What changed in this filing

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Item 1. Business

2023-03-15 compared with 2022-03-15 · 58 added, 39 removed, 163 unchanged (37% of the section changed)

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We serve businesses, not-for-profit associations and entrepreneurs throughout the region.

Capital Bank is headquartered in Rockville, Maryland and operates a branch-lite model through four commercial bank branches, four mortgage offices and one loan production office.

Capital Bank is headquartered in Rockville, Maryland and operates a branch-lite model through four commercial bank branches, one mortgage office and two loan production offices.

Capital Bank currently operates three divisions:

Commercial Banking, Capital Bank Home Loans, and OpenSky ® .

Our Commercial Banking division operates in the Washington, D.C.

Our Commercial Banking division operates primarily in the Washington, D.C.

and Baltimore metropolitan areas and focuses on providing personalized service to commercial clients throughout our area of operations.

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

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

Until recently, CSC typically sold participation interests in these loans to third parties (including to certain of the Company’s and Bank's directors), and retained exposure of as little as

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

Initially, CSC typically sold participation interests in these loans to third parties (including to certain of the Company’s and Bank's directors), and retained exposure of as little as 10 percent.

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

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

Additionally, we have one loan production office located in the Washington, D.C.

Additionally, we have two loan production offices,

one located in the Washington, D.C.

area and one in Columbia, Maryland.

Our Commercial Banking division’s commercial loan officers and commercial real estate loan officers provide commercial and industrial, or C&I, commercial real estate and construction lending solutions to business clients in Capital Bank’s operating markets.

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In addition to its loan officers who have incentives and goals to drive core deposit growth, our Commercial Banking division currently has a team of business development officers concentrating on continuing to diversify Capital Bank’s funding sources away from wholesale funding and towards core deposit funding.

We expect that our deposit gathering teams will continue to help maintain our wholesale funding dependence through improved low-cost core funding.

Capital Bank Home Loans Division

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

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

Loans sold into the secondary market are sold servicing released.

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

In 2020, with the drop in interest rates, CBHL experienced heavy refinance origination volume as opposed to purchase origination volume;

however, in 2021, management began to refocus on purchase originations in anticipation of a slow-down in the refinance market.

In 2021, market interest rates increased causing the refinance market to further contract.

Our residential loan portfolio aims to retain high-quality, lower risk loans which support the Company’s business strategies.

A portion of the retained residential portfolio is represented by mortgage loans on primary residences within Capital Bank’s operating markets to individuals who own businesses where Capital Bank may also pursue a commercial lending relationship and has a vested interest in maintaining the fullest possible control of the lending relationship.

In 2022, as the mortgage refinance market continued to contract in response to increasing market interest rates, CBHL continued to focus on purchase originations.

Purchase origination volume was 80.6 percent for the year ended December 31, 2022, compared to 42.3 percent for the year ended December 31, 2021.

Approximately 69.7 percent of CBHL loan originations by volume occur within Capital Bank’s operating markets in Maryland, Virginia and Washington, D.C.

The remainder of originations are national in scope and occur primarily through a consumer direct channel utilizing consumer marketing, including through social media applications.

The remainder of originations are national in scope and derive primarily through a consumer direct channel utilizing consumer marketing, including through social media applications.

OpenSky ® Secured Credit Card Division

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

The partially secured credit card uses our 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), to offer certain customers an unsecured line in excess of their secured line of credit.

The partially secured credit card uses our proprietary scoring model, which considers among other things, credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis), to offer certain customers an unsecured line in excess of their secured line of credit.

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

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

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

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

Credit card eligibility for all product offerings is based on identity and income verification.

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Capital Bank evaluates its OpenSky ® customers using analytics that track consumer behaviors and score each customer on risk and behavior metrics.

These real-time monitoring capabilities give our management insight into the credit trends of our portfolio on a consumer by consumer basis, allowing them to identify potential fraud situations and mitigate any associated losses, as well as to obtain insights into how to optimize the profitability and life cycle of each account.

These real-time monitoring capabilities give our management insight into the credit trends of our portfolio on a consumer-by-consumer basis, allowing us to identify potential fraud situations and mitigate any associated losses, as well as to obtain insights into how to optimize the profitability and life cycle of each account.

The model utilizes data proprietary to Capital Bank.

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We believe that by using technology-enabled strategies and advice-based solutions, we can deliver attractive shareholder returns in excess of our cost of capital.

