 10.5%;

• a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.

The Basel III final framework provides for a number of deductions from and adjustments to CET1.

These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions include the amount of Additional Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available-for-sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital.

Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first regulatory report following January 1, 2015.

As permitted by Basel III, the Company and the Bank have elected to exclude AOCI from CET1.

In addition, goodwill and most intangible assets are deducted from Tier 1 capital.

For purposes of applicable total risk-based capital regulatory guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is defined to include, subject to limitations:

perpetual preferred stock not included in Tier 1 capital, intermediate-term preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities, allowances for loan and lease losses, and intermediate-term subordinated debt instruments.

The maximum amount of qualifying Tier 2 capital is 100% of qualifying Tier 1 capital.

For purposes of determining total capital under federal guidelines, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other deductions.

Basel III changed the manner of calculating risk-weighted assets.

New methodologies for determining risk-weighted assets in the general capital rules are included, including revisions to recognition of credit risk mitigation, including a greater recognition of financial collateral and a wider range of eligible guarantors.

They also include risk weighting of equity exposures and past due loans;

and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity components.

In particular, loans categorized as “high-volatility commercial real estate” loans (“HVCRE loans”), as defined pursuant to applicable federal regulations, are required to be assigned a 150% risk weighting, and require additional capital support.

In addition to the uniform risk-based capital guidelines and regulatory capital ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy.

Such a change could affect our ability to grow and could restrict the amount of profits, if any, available for the payment of dividends.

In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address the risks that the activities of an institution poses to the institution and the public and private stakeholders, including risks arising from certain enumerated activities.

Basel III became applicable to the Bank on January 1, 2015 and just recently to the Corporation due to the Corporation’s growth in excess of $3.0 billion.

Overall, the Corporation believes that implementation of the Basel III Rule has not had and will not have a material adverse effect on the Corporation’s or the Bank’s capital ratios, earnings, shareholder’s equity, or its ability to pay dividends, effect stock repurchases or pay discretionary bonuses to executive officers.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”).

Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

Under the current U.S.

capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Bank.

The impact of Basel IV on us will depend on how it is implemented by the federal bank regulators.

capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Corporation or the Bank.

The impact of Basel IV on us will depend on the manner in which it is implemented by the federal bank regulators.

In 2018, the federal bank regulatory agencies issued a variety of proposals and made statements concerning regulatory capital standards.

These proposals touched on such areas as commercial real estate exposure, credit loss allowances under generally accepted accounting principles and capital requirements for covered swap entities, among others.

Public statements by key agency officials have also suggested a revisiting of capital policy and supervisory approaches on a going-forward basis.

In July 2019, the federal bank regulators adopted a final rule that simplifies the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Corporation and the Bank, that are not subject to the advanced approaches requirements.

We will be assessing the impact on us of these new regulations and supervisory approaches as they are proposed and implemented.

In February 2019, the U.S.

federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of CECL accounting standard.

Additionally, in March 2020, the U.S.

Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S.

economy as a result of the COVID-19 pandemic.

The capital relief in the interim is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period using a 25% scaling factor.

The cumulative difference at the end of the second year of the transition period is then phased in to regulatory capital at 25% per year over a three-year transition period.

The final rule was adopted and became effective in September 2020.

As a result, entities may gradually phase in the full effect of CECL on regulatory capital over a five-year transition period.

The Corporation is not required to implement the CECL model until January 1, 2023.

Commercial Real Estate Concentration Guidelines

In December 2006, the federal banking regulators issued guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” to address increased concentrations in commercial real estate (“CRE”) loans.

In addition, in December 2015, the federal bank agencies issued additional guidance entitled “Statement on Prudent Risk Management for Commercial Real Estate Lending.” Together, these guidelines describe the criteria the agencies will use as indicators to identify institutions potentially exposed to CRE concentration risk.

outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months, may be identified for further supervisory analysis of the level and nature of its CRE concentration risk.

At December 31, 2019 , the Bank’s construction to total risk based capital ratio was 147.7% , its total non-owner occupied commercial real estate (including construction) to total capital ratio was 341.6% and therefore exceeded the 100% and 300% regulatory guideline thresholds set forth in clauses (iii) and (iv) above.

