Capital Bancorp Inc 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 85 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Capital Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Capital Bancorp, Inc. 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 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 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. 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. Accordingly, we express no such opinion. 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. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion . /s/ Elliott Davis, PLLC We have served as the Company’s auditor since 2017. Raleigh, North Carolina March 15, 2021 Capital Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, 2020 and 2019 (dollars in thousands) 2020 2019 Assets Cash and due from banks $ 18,456 $ 10,530 Interest bearing deposits at other financial institutions 126,081 102,447 Federal funds sold 2,373 1,847 Total cash and cash equivalents 146,910 114,824 Investment securities available for sale 99,787 60,828 Restricted investments 3,958 3,966 Loans held for sale 107,154 71,030 U.S. 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 4,464 6,092 Accrued interest receivable 8,134 4,770 Deferred tax asset 6,818 4,263 Foreclosed real estate 3,326 2,384 Other assets 2,956 2,518 Total assets $ 1,876,593 $ 1,427,609 Liabilities Deposits 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 1,652,128 1,225,421 Federal Home Loan Bank advances 22,000 32,222 Other borrowed funds 14,016 15,423 Accrued interest payable 1,134 1,801 Other liabilities 28,004 19,411 Total liabilities 1,717,282 1,294,278 Stockholders' equity Common stock, $ .01 par value; 49,000,000 shares authorized; 13,753,529 and 13,894,842 issued and outstanding 138 139 Additional paid-in capital 50,602 51,561 Retained earnings 106,854 81,618 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 87 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Income For the Years Ended December 31, 2020 and 2019 (dollars in thousands except per share data) 2020 2019 Interest income Loans, including fees $ 95,367 $ 80,131 Investment securities available for sale 1,292 924 Federal funds sold and other 592 1,125 Total interest income 97,251 82,180 Interest expense Deposits, includes interest expense paid to related parties of $ 1,015 and $ 1,727 11,524 13,689 Borrowed funds 1,658 2,153 Total interest expense 13,182 15,842 Net interest income 84,069 66,338 Provision for loan losses 11,242 2,791 Net interest income after provision for loan losses 72,827 63,547 Noninterest income Service charges on deposits 520 542 Credit card fees 16,966 7,602 Mortgage banking revenue 40,649 15,955 Gain on sale of investment securities available for sale 20 26 Other fees and charges 2,906 1,567 Total noninterest income 61,061 25,692 Noninterest expenses Salaries and employee benefits 44,359 32,586 Occupancy and equipment 5,170 4,360 Professional fees 4,900 2,871 Data processing 26,917 15,512 Advertising 2,530 2,066 Loan processing 3,811 1,894 Other real estate expenses, net 69 122 Other operating expenses 10,995 7,114 Total noninterest expenses 98,751 66,525 Income before income taxes 35,137 22,714 Income tax expense 9,314 5,819 Net income $ 25,823 $ 16,895 Basic earnings per share $ 1.87 $ 1.23 Diluted earnings per share $ 1.87 $ 1.21 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 88 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2020 and 2019 (in thousands) 2020 2019 Net income $ 25,823 $ 16,895 Other comprehensive income (loss): 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 ) 2,320 837 Income tax expense relating to the items above ( 616 ) ( 229 ) Other comprehensive income 1,704 608 Comprehensive income $ 27,527 $ 17,503 See Notes to Consolidated Financial Statements 89 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity For the Years Ended December 31, 2020, 2019 and 2018 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (dollars in thousands) Shares Amount Balance, December 31, 2018 13,672,479 137 49,321 65,701 ( 595 ) 114,564 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 ) Balance, December 31, 2019 13,894,842 139 51,561 81,618 13 133,331 Net income — — — 25,823 — 25,823 Unrealized gain on investment securities available for sale, 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 ) Balance, December 31, 2020 13,753,529 $ 138 $ 50,602 $ 106,854 $ 1,717 $ 159,311 See Notes to Consolidated Financial Statements 90 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2020 and 2019 (dollars in thousands) 2020 2019 Cash flows from operating activities Net income $ 25,823 $ 16,895 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 11,242 2,791 Provision for mortgage put-back reserve 598 184 Provision for off balance sheet credit risk 550 173 Net amortization on investments 297 160 Premises and equipment depreciation 844 1,113 Lease asset amortization 1,050 1,238 Stock-based compensation expense 983 795 Director and employee compensation paid in Company stock 268 301 Deferred income tax benefit ( 3,170 ) ( 839 ) Amortization of debt issuance cost 139 30 Gain on sale of securities available for sale ( 20 ) ( 26 ) Mortgage banking revenue ( 40,649 ) ( 15,955 ) Proceeds from sales of loans held for sale 1,313,437 556,640 Originations of loans held for sale ( 1,308,912 ) ( 593,189 ) Changes in assets and liabilities: Accrued interest receivable ( 3,364 ) ( 308 ) Prepaid income taxes and taxes payable — 81 Other assets ( 438 ) ( 418 ) Accrued interest payable ( 667 ) 236 Other liabilities 7,446 2,886 Net cash provided by operating activities 5,457 ( 27,212 ) Cash flows from investing activities Purchases of securities available for sale ( 53,926 ) ( 38,587 ) Proceeds from maturities, calls and principal paydowns of securities available for sale 16,045 22,119 Proceeds from sale of securities available for sale 965 3,280 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 ) Net purchases of premises and equipment ( 267 ) ( 303 ) Proceeds from sales of foreclosed real estate — 49 Net cash used in investing activities ( 385,512 ) ( 187,981 ) See Notes to Consolidated Financial Statements 91 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2020 and 2019 (dollars in thousands) 2020 2019 Cash flows from financing activities Net increase (decrease) in: Noninterest bearing deposits 316,782 49,518 Interest bearing deposits 109,925 220,662 Securities sold under agreements to repurchase — ( 3,332 ) Federal funds purchased — ( 2,000 ) Federal Home Loan Bank advances, net ( 10,222 ) 30,222 Other borrowed funds ( 1,546 ) — Repurchase of common stock ( 3,720 ) ( 371 ) Proceeds from exercise of stock options 922 595 Net cash provided by financing activities 412,141 295,294 Net increase in cash and cash equivalents 32,086 80,101 Cash and cash equivalents, beginning of year 114,824 34,723 Cash and cash equivalents, end of year $ 146,910 $ 114,824 Noncash investing and financing activities: Loans transferred to foreclosed real estate $ 942 $ 2,291 Change in unrealized gains on investments $ 2,320 $ 842 Change in fair value of loans held for sale $ 5,669 1,420 Change in fair value of cash flow hedging derivative $ — ( 5 ) Establishment of right of use asset $ — $ 5,158 Establishment of lease liability $ — $ 5,358 Cash paid during the period for: Taxes $ 11,998 $ 5,451 Interest $ 13,849 $ 15,606 See Notes to Consolidated Financial Statements 92 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 1 - Nature of Business and Basis of Presentation Nature of Business Capital Bancorp, Inc. is a Maryland corporation and bank holding company (the “Company”) for Capital Bank, N.A. (the “Bank”). The Company's