What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-15 compared with 2021-03-15 · 244 added, 361 removed, 1227 unchanged (33% of the section changed)

35 unchanged sentences

Investment securities available for sale 184,455 99,787

Marketable equity securities 245 245

Restricted investments

Loans held for sale 15,989 107,154

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

Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans receivable, net of deferred fees and costs 108,285 201,018

Portfolio loans receivable, net of deferred fees and costs 1,523,982 1,315,502

Less allowance for loan losses ( 25,181 ) ( 23,434 )

Total portfolio loans held for investment, net 1,498,801 1,292,068

Premises and equipment, net

2 unchanged sentences

Foreclosed real estate 86 3,326

Bank owned life insurance 35,506 —

Other assets 4,064 2,956

$ 2,055,300 $ 1,876,593

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

Noninterest-bearing $ 787,650 $ 608,559

Interest-bearing 1,009,487 1,043,569

Total deposits

12 unchanged sentences

Retained earnings 144,533 106,854

Accumulated other comprehensive income 1,717 13

Accumulated other comprehensive income (loss) ( 1,076 ) 1,717

Total stockholders' equity

14 unchanged sentences

Interest expense

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

11,524 13,689

Deposits 5,808 11,524

Borrowed funds 742 1,658

8 unchanged sentences

Mortgage banking revenue 20,843 32,273

Gain on sale of investment securities available for sale 20 26

Other fees and charges 2,906 1,567

Gain on sale of investment securities available for sale, net 153 20

Other income 1,147 365

Total noninterest income 50,636 50,144

7 unchanged sentences

Other real estate expenses, net 368 69

Other operating expenses 10,995 7,114

Other operating 12,993 10,995

Total noninterest expenses 110,094 87,834

15 unchanged sentences

Other comprehensive income (loss):

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

Unrealized gain (loss) on investment securities available for sale ( 3,688 ) 2,340

Reclassification of realized gain on sales of investment securities available for sale ( 153 ) ( 20 )

Unrealized loss on cash flow hedging derivative — ( 5 )

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

Other comprehensive income 1,704 608

( 3,841 ) 2,320

Income tax benefit (expense) relating to the items above 1,048 ( 616 )

Other comprehensive income (loss) ( 2,793 ) 1,704

Comprehensive income $ 37,185 $ 27,527

8 unchanged sentences

Stockholders'

(dollars in thousands) Shares Amount

(dollars in thousands, except per share data) Shares Amount

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

Adoption of lease standard ( 54 ) ( 54 )

Net income — — — 25,823 — 25,823

Unrealized gain on investment securities available for sale, net of income taxes — — — — 1,704 1,704

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

Stock options exercised, net of shares withheld for purchase price 142,901 2 1,083 ( 163 ) — 922

Shares issued as compensation 19,900 — 268 — — 268

29,133 — 301 — — 301

Stock-based compensation

3 unchanged sentences

Net income — — — 39,978 — 39,978

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

Unrealized loss on investment securities available for sale, net of income taxes — — — — ( 2,793 ) ( 2,793 )

Stock options exercised, net of shares withheld for purchase price 186,461 2 1,838 ( 873 ) — 967

Shares issued as compensation, net of settlement of taxes 22,344 — 519 ( 44 ) — 475

Stock-based compensation

— — 1,347 — — 1,347

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

Cash dividends to stockholders ($ 0.10 per share)

— — — ( 1,382 ) — ( 1,382 )

Balance, December 31, 2021 13,962,334 $ 140 $ 54,306 $ 144,533 $ ( 1,076 ) $ 197,903

9 unchanged sentences

Provision for loan losses 3,359 11,242

Provision for mortgage put-back reserve 598 184

Provision for off balance sheet credit risk 550 173

Provision for mortgage put-back reserve, net 4 584

Provision for (release of) off balance sheet credit risk ( 40 ) 550

Net amortization on investments 642 297

1 unchanged sentence

Lease asset amortization 645 1,050

Increase in cash surrender value of BOLI ( 506 ) —

Executive long term incentive plan expense 1,344 —

Stock-based compensation expense 1,347 983

1 unchanged sentence

Deferred income tax benefit ( 1,927 ) ( 3,170 )

