What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-15 compared with 2022-03-15 · 279 added, 278 removed, 1193 unchanged (32% of the section changed)

65 unchanged sentences

Retained earnings 182,435 144,533

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

Accumulated other comprehensive loss ( 16,751 ) ( 1,076 )

Total stockholders' equity

35 unchanged sentences

Loan processing 1,702 3,527

Other real estate expenses, net 368 69

Other real estate expenses (income), net ( 183 ) 368

Other operating 13,182 12,993

15 unchanged sentences

Net income $ 41,804 $ 39,978

Other comprehensive income (loss):

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

Other comprehensive (loss):

Unrealized loss on investment securities available for sale ( 20,912 ) ( 3,688 )

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

( 20,912 ) ( 3,841 )

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

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

Income tax benefit relating to the items above 5,237 1,048

Other comprehensive loss ( 15,675 ) ( 2,793 )

Comprehensive income $ 26,129 $ 37,185

11 unchanged sentences

Net income — — — 39,978 — 39,978

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

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

2 unchanged sentences

— — 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

2 unchanged sentences

Stock options exercised, net of shares withheld for purchase price 160,590 1 1,999 ( 765 ) — 1,235

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

Shares issued as compensation 15,905 — 223 ( 52 ) — 171

Stock-based compensation

8 unchanged sentences

For the Years Ended December 31, 2022 and 2021

(dollars in thousands) 2021 2020

(in thousands) 2022 2021

Cash flows from operating activities

3 unchanged sentences

Provision for mortgage put-back reserve, net 9 4

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

Release of off balance sheet credit risk ( 54 ) ( 40 )

Net amortization on investments 540 642

5 unchanged sentences

Director and employee compensation paid in Company stock 171 519

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

Deferred income tax expense (benefit) 1,240 ( 1,927 )

Valuation allowance on derivatives 9 ( 49 )

Amortization of debt issuance cost — 139

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

Loss on sales of foreclosed real estate, net 47 —

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

(Gain) loss on sales of foreclosed real estate, net ( 20 ) 47

Loss on disposal of premises and equipment 14 —

(Increase) decrease in valuation of loans held for sale carried at fair value — 246

Proceeds from sales of loans held for sale 308,549 1,091,746

11 unchanged sentences

For the Years Ended December 31, 2022 and 2021

(dollars in thousands) 2021 2020

(in thousands) 2022 2021

Cash flows from investing activities

2 unchanged sentences

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

Sales of restricted investments 215 8

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

Net (purchases) sales of restricted investments ( 3,864 ) 215

Net decrease in SBA-PPP loans receivable 106,122 92,733

Net increase in loans receivable ( 210,037 ) ( 210,092 )

6 unchanged sentences

Noninterest-bearing deposits ( 113,337 ) 179,091

179,091 316,782

Interest-bearing deposits 74,272 ( 34,082 )

( 34,082 ) 109,925

Federal Home Loan Bank advances, net 85,000 —

1 unchanged sentence

Dividends paid ( 3,085 ) ( 1,382 )

Repurchase of common stock — ( 3,720 )

Proceeds from exercise of stock options 1,235 967

Net cash provided by financing activities 44,085 142,640

Net increase in cash and cash equivalents 36,485 32,086

Net increase (decrease) in cash and cash equivalents ( 102,980 ) 36,485

Cash and cash equivalents, beginning of year 183,395 146,910

1 unchanged sentence

Noncash investing and financing activities:

Loans transferred to foreclosed real estate $ — $ 942

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

Change in fair value of loans held for sale

Change in unrealized losses on investments $ ( 20,912 ) $ ( 3,841 )

Value of restricted shares withheld for payment of taxes $ ( 52 ) ( 44 )

8 unchanged sentences

Note 1 - Nature of Business and Basis of Presentation

Nature of Business

Nature of operations:

Capital Bancorp, Inc.

4 unchanged sentences

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 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, the Bank’s 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.

5 unchanged sentences

All intercompany transactions have been eliminated in consolidation.

The Company reports its activities as a four business segments:

The Company reports its activities as four business segments:

commercial banking;

6 unchanged sentences

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

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

The primary reference point for the estimates is on historical experience and assumptions believed to be reasonable regarding the value of certain assets and liabilities that are not readily available from other sources.

Estimates are evaluated on an ongoing basis.

Actual results may differ from these estimates under different assumptions or conditions.

Actual results may materially differ from these estimates under different assumptions or conditions.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits with banks and federal funds sold.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from financial institutions, interest-bearing deposits with financial institutions and federal funds sold.

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

10 unchanged sentences

Any unrealized losses judged to be other than a temporary impairment will be charged to income.

Marketable equity securities

Marketable equity securities are carried at fair value with realized gains and losses included in earnings.

Premiums and discounts on investment securities are amortized or accreted using the interest method.

Changes in the fair value of equity securities are also included in earnings as gain or loss on marketable equity securities.

Loans held for sale

7 unchanged sentences

Unrealized and realized gains on loan sales are determined using the specific-identification method and are recognized through mortgage banking activity in the Consolidated Statements of Income.

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

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

Portfolio loans and the allowance for loan losses

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

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

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

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

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

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

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

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

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

For credit card loans, loan origination fees and direct loan origination costs are amortized on a straight-line basis over a 12-month period.

