What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-03-15 compared with 2020-03-16 · 541 added, 342 removed, 1047 unchanged (46% of the section changed)

4 unchanged sentences

We have audited the accompanying consolidated balance sheets of Capital Bancorp, Inc.

and Subsidiaries (the “Company”) as of December 31, 2019 and 2018 , and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements and schedules (collectively, the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018 , and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

4 unchanged sentences

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting under PCAOB standards.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting under PCAOB standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whe ther due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

14 unchanged sentences

Total cash and cash equivalents

146,910 114,824

Investment securities available for sale 99,787 60,828

1 unchanged sentence

Loans held for sale 107,154 71,030

Loans receivable, net of allowance for loan losses of $13,301 and $11,308 at December 31, 2019 and December 31, 2018, respectively

Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans receivable, net of fees 201,018 —

Portfolio loans receivable, net of deferred fees and costs and net of allowance for loan losses of $ 23,434 and $ 13,301

1,292,068 1,156,934

Premises and equipment, net

Accrued interest receivable 8,134 4,770

Deferred income taxes

Deferred tax asset 6,818 4,263

Foreclosed real estate 3,326 2,384

Noninterest-bearing, including related party balances of $16,009 and $11,214 at December 31, 2019 and December 31, 2018, respectively

Interest-bearing, including related party balances of $125,304 and $144,624 at December 31, 2019 and December 31, 2018, respectively

Other assets 2,956 2,518

$ 1,876,593 $ 1,427,609

Noninterest-bearing, including related party balances of $ 17,848 and $ 16,009

$ 608,559 $ 291,777

Interest-bearing, including related party balances of $ 130,586 and $ 125,304

1,043,569 933,644

Total deposits

Securities sold under agreements to repurchase

Federal funds purchased

1,652,128 1,225,421

Federal Home Loan Bank advances 22,000 32,222

3 unchanged sentences

Total liabilities

1,717,282 1,294,278

Stockholders' equity

Preferred stock, $.01 par value;

1,000,000 shares authorized;

no shares issued or outstanding at December 31, 2019 and December 31, 2018

Common stock, $ .01 par value;

49,000,000 shares authorized;

13,894,842 and 13,672,479 issued and outstanding at December 31, 2019 and December 31, 2018, respectively

13,753,529 and 13,894,842 issued and outstanding

Additional paid-in capital 50,602 51,561

Retained earnings 106,854 81,618

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income 1,717 13

Total stockholders' equity

159,311 133,331

Total liabilities and stockholders' equity

$ 1,876,593 $ 1,427,609

See Notes to Consolidated Financial Statements

10 unchanged sentences

Interest expense

Deposits, includes interest expense payable to related parties of $1,772 and $1,727 for the years ended December 31, 2019 and, 2018, respectively.

Deposits, includes interest expense paid to related parties of $ 1,015 and $ 1,727

11,524 13,689

Borrowed funds 1,658 2,153

3 unchanged sentences

Net interest income after provision for loan losses

72,827 63,547

Noninterest income

2 unchanged sentences

Mortgage banking revenue 40,649 15,955

Gain (loss) on sale of investment securities available for sale

Loss on sale of foreclosed real estate

Loss on disposal of premises and equipment

Gain on sale of investment securities available for sale 20 26

Other fees and charges 2,906 1,567

5 unchanged sentences

Data processing 26,917 15,512

Advertising 2,530 2,066

Loan processing 3,811 1,894

4 unchanged sentences

Income tax expense 9,314 5,819

Net income $ 25,823 $ 16,895

Basic earnings per share $ 1.87 $ 1.23

1 unchanged sentence

Weighted average common shares outstanding:

Basic 13,793,256 13,733,131

Diluted 13,800,176 13,968,585

See Notes to Consolidated Financial Statements

3 unchanged sentences

For the Years Ended December 31, 2020 and 2019

Years Ended December 31,

(in thousands) 2020 2019

Net income $ 25,823 $ 16,895

Other comprehensive income (loss):

Unrealized gain (loss) on investment securities available for sale

Reclassification of realized (gain) loss on sales of investment securities available for sale

Unrealized gain on investment securities available for sale 2,340 868

Reclassification of realized gain on sales of investment securities available for sale ( 20 ) ( 26 )

Unrealized loss on cash flow hedging derivative — ( 5 )

Income tax (expense) benefit relating to the items above

Other comprehensive income (loss)

Income tax expense relating to the items above ( 616 ) ( 229 )

Other comprehensive income 1,704 608

Comprehensive income $ 27,527 $ 17,503

4 unchanged sentences

For the Years Ended December 31, 2020, 2019 and 2018

Accumulated Other Comprehensive Income (Loss)

Common Stock Additional

Capital Retained

Earnings Accumulated Other Comprehensive Income (Loss) Total

Stockholders'

(dollars in thousands)

(dollars in thousands) Shares Amount

Balance, December 31, 2018 13,672,479 137 49,321 65,701 ( 595 ) 114,564

Unrealized loss on investment securities available for sale, net of income taxes

Adoption of lease standard ( 54 ) ( 54 )

Net income — — — 16,895 — 16,895

Unrealized gain on investment securities available for sale, net of income taxes — — — — 612 612

Unrealized loss on cash flow hedging derivative, net of income taxes

— — — — ( 4 ) ( 4 )

Stock options exercised, including tax benefit

221,710 2 1,515 ( 924 ) — 593

Shares issued as compensation

29,133 — 301 — — 301

Stock-based compensation

— — 795 — — 795

Shares repurchased and retired ( 28,480 ) — ( 371 ) — — ( 371 )

Initial public offering, common stock issued, net of costs and underwriting discount of $3.2 million

Balance, December 31, 2019 13,894,842 139 51,561 81,618 13 133,331

Adoption of lease standard

Net income — — — 25,823 — 25,823

Unrealized gain on investment securities available for sale, net of income taxes

Unrealized loss on cash flow hedging derivative, net of income taxes

— — — — 1,704 1,704

Stock options exercised, including tax benefit

142,901 2 1,083 ( 163 ) — 922

Shares issued as compensation

19,900 — 268 — — 268

Stock-based compensation

— — 983 — — 983

Shares repurchased and retired ( 304,114 ) ( 3 ) ( 3,293 ) ( 424 ) — ( 3,720 )

7 unchanged sentences

Cash flows from operating activities

Net income $ 25,823 $ 16,895

Adjustments to reconcile net income to net cash provided by operating activities:

3 unchanged sentences

Net amortization on investments 297 160

Furniture and equipment depreciation

Premises and equipment depreciation 844 1,113

Lease asset amortization 1,050 1,238

2 unchanged sentences

Deferred income tax benefit ( 3,170 ) ( 839 )

Amortization of debt issuance expense

(Gain) loss on sale of securities available for sale

Loss on sales of foreclosed real estate

Loss on disposal of premises and equipment

Amortization of debt issuance cost 139 30

Gain on sale of securities available for sale ( 20 ) ( 26 )

Mortgage banking revenue ( 40,649 ) ( 15,955 )

4 unchanged sentences

Prepaid income taxes and taxes payable — 81

Other assets ( 438 ) ( 418 )

Accrued interest payable ( 667 ) 236

Other liabilities 7,446 2,886

Net cash (used) provided by operating activities

Net cash provided by operating activities 5,457 ( 27,212 )

Cash flows from investing activities

2 unchanged sentences

Proceeds from sale of securities available for sale 965 3,280

Purchases of restricted investments

Sales (purchases) of restricted investments 8 ( 1,463 )

Net increase in SBA-PPP loans receivable ( 201,018 ) —

Net increase in loans receivable ( 147,319 ) ( 173,076 )

1 unchanged sentence

Proceeds from sales of foreclosed real estate — 49

Net cash used by investing activities

Net cash used in investing activities ( 385,512 ) ( 187,981 )

See Notes to Consolidated Financial Statements

7 unchanged sentences

Noninterest bearing deposits

316,782 49,518

Interest bearing deposits

109,925 220,662

Securities sold under agreements to repurchase — ( 3,332 )

4 unchanged sentences

Proceeds from exercise of stock options 922 595

Proceeds from shares sold

Proceeds from initial public offering, net

Net cash provided by financing activities 412,141 295,294

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents 32,086 80,101

Cash and cash equivalents, beginning of year 114,824 34,723

2 unchanged sentences

Loans transferred to foreclosed real estate $ 942 $ 2,291

Change in unrealized gains (losses) on investments

Change in unrealized gains on investments $ 2,320 $ 842

Change in fair value of loans held for sale $ 5,669 1,420

3 unchanged sentences

Cash paid during the period for:

Taxes $ 11,998 $ 5,451

Interest $ 13,849 $ 15,606

See Notes to Consolidated Financial Statements

1 unchanged sentence

and Subsidiaries

Annual Report on Form 10-K

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

12 unchanged sentences

The Trust is a special purpose non-consolidated entity organized for the sole purpose of issuing trust preferred securities.