As a result, we are deemed to have a concentration in commercial real estate lending under applicable regulatory guidelines.

to identify institutions potentially exposed to CRE concentration risk.

An institution that has (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE, (iii) total reported loans for construction, land development, and other land representing 100% or more of the institution’s capital, or (iv) total non-owner-occupied CRE (including construction) loans representing 300% or more of the institution’s capital, and the outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months, may be identified for further supervisory analysis of the level and nature of its CRE concentration risk.

At December 31, 2020, the Bank’s construction to total risk based capital ratio was 149.4%, its total non-owner occupied commercial real estate (including construction) to total capital ratio was 298.6% and therefore do exceed the 100% and do not exceed the 300% regulatory guideline thresholds set forth in clauses (iii) and (iv) above.

Currently, loans categorized as “high-volatility commercial real estate” loans (“HVCRE loans”), are required to be assigned a 150% risk weighting, and require additional capital support.

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Prompt Corrective Action

In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” that federal banking agencies are required to take, and certain actions that they have discretion to take, based upon the capital category into which a federally regulated depository institution falls.

Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution which is not adequately capitalized.

Under the prompt corrective action rules, an institution is deemed “well capitalized” if its leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or exceed 5%, 6.5%, 8%, and 10%, respectively.

An institution is deemed to be “adequately capitalized” or better if its leverage, Common Equity Tier 1, Tier 1, and Total Capital ratios meet or exceed the minimum federal regulatory capital requirements set forth in the Basel III Final Rule.

An institution is “undercapitalized” if it fails to meet the minimum capital requirements.

An institution is “significantly undercapitalized” if any one of its leverage, Common Equity Tier 1, Tier 1, and Total Capital ratios falls below 3%, 3%, 4%, and 6%, respectively, and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

The Regulatory Relief Act requires the federal banking agencies to promulgate a rule establishing a new “Community Bank Leverage Ratio” of 8% to 10% for depository institutions and depository institution holding companies, including banks and BHCs, with less than $10 billion in total consolidated assets, such as the Company and the Bank.

If such a depository institution or holding company maintains tangible equity in excess of this leverage ratio, it would be deemed in compliance with all other capital and leverage requirements:

(1) the leverage and risk-based capital requirements promulgated by the federal banking agencies;

(2) in the case of a depository institution, the capital ratio requirements to be considered “well

capitalized” under the federal banking agencies’ “prompt corrective action” regime;

and (3) any other capital or leverage requirements to which the depository institution or holding company is subject, in each case, unless the appropriate federal banking agency determines otherwise based on the particular institution’s risk profile.

The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party.

In addition, an undercapitalized institution becomes subject to certain automatic restrictions, including a prohibition on payment of dividends and a limitation on asset growth and expansion in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person.” Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring;

limitations on the institution’s ability to make acquisitions, open new branch offices or engage in new lines of business;

obligations to raise additional capital;

restrictions on transactions with affiliates;

and restrictions on interest rates paid by the institution on deposits.

In certain cases, banking regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser.

If an institution is deemed to be “critically undercapitalized” and continues in that category for 90 days, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.

An insured depository institution’s capital level may have consequences outside the prompt corrective action regime.

For example, only well-capitalized institutions may accept brokered deposits without restrictions on rates, while adequately capitalized institutions must seek a waiver from the FDIC to accept such deposits and are subject to rate restrictions.

Well-capitalized institutions may be eligible for expedited treatment of certain applications, an advantage not available to other institutions.

As noted above, Basel III integrates the new capital requirements into the prompt corrective action category definitions.

The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions.

Federal banking regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under applicable regulations, the Bank was “well capitalized,” which means it had a common equity Tier 1 capital ratio of 6.5% or higher;

a Tier I risk-based capital ratio of 8.0% or higher;

a total risk-based capital ratio of 10.0% or higher;

a leverage ratio of 5.0% or higher;

and was not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure.

As noted above, Basel III integrates the capital requirements into the prompt corrective action category definitions.

As a result of the Federal Reserve’s revisions to the Policy raising the total consolidated asset limit in the Policy from $1 billion to $3 billion, Capital Bancorp is currently exempt from the consolidated capital requirements.