Capital Bancorp, Inc.

3 unchanged sentences

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

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)

Deferred Loans Deferred Loans

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

Accommodation & Food Services $ 94.5 $ 2.4 1 $ 14.7 16

Real Estate and Rental Leasing 560.2 1.3 2 5.5 10

Other Services Including Private Households 173.2 0.3 1 1.1 3

Educational Services 15.1 — — — —

Construction 263.1 — — — —

Professional, Scientific, and Technical Services 43.4 — — 1.4 3

Arts, Entertainment & Recreation 32.7 — — 0.7 2

Retail Trade 19.6 — — 0.3 1

Healthcare & Social Assistance 79.1 — — 0.9 1

Wholesale Trade 21.6 — — — —

All other (1)

340.2 — — 5.9 7

Total $ 1,642.7 $ 4.0 4 $ 30.5 43

_______________

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

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

The Company discontinues the accrual of interest at the earlier of when any portion of the principal and/or interest is 90 days past due, or when it is probable that not all principal and interest payments will be collected, and collateral is insufficient to discharge the debt in full.

Generally, interest payments on nonaccrual loans are recorded as a reduction of the principal balance.

7 unchanged sentences

Factors for charge-off that may be considered include:

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

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)

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

For credit card loans, accrued interest and assessed late fees are charged off simultaneously with the charge off of other components of amortized costs as other operating expense.

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

1 unchanged sentence

For loans that are classified as impaired, an allowance is established when the collateral value, if the loan is collateral dependent, or the discounted cash flows of the impaired loan is lower than the carrying value of that loan.

The general component covers pools of nonclassified loans and is based on historical loss experience adjusted for qualitative factors.

There may be an unallocated component of the allowance, which reflects the margin of the imprecision inherent in the underlying assumptions used in the method for estimating specific and general losses in the portfolio.

Actual loan performance may differ from those estimates.

The general component covers pools of nonclassified loans and is based on historical loss experience adjusted with qualitative factors such as:

trends in volume and terms of loans;

levels of, and trends in, delinquencies and non-accruals;

effects of any changes in lending policies, experience, ability and depth of management;

national and local economic trends and conditions;

commitments and concentrations of credit;

changes in the quality of the Company’s loan review system;

and the volume of loans with identified incomplete financial documentation.

Actual loan performance may differ materially from those estimates.

A loss is recognized as a charge to the allowance when management believes that collection of the loan is unlikely.

2 unchanged sentences

The process for determining an appropriate allowance for loan losses is based on a comprehensive, well-documented, and consistently applied analysis of the loan portfolio.

The analysis considers significant factors that affect the collectibility of the portfolio and supports the loan losses estimated by this process.

The analysis considers significant factors that affect the collectability of the portfolio and supports the loan losses estimated by this process.

It is important to recognize that the related process, methodology, and underlying assumptions require a substantial degree of judgment.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

Management believes that the allowance for loan losses is adequate;

11 unchanged sentences

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

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 accounts for leases as detailed in 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.

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.

The Company accounts for leases according to ASU 2016-02, Leases (Topic 842), and 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 package of practical expedients permitting entities to not reassess:

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

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

and 3) initial direct costs for any existing leases.

Additionally, as provided by ASU 2016-02, the Company 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.

Derivative financial instruments

1 unchanged sentence

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

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

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

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

For pipeline loans which are not pre-sold to an investor, the Company manages the interest rate risk on rate lock commitments by entering into forward sale contracts of mortgage backed securities, whereby the Company obtains the right to deliver securities to investors in the future at a specified price.

For pipeline loans which are not pre-sold to an investor, the Company endeavors to manage 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 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.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

The Company accounts for derivative instruments and hedging activities according to guidelines established in ASC 815-10, Accounting for Derivative Instruments and Hedging Activities , as amended.

The Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value.

Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income, net of deferred taxes.

Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

Fair value measurements

10 unchanged sentences

See Note 17 - Fair Value.

Bank-owned life insurance

The Company had $ 36.5 million of bank-owned life insurance at December 31, 2022 and $ 35.5 million at December 31, 2021.

The Company recognized income, which is included in other noninterest income, of $ 1.0 million and $ 506 thousand for the years ended December 31, 2022 and December 31, 2021, respectively.

The Company employs the asset and liability method of accounting for income taxes as required by ASC Topic 740, “ Income Taxes .” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse.

The Company utilizes statutory requirements for its income tax accounting, and limits risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not.

Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves.

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

Capital Bancorp, Inc.

3 unchanged sentences

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.

temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse.

Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves.

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

Earnings per share

12 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 component of other comprehensive income is unrealized losses on investment securities available for sale, net of income taxes.

Information concerning the Company's accumulated other comprehensive loss as of December 31, 2022 and 2021 are as follows:

For the Years Ended December 31,

(in thousands) 2022 2021

Unrealized losses on securities available for sale $ ( 22,416 ) $ ( 1,504 )

Deferred tax benefit 5,665 428

Total accumulated comprehensive loss $ ( 16,751 ) $ ( 1,076 )

Capital Bancorp, Inc.

3 unchanged sentences

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 (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:

In June 2016, the FASB issued guidance to change the accounting for loan losses and modify the impairment model for certain debt securities.