In September 2018, the Company completed its initial public offering (“IPO”) of 2,563,046 shares of its common stock at a price to the public of $12.50 per share, 1,834,310 shares of which were sold by the Company and 728,736 shares of which were sold by certain of the Company’s shareholders (the “selling shareholders”).

The net proceeds to the Company from the IPO were $19.8 million after deducting the underwriting discount and offering expenses of $3.2 million .

The Company did not receive any proceeds from the sales of shares by the selling shareholders.

Basis of Presentation

8 unchanged sentences

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and conform to general practices within the banking industry.

On August 15, 2018, the Company completed a four -for-one stock split of the Company's authorized, issued, and outstanding common stock, par value $.01 per share (the “Stock Split”).

At the effective time of the Stock Split, each share of the Company's issued and outstanding common stock was automatically increased to four shares issued and outstanding.

No fractional shares were issued in connection with the Stock Split.

All share and share-related information presented in these consolidated financial statements have been retroactively adjusted to reflect the increased number of shares resulting from the Stock Split.

Significant Accounting Policies:

The preparation of consolidated financial statements in accordance with GAAP requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.

The basis of the estimates is on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 1 - Nature of Business and Basis of Presentation (continued)

which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources.

The basis of the estimates is on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources.

Estimates are evaluated on an ongoing basis.

3 unchanged sentences

Generally, federal funds are sold for one-day periods.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 1 - Nature of Business and Basis of Presentation (continued)

Investment securities

14 unchanged sentences

The Company elected to measure loans held for sale at fair value to better align reported results with the underlying economic changes in value of the loans on the Company’s balance sheet.

Portfolio loans and the allowance for loan losses

Loans are stated at the principal amount outstanding, adjusted for deferred origination fees, deferred origination costs, discounts on loans acquired, and the allowance for loan losses.

Interest is accrued based on the loan principal balances and stated interest rates.

Origination fees and costs are recognized as an adjustment to the related loan yield using approximate interest methods.

The Company has provided short-term deferrals of loan principal and/or interest payments for customers who have been affected by the COVID-19 pandemic.

Customers receiving payment deferrals must meet certain criteria, such as being in good standing and not more than 30 days past due prior to the pandemic.

In most cases, the deferred principal and/or interest amounts will be collected at the end of the life of the loan and will not accrue additional interest.

The granting of a deferral of principal and/or interest under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was enacted on March 27, 2020, and based on interagency guidelines, does not subject the loan to the past due, non-accrual, or troubled debt restructurings (“TDR”) policies described below.

Upon exiting the loan modification deferral program, the measurement of loan delinquency will resume based in the number of days of delinquency as at the date of modification.

The following discussions of past due, non-accrual and TDR policies remain valid for situations not covered by the CARES Act.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Loans and the allowance for loan losses

Loans are stated at the principal amount outstanding, adjusted for deferred origination fees, deferred origination costs, discounts on loans acquired, and the allowance for loan losses.

Interest is accrued based on the loan principal balances and stated interest rates.

Origination fees and costs are recognized as an adjustment to the related loan yield using approximate interest methods.

Note 1 - Nature of Business and Basis of Presentation (continued)

Outstanding portfolio loans deferred due to COVID-19, which decreased by 78.9 percent from $ 144.0 million at June 30, 2020 to $ 30.5 million at December 31, 2020, are shown in the table below:

Loan Modifications (1)

(dollars in millions)

December 31, 2020 June 30, 2020

Deferred Loans Deferred Loans

Sector Total Loans Outstanding Balance # of Loans Deferred Balance # of Loans Deferred

Accommodation & Food Services $ 89.1 $ 14.7 16 $ 42.6 36

Real Estate and Rental Leasing 508.7 5.5 10 45.6 67

Other Services Including Private Households 174.2 1.1 3 17.3 36

Educational Services 20.9 — — 9.8 6

Construction 260.1 — — 4.2 6

Professional, Scientific, and Technical Services 86.3 1.4 3 5.0 11

Arts, Entertainment & Recreation 39.0 0.7 2 5.0 9

Retail Trade 24.6 0.3 1 3.0 8

Healthcare & Social Assistance 88.5 0.9 1 4.7 11

Wholesale Trade 13.6 — — 0.9 1

All other (1)

216.1 5.9 7 5.9 13

Total $ 1,521.1 $ 30.5 43 $ 144.0 204

_______________

(1) Excludes the minor modifications and deferrals made for OpenSky ® secured card customers.

The Company generally discontinues the accrual of interest when any portion of the principal and interest is 90 days past due and collateral is insufficient to discharge the debt in full.

9 unchanged sentences

repayments deemed to be projected beyond reasonable time frames, client bankruptcy and lack of assets, and/or collateral deficiencies.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 1 - Nature of Business and Basis of Presentation (continued)

The allowance for loan losses is estimated to adequately provide for probable future losses on existing loans.

15 unchanged sentences

In addition, various banking agencies,as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank’s loan portfolio and allowance for loan losses.

Such review may result in

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

recognition of additions to the allowance based on their judgments of information available to them at the time of their examination.

Such review may result in recognition of additions to the allowance based on their evaluation of information available to them at the time of their examination.

The review of the adequacy of the allowance for loan losses includes an assessment of the fair value adjustment for acquired loans in accordance with generally accepted accounting principles.

4 unchanged sentences

Expenditures for maintenance, repairs, and minor replacements are charged to noninterest expenses as incurred.

The costs of major renewals and betterments are capitalized, These costs would be included as a component of premises and equipment expenses on the Consolidated Statements of Operations.

The costs of major renewals and improvements are capitalized, these costs would be included as a component of premises and equipment expenses.

During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) No.

1 unchanged sentence

ASU 2016-02 applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments.

The Company has elected to apply the practical expedients permitting entities to not reassess:

The Company elected to apply the practical expedients permitting entities to not reassess:

1) whether any expired or existing contracts are or contain leases;

2) the lease classification for any expired or existing leases;

and 3) initial direct costs for any existing leases.

Additionally, as provided by ASU 2016-02, the Company has elected not to apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of 12 months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term.

We adopted the guidance using the modified retrospective approach on January 1, 2019 and elected the practical expedients for transition including the transition option provided in ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allowed the Company to initially apply the new leases standard at the adoption date.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 1 - Nature of Business and Basis of Presentation (continued)

3) initial direct costs for any existing leases.

Additionally, as provided by ASU 2016-02, the Company elected not to apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of 12 months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term.

The Company has adopted the guidance using the modified retrospective approach on January 1, 2019 and elected the practical expedients for transition including the transition option provided in ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allowed the Company to initially apply the new leases standard at the adoption date.

Consequently, the reporting for the comparative periods presented continued to be in accordance with ASC Topic 840, Leases .

Therefore, the 2018 financial results and disclosures have not been adjusted.

The Company is largely accounting for our existing operating leases consistent with prior guidance except for the incremental balance sheet recognition for leases.

The Company accounts for our existing operating leases consistent with prior guidance except for the incremental balance sheet recognition for leases.

The adoption of this standard resulted in the Company recognizing lease right-of-use assets and related lease liabilities totaling $ 5.2 million and $ 5.4 million, respectively, as of January 1, 2019.

3 unchanged sentences

Derivative Financial Instruments

T he Company enters into commitments to fund residential mortgage loans (interest rate locks) with the intention of selling them in the secondary market.

The Company enters into commitments to fund residential mortgage loans (interest rate locks) with the intention of selling them in the secondary market.

The Company also enters into forward sales agreements for certain funded loans and loan commitments.

Unfunded commitments intended for loans held for sale and forward sales agreements are recorded at fair value with changes in fair value recorded as a component of mortgage banking revenue.

Loans originated and intended for sale in the secondary market are carried

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

at fair value.

Loans originated and intended for sale in the secondary market are carried at fair value.

For pipeline loans which are not pre-sold to an investor, the Company manages the interest rate risk on rate lock commitments by entering into forward sale contracts, whereby the Company obtains the right to deliver securities to investors in the future at a specified price, Such contracts are accounted for as derivatives and are recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in mortgage banking revenue.

7 unchanged sentences

For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value.

However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value.

In developing our fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs.

However, when quoted market prices or observable market inputs are not fully available, significant

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 1 - Nature of Business and Basis of Presentation (continued)

management judgment may be necessary to estimate fair value.

In developing our fair value estimates, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy defines Level 1 valuations as those based on quoted prices (unadjusted) for identical assets or liabilities in active markets.