Valuation allowance on derivatives ( 49 ) ( 28 )

Amortization of debt issuance cost — 139

Gain on sale of securities available for sale ( 153 ) ( 20 )

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

Loss on sales of foreclosed real estate, net 47 —

Decrease in valuation of loans held for sale carried at fair value 246 8

Proceeds from sales of loans held for sale 1,091,746 1,267,112

2 unchanged sentences

Accrued interest receivable 233 ( 3,364 )

Prepaid income taxes and taxes payable — 81

Other assets ( 1,222 ) ( 412 )

2 unchanged sentences

Net cash provided by operating activities 132,076 5,457

See Notes to Consolidated Financial Statements

Capital Bancorp, Inc.

and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021 and 2020

(dollars in thousands) 2021 2020

Cash flows from investing activities

2 unchanged sentences

Proceeds from sale of securities available for sale 66,534 965

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

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

Sales of restricted investments 215 8

Net decrease (increase) in SBA-PPP loans receivable 92,733 ( 201,018 )

Net increase in loans receivable ( 210,092 ) ( 147,319 )

1 unchanged sentence

Proceeds from sales of foreclosed real estate 3,193 —

Purchase of Bank owned life insurance ( 35,000 ) —

Net cash used in investing activities ( 238,231 ) ( 385,512 )

See Notes to Consolidated Financial Statements

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

4 unchanged sentences

( 34,082 ) 109,925

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

Federal funds purchased — ( 2,000 )

Federal Home Loan Bank advances, net — ( 10,222 )

Other borrowed funds ( 1,954 ) ( 1,546 )

Dividends paid ( 1,382 ) —

Repurchase of common stock — ( 3,720 )

6 unchanged sentences

Loans transferred to foreclosed real estate $ — $ 942

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

Change in unrealized gains (losses) on investments $ ( 3,841 ) $ 2,320

Change in fair value of loans held for sale

Change in fair value of cash flow hedging derivative $ — ( 5 )

Establishment of right of use asset $ — $ 5,158

Establishment of lease liability $ — $ 5,358

Value of restricted shares withheld for payment of taxes $ ( 44 ) ( 163 )

Cash paid during the period for:

11 unchanged sentences

(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's primary operations are conducted by the Bank, which operates branches in Rockville and Columbia, 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 of those commercial and real estate loan customers.

The Company originates residential mortgages for sale in the secondary market through Capital Bank Home Loans, its 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.

49 unchanged sentences

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.

Upon exiting the loan modification deferral program, the measurement of loan delinquency will resume based on 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.

4 unchanged sentences

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:

Outstanding portfolio loans deferred due to COVID-19, which decreased by 86.9 % percent from $ 30.5 million at December 31, 2020 to $ 4.0 million at December 31, 2021, are shown in the table below:

Loan Modifications (1)

(dollars in millions)

December 31, 2020 June 30, 2020

Deferred Loans Deferred Loans

39 unchanged sentences

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 components of the allowance for loan losses represent an estimation done pursuant to Accounting Standards Codification (“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.

12 unchanged sentences

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.

The costs of major renewals and improvements are capitalized with the corresponding costs associated with amortization or depreciation included as a component of occupancy and equipment expenses.

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.

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;

Capital Bancorp, Inc.

3 unchanged sentences

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.

The Company accounts for leases as detailed in Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842) (“ASU 2016-02”).

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 for short-term leases on a straight-line basis over the lease term.

Derivative Financial Instruments

3 unchanged sentences

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.

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 of mortgage backed securities, 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 has determined these derivative financial instruments do not meet the hedging criteria required by FASB ASC 815 and has not designated these derivative financial instruments as hedges.

Accordingly, changes in fair value are recognized currently in income.

Fair Value Measurements

2 unchanged sentences

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

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

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.

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

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

4 unchanged sentences

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.

See Note 17 - Fair Value.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

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

Bank-owned life insurance

The Company had $ 35.5 million in bank-owned life insurance at December 31, 2021.

The Company recognized income, which is included in other noninterest income, of $ 506 thousand for the year ended December 31, 2021.

The Company had no bank-owned life insurance during the year ended December 31, 2020.

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.