In October 2019, the FASB voted to delay implementation and the new standard is now effective for fiscal years beginning after December 15, 2022, including the interim periods within those fiscal years.

The Company expects the provisions of this standard to impact the Company’s consolidated financial statements, in particular, the level of the reserve for loan losses.

The Company 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.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 introduces guidance to change the accounting for loan losses and modifies the impairment model for certain debt securities.

This ASU introduced a new model known as CECL.

CECL changes the impairment model for most financial assets, and will require the use of an “expected credit loss” model for financial instruments measured at amortized cost and certain other instruments, such as off-balance sheet credit exposures, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities.

This model requires entities to estimate the lifetime expected credit loss on such instruments and record an allowance that represents the portion of the amortized cost basis that the entity does not expect to be collected, considering relevant information about historical experience, current conditions and reasonable supportable forecast.

ASU 2016-13 offers a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination.

Additionally, ASU 2016-13 also modifies certain provisions of the current other-than-temporary impairment model for AFS debt securities.

Credit losses on AFS debt securities will be restricted to the difference between the security’s amortized cost basis and its fair value.

In April 2019, the FASB issued ASU 2019-04 which elaborates on the treatment of accrued interest when measuring credit losses.

To meet disclosure requirements, we elected a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance.

ASU 2019-04 explains that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity.

In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off.

In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies.

While early adoption was permitted, the Company did not elect that option.

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.

The Company adopted this guidance on January 1, 2023 using the modified retrospective approach.

Upon adoption of this standard, the Company expects the adoption to result in a change to the Allowance for Loan Losses of less than $ 1.0 million which will be reflected in the Company’s first quarter 2023 Form 10-Q when the Company will also be subject to the amended disclosure requirements of the standard.

The Company expects the adoption of the CECL framework to also impact its off-balance sheet exposures, such as its unfunded commitments.

Upon adoption of ASU 2016-13, the company expects to make an adjustment to its reserve for unfunded commitments in an amount less than $ 1.0 million.

In addition to its allowance for loan losses and its reserve for unfunded commitments, the Company is required to record an allowance for losses on held-to-maturity debt securities with the CECL adoption.

The Company did not hold any held to maturity securities that would be impacted by ASU 2016-13 as of the adoption date.

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.

1 unchanged sentence

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

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

The amendments in the update are effective for all entities between March 12, 2020 and an extended sunset date of December 31, 2024 which was extended by ASU 2022-06 issued by FASB in December 2022.

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

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

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2022 and 2021

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.

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

In February 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures.

The ASU eliminates the accounting guidance for troubled debt restructurings by creditors and enhances disclosure requirements for certain loan re-financings and restructurings by creditors when a borrower is experiencing financial difficulty.

The amendments also add requirements to disclose current-period gross write-offs by year of origination for financing receivables.

The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Company is in the process of reviewing the enhanced modification disclosure requirements.

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

Reclassifications:

Certain reclassifications have been made to the amounts reported in prior periods to conform to the current period presentation.

The reclassifications had no effect on net income or total stockholders' equity.

Certain reclassifications have been made to amounts reported in prior periods to conform to the current period presentation.

The reclassifications had no material effect on net income or total stockholders' equity.

Note 2 - Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest bearing deposits and federal funds sold.

Cash and cash equivalents include cash and amounts due from banks, interest-bearing deposits and federal funds sold.

The Bank is required by regulations to maintain an average cash reserve balance based on a percentage of deposits;

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

however, on March 15, 2020, the Federal Reserve announced that reserve requirement ratios would be reduced to zero percent effective March 26, 2020, due to economic conditions, which eliminated the reserve requirement for all depository institutions.

The reserve requirement is still at zero percent as of December 31, 2022.

Note 3 - Investment Securities

6 unchanged sentences

December 31, 2022 and 2021

Note 3 - Investment Securities (continued)

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2022 and 2021 are summarized as follows:

3 unchanged sentences

December 31, 2022

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

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

Treasuries $ 215,486 $ — $ ( 16,037 ) $ 199,449

Municipal 10,815 — ( 2,803 ) 8,012

Corporate 5,000 — ( 400 ) 4,600

Asset-backed securities 7,970 — ( 259 ) 7,711

Mortgage-backed securities 35,626 — ( 2,917 ) 32,709

$ 185,959 $ 661 $ ( 2,165 ) $ 184,455

Total $ 274,897 $ — $ ( 22,416 ) $ 252,481

December 31, 2021

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

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

Municipal 10,825 43 ( 394 ) 10,474

Corporate 5,000 — ( 66 ) 4,934

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

Mortgage-backed securities 27,589 514 ( 197 ) 27,906

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

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:

Total $ 185,959 $ 661 $ ( 2,165 ) $ 184,455

There were no securities sold during the year ended December 31, 2022.

Proceeds from the sale of securities during the year ended December 31, 2021 were $ 66.5 million and resulted in gains of $ 694 thousand and losses of $ 541 thousand.