9 unchanged sentences

In accordance with ASC Topic 740, the Company may establish a valuation allowance against deferred tax assets in those cases where realization is less than certain.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Earnings per share

2 unchanged sentences

At December 31, 2020 and 2019, there were 504,861 and 7,628 stock options, respectively, that were not included in the calculation as their effect would have been anti-dilutive.

The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per common share as adjusted for the Stock Split:

Earnings Per Share

For the Years Ended December 31,

(dollars in thousands, except per share information)

Weighted Average Shares

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 1 - Nature of Business and Basis of Presentation (continued)

The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per common share:

Earnings Per Share For the Years Ended December 31,

(dollars in thousands, except per share information) Income Weighted Average Shares Per Share

Amount Income Weighted Average Shares Per Share

Net income available to common stockholders $ 25,823 13,793,256 $ 1.87 $ 16,895 13,733,131 $ 1.23

5 unchanged sentences

The Company's only two components of other comprehensive income are unrealized gains and losses on investment securities available for sale, net of income taxes, and unrealized gains and losses on cash flow hedges, net of income taxes.

Information concerning the Company's accumulated other comprehensive income (loss) as of December 31, 2019 , and 2018 are as follows (in thousands):

Comprehensive Income

For the Years Ended December 31,

Information concerning the Company's accumulated other comprehensive income as of December 31, 2020, and 2019 are as follows:

Comprehensive Income For the Years Ended December 31,

(in thousands) 2020 2019

Unrealized gains (losses) on securities available for sale

Deferred tax (expense) benefit

Other comprehensive income (loss), net of tax

Unrealized gains on cash flow hedges

Unrealized gains on securities available for sale $ 2,337 $ 18

Deferred tax expense ( 620 ) ( 5 )

Other comprehensive income, net of tax

Total accumulated comprehensive income (loss)

Total accumulated comprehensive income $ 1,717 $ 13

Recently issued accounting pronouncements:

3 unchanged sentences

The Company is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.

2 unchanged sentences

The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

In August 2018, the FASB amended the Fair Value Measurement Topic 820 disclosure framework.

These amendments include additions, removals and modifications to the fair value disclosure requirements in Topic 820, and are effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

Early adoption is permitted on removed or modified disclosures.

The Company does not expect these amendments to have a material effect on its financial statements.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 1 - Nature of Business and Basis of Presentation (continued)

In April 2019, the FASB issued codification improvements to ASU Topic 326 - Financial Instruments - Credit Loss, Topic 815 - Derivatives and Hedging, and Subtopic 825-10 - Financial Instruments.

1 unchanged sentence

The Company early adopted this guidance upon issuance, and it did not have a material impact on the Company’s Consolidated Financial Statements.

In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on loan losses, hedging, and recognition and measurement of financial instruments.

The amendments related to loan losses will be effective for the Company for reporting periods beginning after December 15, 2022.

The amendments related to hedging were effective for the Company for interim and annual periods beginning after December 15, 2018.

The amendments related to recognition and measurement of financial instruments were adopted by the Company during the first quarter of 2018.

The Company does not expect these amendments to have a material effect on its financial statements.

In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected loan losses (CECL).

11 unchanged sentences

The Company does not expect these amendments to have a material effect on its financial statements.

In March 2020, the FASB released ASU 2020-04 - Reference Rate Reform, Topic 848, which provides guidance to provide temporary guidance to ease the potential accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting.

The new standard is a result of London Interbank Offered Rate (“LIBOR”) likely being discontinued as an available benchmark rate.

The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued.

The amendments in the update are effective for all entities between March 12,2020 and December 31, 2022.

The Company is currently evaluating products and preparing to offer new rates.

The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Reclassifications:

5 unchanged sentences

At December 31, 2020 and 2019, the requirements were satisfied by amounts on deposit with the Federal Reserve Bank and cash on hand.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 3 - Investment Securities

The investment securities portfolio consists primarily of U.S.

government sponsored entity securities, asset-backed securities, securities issued by states, counties and municipalities, corporate bonds and mortgage backed securities (“MBS”).

The asset-backed securities are comprised of student loan collateral issued by the Federal Family Education Loan Program (“FFELP”) which includes a minimum of a 97% government repayment guarantee, as well as additional support in excess of the government guaranteed portion.

Note 3 - Investment Securities (continued)

The amortized cost and estimated fair value of investment securities at December 31, 2020 and 2019 are summarized as follows:

Investment Securities Available for Sale

Cost Unrealized

Gains Unrealized

(in thousands)

December 31, 2020

government-sponsored enterprises

Asset-backed securities $ 10,839 $ 42 $ — $ 10,881

Municipal 10,836 108 ( 17 ) 10,927

Corporate 5,759 30 ( 22 ) 5,767

Mortgage-backed securities 70,016 2,208 ( 12 ) 72,212

$ 97,450 $ 2,388 $ ( 51 ) $ 99,787

December 31, 2019

government-sponsored enterprises

government-sponsored agencies $ 1,000 $ — $ ( 1 ) $ 999

Municipal 515 13 — 528

Corporate 2,542 46 ( 23 ) 2,565

Mortgage-backed securities 56,754 117 ( 135 ) 56,736

Proceeds from sales of securities sold during the year ended December 31, 2019 and 2018 were $3.3 million and $345 thousand respectively, and resulted in aggregate realized gains of $37 thousand and aggregate realized losses of $11 thousand for December 31, 2019 and aggregate realized losses of $2 thousand for the same period in 2018 .

$ 60,811 $ 176 $ ( 159 ) $ 60,828

Proceeds from sales of the security sold during the year ended December 31, 2020 and 2019 were $ 1.0 million and $ 3.3 million respectively, and resulted in aggregate realized gains of $ 20 thousand for December 31, 2020 and aggregate realized gains of $ 26 thousand for the same period in 2019.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 3 - Investment Securities (continued)

Information related to unrealized losses in the investment portfolio as of December 31, 2020 and 2019 are as follows:

Investment Securities Unrealized Losses

Less than 12 months

12 months or longer

Less than 12 months 12 months or longer Total

Value Unrealized

(in thousands)

December 31, 2020

government-sponsored enterprises

Asset-backed securities $ — $ — $ — $ — $ — $ —

Municipal 3,151 ( 17 ) — — 3,151 ( 17 )

Corporate 1,994 ( 6 ) 244 ( 16 ) 2,238 ( 22 )

Mortgage-backed securities

2,410 ( 12 ) — — 2,410 ( 12 )

$ 7,555 $ ( 35 ) $ 244 $ ( 16 ) $ 7,799 $ ( 51 )

December 31, 2019

government-sponsored enterprises

government-sponsored agencies $ — $ — $ 999 $ ( 1 ) $ 999 $ ( 1 )

Municipal — — — — — —

Corporate — — 519 ( 23 ) 519 ( 23 )

Mortgage-backed securities

At December 31, 2019 , there was one U.S.

government-sponsored enterprise security, two corporate securities, and four mortgage-backed securities that had been in a loss position for greater than twelve months.

Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and not as a result of credit deterioration.

21,487 ( 78 ) 5,246 ( 57 ) 26,733 ( 135 )

$ 21,487 $ ( 78 ) $ 6,764 $ ( 81 ) $ 28,251 $ ( 159 )

At December 31, 2020, there was one corporate security that has been in a loss position for greater than twelve months.

Management believes that all unrealized losses have resulted from temporary changes in interest rates and current market conditions and not as a result of credit deterioration.

Management has the ability and the intent to hold these investment securities until maturity or until they recover in value.

Note 3 - Investment Securities (continued)

A summary of pledged securities at December 31, 2020 and 2019 is shown below:

1 unchanged sentence

For the Years Ended December 31,

(in thousands)

Securities sold under agreements to repurchase

(in thousands) Amortized

Value Amortized

Federal Home Loan Bank advances 1,142 1,189 1,508 1,522

$ 1,142 $ 1,189 $ 1,508 $ 1,522

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 3 - Investment Securities (continued)

Contractual maturities of U.S.

government-sponsored enterprises and corporate securities at December 31, 2019 and 2018 are shown below.

government-sponsored agencies, asset-backed, municipal, corporate and mortgage-backed securities at December 31, 2020 and 2019 are shown below.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

1 unchanged sentence

For the Years Ended December 31,

(in thousands)

(in thousands) Amortized

Value Amortized

Within one year $ — $ — $ 1,542 $ 1,518

4 unchanged sentences

70,016 72,212 56,754 56,736

$ 97,450 $ 99,787 $ 60,811 $ 60,828

(1) Mortgage-backed securities are due in monthly installments.

Note 4 - SBA-PPP Loans

Pursuant to the CARES Act, the SBA-PPP provides forgivable loans to small businesses to enable them to maintain payroll, hire back employees who have been laid off, and cover applicable overhead.

SBA-PPP loans have an interest rate of 1%, have 2 and 5 year terms, and carry a 100% guarantee of the SBA.