7 unchanged sentences

At December 31, 2021 and 2020, there were 1,129 and 504,861 stock options, respectively, that were not included in the calculation as their effect would have been anti-dilutive.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

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

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

Earnings Per Share For the Years Ended December 31,

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

For the Years Ended December 31,

(dollars in thousands) Income Weighted Average Shares Per Share

Amount Income Weighted Average Shares Per Share

5 unchanged sentences

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,

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

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

The Company's only component of other comprehensive income is unrealized gains and losses on investment securities available for sale, net of income taxes.

Information concerning the Company's accumulated other comprehensive income (loss) as of December 31, 2021 and 2020 are as follows:

For the Years Ended December 31,

(in thousands) 2021 2020

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

Deferred tax expense ( 620 ) ( 5 )

Total accumulated comprehensive income $ 1,717 $ 13

Unrealized gains (losses) on securities available for sale $ ( 1,504 ) $ 2,337

Deferred tax benefit (expense) 428 ( 620 )

Total accumulated comprehensive income (loss) $ ( 1,076 ) $ 1,717

Recently issued accounting pronouncements:

2 unchanged sentences

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 engaged a consultant to assist with the implementation of this ASU and has completed various milestones so as to ensure the timely implementation of the ASU.

The Company plans to begin running parallel models during the first quarter of 2022 so as to refine assumptions, establish policy, complete model validation and identify expected financial statement impact.

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.

In addition to its 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.

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.

In March 2020, the FASB released ASU 2020-04 - Reference Rate Reform, Topic 848, which provides 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.

3 unchanged sentences

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

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

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“agencies”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19.

The interagency statement was effective immediately and impacted accounting for loan modifications.

Under ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The agencies confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

Such modifications include short-term (e.g., six months) modifications that include payment deferrals of (i) principal and interest, (ii) interest only and (iii) principal only, fee waivers, extensions of repayment terms, or other delays in payment that are deemed insignificant.

Borrowers considered current were those that were less than 30 days past due on their contractual payments at the time a modification program was implemented.

As of December 31, 2021, the Company had offered payment deferrals for commercial and consumer customers for up to six months.

The loan modifications offered to borrowers provided the borrower with payment relief in the form of reduced or deferred payments for up to 90 days (six months in selected instances) during which time interest is continuing to accrue.

It is not expected that this interagency guidance will have a material impact on the Company’s financial statements;

however, this impact cannot be quantified at this time.

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.

6 unchanged sentences

At December 31, 2021 and 2020, the requirements were satisfied by amounts on deposit with the Federal Reserve Bank and cash on hand.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

Note 3 - Investment Securities

2 unchanged sentences

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.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

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

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2021 and 2020 are summarized as follows:

Cost Unrealized

2 unchanged sentences

December 31, 2021

U.S Treasuries $ 132,452 $ 45 $ ( 1,496 ) $ 131,001

Asset-backed securities 10,093 59 ( 12 ) 10,140

4 unchanged sentences

December 31, 2020

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

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

Municipal 10,836 108 ( 17 ) 10,927

2 unchanged sentences

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

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Proceeds from the sale of securities during the years ended December 31, 2021 and 2020 were $ 66.5 million and $ 1.0 million respectively, and resulted in gains of $ 694.2 thousand and losses of $ 540.8 thousand for December 31, 2021 and gains of $ 20 thousand and no losses for the same period in 2020.

Information related to unrealized losses in the investment portfolio as of December 31, 2021 and 2020 are as follows:

Investment Securities Unrealized Losses

Less than 12 months 12 months or longer Total

4 unchanged sentences

December 31, 2021

Treasuries $ 110,191 $ ( 1,496 ) $ — $ — $ 110,191 $ ( 1,496 )

Asset-backed securities — — 2,115 ( 12 ) 2,115 ( 12 )

5 unchanged sentences

December 31, 2020

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

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

3 unchanged sentences

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

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

At December 31, 2021, there was one asset-backed security, two municipal securities, one corporate security, and one mortgage-backed security that have 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,

(in thousands) Amortized

Value Amortized

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

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

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2021 and 2020

Note 3 - Investment Securities (continued)

There were no pledged securities at December 31, 2021.

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

(in thousands) Amortized

Federal Home Loan Bank (“FHLB”) advances $ 1,142 $ 1,189

$ 1,142 $ 1,189

Contractual maturities of U.S.