Information related to unrealized losses in the investment portfolio as of December 31, 2022 and 2021 is summarized as follows:

Less than 12 months 12 months or longer Total

5 unchanged sentences

Treasuries $ 82,102 $ ( 1,396 ) $ 117,347 $ ( 14,641 ) $ 199,449 $ ( 16,037 )

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

Municipal 1,452 ( 207 ) 6,560 ( 2,596 ) 8,012 ( 2,803 )

Corporate — — 4,600 ( 400 ) 4,600 ( 400 )

Asset-backed securities 6,156 ( 237 ) 1,555 ( 22 ) 7,711 ( 259 )

Mortgage-backed securities

22,067 ( 1,884 ) 10,642 ( 1,033 ) 32,709 ( 2,917 )

$ 134,503 $ ( 1,985 ) $ 7,744 $ ( 180 ) $ 142,247 $ ( 2,165 )

Total $ 111,777 $ ( 3,724 ) $ 140,704 $ ( 18,692 ) $ 252,481 $ ( 22,416 )

December 31, 2021

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

Municipal 5,750 ( 248 ) 3,019 ( 146 ) 8,769 ( 394 )

Corporate 4,448 ( 52 ) 486 ( 14 ) 4,934 ( 66 )

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

Mortgage-backed securities

14,114 ( 189 ) 2,124 ( 8 ) 16,238 ( 197 )

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

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.

Total $ 134,503 $ ( 1,985 ) $ 7,744 $ ( 180 ) $ 142,247 $ ( 2,165 )

At December 31, 2022, there were sixteen treasury securities, one asset-backed security, seven municipal securities, five corporate securities, and three mortgage-backed securities 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.

5 unchanged sentences

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

There were no pledged securities at December 31, 2022 or December 31, 2021.

Contractual maturities of U.S.

4 unchanged sentences

Value Amortized

Within one year $ 53,739 $ 53,204 $ — $ —

Over one to five years 88,165 82,538 58,602 57,650

8 unchanged sentences

Note 4 - SBA-PPP Loans

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.

During the global COVID-19 pandemic, pursuant to the CARES Act and the Consolidated Appropriations Act, 2021, the SBA-PPP provided 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 program ended on May 31, 2031.

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 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.

SBA-PPP loans receivable, which totaled $ 2.2 million, and $ 111.5 million at December 31, 2022 and 2021, respectively all of which rated as pass credits, not past due, nonaccrual, TDR, or otherwise impaired.

Earned fees for the years ended December 31, 2022 and 2021 are $ 3.2 million and $ 5.7 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.

Unearned net fees associated with the SBA-PPP loans amounted to $ 31 thousand and $ 3.2 million at December 31, 2022 and 2021, respectively.

There were no outstanding commitments to extend additional SBA-PPP loans at December 31, 2022.

4 unchanged sentences

Note 5 - Portfolio Loans Receivable

Major categories of portfolio loans are as follows:

(in thousands) 2021 2020

Major classifications of portfolio loans are as follows:

(in thousands) Amount Percent Amount Percent

Residential $ 484,735 28 % $ 401,607 26 %

1 unchanged sentence

Construction 238,099 14 255,147 17

Commercial 175,956 157,127

Commercial and Industrial 220,221 13 175,956 11

Credit card, net of reserve 128,434 7 141,120 9

Other consumer 1,179 — 1,033 —

1,531,202 1,316,276

Portfolio loans receivable, gross 1,737,219 100 % 1,531,202 100 %

Deferred origination fees, net ( 8,627 ) ( 7,220 )

2 unchanged sentences

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

metropolitan area.

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

The Company’s portfolio loan categories are described below.

and Baltimore, Maryland metropolitan areas.

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

The Company’s loan categories, excluding SBA-PPP loans, previously discussed in Note 4, are described below.

Residential Real Estate Loans .

One-to-four family mortgage loans are primarily on owner-occupied primary residences and, to a lesser extent, investor owned residences.

Residential loans are originated through the commercial sales teams and Capital Bank Home Loan division.

One-to-four family mortgage loans are primarily secured by owner-occupied primary residences and, to a lesser extent, investor-owned residences.

Residential loans are originated through the commercial sales teams and Capital Bank Home Loans division.

Residential loans also include home equity lines of credit.

6 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, 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.

As of December 31, 2022, there were approximately $ 378.7 million of owner-occupied commercial real estate loans, representing approximately 21.8 % of the commercial real estate 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 generally have initial fixed rate terms that adjust typically at five years .

Origination fees are routinely charged for services.

Personal guarantees from the principal owners of the business are generally required, supported by a review of the principal owners’ personal financial statements and global debt service obligations.

The properties securing the portfolio are generally diverse in terms and type.

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

The properties securing the portfolio are diverse in type.

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

Capital Bancorp, Inc.

7 unchanged sentences

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.

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.

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

Commercial Business Loans .

The Company frequently transitions the end purchaser to permanent financing or re-underwriting and sale 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, cannot exceed 75 % for investor-owned and 80 % for owner-occupied properties, although exceptions are sometimes made.

Semi-annual stress testing of the construction loan portfolio is conducted, and underlying real estate conditions are monitored as well as trends in sales outcomes versus underwriting valuations as part of ongoing risk management efforts.

The borrowers’ progress in construction buildout is monitored to enforce the original underwriting guidelines for construction milestones and completion timelines.

Commercial and Industrial .

In addition to other loan products, general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products are offered, primarily in target markets, and underwritten based on each borrower’s ability to service debt from income.

These loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower.

Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment, and personal guaranties from the borrower or other principal are generally obtained.

Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment.