Total Risk-Based

Capital Ratio

Tier 1 Risk-Based

Capital Ratio

Common Equity

Tier 1 (CET1) Capital Ratio

Leverage Ratio

Tangible Equity

Category Total Risk-Based

Capital Ratio Tier 1 Risk-Based

Capital Ratio Common Equity

Tier 1 (CET1) Capital Ratio Leverage Ratio Tangible Equity

to Assets Supplemental

Leverage Ratio

Well Capitalized

10% or greater

8% or greater

6.5% or greater

5% or greater

Well Capitalized 10% or greater 8% or greater 6.5% or greater 5% or greater n/a n/a

Adequately Capitalized

8% or greater

6% or greater

4.5% or greater

4% or greater

3% or greater

Undercapitalized

Less than 4.5%

8% or greater 6% or greater 4.5% or greater 4% or greater n/a 3% or greater

Undercapitalized Less than 8% Less than 6% Less than 4.5% Less than 4% n/a Less than 3%

Significantly Undercapitalized

Less than 6% Less than 4% Less than 3% Less than 3% n/a n/a

Critically Undercapitalized

n/a n/a n/a n/a Less than 2% n/a

As of December 31, 2020, the Bank was “well capitalized” according to the guidelines as generally discussed above.

An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.

An institution’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the institution’s overall financial condition or prospects for other purposes.

In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan.

The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount.

Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan.

In addition to requiring undercapitalized institutions to submit a capital restoration plan, bank regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business.

With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

As an institution’s capital decreases, the regulators’ enforcement powers become more severe.

A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions.

A regulator has limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator.

Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

Safety and Soundness Standards

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and (vi) compensation, fees and benefits.

In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the

maintenance of adequate capital and reserves.

These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.

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Our Bank received a “satisfactory” rating in its most recent CRA evaluation.

In April 2018, the U.S.

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.

The OCC adopted its final rules in May 2020, and, to date, the FDIC has not adopted revised rules.

In September 2020, the Board of Governors of the Federal Reserve System released for public comment its proposed rules to modernize CRA regulations.

We will continue to evaluate the impact of any changes to the CRA regulations.

Anti-Terrorism, Money Laundering Legislation and OFAC

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OFAC publishes lists of persons that are the target of sanctions, including the List of Specially Designated Nationals and Blocked Persons.

Financial institutions are responsible for, among other things, blocking accounts of and transactions with sanctioned persons and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked and

rejected transactions after their occurrence.

If the Company or the Bank finds a name or other information on any transaction, account or wire transfer that is on an OFAC list or that otherwise indicates that the transaction involves a target of sanctions, the Company or the Bank generally must freeze or block such account or transaction, file a suspicious activity report, and notify the appropriate authorities.

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The CFPB has authority through rulemaking, orders, policy statements, guidance, and enforcement actions to administer and enforce federal consumer financial laws, to oversee several entities and market segments not previously under the supervision of a federal regulator, and to impose its own regulations and pursue enforcement actions when it determines that a practice is unfair, deceptive, or abusive.

The federal consumer financial laws and all the functions and responsibilities associated with them, many of which were previously enforced by other federal regulatory agencies, were transferred to the CFPB on July 21, 2011.

consumer financial laws and all the functions and responsibilities associated with them, many of which were previously enforced by other federal regulatory agencies, were transferred to the CFPB on July 21, 2011.

While the CFPB has the power to interpret, administer, and enforce federal consumer financial laws, the Dodd-Frank Act provides that the federal banking regulatory agencies continue to have examination and enforcement powers over the financial institutions that they supervise relating to the matters within the jurisdiction of the CFPB if such institutions have less than $10 billion in assets.

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Insured depository institutions and insured credit unions that originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in each of the two preceding years are exempt from a subset of disclosure requirements (recently imposed by the CFPB) under the Home Mortgage Disclosure Act (“HMDA”), provided they have received certain minimum CRA ratings in their most recent examinations.

The Regulatory Relief Act also directs the Comptroller of the Currency to conduct a study assessing the effect of the exemption described above on the amount of HMDA data available at the national and local level.

The Regulatory Relief Act also directs the OCC to conduct a study assessing the effect of the exemption described above on the amount of HMDA data available at the national and local level.

In addition, Section 941 of the Dodd-Frank Act amended the Exchange Act to require sponsors of asset-backed securities (“ABS”) to retain at least 5% of the credit risk of the assets underlying the securities and generally prohibits sponsors from transferring or hedging that credit risk.