1 unchanged sentence

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,

1 unchanged sentence

Value Amortized

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

Over one to five years $ 58,602 $ 57,650 $ — $ —

1 unchanged sentence

Over ten years 10,825 10,474 11,095 11,170

Asset-backed securities (1)

10,093 10,140 10,839 10,881

Mortgage-backed securities (1)

1 unchanged sentence

$ 185,959 $ 184,455 $ 97,450 $ 99,787

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

(1) Mortgage-backed and Asset-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.

Pursuant to the CARES Act and the Consolidated Appropriations Act, 2021, 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 PPP Extension Act of 2021 extended the program through May 31, 2021.

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.

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

At December 31, 2021, SBA-PPP loans receivable, which totaled $ 111.5 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.

Earned fees for the years ended December 31, 2021 and 2020 are $ 5.7 million and $ 2.8 million, respectively.

Unearned net fees associated with the SBA-PPP loans amounted to $ 3.2 million and $ 3.9 million at December 31, 2021 and 2020, respectively.

There were no outstanding commitments to extend additional SBA-PPP loans at December 31, 2021.

5 unchanged sentences

Major categories of portfolio loans are as follows:

Portfolio Loan Categories

(in thousands) 2021 2020

3 unchanged sentences

Commercial 175,956 157,127

Credit card 102,186 45,526

Credit card, net of reserve 141,120 102,186

Other consumer 1,033 1,649

14 unchanged sentences

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 .

2 unchanged sentences

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

As of December 31, 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.

As of December 31, 2021, there were approximately $ 302.5 million of owner-occupied commercial real estate loans, representing approximately 19.8 % of the portfolio loan total.

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

The interest rates on commercial real estate loans have initial fixed rate terms that normally adjust 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.

9 unchanged sentences

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.

Construction loans typically have terms of 12 to 18 months.

The Company often transitions the end purchaser to permanent financing or re-underwriting and selling into the secondary market through Capital Bank Home Loans.

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

The borrowers’ progress in construction buildout is monitored including for adherence to construction milestones and completion timelines.

Commercial Business Loans .

3 unchanged sentences

Credit Cards .

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

Through the OpenSky ® credit card division, the Company offers secured, partially secured, and unsecured 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.

The secured 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.

For the partially secured lines of credit, the Bank offers certain customers an unsecured line in excess of their secured line of credit by 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).

Partially secured and unsecured credit cards are only extended to existing unsecured card customers who have demonstrated sound credit behaviors.

Approximately $ 126.6 million and $ 98.5 million of the credit card balances were secured by savings deposits held by the Bank as of December 31, 2021 and 2020, respectively, with $ 16.7 million and $ 5.7 million of the credit card balances not secured by savings deposits as of December 31, 2021 and 2020, respectively.

Other Consumer Loans .

5 unchanged sentences

The remaining nonaccretable discounts on loans acquired were $ 285 thousand at December 31, 2021 and 2020.

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

Loans with nonaccretable discounts had a carrying value of $ 817.8 thousand and $ 835.7 thousand as of December 31, 2021 and 2020, respectively.

Capital Bancorp, Inc.

4 unchanged sentences

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

Accretable Discounts on Loans Acquired

(in thousands) 2021 2020

6 unchanged sentences

The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans as of December 31, 2021 and 2020.

Allowance for Loan Losses

(in thousands) Provision for

27 unchanged sentences

_______________

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

5 unchanged sentences

Past due portfolio loans, segregated by delinquency and class of loans, as of December 31, 2021 and 2020 were as follows:

Portfolio Loans Past Due Loans

Past Due Loans

Past Due Total

11 unchanged sentences

$ 20,041 $ 10,925 $ 30,966 $ 1,500,236 $ 1,531,202 $ 82 $ 11,339

Acquired loans included above

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

December 31, 2020

6 unchanged sentences

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

Acquired loans included above

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

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, 2021 and 2020 were as follows:

Impaired Portfolio Loans

Balance Recorded

11 unchanged sentences

$ 11,829 $ 11,003 $ 336 $ 11,339 $ 218 $ 15,470 $ 918

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

December 31, 2020

1 unchanged sentence

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 $ 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:

Capital Bancorp, Inc.