The allowance for loan losses for SBA-PPP loans was separately evaluated given the explicit government guarantee.

This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore no allowance for loan losses was assigned to these loans.

At December 31, 2020, SBA-PPP loans receivable, which totaled $ 204.9 million, are all rated as pass credits, not past due, nonaccrual, TDR, or otherwise impaired.

Earned fees for the year are $ 2.8 million and unearned net fees associated with the SBA-PPP loans amounted to $ 3.9 million at December 31, 2020.

There were no outstanding commitments to extend additional SBA-PPP loans at December 31, 2020.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 4 - Loans Receivable

Major categories of loans are as follows:

Loan Categories

Note 5 - Portfolio Loans Receivable

Major categories of portfolio loans are as follows:

Portfolio Loan Categories

(in thousands) 2020 2019

Residential $ 437,860 $ 427,926

Commercial 392,550 348,091

Construction 224,904 198,702

Commercial 157,127 151,109

Credit card 102,186 45,526

Other consumer 1,649 1,285

1,316,276 1,172,639

Deferred origination fees, net ( 774 ) ( 2,404 )

Allowance for loan losses ( 23,434 ) ( 13,301 )

Loans receivable, net

Portfolio loans receivable, net $ 1,292,068 $ 1,156,934

The Company makes loans to customers located primarily in the Washington, D.C.

1 unchanged sentence

Although the loan portfolio is diversified, its performance will be influenced by the regional economy.

The Company’s loan categories are described below.

The Company’s portfolio loan categories are described below.

Residential Real Estate Loans .

10 unchanged sentences

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 , there were approximately $165.4 million of owner-occupied commercial real estate loans, representing approximately 47.5% of the commercial real estate portfolio.

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

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

3 unchanged sentences

This diversity helps reduce the exposure to adverse economic events that affect any single industry.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 5 - Portfolio Loans Receivable (continued)

Construction Loans .

3 unchanged sentences

According to underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, cannot exceed 75 % for investor-owned and 80 % for owner-occupied properties.

Semi-annual stress testing of

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

the construction loan portfolio is conducted, and underlying real estate conditions are closely monitored as well as the borrower’s trends of sales valuations as compared to underwriting valuations as part of the ongoing risk management efforts.

The borrowers’ progress in construction buildout is closely monitored and the original underwriting guidelines for construction milestones and completion timelines are strictly enforced.

Semi-annual stress testing of the construction loan portfolio is conducted, and underlying real estate conditions are closely monitored as well as the borrower’s trends of sales valuations as compared to underwriting valuations as part of the ongoing risk management efforts.

The borrowers’ progress in construction buildout is closely monitored and the original underwriting guidelines for construction milestones and completion timelines are enforced.

Commercial Business Loans .

3 unchanged sentences

Credit Cards .

Through the OpenSky® credit card division, the Company offers credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores are provided through a fully digital and mobile platform.

Through the OpenSky® credit card division, the Company offers credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores through a fully digital and mobile platform.

Substantially all of the lines of credit are secured by a noninterest bearing demand account at the Bank in an amount equal to the full credit limit of the credit card.

2 unchanged sentences

Other Consumer Loans .

To a very limited extent and typically as an accommodation to existing customers, personal consumer loans such as term loans, car loans or boat loans are offered.

Loans acquired through acquisitions are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses.

To a limited extent and typically as an accommodation to existing customers, personal consumer loans such as term loans, car loans or boat loans are offered.

Acquired loans through acquisitions are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses.

In estimating the fair value of loans acquired, certain factors were considered, including the remaining lives of the acquired loans, payment history, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and the net present value of cash flows expected.

1 unchanged sentence

For loans considered to be impaired, the difference between the contractually required payments and expected cash flows was recorded as a nonaccretable discount.

The remaining nonaccretable discounts on loans acquired were $285 thousand and $354 thousand as of December 31, 2019 and 2018 , respectively.

The remaining nonaccretable discounts on loans acquired were $ 285 thousand at December 31, 2020 and 2019.

Loans with nonaccretable discounts had a carrying value of $ 0.8 million and $ 0.9 million as of December 31, 2020 and 2019, respectively.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 5 - Portfolio Loans Receivable (continued)

The activity in the accretable discounts on loans acquired was as follows:

8 unchanged sentences

The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans as of December 31, 2020 and 2019.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Allowance for Loan Losses

(in thousands)

Provision for

Allowance for Loan Losses

(in thousands) Provision for

Loan Losses Allowance for Loan Losses

Ending Balance Evaluated

3 unchanged sentences

for Impairment:

December 31, 2019

December 31, 2020 Beginning

Balance Charge-Offs Recoveries Ending

Balance Individually Collectively Individually Collectively

Residential $ 4,135 $ 3,018 $ — $ — $ 7,153 $ — $ 7,153 $ 4,687 $ 433,173

Commercial 3,572 3,214 — — 6,786 — 6,786 2,358 390,192

Construction 2,668 2,216 ( 296 ) 7 4,595 — 4,595 1,736 223,168

Commercial 1,548 1,102 ( 233 ) — 2,417 253 2,164 1,182 155,945

Credit card (1)

1,368 1,681 ( 637 ) 50 2,462 — 2,462 — 102,186

Other consumer (1)

10 11 — — 21 — 21 — 1,649

$ 13,301 $ 11,242 $ ( 1,166 ) $ 57 $ 23,434 $ 253 $ 23,181 $ 9,963 $ 1,306,313

December 31, 2019

Residential $ 3,541 $ 634 $ ( 40 ) $ — $ 4,135 $ — $ 4,135 $ 2,192 $ 425,734

Commercial 3,003 556 — 13 3,572 — 3,572 1,433 346,658

Construction 2,093 575 — — 2,668 — 2,668 — 198,702

Commercial 1,578 299 ( 331 ) 2 1,548 119 1,429 474 150,635

Credit card (1)

1,084 726 ( 461 ) 19 1,368 — 1,368 — 45,526

Other consumer (1)

9 1 — — 10 — 10 — 1,285

$ 11,308 $ 2,791 $ ( 832 ) $ 34 $ 13,301 $ 119 $ 13,182 $ 4,099 $ 1,168,540

_______________

(1) Credit cards loans are collectively evaluated by past due status and as such are not individually risk rated.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 4 - Loans Receivable (continued)

Past due loans, segregated by delinquency and class of loans, as of December 31, 2019 and 2018 were as follows:

Loans Past Due

Note 5 - Portfolio Loans Receivable (continued)

Past due portfolio loans, segregated by delinquency and class of loans, as of December 31, 2020 and 2019 were as follows:

Portfolio Loans Past Due Loans

Past Due Total

Loans Current

Loans Accruing

Past Due Nonaccrual

(in thousands)

December 31, 2020

Residential $ 1,029 $ 3,539 $ 4,568 $ 433,292 $ 437,860 $ — $ 3,581

Commercial 36 2,583 2,619 389,931 392,550 225 2,358

Construction 1,444 442 1,886 223,018 224,904 — 1,886

Commercial 486 741 1,227 155,900 157,127 — 1,182

Credit card 13,811 6 13,817 88,369 102,186 6 —

Other consumer — — — 1,649 1,649 — —

$ 16,806 $ 7,311 $ 24,117 $ 1,292,159 $ 1,316,276 $ 231 $ 9,007

Acquired loans included above

$ 36 $ 565 $ 601 $ 4,675 $ 5,276 $ 225 $ 381

December 31, 2019

Residential $ 704 $ 2,436 $ 3,140 $ 424,786 $ 427,926 $ 374 $ 2,192

Commercial 275 1,671 1,946 346,145 348,091 237 1,433

Construction 756 — 756 197,946 198,702 — —

Commercial 172 353 525 150,584 151,109 — 474

Credit card 5,526 8 5,534 39,992 45,526 8 —

Other consumer — — — 1,285 1,285 — —

$ 7,433 $ 4,468 $ 11,901 $ 1,160,738 $ 1,172,639 $ 619 $ 4,099

Acquired loans included above

$ 305 $ 1,243 $ 1,548 $ 4,873 $ 6,421 $ 464 $ 880

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 4 - Loans Receivable (continued)

Note 5 - Portfolio Loans Receivable (continued)

Impaired loans also include acquired loans for which management has recorded a nonaccretable discount.