primary operations are conducted by the Bank, which operates branches in Rockville, Columbia and North Bethesda, Maryland, Reston, Virginia, and the District of Columbia. The Bank is principally engaged in the business of investing in commercial, real estate, and credit card loans and attracting deposits. The Company originates residential mortgages for sale in the secondary market through Capital Bank Home Loans, our residential mortgage banking arm, and issues credit cards through OpenSky®, a secured, digitally-driven, nationwide credit card platform. The Company formed Church Street Capital, LLC (“Church Street Capital”) in 2014 to provide short-term secured real estate financing to Washington, D.C. area investors and developers that may not meet all Bank credit criteria. In addition, the Company owns all of the stock of Capital Bancorp (MD) Statutory Trust I (the “Trust”). The Trust is a special purpose non-consolidated entity organized for the sole purpose of issuing trust preferred securities. Basis of Presentation The accompanying consolidated financial statements include the activity of the Company and its wholly-owned subsidiaries, the Bank and Church Street Capital. All intercompany transactions have been eliminated in consolidation. The Company reports its activities as a four business segments: commercial banking; mortgage lending; credit cards; and corporate activities. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment. 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. 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 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. Actual results may differ from these estimates under different assumptions or conditions. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits with banks and federal funds sold. Generally, federal funds are sold for one-day periods. 93 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 Investment securities are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders’ equity on an after-tax basis. Premiums and discounts on investment securities are amortized or accreted using the interest method. Changes in the fair value of debt securities available for sale are included in stockholder’s equity as unrealized gains and losses, net of the related tax effect. Unrealized losses are periodically reviewed to determine whether the loss represents an other than temporary impairment. Any unrealized losses judged to be other than a temporary impairment will be charged to income. Loans held for sale Mortgage loans originated and intended for sale are recorded at fair value, determined individually, as of the balance sheet date. Fair value is determined based on outstanding investor commitments, or in the absence of such commitments, based on current investor yield requirements. Gains and losses on loan sales are determined by the specific-identification method. The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing. Interest on loans held for sale is credited to income based on the principal amounts outstanding. Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third‑party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third‑party investors to put the mortgage loans back to the Company. Unrealized and realized gains on loan sales are determined using the specific-identification method and are recognized through mortgage banking activity in the Consolidated Statements of Income. 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. 94 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) 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. Generally, interest payments on nonaccrual loans are recorded as a reduction of the principal balance. Loans are considered impaired when, based on current information, management believes the Company will not collect all principal and interest payments according to contractual terms. Generally, loans are reviewed for impairment when the risk grade for a loan is downgraded to a classified asset category. The loans are evaluated for appropriate classification, accrual, impairment, and troubled debt restructure status. If collection of principal is evaluated as doubtful, all payments are applied to principal. A modification of a loan is considered a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company may consider interest rate reductions, changes to payment terms, extensions of maturities and/or principal reductions. Loans are generally charged-off in part or in full when management determines the loan to be uncollectible. Factors for charge-off that may be considered include: repayments deemed to be projected beyond reasonable time frames, client bankruptcy and lack of assets, and/or collateral deficiencies. 95 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. The allowance consists of specific and general components. For loans that are classified as impaired, an allowance is established when the collateral value, if the loan is collateral dependent, or the discounted cash flows of the impaired loan, is lower than the carrying value of that loan. The general component covers pools of nonclassified loans and is based on historical loss experience adjusted for qualitative factors. There may be an unallocated component of the allowance, which reflects the margin of the imprecision inherent in the underlying assumptions used in the method for estimating specific and general losses in the portfolio. Actual loan performance may differ from those estimates. A loss is recognized as a charge to the allowance when management believes that collection of the loan is unlikely. Collections of loans previously charged off are added to the allowance at the time of recovery. The components of the allowance for loan losses represent an estimation done pursuant to ASC Topic 450, “Contingencies,” or ASC Topic 310, “Receivables.” Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred. The process for determining an appropriate allowance for loan losses is based on a comprehensive, well-documented, and consistently applied analysis of the loan portfolio. The analysis considers significant factors that affect the collectibility of the portfolio and supports the loan losses estimated by this process. It is important to recognize that the related process, methodology, and underlying assumptions require a substantial degree of judgment. Management believes that the allowance for loan losses is adequate; however, determination of the allowance is inherently subjective and requires significant estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. 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 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. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related property generally over two to seven years . Leasehold improvements are amortized over the estimated term of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is less. Expenditures for maintenance, repairs, and minor replacements are charged to noninterest expenses as incurred. The costs of major renewals and improvements are capitalized, these costs would be included as a component of premises and equipment expenses. Leases During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). 