3 unchanged sentences

Note 5 - Portfolio Loans Receivable (continued)

There were $ 6 thousand and $ 175 thousand, respectively, of loans secured by one to four family residential properties in the process of foreclosure as of December 31, 2021 and 2020.

Credit quality indicators

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:

Special Mention

18 unchanged sentences

Classified loans include Special Mention, Substandard, and Doubtful loans:

Classified Loans

(in thousands) Pass (1)

27 unchanged sentences

The status of TDRs is as follows:

Troubled Debt Restructurings

Contracts Recorded Investment

4 unchanged sentences

Total 5 $ — $ 533 $ 533

Acquired loans included above 3 $ — $ 145 $ 145

December 31, 2020

2 unchanged sentences

Total 5 $ — $ 439 $ 439

Acquired loans included above

3 $ — $ 145 $ 145

During the year ended December 31, 2021, the Company did restructure one residential portfolio loan for $ 319 thousand in which the borrower was granted a rate reduction and payment recast.

There were no material financial effects as a direct result of this modification There was one commercial TDR that was paid off during the twelve months ended December 31, 2021 for $ 200 thousand.

The Company had no defaulted TDR loans in the twelve months ended December 31, 2021.

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.

Capital Bancorp, Inc.

4 unchanged sentences

Outstanding loan commitments were as follows:

Loan Commitments

For the Year Ended December 31,

(in thousands) 2021 2020

6 unchanged sentences

Credit card (1)

123,874 92,452

Personal 2,247 185

Construction commitments:

Residential real estate — —

Commercial real estate — —

$ 360,386 $ 331,576

1 unchanged sentence

Letters of credit $ 5,105 $ 5,102

_______________

(1) Outstanding loan commitments in the credit card portfolio include $ 98.2 million and $ 89.5 million in secured balances as of December 31, 2021 and 2020, respectively.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition of the contract.

15 unchanged sentences

Activity for this account is as follows:

Off-Balance Sheet Reserve

(in thousands) 2021 2020

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

Provision 550 173

Provision expense (release) ( 40 ) 550

Recoveries — —

5 unchanged sentences

Activity in this reserve is as follows for the periods presented:

Mortgage Loan Put-back Reserve

(in thousands) 2021 2020

6 unchanged sentences

Premises and equipment and the related depreciation and amortization consist of the following:

Premises and Equipment

(in thousands) 2021 2020

14 unchanged sentences

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.

As of December 31, 2021, the Company had leased four 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.

13 unchanged sentences

The Company’s lease information is summarized as follows:

(in thousands) December 31, 2020

(in thousands) 2021 2020

Lease Right-of-Use Asset

11 unchanged sentences

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

Future minimum payments for operating leases with initial or remaining terms of one year or more are as follows at December 31, 2021:

(in thousands) 2021

Amounts due in:

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.

Total future lease payments 2,820

Discount of cash flows ( 85 )

Present value of net future lease payments $ 2,735

Operating lease and rent expense were $ 1.2 million and $ 1.6 million for the years ended December 31, 2021 and 2020, respectively.

Note 8 - Derivative Financial Instruments

6 unchanged sentences

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 %.

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:

6 unchanged sentences

Fair value of interest rate lock commitments 34 179

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Note 9 - Interest-Bearing Deposits

Major categories of interest bearing deposits are as follows:

Interest-Bearing Deposits

(in thousands) 2021 2020

5 unchanged sentences

Total interest-bearing deposits $ 1,009,487 $ 1,043,569

The aggregate amount of brokered certificates of deposit was $ 45.1 million and $ 88.8 million at December 31, 2020 and 2019, respectively.

The Company did no t have any brokered deposits at December 31, 2021 compared to $ 45.1 million at December 31, 2020.