Personal guaranties from the borrower or other principal are generally obtained.

Credit Cards .

2 unchanged sentences

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.

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

Approximately $ 109.4 million and $ 126.8 million of the $ 123.1 million and $ 140.2 million in secured and partially secured credit card balances were protected by savings deposits held by the Company as of December 31, 2022 and December 31, 2021, respectively.

Unsecured balances were $ 26.8 million and $ 17.7 million, respectively, as of December 31, 2022 and December 31, 2021, respectively.

Other Consumer Loans .

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

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

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

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

Discounts on loans that were not considered impaired at acquisition were recorded as an accretable discount, which will be recognized in interest income over the terms of the related loans.

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

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

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

For loans considered to be impaired at acquisition, the difference between the contractually required payments and expected cash flows are recorded as a non-accretable discount.

The remaining non-accretable discounts on loans acquired was $ 285 thousand as of December 31, 2022 and December 31, 2021.

Loans with non-accretable discounts had carrying values of $ 781 thousand and $ 818 thousand as of December 31, 2022 and December 31, 2021, respectively.

Capital Bancorp, Inc.

3 unchanged sentences

Note 5 - Portfolio Loans Receivable (continued)

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

(in thousands) 2021 2020

Accretable discount at beginning of period $ 221 $ 429

Accretion and payoff of loans ( 55 ) ( 208 )

Accretable discount at end of period $ 166 $ 221

The allowance for loan losses consists of specific and general components.

15 unchanged sentences

Construction 4,699 ( 900 ) ( 17 ) — 3,782 — 3,782 2,837 235,262

Commercial 2,417 253 ( 39 ) 6 2,637 218 2,419 676 175,280

Commercial and Industrial 2,637 298 — — 2,935 372 2,563 705 219,516

Credit card (1)

2 unchanged sentences

12 ( 1 ) — — 11 — 11 — 1,179

$ 23,434 $ 3,359 $ ( 1,654 ) $ 42 $ 25,181 $ 218 $ 24,963 $ 11,339 $ 1,519,863

Total $ 25,181 $ 6,631 $ ( 5,478 ) $ 51 $ 26,385 $ 372 $ 26,013 $ 9,393 $ 1,727,826

December 31, 2021

2 unchanged sentences

Construction 4,595 103 — 1 4,699 — 4,699 7,803 247,344

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

Commercial and Industrial 2,417 253 ( 39 ) 6 2,637 218 2,419 676 175,280

Credit card (1)

1 unchanged sentence

Other consumer 21 ( 9 ) — — 12 — 12 — 1,033

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

Total $ 23,434 $ 3,359 $ ( 1,654 ) $ 42 $ 25,181 $ 218 $ 24,963 $ 11,339 $ 1,519,863

_______________

16 unchanged sentences

Construction 1,804 2,837 4,641 233,458 238,099 — 2,837

Commercial 183 593 776 175,180 175,956 — 676

Commercial and Industrial 503 569 1,072 219,149 220,221 — 705

Credit card 15,928 363 16,291 112,143 128,434 363 —

Other consumer — — — 1,179 1,179 — —

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

Total $ 18,381 $ 9,616 $ 27,997 $ 1,709,222 $ 1,737,219 $ 363 $ 9,393

December 31, 2021

2 unchanged sentences

Construction — 7,803 7,803 247,344 255,147 — 7,803

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

Commercial and Industrial 183 593 776 175,180 175,956 — 676

Credit card 19,022 10 19,032 122,088 141,120 10 —

Other consumer — — — 1,033 1,033 — —

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

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

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

Impaired loans also include acquired loans for which management has recorded a non-accretable discount.

Impaired loans as of December 31, 2022 and 2021 were as follows:

10 unchanged sentences

Construction 2,939 2,837 — 2,837 — 2,938 75

Commercial 832 340 336 676 218 1,056 282

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

Commercial and Industrial 899 247 458 705 372 1,199 77

Total $ 9,961 $ 8,935 $ 458 $ 9,393 $ 372 $ 10,422 $ 353

December 31, 2021

2 unchanged sentences

Construction 7,885 7,803 — 7,803 — 9,746 209

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

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

Commercial and Industrial 832 340 336 676 218 1,056 282

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

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.

There were $ 1.3 million and $ 6 thousand, respectively, of loans secured by one to four family residential properties in the process of foreclosure as of December 31, 2022 and 2021.

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.

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 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.

18 unchanged sentences

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

The Company grades all credit cards loans as Pass.

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

(in thousands) Pass (1)

Special Mention Substandard Doubtful Total

Special Mention Substandard Doubtful Ungraded (2)

December 31, 2022

2 unchanged sentences

235,262 — 2,837 — — 238,099

Commercial 164,066 10,417 1,473 — 175,956

Commercial and Industrial 196,381 22,469 1,371 — — 220,221

Credit card — — — — 128,434 128,434

Other consumer 1,179 — — — — 1,179

Total $ 1,492,799 $ 24,523 $ 13,880 $ — $ 1,531,202

Portfolio loans receivable, gross $ 1,559,537 $ 38,012 $ 11,236 $ — $ 128,434 $ 1,737,219

December 31, 2021

2 unchanged sentences

243,848 3,496 7,803 — — 255,147

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

Commercial and Industrial 164,066 10,417 1,473 — — 175,956

Credit card — — — — 141,120 141,120

Other consumer 1,033 — — — — 1,033

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

Portfolio loans receivable, gross $ 1,351,679 $ 24,523 $ 13,880 $ — $ 141,120 $ 1,531,202

________________________

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

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

(2) Credit card loans are not individually graded.