We have adopted the following

strategies that we believe will continue to drive growth while maintaining consistent profitability and enhancing shareholder value:

We have adopted the following strategies that we believe will continue to drive growth while maintaining consistent profitability and enhancing shareholder value:

Deliver premium advice-based solutions that drive organic loan and core deposit growth with corresponding net interest margin

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• Utilize our customer acquisition system, Apollo, and leverage our investment in a new core processing system, together with our expertise in data, analytics and marketing, to deliver new products and services and grow our secured credit card business;

• Retain OpenSky ® customers that “graduate” from our secured credit product through the limited use of partially unsecured credit products;

• Retain OpenSky ® customers that “graduate” from our secured credit product through the limited use of partially and fully unsecured credit products;

• Expand our purchase-oriented mortgage loan sales both in-market and in adjacent markets through the hiring of qualified mortgage originators and continue to improve on our direct to consumer marketing channels.

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• Use our management’s and Board’s expertise to structure transactions that minimize the integration and execution risk for the Bank.

Sustainability

We aspire to be the most valued and trusted community bank within the markets we serve.

We understand our obligation to both our shareholders and the communities we serve -- to be an institution that achieves superior financial performance, while contributing to society through the delivery to our customers of services that enlarge access, equity and opportunity.

We focus our environmental, social, and governance (“ESG”) efforts on issues that are important to our business and to our key stakeholders.

Our mission is to support businesses, help people and strengthen communities, as well as to grow our operations and revenue.

Essential to this mission is our commitment to provide long-term, sustainable financial and social value to our stakeholders, including the communities we serve, our shareholders and our employees.

Employees and Human Capital Resources

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

We believe the relationship with our employees to be excellent and were recently named a Best Bank to Work For by American Banker for the third consecutive year.

We believe the relationship with our employees to be excellent and we were recently named a Best Bank to Work For by American Banker for the fourth consecutive year.

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

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

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

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

Available Information

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These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage and fiduciary activities.

They also impose capital adequacy requirements

and conditions on a bank holding company’s (“BHC”), ability to repurchase stock or to receive dividends from its subsidiary banks.

We are subject to comprehensive examination and supervision by the Federal Reserve, and the Bank is subject to comprehensive examination and supervision by the Office of the Comptroller of the Currency (“OCC”).

They also impose capital adequacy requirements and conditions on a bank holding company’s (“BHC”) ability to repurchase stock or to receive dividends from its subsidiary banks.

We are subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve (“Federal Reserve”), and the Bank is subject to comprehensive examination and supervision by the Office of the Comptroller of the Currency (“OCC”).

We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the Bank Holding Company Act of 1956 (“BHC Act”).

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The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”), through the Deposit Insurance Fund (“DIF”).

As a result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank as well as all other FDIC insured institutions.

result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank as well as all other FDIC insured institutions.

The Company’s and the Bank’s regulators generally have broad discretion to impose restrictions and limitations on our operations.

Bank regulation is intended to protect depositors and consumers and not shareholders.

This supervisory framework could materially impact the conduct and profitability of our activities.

This supervisory framework could materially and adversely impact the conduct and profitability of our activities.

To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the text of the applicable statutory and regulatory provisions.

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

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

The Dodd-Frank Act also modified the standard under which state consumer financial laws may be applied to national banking associations, such as the Bank.

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

The Dodd-Frank Act also modified the standard by which state consumer financial laws may be applied to national banking associations, such as the Bank.

The application of that standard by state regulators and the courts may cause the Bank’s compliance burden and costs to increase.

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

Moreover, bank regulatory agencies appear to be increasingly aggressive in responding to concerns and trends identified in examinations, which could result in higher frequency initiation of enforcement actions against financial institutions to address credit quality, liquidity, risk management and capital adequacy, as well as other safety and soundness concerns.

Regulation of Capital Bancorp, Inc.

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Regulation of Capital Bank

against deposits, restrictions on the types, amount, and terms and conditions of loans it may originate, and limits on the types of other activities in which our Bank may engage and the investments that it may make.

The operations and investments of our Bank are subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the OCC as well as other federal banking statutes and regulations, including with respect to the level of reserves that our Bank must maintain against deposits, restrictions on the types, amount, and terms and conditions of loans it may originate, and limits on the types of other activities in which our Bank may engage and the investments that it may make.

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

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

If, as a result of an examination of our Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators.