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 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 96 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 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. The difference between the lease assets and the lease liabilities was $ 146 thousand of deferred rent, which was reclassified to lease liabilities, and the remainder was recorded as an adjustment to retained earnings in the amount of $ 54 thousand. The adoption of this ASU did not have a significant impact on the Company’s consolidated statement of income. Additional information is included in Note 7 - Leases. Derivative Financial Instruments 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 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. The Company accounts for derivative instruments and hedging activities according to guidelines established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10, Accounting for Derivative Instruments and Hedging Activities , as amended. The Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income, net of deferred taxes. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item. Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. 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 97 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. Level 2 valuations include inputs based on quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 valuations are based on at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed. Financial assets that are recorded at fair value on a recurring basis include investment securities available for sale, loans held for sale, and derivative financial instruments. Financial liabilities that are recorded at fair value on a recurring basis are comprised of derivative financial instruments. See the Fair Value note to our consolidated financial statements. Income Taxes The Company employs the asset and liability method of accounting for income taxes as required by ASC Topic 740, “ Income Taxes .” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e. temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and limits risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves. 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. Earnings per share Earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options and restricted stock using the treasury stock method. 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. 98 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, 2020 2019 (dollars in thousands, except per share information) Income Weighted Average Shares Per Share Amount Income Weighted Average Shares Per Share Amount Basic EPS Net income available to common stockholders $ 25,823 13,793,256 $ 1.87 $ 16,895 13,733,131 $ 1.23 Effect of dilutive securities — 6,920 — 235,454 Dilutive EPS per common share $ 25,823 13,800,176 $ 1.87 $ 16,895 13,968,585 $ 1.21 Comprehensive income The Company reports as comprehensive income all changes in stockholders' equity during the year from sources other than stockholders. Other comprehensive income refers to all components (income, expenses, gains, and losses) of comprehensive income that are excluded from net income. 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 as of December 31, 2020, and 2019 are as follows: Comprehensive Income For the Years Ended December 31, (in thousands) 2020 2019 Unrealized gains on securities available for sale $ 2,337 $ 18 Deferred tax expense ( 620 ) ( 5 ) Total accumulated comprehensive income $ 1,717 $ 13 Recently issued accounting pronouncements: In June 2016, the FASB issued guidance to change the accounting for loan losses and modify the impairment model for certain debt securities. In October 2019, the FASB voted to delay implementation and the new standard is now effective for fiscal years beginning after December 15, 2022, including the interim periods within those fiscal years. The Company expects the provisions of this standard to impact the Company’s consolidated financial statements, in particular, the level of the reserve for loan losses. 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. 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. While early adoption was permitted, the Company did not elect that option. In addition to our allowance for loan losses, the Company will also record an allowance for credit losses on held-to-maturity debt securities instead of applying the impairment model currently utilized. 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. 99 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. This codification provides technical corrections and clarifies issues related to fair value hedges. The Company early adopted this guidance upon issuance, and it did not have a material impact on the Company’s Consolidated 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). The new effective dates will be fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. In addition, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments-loan losses (Topic 326): Measurement of loan losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements. In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. 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. Reclassifications: Certain reclassifications have been made to the amounts reported in prior periods to conform to the current period presentation. The reclassifications had no effect on net income or total stockholders' equity. Note 2 - Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, interest bearing deposits and federal funds sold. The Bank is required by regulations to maintain an average cash reserve balance based on a percentage of deposits. At December 31, 2020 and 2019, the requirements were satisfied by amounts on deposit with the Federal Reserve Bank and cash on hand. 100 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 Amortized Cost Unrealized Gains Unrealized Losses Fair Value (in thousands) December 31, 2020 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 U.S. 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 $ 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. 101 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 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 Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) December 31, 2020 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 U.S. government-sponsored agencies $ — $ — $ 999 $ ( 1 ) $ 999 $ ( 1 ) Municipal — — — — — — Corporate — — 519 ( 23 ) 519 ( 23 ) Mortgage-backed securities 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: Pledged Securities For the Years Ended December 31, 2020 2019 (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Federal Home Loan Bank advances 1,142 1,189 1,508 1,522 $ 1,142 $ 1,189 $ 1,508 $ 1,522 102 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Contractual maturities of U.S. 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. Investment Securities - Contractual Maturities For the Years Ended December 31, 2020 2019 (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ — $ — $ 1,542 $ 1,518 Over one to five years — — — — Over five to ten years 5,500 5,524 2,000 2,046 Over ten years 21,934 22,051 515 528 Mortgage-backed securities (1) 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. 103 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 5 - Portfolio Loans Receivable Major categories of portfolio loans are as follows: Portfolio Loan Categories December 31, (in thousands) 2020 2019 Real estate: 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 ) Portfolio loans receivable, net $ 1,292,068 $ 1,156,934 The Company makes loans to customers located primarily in the Washington, D.C. metropolitan area. Although the loan portfolio is diversified, its performance will be influenced by the regional economy. The Company’s portfolio loan categories are described below. Residential Real Estate Loans . One-to-four family mortgage loans are primarily on owner-occupied primary residences and, to a lesser extent, investor owned residences. Residential loans are originated through the commercial sales teams and Capital Bank Home Loan division. Residential loans also include home equity lines of credit. Owner-occupied residential real estate loans usually have fixed rates for five or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years. Investor residential real estate loans are generally based on 25 -year terms with a balloon payment due after five years . Generally, the required minimum debt service coverage ratio is 1.15 . Residential real estate loans have represented a stable and growing portion of the loan portfolio. Commercial Real Estate Loans . Commercial real estate loans are originated on owner-occupied and non-owner-occupied properties. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. 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, 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. The interest rates on commercial real estate loans have initial fixed rate terms that adjust typically at 5 years and origination fees are routinely charged for services. Personal guarantees from the principal owners of the business are generally required, supported by a review of the principal owners’ personal financial statements and global debt service obligations. The properties securing the portfolio are generally diverse in terms and type. This diversity helps reduce the exposure to adverse economic events that affect any single industry. 104 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 5 - Portfolio Loans Receivable (continued) Construction Loans . Construction loans are offered within the Company’s Washington, D.C. and Baltimore, Maryland metropolitan operating areas to builders primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals. Construction loans typically have terms of 12 to 18 months, the Company generally transitions the end purchaser to permanent financing or re-underwriting and selling into the secondary market through Capital Bank Home Loan. 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 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 . In addition to other loan products, general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products are offered, primarily in target markets, and underwritten based on each borrower’s ability to service debt from income. These loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower. Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment, and personal guaranties from the borrower or other principal are generally obtained. 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 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. In addition, using a proprietary scoring model, which considers credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis), the Bank has recently begun to offer certain customers an unsecured line in excess of their secured line of credit. Approximately $ 98.5 million and $ 43.3 million of the credit card balances were secured by savings deposits held by the Bank as of December 31, 2020 and 2019, respectively. Other Consumer Loans . 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. Discounts on loans that were not considered impaired at acquisition were recorded as an accretable discount, which will be recognized in interest income over the terms of the related loans. 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 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. 105 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: Accretable Discounts on Loans Acquired December 31, (in thousands) 2020 2019 Accretable discount at beginning of period $ 429 $ 438 Accretion and payoff of loans ( 208 ) ( 9 ) Accretable discount at end of period $ 221 $ 429 The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors. 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. Allowance for Loan Losses (in thousands) Provision for Loan Losses Allowance for Loan Losses Ending Balance Evaluated for Impairment: Outstanding Loan Balances Evaluated for Impairment: December 31, 2020 Beginning Balance Charge-Offs Recoveries Ending Balance Individually Collectively Individually Collectively Real estate: 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 Real estate: 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. 106 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 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 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or More days Past Due Nonaccrual Loans Loans 30-89 Days Past Due (in thousands) December 31, 2020 Real estate: 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 Real estate: 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 $ 880 107 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 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 Portfolio Loans Unpaid Contractual Principal Balance Recorded Investment with no Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Recognized (in thousands) December 31, 2020 Real estate 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 Real estate 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 There were $ 175 thousand and $ 481 thousand, respectively, of loans secured by one to four family residential properties in the process of foreclosure as of December 31, 2020 and 2019. Credit quality indicators As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of loans, the level of classified loans, net charge-offs, nonperforming loans, and the general economic conditions in the Company’s market. The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of loans characterized as classified is as follows: 108 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 5 - Portfolio Loans Receivable (continued) Special Mention A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers. Substandard A substandard loan is inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Company management. Doubtful 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. 109 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. The Company grades all credit cards loans as Pass. Classified loans include Special Mention, Substandard, and Doubtful loans: Classified Loans (in thousands) Pass (1) Special Mention Substandard Doubtful Total December 31, 2020 Real estate: Residential $ 428,260 $ 5,150 $ 4,450 $ — $ 437,860 Commercial 383,311 6,881 2,358 — 392,550 Construction 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 Real estate: Residential $ 425,661 $ — $ 2,265 $ — $ 427,926 Commercial 340,313 6,345 1,433 — 348,091 Construction 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, in addition to credit card loans which are not individually graded. 110 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 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. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. The status of TDRs is as follows: Troubled Debt Restructurings Number of Contracts Recorded Investment (dollars in thousands) Performing Nonperforming Total December 31, 2020 Real estate: Residential 3 $ — $ 145 $ 145 Commercial 2 — 294 294 Total 5 $ — $ 439 $ 439 Acquired loans included above 3 $ — $ 145 $ 145 December 31, 2019 Real estate: Residential 3 $ — $ 145 $ 145 Commercial 2 — 314 314 Total 5 $ — $ 459 $ 459 Acquired loans included above 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 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. 111 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 5 - Portfolio Loans Receivable (continued) Outstanding loan commitments were as follows: Loan Commitments 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 Home equity 118,843 114,999 Commercial and industrial 50,877 36,442 Credit Card 92,452 37,517 Personal 185 43 Construction commitments: Residential real estate — — Commercial real estate — — $ 331,576 $ 260,573 Commitments to originate residential loans held for sale $ 11,444 $ 2,646 Letters of credit $ 5,102 $ 5,305 Lines of credit are agreements to lend to a customer as long as there is no violation of any condition of the contract. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Loan commitments generally have variable interest rates, fixed expiration dates, and may require payment of a fee. 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. The Company's maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments and lines of credit are made on the same terms, including collateral, as outstanding loans. The Company is not aware of any accounting loss to be incurred by funding these loan commitments. As of December 31, 2020 and 2019, respectively, the Company had an allowance for off-balance-sheet credit risk of $ 1.8 million and $ 1.2 million, recorded in other liabilities on the consolidated balance sheet. 112 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 5 - Portfolio Loans Receivable (continued) The Company maintains a reserve for off-balance sheet items such as unfunded lines of credit. Activity for this account is as follows: Off-Balance Sheet Reserve (in thousands) 2020 2019 Balance at beginning of period $ 1,226 $ 1,053 Add: Provision 550 173 Add: Recoveries — — Less: Charge-offs — — Balance at end of period $ 1,776 $ 1,226 The Company makes representations and warranties that loans sold to investors meet their program's guidelines and that the information provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies, program non-compliance, early payment default, and fraud or borrower misrepresentations. The Company maintains a reserve for potential losses on mortgage loans sold. Activity in this reserve is as follows for the periods presented: Mortgage Loan Put-back Reserve (in thousands) 2020 2019 Balance at beginning of period $ 576 $ 501 Add: Provision 598 184 Add: Recoveries — — Less: Charge-offs ( 14 ) ( 109 ) Balance at end of period $ 1,160 $ 576 Note 6 - Premises and Equipment Premises and equipment and the related depreciation and amortization consist of the following: Premises and Equipment (in thousands) 2020 2019 Leasehold improvements $ 1,694 $ 1,688 Furniture and equipment 4,635 4,622 Vehicle 54 54 Software 2,518 2,517 Construction in progress 6 — 8,907 8,881 Less: Accumulated depreciation and amortization 7,554 6,709 Premises and equipment 1,353 2,172 Net lease asset 3,111 3,920 Premises and equipment, net $ 4,464 $ 6,092 Depreciation and amortization expense $ 844 $ 1,113 113 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 7 - Leases On January 1, 2019, the Company adopted ASU 2016-02, Leases, as further explained in Note 1 - Nature of Business and Basis of Presentation. The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch operations and back office operations. As of January 1, 2019, the Company had leased five of its full service branches and five other locations for corporate/administration activities, operations, and loan production. All property leases under lease agreements have been been designated as operating leases. The Company does not have leases designated as finance leases. The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are included in premises and equipment, and operating lease liabilities are included as other liabilities in the consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted average discount rate used was 2.23 %. The operating lease ROU asset also includes any lease pre-payments. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which the Company has elected to account for separately as the non-lease component amounts are readily determinable under most leases. As of December 31, 2020, the Company’s lease ROU assets and related lease liabilities were $ 3.1 million and $ 3.4 million, respectively, and have remaining terms ranging from 1 - 6 years, including extension options that the Company is reasonably certain will be exercised. As of December 31, 2020, the Company had not entered into any material leases that have not yet commenced. The Company’s lease information is summarized as follows: Leases (in thousands) December 31, 2020 Lease Right-of-Use Asset Lease asset 5,399 Less: Accumulated amortization ( 2,288 ) Net lease asset 3,111 Lease Liability Lease liability $ 5,577 Less: Accumulated amortization ( 2,137 ) Net lease liability $ 3,440 114 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 7 - Leases (continued) Future minimum payments for operating leases with initial or remaining terms of one year or more are as follows: Lease Payment Obligations (in thousands) December 31, 2020 Amounts due in: 2021 $ 1,408 2022 1,023 2023 777 2024 420 Total lease payments $ 3,628 Operating lease and rent expense was $ 1.6 million and $ 1.3 million for the years ended December 31, 2020 and 2019, respectively. Note 8 - Derivative Financial Instruments As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company then either locks the loan and rate in with an investor and commits to deliver the loan if settlement occurs (Best Efforts) or commits to deliver the locked loan to an investor in a binding (Mandatory) delivery program. Certain loans under rate lock commitments are covered under forward sales contracts. Forward sales contracts are recorded at fair value with changes in fair value recorded in mortgage banking revenue. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and takes into consideration the probability that the rate lock commitments will close or will be funded. On January 7, 2015, the Company entered into an interest rate swap transaction with a notional amount of $ 2 million. The swap qualifies as a derivative and is designated as a hedging instrument. 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 the counterparty paid the Company interest at a rate of three‑month LIBOR plus 1.87 %. 115 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: Derivatives (in thousands) December 31, 2020 December 31, 2019 Notional amount of open forward sales agreements $ 38,000 $ 61,000 Fair value of open forward delivery sales agreements ( 179 ) ( 125 ) Notional amount of open mandatory delivery commitments 15,531 22,888 Fair value of open mandatory delivery commitments 179 122 Notional amount of interest rate lock commitments 34,827 32,365 Fair value of interest rate lock commitments 148 115 Note 9 - Interest-Bearing Deposits Major categories of interest bearing deposits are as follows: Interest-Bearing Deposits (in thousands) 2020 2019 Interest-bearing demand accounts $ 257,126 $ 174,166 Money market accounts 447,077 429,078 Savings 4,800 3,675 Certificates of deposit of $250,000 or more 134,752 115,311 Other time deposits 199,814 211,414 Total interest-bearing deposits $ 1,043,569 $ 933,644 The aggregate amount of brokered certificates of deposit was $ 45.1 million and $ 88.8 million at December 31, 2020 and 2019, respectively. 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, 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 2022 93,909 2023 1,915 2024 760 2025, and thereafter 359 $ 334,566 116 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 10 - Securities Sold Under Agreements to Repurchase The Company formerly sold securities under repurchase agreements to provide cash management services to commercial account customers. These borrowings are summarized as follows: Securities Sold Under Agreements to Repurchase (dollars in thousands) 2020 2019 Average amount outstanding $ — $ 1,287 Average rate paid during the year — % 1.75 % Maximum amount outstanding at month end $ — $ 3,400 Investment securities pledged to secure the underlying agreements at year end: Amortized cost $ — $ — Fair value — — Note 11 - Borrowed Funds As of December 31, 2020 and 2019, the Company was indebted as follows: Borrowed Funds 2020 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 — — — Less: Unamortized debt issuance costs — ( 139 ) Total - Other borrowed funds $ 14,016 $ 15,423 Federal Home Loan Bank Advances 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 . 