Capital Bancorp, Inc.

5 unchanged sentences

These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after confirmation of the borrower’s sustained repayment performance for a reasonable period, generally six months.

The status of TDRs is as follows:

3 unchanged sentences

1 $ — $ 288 $ 288

Commercial 1 — 83 83

Total 1 $ — $ 288 $ 288

1 unchanged sentence

4 $ — $ 450 $ 450

Commercial 2 — 294 294

Commercial and Industrial 1 — 83 83

Total 5 $ — $ 533 $ 533

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.

At December 31, 2022 the Company had one defaulted TDR for $ 288 thousand.

In the 12 months ending December 31, 2022, four TDRs, totaling $ 215 thousand paid off.

There were no new TDRs added in 2022.

During the year ended December 31, 2021, the Company restructured 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.

Capital Bancorp, Inc.

6 unchanged sentences

Unused lines of credit

Residential $ 14,336 $ 15,747

Residential - Home Equity 43,128 37,640

Commercial 36,609 17,225

Commercial real estate 37,640 32,398

Residential real estate 17,225 20,848

Home equity 118,518 118,843

Construction 93,913 118,518

Commercial and Industrial 45,747 45,135

1 unchanged sentence

111,227 123,874

Personal 2,247 185

Other consumer 102 2,247

$ 345,062 $ 360,386

5 unchanged sentences

Lines of credit generally have variable interest rates.

Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time.

Such lines do not represent future cash requirements because it is unlikely that all customers will, at any given time, draw upon their lines in full.

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

2 unchanged sentences

The Company's maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment.

Loan commitments and lines of credit are made on the same terms, including collateral, as outstanding loans.

The Company is not aware of any accounting loss to be incurred by funding these loan commitments.

As of December 31, 2021 and 2020, respectively, the Company had an allowance for off-balance-sheet credit risk of $ 1.7 million and $ 1.8 million, recorded in other liabilities on the consolidated balance sheet.

Loan commitments and lines of credit are generally made on the same terms, including with regard to collateral, as outstanding loans.

Management is not aware of any accounting loss to be incurred by funding these loan commitments.

Capital Bancorp, Inc.

3 unchanged sentences

Note 5 - Portfolio Loans Receivable (continued)

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

Activity for this account is as follows:

The Company maintains an estimated reserve for off balance sheet items such as unfunded lines of credit, which is reflected in other liabilities, with increases or decreases in the reserve being charged to or released from operating expense.

Activity for this account is as follows for the periods presented:

(in thousands) 2022 2021

Balance at beginning of period $ 1,736 $ 1,776

Provision expense (release) ( 40 ) 550

Provision for (reversal of) off balance sheet credit commitments ( 54 ) ( 40 )

Recoveries — —

1 unchanged sentence

Balance at end of period $ 1,682 $ 1,736

The Company makes representations and warranties that loans sold to investors meet their program's guidelines and that the information provided by the borrowers is accurate and complete.

In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies, program non-compliance, early payment default, and fraud or borrower misrepresentations.

The Company maintains a reserve for potential losses on mortgage loans sold.

The Company makes representations and warranties that loans sold to investors meet the investors’ program guidelines and that the information provided by the borrowers is accurate and complete.

In the event of a default on a loan sold, the investor may have the right to make a claim for losses due to document deficiencies, program non-compliance, early payment default, and fraud or borrower misrepresentations.

The Company maintains a reserve for potential losses on mortgage loans sold, which is reflected in other liabilities, with changes being charged to or released from operating expense.

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

1 unchanged sentence

Balance at beginning of period $ 1,164 $ 1,160

Provision 4 598

Provision for mortgage loan put backs

Recoveries — —

20 unchanged sentences

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 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.

The Company leases its four full-service branches and three other locations for corporate/administration activities, operations, and loan production.

All property leases under lease agreements have been designated as operating leases.

The Company does not have leases designated as finance leases.

4 unchanged sentences

As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The weighted average discount rate used was 2.23 %.

The historical weighted average discount rate used was 1.94 % at December 31, 2022 and 2.23 % at December 31, 2021.

The operating lease ROU asset also includes any lease pre-payments.

2 unchanged sentences

The Company has lease agreements with lease and non-lease components, which the Company has elected to account for separately as the non-lease component amounts are readily determinable under most leases.

As of December 31, 2021, the Company’s lease ROU assets and related lease liabilities were $ 2.5 million and $ 2.7 million, respectively, and have remaining terms ranging from 1 - 6 years, including extension options that the Company is reasonably certain will be exercised.

As of December 31, 2022, the Company’s net lease ROU assets and related lease liabilities were $ 2.1 million and $ 2.4 million, respectively, and have remaining terms ranging from 1 - 6 years, including extension options that the Company is reasonably certain will be exercised.

As of December 31, 2022, the Company had not entered into any material leases that have not yet commenced.

17 unchanged sentences

Amounts due in:

2027 and thereafter 137

Total future lease payments 2,422

4 unchanged sentences

As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate.