The aggregate amount of Certificate of Deposit Account Registry Service (“CDARS”) deposits was $ 8.6 million and $ 10.7 million at December 31, 2021 and 2020, 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, 2021, mature as follows:

Maturities of Certificates of Deposit

(in thousands)

1 unchanged sentence

2026, and thereafter 714

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 10 - Borrowed Funds

As of December 31, 2021 and 2020, the Company was indebted as follows:

Borrowed Funds

(dollars in thousands) Balance Interest Balance Interest

FHLB fixed rate advance due October 16, 2025 $ 22,000 0.93 % $ 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 2.07 % $ 2,062 2.09 %

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

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

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

Unamortized debt issuance costs — ( 139 )

Total - Other borrowed funds $ 12,062 $ 14,016

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

The FHLB fixed rate advance accrues interest on a daily basis and is paid semi-annually.

Junior subordinated debentures

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.

17 unchanged sentences

On November 30, 2020, the Company issued $ 10.0 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.

1 unchanged sentence

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

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 11 - Borrowed Funds (Continued)

The Company used the proceeds from the offering to redeem the outstanding $ 13.5 million, 6.95 % fixed-to-floating rate subordinated notes issued in November 2015 and called on December 1, 2020.

Available lines of credit

4 unchanged sentences

As of December 31, 2021 and 2020, the Company had pledged loans providing borrowing capacity of $ 205.3 million and $ 222.0 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, 2021, the Company did no t have any pledged investment securities to the FHLB while at December 31, 2020, the Company had pledged investment securities with a fair value of $ 1.2 million.

As of December 31, 2021 and 2020, the Company had available borrowing capacity, net of advances and amounts pledged for letters of credit, from the FHLB of $ 183.3 million and $ 201.2 million, respectively.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Note 10 - Borrowed Funds (continued)

As of December 31, 2021 and 2020, the Company had pledged commercial loans to the Federal Reserve Bank of Richmond to secure a borrowing capacity totaling $ 15.9 million and $ 15.6 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.

In addition, the Company had the ability to borrow from the SBA-PPP Liquidity Facility by pledging SBA-PPP loans during 2020 and up through July 30, 2021 after which no new extensions of credit would be made under the facility .

The Company limits its certificate of deposit funding through financial networks to 15 % of the Bank’s assets, or approximately $ 302.1 million and $ 277.1 million as of December 31, 2021 and 2020, respectively.

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

Note 12 - Retirement Plan

No amount was outstanding as of December 31, 2021 and $ 45.1 million was outstanding as of December 31, 2020.

Note 11 - Retirement Plans

The Company provides a defined contribution plan qualifying under Section 401(k) of the Internal Revenue Code to eligible employees.

1 unchanged sentence

The Company’s contribution to the plan was $ 398 thousand in 2021 and $ 879 thousand in 2020.

The Bank adopted a Long-Term Incentive Plan (“LTIP”) for executive management members in 2021.

The LTIP is in the form of a nonqualified deferred compensation plan and complies with IRC Section 409A as well as related guidance and regulations.

The LTIP was introduced in order to align long-term interests of the Bank with the Bank’s key executive management members.

Under the LTIP, the CEO is eligible to earn an annual contribution of 20 percent of salary for achieving targeted performance levels while other executive management members are eligible to earn an annual contribution of 15 percent of salary for achieving targeted performance levels.

The Compensation Committee may award more for overachievement of the targets, and all targets are set for participants at the beginning of a fiscal year.

All participants are subject to the following vesting schedule for any earnings (or losses) on the investment of the contribution:

100 percent vesting following completion of either (i) ten years of service by the applicable executive from the later of the effective date of the LTIP or the executive’s hire date or (ii) ten years of continuous, full-time employment with the Bank by the applicable executive (to include continuous employment prior to the effective date of the LTIP) and retirement, which is defined in the LTIP as the later of a participant’s separation from service or the executive attaining 67 years of age.

Any executive not fulfilling either vesting requirement will forfeit any employer contributions.

Note 12 - Related-Party Transactions

2 unchanged sentences

Activity in related-party loans during 2021 and 2020 is shown below:

Related Party Loans

(in thousands) 2021 2020

12 unchanged sentences

Company directors, or their related interests, held $ 2.5 million of the subordinated notes outstanding as of December 31, 2021.

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.

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

Company directors, or their related interests, did not hold any participation loans from the Bank as of December 31, 2021 or December 31, 2020.

Company and Bank directors, or their related interests, held no participation loans from Church Street Capital as of December 31, 2021, and $ 120.9 thousand of participation loans from Church Street Capital as of December 31, 2020.