117 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”). The Floating Rate Debentures for the Trust will mature on June 15, 2036, which may be shortened if certain conditions are met (including the Company having received prior approval of the Board of Governors of the Federal Reserve System and any other required regulatory approvals). These Floating Rate Debentures, which are the only assets of the Trust, are subordinate and junior in right of payment to all present and future senior indebtedness (as defined in the Indenture dated June 15, 2006) of the Company. The Floating Rate Debentures for the Trust accrue interest at a floating rate equal to the three-month LIBOR plus 1.89 %, payable quarterly. As of December 31, 2020 and 2019, the rate for the Trust was 2.09 % and 3.76 %, respectively. The quarterly distributions on the Capital Securities will be paid at the same rate that interest is paid on the Floating Rate Debentures. The Company has fully and unconditionally guaranteed the Trust’s obligation under the Capital Securities. The Trust must redeem the Capital Securities when the Floating Rate Debentures are paid at maturity or upon any earlier prepayment of the Floating Rate Debentures. 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 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 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. Interest is payable quarterly. There were related debt issuance costs incurred totaling $ 278,231 . 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. 118 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, 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. Borrowings from the FHLB are secured by a portion of the Company’s loan and/or investment portfolio. As of December 31, 2020 and 2019, the Company had pledged loans providing borrowing capacity of $ 222.0 million and $ 193.7 million, respectively. As of December 31, 2020 and 2019, the Company had pledged investment securities with a fair value of $ 1.2 million and $ 1.5 million, respectively, to the FHLB. 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, 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. l 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 The Company provides a defined contribution plan qualifying under Section 401(k) of the Internal Revenue Code to eligible employees. The Company contributes 3 % of eligible compensation on behalf of all full‑time employees up to limits prescribed by the Internal Revenue Code. The Company’s contribution to the plan was $ 879 thousand in 2020 and $ 691 thousand in 2019. Note 13 - Related-Party Transactions Certain executive officers and directors of the Company and Bank, and companies with which they are affiliated, are clients of and have banking transactions with the Company in the ordinary course of business. 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. Activity in related-party loans during 2020 and 2019 is shown below: Related Party Loans (in thousands) 2020 2019 Balance at beginning of year $ 22,112 $ 13,221 Add: New loans 99 14,583 Less: Amounts collected ( 2,936 ) ( 5,692 ) Balance at end of year $ 19,275 $ 22,112 119 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 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 The components of income tax expense are as follows: Income Tax Expense For the Years Ended December 31, (in thousands) 2020 2019 Current: Federal $ 9,489 $ 5,151 State 2,995 1,507 Total current expense 12,484 6,658 Deferred tax benefit ( 3,170 ) ( 839 ) Total income tax expense $ 9,314 $ 5,819 120 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: Net Deferred Tax Asset (in thousands) 2020 2019 Deferred tax assets: Allowance for loan and credit losses $ 6,666 $ 3,977 Reserve for recourse on mortgage loans sold 308 158 Nonaccrual interest 18 19 Foreclosed real estate write-downs 22 3 Stock-based compensation 276 251 Long-term incentive program 302 266 Core deposit intangible 17 21 Lease liability net of right-of-use asset 87 — Net operating loss carryforward 123 178 7,819 4,873 Deferred tax liabilities: Unrealized gains on investment securities available for sale 620 5 Unrealized gain on loans held for sale 67 72 Accumulated depreciation 190 355 Deferred casualty gain 1 1 878 433 Net deferred tax asset before valuation allowance 6,941 4,440 Less: Valuation allowance 123 177 Net deferred tax asset $ 6,818 $ 4,263 The differences between the federal income tax rate and the effective tax rate for the Company are reconciled as follows: Reconciliation of Federal Tax Rate to the Effective Rate 2020 2019 Statutory federal income tax rate 21.00 % 21.00 % Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 5.40 6.02 Nondeductible expenses 0.49 0.73 Tax exempt income ( 0.01 ) ( 0.03 ) Other ( 0.37 ) ( 2.10 ) Effective Tax Rate 26.51 % 25.62 % Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the net deferred tax assets to net realizable value. As of December 31, 2020, management has determined that it is more likely than not that the majority of the deferred tax asset from continuing operations will be realized. At December 31, 2020 and 2019, a valuation allowance of $ 123 thousand and $ 177 thousand was recognized, respectively, for a State of Maryland net operating loss carryforward that may not be realizable. The Company does not have material uncertain tax positions and did not recognize any adjustments for unrecognized tax benefits. The Company remains subject to examination of income tax returns for the years ending after December 31, 2017 . 121 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 15 - Capital Standards The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established and defined by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 2020 and 2019, the capital levels of the Company and the Bank substantially exceeded all applicable capital adequacy requirements. 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. To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank’s category. The following table presents actual and required capital ratios as of December 31, 2020 and 2019 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2020 and 2019 based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. 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. 122 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 15 - Capital Standards (continued) Regulatory Capital 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 The Company 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) 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 % The Bank Tier 1 leverage ratio (to average assets) $ 135,527 7.44 % $ 72,770 4.00 % $ 90,962 5.00 % $ 90,962 5.00 % Tier 1 capital (to risk-weighted assets) 135,527 12.06 % 71,731 6.00 % 95,642 8.00 % 95,642 8.00 % 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 The Company 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) 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 % The Bank Tier 1 leverage ratio (to average assets) $ 114,613 8.65 % $ 53,005 4.00 % $ 66,256 5.00 % $ 66,256 5.00 % Tier 1 capital (to risk-weighted assets) 114,613 10.73 % 64,093 6.00 % 85,458 8.00 % 85,458 8.00 % 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 % 123 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 16 - Stock-Based Compensation Compensation cost is recognized for stock options and restricted stock awards issued to employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. 