The Company then either locks the loan and rate in with an investor and commits to deliver the loan if settlement occurs (Best Efforts) or commits to deliver the locked loan to an investor in a binding (Mandatory) delivery program.

The Company then either locks the loan and rate in with an investor and commits to deliver the loan if settlement occurs (Best Efforts).

Certain loans under rate lock commitments are covered under forward sales contracts.

7 unchanged sentences

Fair value of open forward delivery sales agreements 9 ( 16 )

Notional amount of open mandatory delivery commitments 2,971 15,531

Fair value of open mandatory delivery commitments 90 148

Notional amount of interest rate lock commitments 626 18,053

13 unchanged sentences

Total Interest-bearing deposits $ 1,083,759 $ 1,009,487

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.

The Company had $ 131.1 million in brokered deposits at December 31, 2022 compared to none at December 31, 2021.

Deposits securing our OpenSky ® card lines of credit and deposits from title companies represent the largest concentrations in the deposit portfolio.

As of December 31, 2022, these concentrations represent 11 % and 13 % of deposits, respectively.

As of December 31, 2021, these deposits represented 13 % and 18 % of deposits, respectively.

Certificates of deposit, as of December 31, 2022, mature as follows:

2 unchanged sentences

2027, and thereafter 804

Total $ 293,415

Note 10 - Borrowed Funds

2 unchanged sentences

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

FHLB fixed rate advance due March 20, 2023 50,000 4.42 — —

FHLB daily rate advance due September 13, 2023 35,000 4.57 — —

Total - FHLB advances $ 107,000 3.75 % $ 22,000 0.93 %

Junior subordinated debentures due June 15, 2036 $ 2,062 6.64 % $ 2,062 2.07 %

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

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

Total - Other borrowed funds $ 12,062 5.28 % $ 12,062 4.50 %

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

The FHLB fixed rate advances accrue interest on a daily basis and are 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.

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

In June 2006, the Company formed Capital Bancorp (MD) Statutory Trust I (the “Trust”) and on

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2022 and 2021

June 15, 2006, the Trust issued 2,000 floating rate capital securities (the “Capital Securities”) with an aggregate liquidation value of $ 2,000,000 to a third party in a private placement.

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

Note 10 - Borrowed Funds (continued)

21 unchanged sentences

As of December 31, 2022 and 2021, the Company had pledged loans providing borrowing capacity of $ 330.8 million and $ 205.3 million, respectively.

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.

The Company did no t have any pledged investment securities to the FHLB at December 31, 2022 or December 31, 2021.

As of December 31, 2022 and 2021, the Company had available borrowing capacity, net of advances and amounts pledged for letters of credit, from the FHLB of $ 223.8 million and $ 183.3 million, respectively.

5 unchanged sentences

As of December 31, 2022 and 2021, the Company had pledged commercial loans to the Federal Reserve Bank of Richmond to secure a borrowing capacity totaling $ 21.4 million and $ 15.9 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 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 $ 310.5 million and $ 302.1 million as of December 31, 2022 and 2021, respectively.

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

The Company had $ 131.8 million outstanding as of December 31, 2022 and zero outstanding as of December 31, 2021.

Note 11 - Retirement Plans

9 unchanged sentences

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.

In the event of a change in control, the LTIP will accelerate vesting.

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

18 unchanged sentences

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

5 unchanged sentences

Total current expense 11,190 15,825

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

Deferred tax expense (benefit) 1,240 ( 1,927 )

Total income tax expense $ 12,430 $ 13,898

9 unchanged sentences

Net operating loss carryforward — 67

Other 532 144

Deferred tax liabilities:

Unrealized gains on investment securities available for sale — 620

Accumulated depreciation 34 107

17 unchanged sentences

As of December 31, 2022, management has determined that it is more likely than not that the majority of the deferred tax asset from continuing operations will be realized.

At December 31, 2021 and 2020, a valuation allowance of $ 67 thousand and $ 123 thousand was recognized, respectively, for a State of Maryland net operating loss carryforward that may not be realizable.

At December 31, 2021, a valuation allowance of $ 67 thousand was recognized for a State of Maryland net operating loss carryforward that may not be realizable.

No such valuation allowance was recognized at December 31, 2022.

The Company does not have material uncertain tax positions and did not recognize any adjustments for unrecognized tax benefits.

The Company remains subject to examination of income tax returns for the years ending after December 31, 2018.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 14 - Capital Standards

11 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

2 unchanged sentences

Capitalized Full Phase In of Basel III

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

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio

December 31, 2022

15 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 % N/A 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 %

57 unchanged sentences

21.86 4.71 2,500 —

22.50 - 26.41

26.41 5.00 142,244 —

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

3 unchanged sentences

Total unrecognized compensation expense related to stock options to be recognized over the next five years was $ 1.2 million and $ 2.9 million at December 31, 2022 and 2021, respectively.

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 intrinsic value of stock options exercised was $ 1.9 million and $ 4.0 million during the years ended December 31, 2022 and 2021, respectively.

The weighted average fair value of options granted during 2022 and 2021 were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

3 unchanged sentences

Expected life in years 5 5

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 15 - Stock-Based Compensation (continued)

Restricted stock:

4 unchanged sentences

The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

Note 15 - Stock-Based Compensation (continued)

All restricted stock agreements are conditioned upon continued employment.