If, as a result of an examination of our Bank, the regulators should determine that the financial condition, capital resources, asset quality,

earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators.

Such remedies include the power to enjoin unsafe or unsound practices, require affirmative action to correct any conditions resulting from any violation or practice, issue an administrative order that can be judicially enforced, direct an increase in capital, restrict growth, assess civil monetary penalties and remove officers and directors.

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Capital Adequacy Guidelines

Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal agencies See “Part II, Item 8.

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

See “Part II, Item 8.

Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14, Capital Standards” for additional regulatory capital information, including the Bank’s and Company’s Leverage Ratio as of December 31, 2022.

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An institution’s record in meeting the requirements of the CRA is based on a performance-based evaluation system, and is made publicly available and is taken into consideration in evaluating any applications it files with federal regulators to engage in certain activities, including approval of a branch or other deposit facility, mergers and acquisitions, office relocations, and expansions into non-banking activities.

Our Bank received an “outstanding” rating in its most recent CRA evaluation.

Our Bank received an “outstanding” rating in its most recent CRA evaluation which was in 2021.

In April 2018, the U.S.

Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s regulations to reduce their complexity and associated burden on banks, and in December 2019, the FDIC and the OCC proposed for public comment rules to modernize the agencies' regulations under the CRA.

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

As of this issuance, the Federal Reserve has not moved forward in the rulemaking process.

In July 2021, the Federal Reserve, FDIC, and the OCC issued an interagency statement committing to joint agency action on CRA.

This may signal that additional regulatory action on this issue will be forthcoming in 2023.

Anti-Terrorism, Money Laundering Legislation and OFAC

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These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and accounts and other relationships intended to guard against money laundering and terrorism financing.

The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering, tax evasion, or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S.

The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to decline to open accounts for those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash and suspicious activities reports for activity that might signify money laundering,

tax evasion or other criminal activities, (iv) additional precautions for accounts sought and managed for non-U.S.

persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships.

For many of these tasks, a bank must keep records to be

made available to its primary federal regulator.

For many of these tasks, a bank must keep records to be made available to its primary federal regulator.

Anti-money laundering rules and policies are developed by a bureau within the Financial Crimes Enforcement Network, but compliance by individual institutions is overseen by its primary federal regulator.

The Bank has established anti-money laundering and customer identification programs and it maintains records of cash purchases of negotiable instruments, files reports of certain cash transactions exceeding $10,000 (daily aggregate amount), and reports suspicious activity that might signify money laundering, tax evasion or other criminal activities pursuant to the Bank Secrecy Act.

The Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries, persons, non-governmental organizations, associations, and criminal networks, among others, as defined by various Executive Orders and Acts of Congress.

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

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

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

Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC.

The Bank has implemented policies and procedures to comply with the foregoing requirements.

Federal Home Loan Bank Membership

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Dividends and Share Repurchases

The ability of the Company to pay dividends on or to repurchase its common stock, and the ability of the Bank to pay dividends to the Company, may be restricted due to several factors including:

The ability of the Company to pay dividends or to repurchase its common stock, and the ability of the Bank to pay dividends to the Company, may be restricted due to several factors including:

(a) the Maryland General Corporate Law ("MGCL," in the case of the Company), (b) covenants contained in any subordinated debentures and borrowing agreements in existence now or that may exist in the future, (c) restrictions on the ability of the Bank to declare dividends under the National Bank Act and OCC regulations (in the case of the Bank), and (d) the general supervisory authority of the FRB and the OCC.

Our ability to pay dividends to our stockholders or to repurchase shares of our common stock is subject to the restrictions set forth in the MGCL.

Notification to the FRB is required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements.

Notification to the FRB is required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly and/or cumulative twelve‑month net earnings are

insufficient to fund the dividend amount, among other requirements.

Under such circumstances, we may not pay a dividend should the FRB object until such time as we receive approval from the FRB or no longer need to provide notice under applicable regulations.

In addition, prior approval of the FRB may be required in certain circumstances prior to our repurchasing shares of our common stock.

In connection with the decision regarding dividends and share repurchase programs, our Board will take into account general business conditions, our financial results, projected cash flows, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by the Bank to the Company and such other factors as deemed relevant.

We can provide no assurance that we will continue to declare dividends on a quarterly basis or otherwise or to repurchase shares of our common stock.

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

What changed 10-K

Item 1. Business