Note 13 - Income Taxes

The components of income tax expense are as follows:

Income Tax Expense

The components of income tax expense were as follows:

For the Years Ended December 31,

5 unchanged sentences

Total income tax expense $ 13,898 $ 9,314

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

The components of the net deferred tax asset at December 31, 2021 and 2020 were:

(in thousands) 2021 2020

2 unchanged sentences

Reserve for recourse on mortgage loans sold 364 308

Nonaccrual interest 18 19

Foreclosed real estate write-downs 22 3

Deferred loan fees - PPP 1,076 —

Stock-based compensation 320 276

Long-term incentive program 507 302

Core deposit intangible 17 21

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

Unrealized loss on investment securities available for sale 428 —

Net operating loss carryforward 67 123

Other 532 144

Deferred tax liabilities:

Unrealized gains on investment securities available for sale — 620

Unrealized gain on loans held for sale 67 72

Accumulated depreciation 107 190

Deferred casualty gain 1 1

Net deferred tax asset before valuation allowance 9,860 6,941

1 unchanged sentence

Net deferred tax asset $ 9,793 $ 6,818

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Note 13 - Income Taxes (continued)

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

Reconciliation of Federal Tax Rate to the Effective Rate

Statutory federal income tax rate 21.00 % 21.00 %

10 unchanged sentences

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2020 and 2019

Note 14 - 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.

Failure to meet minimum capital requirements can precipitate 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.

1 unchanged sentence

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, 2021 and 2020, the capital levels of the Company and the Bank exceeded all applicable capital adequacy requirements.

As of December 31, 2021 the most recent notification from the OCC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

4 unchanged sentences

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.

Capital Bancorp, Inc.

3 unchanged sentences

Note 14 - Capital Standards (continued)

At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

Regulatory Capital

4 unchanged sentences

December 31, 2021

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 leverage ratio (to average assets) $ 201,040 9.73 % $ 82,683 4.00 % N/A N/A N/A N/A

Tier 1 capital (to risk-weighted assets) 201,040 14.43 % 83,596 6.00 % N/A N/A 118,428 8.50 %

2 unchanged sentences

Total capital ratio (to risk-weighted assets) 228,574 16.41 % $ 111,462 8.00 % N/A N/A 146,294 10.50 %

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 leverage ratio (to average assets) $ 169,384 8.36 % $ 81,070 4.00 % $ 101,338 5.00 % N/A N/A

Tier 1 capital (to risk-weighted assets) 169,384 12.53 % 81,097 6.00 % 108,130 8.00 % 114,888 8.50 %

3 unchanged sentences

December 31, 2020

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 leverage ratio (to average assets) $ 159,656 8.78 % $ 72,770 4.00 % N/A N/A N/A N/A

Tier 1 capital (to risk-weighted assets) 159,656 13.10 % 73,100 6.00 % N/A N/A 103,559 8.50 %

2 unchanged sentences

Total capital ratio (to risk-weighted assets) 185,008 15.19 % 97,467 8.00 % N/A N/A 127,926 10.50 %

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 leverage ratio (to average assets) $ 135,527 7.44 % $ 72,770 4.00 % $ 90,962 5.00 % N/A 5.00 %

Tier 1 capital (to risk-weighted assets) 135,527 12.06 % 71,731 6.00 % 95,642 8.00 % 101,645 8.00 %

12 unchanged sentences

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

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

The expense recognition of employee stock option and restricted stock awards resulted in net expense of approximately $ 1.4 million and $ 1.0 million during the years ended December 31, 2021 and 2020, respectively.

Stock options:

2 unchanged sentences

At inception the Plan allowed for up to 1,120,000 shares of common stock to be issued.

In 2021, an additional 900,000 shares were authorized for a total of 2,020,000 .

As of December 31, 2021, there are 883,381 shares available for future grant.