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Among other things, the Risk Retention Rule requires a securitizer to retain not less than 5% of the credit risk of any asset that the securitizer, through the issuance of an ABS, transfers, sells, or conveys to a third party;

and prohibits a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain.

and prohibits a securitizer from directly or indirectly hedging or otherwise

transferring the credit risk that the securitizer is required to retain.

In certain situations, the final rule allows securitizers to allocate a portion of the risk retention requirement to the originator(s) of the securitized assets, if an originator contributes at least 20% of the assets in the securitization.

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The Volcker Rule

In December 2013, five federal financial regulatory agencies, including the Federal Reserve, adopted final rules implementing the so-called “Volcker Rule” embodied in Section 13 of the BHC Act, which was added by the Dodd-Frank Act.

In general, the Volcker Rule prohibits banking entities from (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in, and relationships with, hedge funds or private equity funds, or covered funds.

The Volcker Rule is intended to provide greater clarity with respect to both the extent of those primary prohibitions and the related exemptions and exclusions.

The Regulatory Relief Act creates an exemption from prohibitions on propriety trading, and relationships with certain investment funds for banking entities with (i) less than $10 billion in total consolidated assets, and (ii) trading assets and trading liabilities less than 5% of its total consolidated assets.

Currently, all banks are subject to these prohibitions pursuant to the Dodd-Frank Act.

Any insured depository institution that is controlled by a company that itself exceeds these $10 billion and 5% thresholds would not qualify for the exemption.

In addition, the Regulatory Relief Act eases certain Volcker Rule restrictions on all bank entities, regardless of size, for simply share a name with hedge funds and private equity funds they organize.

While the Company would be exempt from the prohibition on proprietary trading pursuant to the Regulatory Relief Act, currently, the Company does not have any ownership interest in, or relationships with, hedge funds or private equity funds, or covered funds, or engage in any activities that would have previously subjected it to the Volcker Rule.

On December 10, 2013, the federal regulators adopted final regulations to implement the proprietary trading and private fund prohibitions of the Volcker Rule under the Dodd-Frank Act.

Under the final regulations, banking entities are generally prohibited, subject to significant exceptions from:

(i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds.

Revisions to the Volcker Rule in 2019, that become effective in 2020, simplifies and streamlines the compliance requirements for banks that do not have significant trading activities.

In 2020, the OCC, Federal Reserve, FDIC, SEC and Commodity Futures Trading Commission finalized further amendments to the Volcker Rule.

The amendments include new exclusions from the Volcker Rule’s general prohibitions on banking entities investing in and sponsoring private equity funds, hedge funds, and certain other investment vehicles (collectively “covered funds”).

The amendments in the final rule, which became effective on October 1, 2020, clarify and expand permissible banking activities and relationships under the Volcker Rule.

Other Provisions of the Dodd-Frank Act

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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.

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.

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We are also subject to a variety of laws and regulations that are not limited to banking organizations.

For example, in lending to commercial and consumer borrowers, and in owning and operating our own property, we are subject to regulations and potential liabilities under state and federal environmental laws.

For example, in lending to commercial and consumer borrowers, and in owning and operating our own

property, we are subject to regulations and potential liabilities under state and federal environmental laws.

In addition, we must comply with privacy and data security laws and regulations at both the federal and state level.

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The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, BHCs, and their respective subsidiaries by the appropriate regulatory agency.

Future Legislation and Regulation

Regulators have increased their focus on the regulation of the financial services industry in recent years, leading in many cases to greater uncertainty and compliance costs for regulated entities.

Proposals that could substantially intensify the regulation of the financial services industry have been and may be expected to continue to be introduced in the United States Congress, in state legislatures, and by applicable regulatory authorities.

These proposals may change banking statutes and regulations and our operating environment in substantial and unpredictable ways.

If enacted, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.

We cannot predict whether any of these proposals will be enacted and, if enacted, the effect that these proposals, or any implementing regulations, would have on our business, results of operations, or financial condition.

See “Risk Factors —Risks Related to the Regulation of Our Industry Legislative and regulatory actions taken now or in the future may increase our costs and impact our business governance structure, financial condition or results of operations.”

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business