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 $ 1.0 million and $ 858 thousand during the years ended December 31, 2020 and 2019, respectively. Stock options: The Company currently has two incentive compensation plans with outstanding stock options, the 2002 Stock Option Plan and the 2017 Stock and Incentive Compensation Plan (“the Plan”). Only the Plan, which authorizes the use of stock options, stock appreciation rights, restricted stock and/or restricted stock, is available to grant options and shares to employees and directors. At inception the Plan allowed for up to 1,120,000 shares of common stock to be issued. As of December 31, 2020, there are 144,049 shares available for future grant. Shares of common stock related to any unexercised or unvested award granted under the Plan that terminate or expire, or are subsequently forfeited or cancelled for any reason, become available for re-grant under the Plan. Option prices are equal to or greater than the estimated fair value of the common stock at the date of grant. Options outstanding vest over a four -year period, whereby 25 % of the options become exercisable on each anniversary of the grant date. Information with respect to options outstanding during the years ended December 31, 2020 and 2019 is as follows: Stock Options Outstanding 2020 2019 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 Add: Granted 205,100 13.95 249,300 14.29 Less: Exercised ( 142,901 ) 7.72 ( 221,710 ) 6.88 Less: Retired on exercise ( 137,334 ) 7.90 ( 141,955 ) 6.90 Less: Expired/cancelled/forfeited ( 63,499 ) 11.60 ( 9,448 ) 10.89 Outstanding at end of year 1,169,413 $ 12.21 1,308,047 $ 11.00 Exercisable at end of year 567,593 $ 11.13 592,782 $ 9.40 The weighted average fair value of options granted during the years ended December 31, 2020 and 2019, was $ 7.37 and $ 4.30 , respectively. 124 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 16 - Stock-Based Compensation (continued) A summary of information about stock options outstanding is as follows: Stock Option Summary 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 Intrinsic value on December 31, 2020 2,164,598 1,620,892 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 Intrinsic value on December 31, 2019 5,089,032 3,256,491 The aggregate intrinsic value as presented in the preceding tables is the difference between the estimated fair value of the stock as of December 31, 2020 and 2019, and the exercise price of the option multiplied by the number of options outstanding. Stock options with exercise prices greater than the estimated fair value of the stock are not included in this calculation. Total unrecognized compensation expense related to stock options to be recognized over the next five years was $ 0.8 million and $ 1.7 million at December 31, 2020 and 2019, respectively. 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 2020 and 2019 were estimated using the 125 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 16 - Stock-Based Compensation (continued) Black-Scholes option-pricing model with the following weighted average assumptions: Stock Option Pricing Assumptions 2020 2019 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: The Company from time-to-time also grants shares of restricted stock to key employees. These awards help align the interests of these employees with the interests of the stockholders of the Company by providing economic value directly related to increases in the value of the Company’s stock. These awards typically hold service requirements over various vesting periods. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. All restricted stock agreements are conditioned upon continued employment. Termination of employment prior to a vesting date, as described below, would terminate any interest in non-vested shares. All restricted shares will fully vest in the event of change in control of the Company. 126 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 2020 2019 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 Add: Granted 16,713 14.36 — — Less: Vested ( 5,500 ) 12.38 ( 18,500 ) 8.16 Less: Forfeited — — — — Nonvested at end of year 30,713 $ 13.46 19,500 $ 12.38 The vesting schedule of restricted shares as of December 31, 2020 is as follows: Restricted Stock Vesting Schedule Year Shares 2021 9,678 2022 9,678 2023 7,178 2024 4,179 30,713 There was $ 121 thousand and $ 176 thousand of total unrecognized compensation expense related to nonvested restricted stock at December 31, 2020 and 2019, respectively. 127 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 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. Parent Company Only Balance Sheets (in thousands) 2020 2019 Assets Cash and cash equivalents $ 2,777 $ 2,391 Investment in Bank 137,244 114,626 Investment in Church Street Capital 4,161 3,755 Investment in Trust 62 62 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 Due from subsidiaries — 16 Prepaid income taxes — 9 Deferred income taxes 86 65 Total assets $ 171,629 $ 149,066 Liabilities and Stockholders’ Equity Borrowed funds $ 12,062 $ 15,423 Accrued interest payable 43 82 Other liabilities 213 230 Total liabilities 12,318 15,735 Stockholders’ equity Common stock 138 139 Additional paid-in capital 50,602 51,561 Retained earnings 106,854 81,618 Accumulated other comprehensive income 1,717 13 Total stockholders’ equity 159,311 133,331 Total liabilities and stockholders’ equity $ 171,629 $ 149,066 128 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 17 - Parent Company Financial Information (continued) Parent Company Only Statements of Income (in thousands) 2020 2019 Interest and dividend income $ 1,662 $ 1,650 Dividend from Bank 5,500 3,500 Total interest and dividend revenue 7,162 5,150 Interest expense 1,095 1,054 Net interest income 6,067 4,096 Provision for loan losses — 50 Net interest income after provision for loan losses 6,067 4,046 Noninterest income 3 5 Noninterest expenses 334 180 Income before income taxes 5,736 3,871 Income tax expense 50 78 Income before undistributed net income of subsidiaries 5,686 3,793 Undistributed net income of subsidiaries 20,137 13,102 Net income $ 25,823 $ 16,895 129 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 17 - Parent Company Financial Information (continued) Parent Company Only Statements of Cash Flows (in thousands) 2020 2019 Cash flows from operating activities Net Income 25,823 16,895 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses — 50 Undistributed net income of subsidiaries ( 20,137 ) ( 13,102 ) Decrease in receivable from Bank 16 38 Stock-based compensation expense 983 795 Director and employee compensation paid in Company stock 268 301 Deferred income tax benefit ( 21 ) ( 47 ) Amortization of debt issuance costs 139 30 Changes in assets and liabilities: Accrued interest receivable ( 202 ) 8 Prepaid income taxes 9 81 Other assets — ( 663 ) Accrued interest payable ( 39 ) 1 Other liabilities ( 17 ) 195 Net cash provided by operating activities 6,822 4,582 Cash flows from investing activities Net increase in loans receivable 1,045 ( 1,062 ) Capital contributions to subsidiaries ( 1,183 ) ( 5,120 ) Net cash provided by investing activities ( 138 ) ( 6,182 ) Cash flows from financing activities Repayment of debt ( 3,500 ) — Repurchase of common stock ( 3,720 ) ( 371 ) Proceeds from exercise of stock options 922 594 Net cash provided used in financing activities ( 6,298 ) 223 Net increase (decrease) in cash and cash equivalents 386 ( 1,377 ) Cash and cash equivalents, beginning of year 2,391 3,768 Cash and cash equivalents, end of year $ 2,777 $ 2,391 130 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 18 - Fair Value Generally accepted accounting principles define fair value, establish a framework for measuring fair value, recommend disclosures about fair value, and establish a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows: Level 1 - Inputs to the valuation method are quoted prices (unadjusted) for identical assets or liabilities in active markets; Level 2 - Inputs to the valuation method include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and Level 3 - Inputs to the valuation method are unobservable and significant to the fair value measurement. 