Impaired loans as of December 31, 2020 and 2019 were as follows:

Impaired Loans

Impaired Portfolio Loans

Balance Recorded

Allowance Recorded

Allowance Total

Investment Related

Allowance Average

Investment Interest

(in thousands)

December 31, 2020

Residential $ 3,960 $ 3,726 $ — $ 3,726 $ — $ 3,982 $ 136

Commercial 2,490 2,358 — 2,358 — 2,519 46

Construction 1,996 1,886 — 1,886 — 1,809 15

Commercial 1,344 791 391 1,182 253 1,826 58

$ 9,790 $ 8,761 $ 391 $ 9,152 $ 253 $ 10,136 $ 255

Acquired loans included above $ 548 $ 381 $ — $ 381 $ — $ 555 $ 3

December 31, 2019

Residential $ 2,309 $ 2,192 $ — $ 2,192 $ — $ 2,510 $ 8

Commercial 1,477 1,433 — 1,433 — 1,620 18

Commercial 574 201 273 474 119 777 9

$ 4,360 $ 3,826 $ 273 $ 4,099 $ 119 $ 4,907 $ 35

Acquired loans included above $ 1,148 $ 880 — $ 880 $ — $ 1,164 $ 18

4 unchanged sentences

A description of the general characteristics of loans characterized as classified is as follows:

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 5 - Portfolio Loans Receivable (continued)

Special Mention

4 unchanged sentences

Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 4 - Loans Receivable (continued)

A substandard loan is inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral pledged, if any.

3 unchanged sentences

These loans require more intense supervision by Company management.

A doubtful loan has all the weaknesses inherent as a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

A doubtful loan has all the weaknesses associated with a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 5 - Portfolio Loans Receivable (continued)

The following table presents the balances of classified loans based on the risk grade.

2 unchanged sentences

Classified Loans

(in thousands)

Special Mention

(in thousands) Pass (1)

Special Mention Substandard Doubtful Total

December 31, 2020

$ 428,260 $ 5,150 $ 4,450 $ — $ 437,860

383,311 6,881 2,358 — 392,550

220,057 1,112 3,735 — 224,904

Commercial 145,365 9,766 1,996 — 157,127

Credit card 102,186 — — — 102,186

Other consumer 1,649 — — — 1,649

Total $ 1,280,828 $ 22,909 $ 12,539 $ — $ 1,316,276

December 31, 2019

$ 425,661 $ — $ 2,265 $ — $ 427,926

340,313 6,345 1,433 — 348,091

198,702 — — — 198,702

Commercial 145,178 4,505 1,426 — 151,109

Credit card 45,526 — — — 45,526

Other consumer 1,285 — — — 1,285

Total $ 1,156,665 $ 10,850 $ 5,124 $ — $ 1,172,639

________________________

(1) Pass includes loans graded exceptional, very good, good, satisfactory and pass/watch

(1) Pass includes loans graded exceptional, very good, good, satisfactory and pass/watch, in addition to credit card loans which are not individually graded.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 4 - Loans Receivable (continued)

Note 5 - Portfolio Loans Receivable (continued)

Impaired loans also include certain loans that have been modified in troubled debt restructurings (“TDRs”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.

3 unchanged sentences

Troubled Debt Restructurings

Recorded Investment

(dollars in thousands)

Nonperforming

Contracts Recorded Investment

(dollars in thousands) Performing Nonperforming Total

December 31, 2020

3 $ — $ 145 $ 145

Commercial 2 — 294 294

Total 5 $ — $ 439 $ 439

Acquired loans included above 3 $ — $ 145 $ 145

December 31, 2019

3 $ — $ 145 $ 145

Commercial 2 — 314 314

Total 5 $ — $ 459 $ 459

Acquired loans included above

During the year ended December 31, 2019 , the Company added one TDR which had a recorded investment of $198 thousand .

Of the five loans designated as troubled debt restructure at December 31, 2019 , two loans had a principal payment adjustment and three loans had changes in interest and payment terms.

3 $ — $ 145 $ 145

During the year ended December 31, 2020, the Company did not incur any new TDR loans.

The Company had no defaulted TDR loans in the twelve months ended December 31, 2020.

Of the four loans designated as troubled debt restructured at December 31, 2018 , three loans were classified as TDR due to changes in interest rates and payment terms, and one loan was due to a change in interest rate, payment terms and a principal reduction.

There were three restructured loans charged off in the amount of $291 thousand and two performing restructured loans paid off for $3.2 million during the year ended December 31, 2018 .

Of the five loans designated as TDR at December 31, 2019, three loans were classified as TDR due to changes in interest rates and payment terms, and two loans had a principal payment adjustment.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 4 - Loans Receivable (continued)

Note 5 - Portfolio Loans Receivable (continued)

Outstanding loan commitments were as follows:

Loan Commitments

For the Years Ended December 31,

For the Year Ended December 31,

(in thousands) 2020 2019

Unused lines of credit

Commercial $ 15,973 $ 13,754

Commercial real estate 32,398 26,407

Residential real estate 20,848 31,411

Secured credit card

Home equity 118,843 114,999

Commercial and industrial 50,877 36,442

Credit Card 92,452 37,517

Personal 185 43

Construction commitments:

1 unchanged sentence

Commercial real estate — —

$ 331,576 $ 260,573

Commitments to originate residential loans held for sale $ 11,444 $ 2,646

4 unchanged sentences

Loan commitments generally have variable interest rates, fixed expiration dates, and may require payment of a fee.

Letters of credit are conditional commitments issued us to guarantee the performance of a customer to a third party.

Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party.

In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment.

7 unchanged sentences

December 31, 2020 and 2019

Note 4 - Loans Receivable (continued)

Note 5 - Portfolio Loans Receivable (continued)

The Company maintains a reserve for off-balance sheet items such as unfunded lines of credit.

3 unchanged sentences

Balance at beginning of period $ 1,226 $ 1,053

Provision 550 173

Recoveries — —

Charge-offs — —

Balance at end of period $ 1,776 $ 1,226

6 unchanged sentences

Balance at beginning of period $ 576 $ 501

Provision 598 184

Recoveries — —

Charge-offs ( 14 ) ( 109 )

Balance at end of period $ 1,160 $ 576

5 unchanged sentences

Furniture and equipment 4,635 4,622

Vehicle 54 54

Software 2,518 2,517

Construction in progress 6 —

27 unchanged sentences

The Company’s lease information is summarized as follows:

(in thousands)

December 31, 2019

(in thousands) December 31, 2020

Lease Right-of-Use Asset

Lease asset 5,399

Accumulated amortization ( 2,288 )

11 unchanged sentences

Lease Payment Obligations

(in thousands)

December 31, 2019

(in thousands) December 31, 2020

Amounts due in:

1 unchanged sentence

Operating lease and rent expense was $ 1.6 million and $ 1.3 million for the years ended December 31, 2020 and 2019, respectively.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 8 - Derivative Financial Instruments

9 unchanged sentences

The swap fixed the interest rate the Company paid on the floating rate junior subordinated debentures for four years beginning on March 16, 2015 and matured on March 16, 2019.

Based on the notional amount, the Company paid its counterparty quarterly interest at a fixed rate, and counterparty paid the Company interest at a rate of three‑month LIBOR plus 1.87% .

Based on the notional amount, the Company paid its counterparty quarterly interest at a fixed rate, and the counterparty paid the Company interest at a rate of three‑month LIBOR plus 1.87 %.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 8 - Derivative Financial Instruments (continued)

The following table reports the commitment and fair value amounts on the outstanding derivatives:

(in thousands)

December 31, 2019

December 31, 2018

(in thousands) December 31, 2020 December 31, 2019

Notional amount of open forward sales agreements $ 38,000 $ 61,000

4 unchanged sentences

Fair value of interest rate lock commitments 148 115

Fair value of interest rate swap

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 9 - Interest-Bearing Deposits

4 unchanged sentences

Money market accounts 447,077 429,078

Savings 4,800 3,675

Certificates of deposit of $250,000 or more 134,752 115,311

3 unchanged sentences

The aggregate amount of Certificate of Deposit Account Registry Service (“CDARS”) deposits was $ 10.7 million and $ 5.0 million at December 31, 2020 and 2019, respectively.

As of December 31, 2019 , our certificates of deposit from listing services amounted to $78.2 million or 6.4% of our deposits.

As of December 31, 2019 , certificates of deposit mature as follows:

As of December 31, 2020, the Company’s certificates of deposit from listing services amounted to $ 62.5 million or 3.8 % of our deposits.

Certificates of deposit, as of December 31, 2020, mature as follows:

Maturities of Certificates of Deposit

(in thousands)

2021 $ 237,623

2025, and thereafter 359

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 10 - Securities Sold Under Agreements to Repurchase

8 unchanged sentences

Amortized cost $ — $ —

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Fair value — —

Note 11 - Borrowed Funds

1 unchanged sentence

Borrowed Funds

(dollars in thousands)

Correspondent Banks

Total - Federal funds purchased

FHLB principal reducing advances due May 10, 2022

FHLB advance due March 25, 2019

(dollars in thousands) Balance Interest Balance Interest

FHLB fixed rate advance due October 16, 2025 $ 22,000 0.93 % $ — — %

FHLB principal reducing advance due May 10, 2022 — — 32,222 2.40

Total - FHLB advances $ 22,000 $ 32,222

Junior subordinated debentures due June 15, 2036 $ 2,062 2.09 % $ 2,062 3.76 %

Other subordinated notes due November 30, 2030 10,000 5.00 — —

Other subordinated notes due December 1, 2025 — — 13,500 6.95

FRB advances under the SBA-PPP Liquidity Facility 1,954 — — —

Unamortized debt issuance costs — ( 139 )

1 unchanged sentence

Federal Home Loan Bank Advances

The Federal Home Loan Bank fixed rate advance requires a principal reduction and accrued interest payment on a monthly basis.