3 unchanged sentences

Information with respect to options outstanding during the years ended December 31, 2021 and 2020 is as follows:

Stock Options Outstanding

Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price

13 unchanged sentences

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

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

December 31, 2021

7 unchanged sentences

26.41 5.00 142,244 —

14.38 4.10 5,000 —

14.54 4.00 219,800 55,714

14.89 4.00 20,000 —

Total outstanding options $ 14.77 2.80 1,060,023 551,804

7 unchanged sentences

14.57 4.00 239,800 55,714

14.54 5.0 229,300 —

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

3 unchanged sentences

Total unrecognized compensation expense related to stock options to be recognized over the next five years was $ 2.9 million and $ 2.2 million at December 31, 2021 and 2020, 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

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

The intrinsic value of stock options exercised was $ 4.0 million and $ 887.7 thousand during the years ended December 31, 2021 and 2020, respectively.

The weighted average fair value of options granted during 2021 and 2020 were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

Dividend yield 0.80 % 0.00 %

8 unchanged sentences

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.

Capital Bancorp, Inc.

3 unchanged sentences

Note 15 - Stock-Based Compensation (continued)

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.

Nonvested restricted stock for the years ended December 31, 2021 and 2020 is summarized in the following table.

Restricted Stock Summary

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

5 unchanged sentences

The vesting schedule of restricted shares as of December 31, 2021 is as follows:

Restricted Stock Vesting Schedule

There was $ 189 thousand and $ 121 thousand of total unrecognized compensation expense related to nonvested restricted stock at December 31, 2021 and 2020, respectively.

12 unchanged sentences

Investment in Trust 62 62

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

Loans receivable, net of allowance for loan losses of $ 328 and $ 258 at December 31, 2021 and 2020, respectively

36,198 26,999

Accrued interest receivable 217 300

Due from subsidiaries — 16

Prepaid income taxes — 9

Deferred income taxes 100 86

Other assets 14 —

Total assets $ 210,136 $ 171,629

8 unchanged sentences

Retained earnings 144,533 106,854

Accumulated other comprehensive income 1,717 13

Accumulated other comprehensive income (loss) ( 1,076 ) 1,717

Total stockholders’ equity

1 unchanged sentence

Total liabilities and stockholders’ equity $ 210,136 $ 171,629

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

45 unchanged sentences

Repayment of debt — ( 3,500 )

Dividends paid ( 1,382 ) —

Repurchase of common stock — ( 3,720 )

27 unchanged sentences

The Company has categorized its financial instruments measured at fair value on a recurring basis as of December 31, 2021 and December 31, 2020 as follows:

Fair Value of Financial Instruments

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

1 unchanged sentence

Investment securities available for sale

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

U.S Treasuries $ 131,001 $ — $ 131,001 $ —

Asset-backed securities 10,140 — 10,140 —

Municipal 10,474 — 10,474 —

7 unchanged sentences

Investment securities available for sale

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

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

Municipal 10,927 — 10,927 —

15 unchanged sentences

Difference $ 1,485 $ 7,792

The Company elects 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.

Capital Bancorp, Inc.

3 unchanged sentences

Note 17 - 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

9 unchanged sentences

(in thousands)

December 31, 2020 December 31, 2019

Impaired loans

14 unchanged sentences

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.

Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument.

Capital Bancorp, Inc.

58 unchanged sentences

Note 18 - Segments

The Company’s reportable segments represent product line divisions and are viewed separately for strategic planning purposes by management.

The Company’s reportable segments represent business units with discrete financial information whose results are regularly reviewed by management.

The four segments include Commercial Banking, Capital Bank Home Loans (the Company’s mortgage loan division), 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.

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

The following schedule presents financial information for each reportable segment at December 31, 2021 and 2020.

(in thousands)

December 31, 2021 Commercial Bank CBHL OpenSky ®

Corporate (2)

Eliminations Consolidated

Interest income $ 69,433 $ 1,217 $ 50,422 $ 2,307 $ ( 136 ) $ 123,243

7 unchanged sentences

Total assets $ 1,859,201 $ 16,698 $ 138,232 $ 217,993 $ ( 176,824 ) $ 2,055,300

_______________

(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.

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)

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

December 31, 2020

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

4 unchanged sentences

Noninterest expense (1)

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.

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 $ 36.1 million and $ 24.5 million in data processing expenses in OpenSky’s ® segment for the years ended December 31, 2021 and 2020, respectively.

(2) The Corporate segment invests idle cash in revenue producing assets including interest bearing cash accounts, loan participations and other appropriate investments for the Company.

Note 19 - 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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data