6 unchanged sentences

Vested ( 15,905 ) 14.01 ( 11,071 ) 13.38

Retired on vesting ( 4,968 ) 14.44 — —

Forfeited — — — —

30 unchanged sentences

Retained earnings 182,435 144,533

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

Accumulated other comprehensive loss ( 16,751 ) ( 1,076 )

Total stockholders’ equity

29 unchanged sentences

Undistributed net income of subsidiaries ( 29,594 ) ( 32,956 )

Decrease in receivable from Bank — 16

Stock-based compensation expense 1,662 1,347

1 unchanged sentence

Deferred income tax benefit — ( 14 )

Amortization of debt issuance costs — 139

Changes in assets and liabilities:

Accrued interest receivable ( 71 ) 83

Prepaid income taxes — 9

Other assets ( 31 ) ( 14 )

6 unchanged sentences

Capital contributions to subsidiaries ( 1,662 ) ( 1,347 )

Net cash provided by investing activities ( 10,616 ) ( 138 )

Net cash used by investing activities ( 12,981 ) ( 10,616 )

Cash flows from financing activities

Repayment of debt — ( 3,500 )

Dividends paid ( 3,085 ) ( 1,382 )

Repurchase of common stock — ( 3,720 )

Proceeds from exercise of stock options 1,235 967

Net cash provided used in financing activities ( 415 ) ( 6,298 )

Net increase (decrease) in cash and cash equivalents ( 2,147 ) 386

Net cash used by financing activities ( 1,850 ) ( 415 )

Net decrease in cash and cash equivalents ( 358 ) ( 2,147 )

Cash and cash equivalents, beginning of year 630 2,777

13 unchanged sentences

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

The fair values of the Company's securities are determined based on quoted prices for similar securities under Level 2 inputs.

The fair values of the Company's securities are determined based on quoted prices for similar securities under Level 1 or Level 2 inputs.

Loans held for sale - The fair value of loans held for sale is determined using Level 2 inputs of quoted prices for a similar asset, adjusted for specific attributes of that loan.

10 unchanged sentences

Investment securities available for sale

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

Treasuries $ 199,449 $ 199,449 $ — $ —

Asset-backed securities 7,711 — 7,711 —

2 unchanged sentences

Mortgage-backed securities 32,709 — 32,709 —

$ 184,455 $ — $ 184,455 $ —

Total $ 252,481 $ 199,449 $ 53,032 $ —

Loans held for sale $ 7,416 $ — $ 7,416 $ —

3 unchanged sentences

Investment securities available for sale

Treasuries $ 131,001 $ 131,001 $ — $ —

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

2 unchanged sentences

Mortgage-backed securities 27,906 — 27,906 —

$ 99,787 $ — $ 99,787 $ —

Total $ 184,455 $ 131,001 $ 53,454 $ —

Marketable equity securities $ 245 $ 245 $ — $ —

Loans held for sale $ 15,989 $ — $ 15,989 $ —

11 unchanged sentences

Difference $ 608 $ 1,485

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)

Fair value measurements on a nonrecurring basis

11 unchanged sentences

Level 3 Inputs 9,021 11,121

Level 2 Inputs — —

Level 3 Inputs 11,121 8,899

Total $ 9,021 $ 11,121

1 unchanged sentence

Level 3 Inputs — 86

Level 2 Inputs — —

Level 3 Inputs 86 3,326

Total $ — $ 86

47 unchanged sentences

Interest-bearing deposits at other financial institutions 39,764 39,764 136,824 136,824

136,824 136,824 126,081 126,081

Marketable equity securities — — 245 245

Federal funds sold

20,688 20,688 3,657 3,657

Restricted investments

3,743 3,743 3,958 3,958

Loans receivable, net

$ 1,704,370 $ 1,659,283 $ 1,607,086 $ 1,598,228

Restricted investments

7,362 7,362 3,498 3,498

Financial liabilities

20 unchanged sentences

Net interest income 72,937 217 64,859 2,594 — 140,607

Provision for loan losses 433 — 2,856 70 — 3,359

Provision for (reversal of) loan losses ( 980 ) — 7,611 — — 6,631

Noninterest income 2,122 5,276 21,972 2 — 29,372

1 unchanged sentence

52,552 8,450 47,647 465 — 109,114

Net income before taxes $ 20,888 $ 8,541 $ 23,219 $ 1,228 $ — $ 53,876

Net income (loss) before taxes $ 23,487 $ ( 2,957 ) $ 31,573 $ 2,131 $ — $ 54,234

Total assets $ 1,939,601 $ 7,936 $ 122,418 $ 245,399 $ ( 191,699 ) $ 2,123,655

15 unchanged sentences

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, 2022 and 2021

Note 20 - Subsequent Events

The Company has disclosed information about deposit concentrations in Note 9.

In relation to the current economic conditions, management has monitored deposit concentrations through the date the financial statements were issued, noting no significant changes to concentrations.

In addition, there has been no significant changes in the characteristics of the deposit book through the date the financial statements were issued.

The company has disclosed its investment portfolio position in Note 3.

There has been no significant changes in the composition of the investment portfolio through the date the consolidated financial statements were issued.

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