Junior subordinated debentures

The Federal Home Loan Bank fixed rate advance accrues interest on a daily basis and is paid semi-annually.

Junior subordinated debentu res

In June 2006, the Company formed Capital Bancorp (MD) Statutory Trust I (the “Trust”) and on June 15, 2006, the Trust issued 2,000 floating Rate Capital Securities (the “Capital Securities”) with an aggregate liquidation value of $ 2,000,000 to a third party in a private placement.

Concurrent with the issuance of the Capital Securities, the Trust issued trust common securities to the Company in the aggregate liquidation value of $ 62,000 .

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 11 - Borrowed Funds (Continued)

The proceeds of the issuance of the Capital Securities and trust common securities were invested in the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Floating Rate Debentures”).

7 unchanged sentences

The Floating Rate Debentures may be prepaid if certain events occur, including a change in the tax status or regulatory capital treatment of the Capital Securities, or a change in existing laws that requires the Trust to register as an investment company.

The junior subordinated debentures are treated as Tier 1 capital, to a limited extent, by the Federal Reserve.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 10 - Borrowed Funds (Continued)

The junior subordinated debentures are treated as Tier 1 capital by the Company, to a limited extent, by the Federal Reserve.

Other subordinated notes

On November 24, 2015, the Company issued $ 13.5 million of subordinated notes.

The notes mature on December 1, 2025 and are all callable December 1, 2020.

The notes had a maturity date of December 1, 2025 and were called December 1, 2020.

The notes bear interest at 6.95 % for the first five years, then adjust to the three‑month LIBOR plus 5.33 % adjusted on March 1, June 1, September 1, and December 1 of each year.

1 unchanged sentence

There were related debt issuance costs incurred totaling $ 278,231 .

The costs are amortized to interest expense through the maturity date of the notes.

The costs were amortized to interest expense through the maturity date of the notes.

On November 30, 2020, the Company issued $ 10.0 million of subordinated notes.

The notes mature on November 30, 2030 and are redeemable in whole or part on November 30, 2025.

The notes bear interest at a fixed annual rate of 5.00 % for the first five years, then adjust quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be the three-month SOFR, plus 490 basis points.

There were related debt issuance costs incurred totaling $ 50,000 which were fully expensed at the time of issuance.

The Company used the proceeds from the offering to redeem the outstanding $ 13.5 million, 6.95 % fixed-to-floating rate subordinated notes.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 11 - Borrowed Funds (Continued)

Available lines of credit

The Company has available lines of credit of $ 76.0 million with other correspondent banks.

There were no outstanding line of credit balances at December 31, 2019 .

At December 31, 2018 , $2.0 million was outstanding, and was paid off on January 2, 2019.

There were no outstanding line of credit balances at December 31, 2020 and December 31, 2019.

The Company may borrow up to 25 % of its assets from the FHLB, based on collateral available to pledge to secure the borrowings.

3 unchanged sentences

As of December 31, 2020 and 2019, the Company had available borrowing capacity, net of advances and amounts pledged for letters of credit, from the FHLB of $ 201.2 million and $ 140.5 million, respectively.

As of December 31, 2019 and 2018 , the Company had pledged commercial loans to the Federal Reserve Bank of Richmond to provide a borrowing capacity totaling $12.5 million and $13.1 million , respectively, under its discount window program.

There were no advances outstanding under this facility as of December 31, 2019 and 2018 .

The Company limits its certificate of deposit funding through a financial network to 15% of the Bank’s assets, or approximately $209.5 million and $161.2 million as of December 31, 2019 and 2018 , respectively.

The balance outstanding was $88.8 million and $114.3 million as of December 31, 2019 and 2018 , respectively.

As of December 31, 2020 and 2019, the Company had pledged commercial loans to the Federal Reserve Bank of Richmond to secure a borrowing capacity totaling $ 15.6 million and $ 12.5 million, respectively, under its discount window program.

In addition, the Company had the ability to borrow from the SBA-PPP Liquidity Facility by pledging SBA-PPP loans.

As of December 31, 2020 the company pledged $ 2.0 million under this facility and had the funds advanced.

Additionally, there was $ 201.0 million of SBA-PPP loans remaining available to pledge as collateral to enable the Company to borrow under the program.

The Company limits its certificate of deposit funding through financial networks to 15 % of the Bank’s assets, or approximately $ 277.1 million and $ 209.5 million as of December 31, 2020 and 2019, respectively.

Amounts outstanding were $ 45.1 million and $ 88.8 million as of December 31, 2020 and 2019, respectively.

Note 12 - Retirement Plan

5 unchanged sentences

These transactions are conducted on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 12 - Related-Party Transactions (continued)

Activity in related-party loans during 2020 and 2019 is shown below:

2 unchanged sentences

Balance at beginning of year $ 22,112 $ 13,221

New loans 99 14,583

Amounts collected ( 2,936 ) ( 5,692 )

Add (deduct):

Relationship changes

Balance at end of year $ 19,275 $ 22,112

Deposits from officers and directors and their related interests were $141.3 million at December 31, 2019 , and $155.8 million at December 31, 2018 .

A director of the Company owns an interest in an entity from which the Company leases space for one of its Rockville, Maryland locations.

Payments made in accordance with the lease were $74 thousand and $566 thousand in 2019 and 2018 , respectively.

The decrease in 2019 lease payments is due to the fact that the Company reduced the amount of space leased.

Company directors, or their related interests, held $1.0 million of the convertible subordinated notes outstanding as of December 31, 2019 and 2018 .

This note carries a fixed rate of interest until December 1, 2020, after which it converts to variable rate.

Company directors, or their related interests, held $171 thousand and $4.5 million of participation loans from the Bank as of December 31, 2019 and 2018 , respectively.

Company and Bank directors, or their related interests, held $364 thousand and $2.0 million of participation loans from Church Street Capital as of December 31, 2019 and 2018 , respectively.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 13 - Related-Party Transactions (continued)

Deposits from officers and directors and their related interests were $ 148.4 million at December 31, 2020, and $ 141.3 million at December 31, 2019.

A director of the Company owns an interest in an entity from which the Company leases space for one of its Rockville, Maryland locations.

Payments made in accordance with the lease were $ 76 thousand and $ 74 thousand in 2020 and 2019, respectively.

Company directors, or their related interests, held $ 3.3 million of the subordinated notes outstanding as of December 31, 2020.

These notes hold a fixed rate of interest until November 30, 2025, after which it converted to variable rate.

Company directors, or their related interests, did not hold any participation loans from the Bank as of December 31, 2020 and held $ 171 thousand as of December 31, 2019.

Company and Bank directors, or their related interests, held $ 121 thousand and $ 364 thousand of participation loans from Church Street Capital as of December 31, 2020 and 2019, respectively.

Note 14 - Income Taxes

3 unchanged sentences

(in thousands) 2020 2019

Federal $ 9,489 $ 5,151

State 2,995 1,507

Total current expense 12,484 6,658

1 unchanged sentence

Total income tax expense $ 9,314 $ 5,819

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 14 - Income Taxes (continued)

The components of the net deferred tax asset at December 31, 2020 and 2019 are:

9 unchanged sentences

Core deposit intangible 17 21

Unrealized loss on investment securities available for sale

Lease liability net of right-of-use asset 87 —

Net operating loss carryforward 123 178

1 unchanged sentence

Unrealized gains on investment securities available for sale 620 5

Unrealized gain on cash flow hedging derivative

Unrealized gain on loans held for sale 67 72

4 unchanged sentences

Net deferred tax asset $ 6,818 $ 4,263

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 13 - Income Taxes (continued)

The differences between the federal income tax rate and the effective tax rate for the Company are reconciled as follows:

5 unchanged sentences

Tax exempt income ( 0.01 ) ( 0.03 )

Other ( 0.37 ) ( 2.10 )

Effective Tax Rate 26.51 % 25.62 %

4 unchanged sentences

The Company remains subject to examination of income tax returns for the years ending after December 31, 2017 .