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. The fair values of the Company's securities are determined based on quoted prices for similar securities under Level 2 inputs. Loans held for sale - The fair value of loans held for sale is determined using Level 2 inputs of quoted prices for a similar asset, adjusted for specific attributes of that loan. Derivative financial instruments - Derivative instruments used to hedge residential mortgage loans held for sale and the related interest rate lock commitments include forward commitments to sell mortgage loans and are reported at fair value utilizing Level 2 inputs. 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. 131 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 18 - Fair Value (continued) 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) Total Level 1 Inputs Level 2 Inputs Level 3 Inputs December 31, 2020 Investment securities available for sale U.S. 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 $ — Derivative assets $ 327 $ — $ 327 $ — Derivative liabilities $ 179 $ — $ 179 $ — December 31, 2019 Investment securities available for sale U.S. 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 $ — Derivative assets $ 237 $ — $ 237 $ — Derivative liabilities $ 125 $ — $ 125 $ — Financial instruments recorded using FASB ASC 825-10 Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made. The following table reflects the difference between the fair value carrying amount of loans held for sale, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity: Fair Value of 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 $ 3,912 132 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 18 - Fair Value (continued) 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 Impaired loans - The Company has measured impairment generally based on the fair value of the loan's collateral and discounted cash flow analysis. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. 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. Fair value was determined based on offers and/or appraisals. Cost to sell the real estate was based on standard market factors. The Company has categorized its foreclosed real estate as Level 3. Fair Value of Impaired Loans and Foreclosed Real Estate (in thousands) December 31, 2020 December 31, 2019 Impaired loans Level 1 Inputs $ — $ — Level 2 Inputs — — Level 3 Inputs 8,899 3,980 Total $ 8,899 $ 3,980 Foreclosed real estate Level 1 Inputs — — Level 2 Inputs — — 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: Inputs 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 Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. 133 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 18 - Fair Value (continued) The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different. As of December 31, 2020, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2019, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. The fair value of the Company’s loan portfolio has always included a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans, and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. The fair value of cash and cash equivalents, interest bearing deposits at other financial institutions, federal funds sold and restricted investments is the carrying amount. Restricted stock includes equity of the Federal Reserve and other banker’s banks. The fair value of noninterest bearing deposits and securities sold under agreements to repurchase is the carrying amount. The fair value of checking and savings deposits, and money market accounts, is the amount payable on demand at the reporting date. Fair value of fixed maturity term accounts and individual retirement accounts is estimated using rates currently offered for accounts of similar remaining maturities. The fair value of certificates of deposit in other financial institutions is estimated based on interest rates currently offered for deposits of similar remaining maturities. The fair value of borrowings is estimated by discounting the value of contractual cash flows using current market rates for borrowings with similar terms and remaining maturities. The fair value of outstanding loan commitments, unused lines of credit, and letters of credit are not included in the table since the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments. 134 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 18 - Fair Value (continued) The table below presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments (in thousands). Fair Value of Financial Assets and Liabilities December 31, 2020 December 31, 2019 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets Level 1 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 Level 3 Loans receivable, net $ 1,493,086 $ 1,499,073 $ 1,156,934 $ 1,155,922 Financial liabilities Level 1 Noninterest-bearing deposits $ 608,559 $ 608,559 $ 291,777 $ 291,777 Level 3 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 47,678 135 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 19 - Segments The Company’s reportable segments represent product line divisions and are viewed separately for strategic planning purposes by management. The four segments include Commercial Banking, Capital Bank Home Loans (the Company’s mortgage loan division), and OpenSky® (the Company’s credit card division) and the Corporate Office. The following schedule presents financial information for each reportable segment at December 31, 2020. Segments (in thousands) Commercial Bank CBHL OpenSky® Corporate Eliminations Consolidated Interest income $ 66,373 $ 2,611 $ 25,907 $ 2,481 $ ( 121 ) $ 97,251 Interest expense 10,396 1,691 — 1,216 ( 121 ) 13,182 Net interest income 55,977 920 25,907 1,265 — 84,069 Provision for loan losses 9,461 — 1,681 100 — 11,242 Noninterest income 822 43,250 16,966 23 — 61,061 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 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. 136 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2020 and 2019 Note 21 - Quarterly Results of Operations (unaudited) The following table presents condensed unaudited information relating to quarterly periods in 2020 and 2019. Quarterly Results of Operations (in thousands) 2020 2019 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 Interest Expense 2,599 3,150 3,376 4,057 4,339 4,170 3,758 3,574 Net Interest Income 25,719 22,039 18,624 17,687 16,880 18,184 16,531 14,744 Provision for Loan Losses 2,033 3,500 3,300 2,409 921 1,071 677 121 Noninterest Income 19,437 21,146 13,899 6,579 8,453 7,221 5,927 4,092 Noninterest Expense 30,086 28,119 22,703 17,843 17,757 18,228 16,210 14,330 Income Before Provision for Income Taxes 13,037 11,566 6,520 4,014 6,654 6,106 5,571 4,385 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 Diluted earnings per common share $ 0.71 $ 0.61 $ 0.34 $ 0.21 $ 0.36 $ 0.32 $ 0.29 $ 0.24 Note 22 - Subsequent Events Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. 137 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.