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 15 - Capital Standards

5 unchanged sentences

As of December 31, 2020 and 2019, the capital levels of the Company and the Bank substantially exceeded all applicable capital adequacy requirements.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 14 - Capital Standards (continued)

As of December 31, 2020 the most recent notification from the OCC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

7 unchanged sentences

For comparison purposes, the Company’s ratios are presented in the following table as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 15 - Capital Standards (continued)

Regulatory Capital

Minimum Capital

Full Phase In of Basel III

(Dollar amounts in thousands)

Actual Minimum Capital

Adequacy To Be Well

Capitalized Full Phase In of Basel III

(Dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio

December 31, 2020

Tier 1 leverage ratio (to average assets)

Tier 1 capital (to risk-weighted assets)

Tier 1 leverage ratio (to average assets) $ 159,656 8.78 % $ 72,770 4.00 % N/A N/A $ 90,962 5.00 %

Tier 1 capital (to risk-weighted assets) 159,656 13.10 % 73,100 6.00 % N/A N/A 97,467 8.00 %

Common equity tier 1 capital ratio (to risk-weighted assets)

Total capital ratio (to risk-weighted assets)

157,594 12.94 % $ 54,825 4.50 % N/A N/A 79,192 6.50 %

Total capital ratio (to risk-weighted assets) 185,008 15.19 % $ 97,467 8.00 % N/A N/A 121,834 10.00 %

Tier 1 leverage ratio (to average assets) $ 135,527 7.44 % $ 72,770 4.00 % $ 90,962 5.00 % $ 90,962 5.00 %

1 unchanged sentence

Common equity tier 1 capital ratio (to risk-weighted assets)

135,527 12.06 % 53,798 4.50 % 77,709 6.50 % 77,709 6.50 %

Total capital ratio (to risk-weighted assets) 150,593 13.40 % 95,642 8.00 % 119,552 10.00 % 119,552 10.00 %

December 31, 2019

Tier 1 leverage ratio (to average assets)

Tier 1 capital (to risk-weighted assets)

Tier 1 leverage ratio (to average assets) $ 135,380 9.96 % $ 54,397 4.00 % N/A N/A $ 67,996 5.00 %

Tier 1 capital (to risk-weighted assets) 135,380 12.31 % 66,011 6.00 % N/A N/A 88,015 8.00 %

Common equity tier 1 capital ratio (to risk-weighted assets)

Total capital ratio (to risk-weighted assets)

133,318 12.12 % 49,508 4.50 % N/A N/A 71,512 6.50 %

Total capital ratio (to risk-weighted assets) 149,142 13.56 % 88,015 8.00 % N/A N/A 110,018 10.00 %

Tier 1 leverage ratio (to average assets) $ 114,613 8.65 % $ 53,005 4.00 % $ 66,256 5.00 % $ 66,256 5.00 %

1 unchanged sentence

Common equity tier 1 capital ratio (to risk-weighted assets)

114,613 10.73 % 48,070 4.50 % 69,435 6.50 % 69,435 6.50 %

Total capital ratio (to risk-weighted assets) 127,976 11.98 % 85,458 8.00 % 106,822 10.00 % 106,822 10.00 %

9 unchanged sentences

For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

The expense recognition of employee stock option and restricted stock awards resulted in net expense of approximately $858 thousand and $724 thousand during the years ended December 31, 2019 and 2018 , respectively.

All share and per common share amounts have been adjusted to reflect the Stock Split.

Refer to Notes 1 and 20 for additional information.

The expense recognition of employee stock option and restricted stock awards resulted in net expense of approximately $ 1.0 million and $ 858 thousand during the years ended December 31, 2020 and 2019, respectively.

Stock options:

8 unchanged sentences

Stock Options Outstanding

Weighted Average Exercise Price

Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price

Outstanding at beginning of year 1,308,047 $ 11.00 1,431,860 $ 9.38

Granted 205,100 13.95 249,300 14.29

Exercised ( 142,901 ) 7.72 ( 221,710 ) 6.88

Retired on exercise ( 137,334 ) 7.90 ( 141,955 ) 6.90

10 unchanged sentences

Stock Option Summary

Weighted Average Exercise Price

Average Remaining Life (years)

Outstanding Shares

Exercisable Shares

Weighted Average Exercise Price Average Remaining Life (years) Outstanding Shares Exercisable Shares

December 31, 2020

$ 8.50 1.00 172,976 172,976

10.70 4.30 2,500 —

11.13 4.30 500 —

11.38 3.00 306,437 152,953

11.41 4.00 20,000 5,000

12.38 2.00 238,100 177,450

12.80 2.80 7,000 3,500

13.89 5.00 177,100 —

14.38 4.10 5,000 —

14.54 4.00 219,800 55,714

14.89 4.00 20,000 —

Total outstanding options 12.21 3.00 1,169,413 567,593

1 unchanged sentence

December 31, 2019

$ 7.50 1.0 236,212 231,212

8.50 2.0 202,435 142,885

11.38 4.0 346,500 86,635

11.41 4.0 20,000 —

12.38 3.0 266,600 130,300

12.80 3.8 7,000 1,750

14.54 5.0 229,300 —

Total outstanding options 11.00 3.1 1,308,047 592,782

4 unchanged sentences

The intrinsic value of stock options exercised was $ 0.9 million and $ 1.8 million during the years ended December 31, 2020 and 2019, respectively.

The weighted average fair value of options granted during 2019 and 2018 were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

Stock Option Pricing Assumptions

Dividend yield

Risk free interest rate

Expected volatility

Expected life in years

The weighted average fair value of options granted during 2020 and 2019 were estimated using the

Capital Bancorp, Inc.

3 unchanged sentences

Note 16 - Stock-Based Compensation (continued)

Black-Scholes option-pricing model with the following weighted average assumptions:

Stock Option Pricing Assumptions

Dividend yield 0.00 % 0.00 %

Risk free interest rate 0.43 % 1.75 %

Expected volatility 64.46 % 34.79 %

Expected life in years 5 5

Restricted stock:

7 unchanged sentences

All restricted shares will fully vest in the event of change in control of the Company.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 16 - Stock-Based Compensation (continued)

Nonvested restricted stock for the years ended December 31, 2020 and 2019 is summarized in the following table.

Restricted Stock Summary

Weighted Average Grant-Date Fair Value

Shares Weighted Average Grant-Date Fair Value Shares Weighted Average Grant-Date Fair Value

Nonvested at beginning of year 19,500 $ 12.38 38,000 $ 10.32

Granted 16,713 14.36 — —

Vested ( 5,500 ) 12.38 ( 18,500 ) 8.16

Forfeited — — — —

Nonvested at end of year 30,713 $ 13.46 19,500 $ 12.38

1 unchanged sentence

Restricted Stock Vesting Schedule

At December 31, 2019 there was $176 thousand of total unrecognized compensation expense related to nonvested restricted stock.

At December 31, 2018 , there was $230 thousand of total unrecognized compensation expense related to nonvested restricted stock.

There was $ 121 thousand and $ 176 thousand of total unrecognized compensation expense related to nonvested restricted stock at December 31, 2020 and 2019, respectively.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2020 and 2019

Note 16 - Parent Company Financial Informatio n

Note 17 - Parent Company Financial Information

The balance sheets as of December 31, 2020 and 2019 and statements of income and cash flows for the years then ended, for Capital Bancorp, Inc.

(Parent only) are presented below.

All share and per common share amounts have been adjusted to reflect the Stock Split.

Refer to Note 1 for additional information.

Parent Company Only Balance Sheets

4 unchanged sentences

Investment in Trust 62 62

Loans receivable, net of allowance for loan losses of $258 and $208 at December 31, 2019 and 2018, respectively

Loans receivable, net of allowance for loan losses of $ 258 at both December 31, 2020 and 2019, respectively

26,999 28,044

Accrued interest receivable 300 98

2 unchanged sentences

Deferred income taxes 86 65

Total assets $ 171,629 $ 149,066

Liabilities and Stockholders’ Equity

4 unchanged sentences

Stockholders’ equity

Common stock 138 139

Additional paid-in capital 50,602 51,561

Retained earnings 106,854 81,618

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income 1,717 13

Total stockholders’ equity

159,311 133,331

Total liabilities and stockholders’ equity $ 171,629 $ 149,066

6 unchanged sentences

(in thousands) 2020 2019

Interest and dividend revenue

Interest and dividend income $ 1,662 $ 1,650

Dividend from Bank 5,500 3,500

7 unchanged sentences

Income before income taxes 5,736 3,871

Income tax (expense) benefit

Income tax expense 50 78

Income before undistributed net income of subsidiaries 5,686 3,793

Equity in undistributed net income of subsidiaries

Undistributed net income of subsidiaries 20,137 13,102

Net income $ 25,823 $ 16,895

Capital Bancorp, Inc.

6 unchanged sentences

Cash flows from operating activities

25,823 16,895

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses — 50

Equity in undistributed income-subsidiary

(Increase) decrease in receivable from subsidiary bank

Undistributed net income of subsidiaries ( 20,137 ) ( 13,102 )

Decrease in receivable from Bank 16 38

Stock-based compensation expense 983 795

4 unchanged sentences

Accrued interest receivable ( 202 ) 8

Prepaid income taxes and taxes payable

Prepaid income taxes 9 81

Other assets — ( 663 )

Accrued interest payable ( 39 ) 1

3 unchanged sentences

Net increase in loans receivable

Capital injections to subsidiaries

1,045 ( 1,062 )

Capital contributions to subsidiaries ( 1,183 ) ( 5,120 )

Net cash provided by investing activities ( 138 ) ( 6,182 )

3 unchanged sentences

Proceeds from exercise of stock options 922 594

Proceeds from shares sold

Proceeds from initial public offering, net

Net cash provided by financing activities

Net cash provided used in financing activities ( 6,298 ) 223

Net increase (decrease) in cash and cash equivalents 386 ( 1,377 )

12 unchanged sentences

Level 3 - Inputs to the valuation method are unobservable and significant to the fair value measurement.

Fair value measurements on a recurring basi s

Fair value measurements on a recurring basis

Investment securities available for sale - The fair values of the Company's investment securities available for sale are provided by an independent pricing service.

3 unchanged sentences

The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

The interest rate swap is reported at fair value utilizing Level 2 inputs.

The Company obtains dealer quotations to value its swap.

For purposes of potential valuation adjustments to its derivative position, the Company evaluates the credit risk of its counterparty.

Accordingly, the Company has considered factors such as the likelihood of default by the counterparty and the remaining contractual life, among other things, in determining if any fair value adjustment related to credit risk is required.

Capital Bancorp, Inc.

3 unchanged sentences

Note 18 - Fair Value (continued)

The Company has categorized its financial instruments measured at fair value on a recurring basis as of December 31, 2019 and 2018 as follows:

The Company has categorized its financial instruments measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019 as follows:

Fair Value of Financial Instruments

(in thousands)

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

(in thousands) Total Level 1 Inputs Level 2 Inputs Level 3 Inputs

December 31, 2020

1 unchanged sentence

government-sponsored enterprises $ 10,881 $ — $ 10,881 $ —

Municipal 10,927 — 10,927 —

Corporate 5,767 — 5,767 —

Mortgage-backed securities 72,212 — 72,212 —

$ 99,787 $ — $ 99,787 $ —

Loans held for sale $ 107,154 $ — $ 107,154 $ —

4 unchanged sentences

government-sponsored enterprises $ 999 $ — $ 999 $ —

Municipal 528 — 528 —

Corporate 2,565 — 2,565 —

Mortgage-backed securities 56,736 — 56,736 —

$ 60,828 $ — $ 60,828 $ —

Loans held for sale $ 71,030 $ — $ 71,030 $ —

7 unchanged sentences

Fair Value of Loans Held for Sale

(in thousands)

Loans held for sale

(in thousands) December 31, 2020 December 31, 2019

Aggregate fair value $ 107,154 $ 71,030

Contractual principal 99,362 $ 67,118

Difference $ 7,792 $ 3,912

Capital Bancorp, Inc.

3 unchanged sentences

Note 18 - Fair Value (continued)

As of December 31, 2019 and 2018 , the Company elected to account for loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

As of December 31, 2020 and December 31, 2019, the Company elected to account for loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

Fair value measurements on a nonrecurring basis

2 unchanged sentences

These assets are included as Level 3 fair values.

As of December 31, 2019 and 2018 , the fair values consist of loan balances of $4.1 million and $4.4 million , with valuation allowances of $119 thousand and $262 thousand , respectively.

As of December 31, 2020 and December 31, 2019, the fair values consist of loan balances of $ 9.2 million and $ 4.1 million, with valuation allowances of $ 253 thousand and $ 119 thousand, respectively.

Foreclosed real estate - The Company's foreclosed real estate is measured at fair value less cost to sell.

4 unchanged sentences

(in thousands)

December 31, 2020 December 31, 2019

Impaired loans

2 unchanged sentences

Level 3 Inputs 8,899 3,980

Total $ 8,899 $ 3,980

Foreclosed real estate

2 unchanged sentences

Level 3 Inputs 3,326 2,384

Total $ 3,326 $ 2,384

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2020 and 2019:

Valuation Technique

Unobservable Inputs

General Range of Inputs

Impaired Loans

Appraised Value/Discounted Cash Flows

Discounts to appraisals or cash flows for estimated holding and/or selling costs

Foreclosed Real Estate

Appraised Value/Comparable Sales

Discounts to appraisals for estimated holding and/or selling costs

Valuation Technique Unobservable Inputs General Range of Inputs

Impaired Loans Appraised Value/Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs 0 - 25 %

Foreclosed Real Estate Appraised Value/Comparable Sales Discounts to appraisals for estimated holding and/or selling costs 0 - 25 %

Fair value of financial instruments

36 unchanged sentences

Fair Value of Financial Assets and Liabilities

December 31, 2019

December 31, 2018

(in thousands)

Carrying Amount

December 31, 2020 December 31, 2019

(in thousands) Carrying Amount Fair Value Carrying Amount Fair Value

Financial assets

Cash and due from banks

$ 18,456 $ 18,456 $ 10,530 $ 10,530

Interest bearing deposits at other financial institutions

126,081 126,081 102,447 102,447

Federal funds sold

2,373 2,373 1,847 1,847

Restricted investments

3,958 3,958 3,966 3,966

Loans receivable, net

$ 1,493,086 $ 1,499,073 $ 1,156,934 $ 1,155,922

Financial liabilities

Noninterest-bearing deposits

Securities sold under agreements to repurchase

$ 608,559 $ 608,559 $ 291,777 $ 291,777

Interest-bearing deposits

$ 1,043,569 $ 1,048,728 $ 933,644 $ 934,349

FHLB advances and other borrowed funds

36,016 37,067 47,645 47,678

Capital Bancorp, Inc.

6 unchanged sentences

The following schedule presents financial information for each reportable segment at December 31, 2020.

(in thousands)

Commercial Bank

(in thousands) Commercial Bank CBHL OpenSky® Corporate Eliminations Consolidated

Interest income $ 66,373 $ 2,611 $ 25,907 $ 2,481 $ ( 121 ) $ 97,251

4 unchanged sentences

Noninterest expense (1)

35,790 27,530 35,013 418 — 98,751

Net income before taxes $ 11,548 $ 16,640 $ 6,179 $ 770 $ — $ 35,137

Total assets $ 1,624,280 $ 107,507 $ 113,244 $ 178,569 $ ( 147,006 ) $ 1,876,593

_______________

(1) Noninterest expense includes $ 10.9 million in commissions expense in CBHL’s segment and $ 24.5 million in data processing in Open Sky’s segment.

Note 20 - Litigation

As previously reported in the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2019, the Bank, along with two other banking institutions, was a defendant in a lawsuit to which on April 9, 2019, the Bank entered into a Settlement Agreement and Joint Tortfeasor Release with the plaintiff.

All amounts paid by the Bank were fully funded by its insurance carrier except for $200,000 which was accrued at March 31, 2019 and paid in April, 2019.

The Settlement includes a release of all claims in the lawsuit that were or could have been brought and precludes further proceedings.

In addition to the lawsuit described above, the Company is involved in legal proceedings occurring in the ordinary course of business.

The aggregate effect of these, in management’s opinion, would not be material on the results of operations or financial condition of the Company.

The Company is involved in legal proceedings occurring in the ordinary course of business.

The aggregate effect of these, in management’s opinion, would not be material to the results of operations or financial condition of the Company.

Capital Bancorp, Inc.

4 unchanged sentences

The following table presents condensed unaudited information relating to quarterly periods in 2020 and 2019.

All share and per common share amounts have been adjusted to reflect the Stock Split.

Refer to Note 1 for additional information.

Quarterly Results of Operations

(in thousands)

Dec 31 Sept 30 Jun 30 Mar 31 Dec 31 Sept 30 Jun 30 Mar 31

Interest Income $ 28,318 $ 25,189 $ 22,000 $ 21,744 $ 21,219 $ 22,354 $ 20,289 $ 18,318

6 unchanged sentences

Provision for Income Taxes 3,347 3,128 1,759 1,080 1,581 1,625 1,548 1,066

Net Income $ 9,690 $ 8,438 $ 4,761 $ 2,934 $ 5,073 $ 4,481 $ 4,023 $ 3,319

Basic earnings per common share $ 0.71 $ 0.61 $ 0.34 $ 0.21 $ 0.37 $ 0.33 $ 0.30 $ 0.24

6 unchanged sentences

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 8. Financial Statements and Supplementary Data