Capital Bancorp Inc 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 56 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Capital Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Capital Bancorp, Inc. and Subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Elliott Davis, PLLC We have served as the Company’s auditor since 2017. Raleigh, North Carolina March 15, 2023 Capital Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, 2022 and 2021 (dollars in thousands) 2022 2021 Assets Cash and due from banks $ 19,963 $ 42,914 Interest-bearing deposits at other financial institutions 39,764 136,824 Federal funds sold 20,688 3,657 Total cash and cash equivalents 80,415 183,395 Investment securities available for sale 252,481 184,455 Marketable equity securities — 245 Restricted investments 7,362 3,498 Loans held for sale 7,416 15,989 U.S. Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans receivable, net of deferred fees and costs 2,163 108,285 Portfolio loans receivable, net of deferred fees and costs 1,728,592 1,523,982 Less allowance for loan losses ( 26,385 ) ( 25,181 ) Total portfolio loans held for investment, net 1,702,207 1,498,801 Premises and equipment, net 3,386 3,282 Accrued interest receivable 9,489 7,901 Deferred tax asset 13,777 9,793 Foreclosed real estate — 86 Bank owned life insurance 36,524 35,506 Other assets 8,435 4,064 Total assets $ 2,123,655 $ 2,055,300 Liabilities Deposits Noninterest-bearing $ 674,313 $ 787,650 Interest-bearing 1,083,759 1,009,487 Total deposits 1,758,072 1,797,137 Federal Home Loan Bank advances 107,000 22,000 Other borrowed funds 12,062 12,062 Accrued interest payable 1,031 473 Other liabilities 21,475 25,725 Total liabilities 1,899,640 1,857,397 Stockholders' equity Common stock, $ .01 par value; 49,000,000 shares authorized; 14,138,829 and 13,962,334 issued and outstanding 141 140 Additional paid-in capital 58,190 54,306 Retained earnings 182,435 144,533 Accumulated other comprehensive loss ( 16,751 ) ( 1,076 ) Total stockholders' equity 224,015 197,903 Total liabilities and stockholders' equity $ 2,123,655 $ 2,055,300 See Notes to Consolidated Financial Statements 58 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Income For the Years Ended December 31, 2022 and 2021 (dollars in thousands except per share data) 2022 2021 Interest income Loans, including fees $ 144,408 $ 120,784 Investment securities available for sale 3,912 2,010 Federal funds sold and other 2,326 449 Total interest income 150,646 123,243 Interest expense Deposits 7,611 5,808 Borrowed funds 2,428 742 Total interest expense 10,039 6,550 Net interest income 140,607 116,693 Provision for loan losses 6,631 3,359 Net interest income after provision for loan losses 133,976 113,334 Noninterest income Service charges on deposits 767 609 Credit card fees 21,972 27,884 Mortgage banking revenue 4,866 20,843 Gain on sale of investment securities available for sale, net — 153 Other income 1,767 1,147 Total noninterest income 29,372 50,636 Noninterest expenses Salaries and employee benefits 42,898 37,843 Occupancy and equipment 4,865 4,327 Professional fees 11,012 6,996 Data processing 29,418 39,237 Advertising 6,220 4,803 Loan processing 1,702 3,527 Other real estate expenses (income), net ( 183 ) 368 Other operating 13,182 12,993 Total noninterest expenses 109,114 110,094 Income before income taxes 54,234 53,876 Income tax expense 12,430 13,898 Net income $ 41,804 $ 39,978 Basic earnings per share $ 2.98 $ 2.90 Diluted earnings per share $ 2.91 $ 2.84 Weighted average common shares outstanding: Basic 14,024,598 13,798,620 Diluted 14,362,203 14,081,403 See Notes to Consolidated Financial Statements 59 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2022 and 2021 (in thousands) 2022 2021 Net income $ 41,804 $ 39,978 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 relating to the items above 5,237 1,048 Other comprehensive loss ( 15,675 ) ( 2,793 ) Comprehensive income $ 26,129 $ 37,185 See Notes to Consolidated Financial Statements 60 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity For the Years Ended December 31, 2022 and 2021 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (dollars in thousands, except per share data) Shares Amount Balance, December 31, 2020 13,753,529 $ 138 $ 50,602 $ 106,854 $ 1,717 $ 159,311 Net income — — — 39,978 — 39,978 Unrealized loss on investment securities available for sale, net of income taxes — — — — ( 2,793 ) ( 2,793 ) Stock options exercised, net of shares withheld for purchase price 186,461 2 1,838 ( 873 ) — 967 Shares issued as compensation 22,344 — 519 ( 44 ) — 475 Stock-based compensation — — 1,347 — — 1,347 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 Net income — — — 41,804 — 41,804 Unrealized loss on investment securities available for sale, net of income taxes — — — — ( 15,675 ) ( 15,675 ) Stock options exercised, net of shares withheld for purchase price 160,590 1 1,999 ( 765 ) — 1,235 Shares issued as compensation 15,905 — 223 ( 52 ) — 171 Stock-based compensation — — 1,662 — — 1,662 Cash dividends to stockholders ($ 0.22 per share) — — — ( 3,085 ) — ( 3,085 ) Balance, December 31, 2022 14,138,829 $ 141 $ 58,190 $ 182,435 $ ( 16,751 ) $ 224,015 See Notes to Consolidated Financial Statements 61 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2022 and 2021 (in thousands) 2022 2021 Cash flows from operating activities Net income $ 41,804 $ 39,978 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 6,631 3,359 Provision for mortgage put-back reserve, net 9 4 Release of off balance sheet credit risk ( 54 ) ( 40 ) Net amortization on investments 540 642 Premises and equipment depreciation 364 561 Lease asset amortization 1,068 645 Increase in cash surrender value of BOLI ( 1,018 ) ( 506 ) Executive long term incentive plan expense 582 1,344 Stock-based compensation expense 1,662 1,347 Director and employee compensation paid in Company stock 171 519 Deferred income tax expense (benefit) 1,240 ( 1,927 ) Valuation allowance on derivatives 9 ( 49 ) Gain on sale of securities available for sale — ( 153 ) (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 Originations of loans held for sale ( 299,976 ) ( 1,000,827 ) Changes in assets and liabilities: Accrued interest receivable ( 1,588 ) 233 Other assets ( 4,382 ) ( 1,222 ) Accrued interest payable 558 ( 661 ) Other liabilities ( 4,773 ) ( 3,210 ) Net cash provided by operating activities 51,390 132,076 See Notes to Consolidated Financial Statements 62 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2022 and 2021 (in thousands) 2022 2021 Cash flows from investing activities Purchases of securities available for sale ( 113,078 ) ( 169,672 ) Proceeds from maturities, calls and principal paydowns of securities available for sale 23,846 13,882 Proceeds from sale of securities available for sale — 66,534 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 ) Net purchases of premises and equipment ( 1,550 ) ( 24 ) Proceeds from sales of foreclosed real estate 106 3,193 Purchase of Bank owned life insurance — ( 35,000 ) Net cash used in investing activities ( 198,455 ) ( 238,231 ) Cash flows from financing activities Net increase (decrease) in: Noninterest-bearing deposits ( 113,337 ) 179,091 Interest-bearing deposits 74,272 ( 34,082 ) Federal Home Loan Bank advances, net 85,000 — Other borrowed funds — ( 1,954 ) Dividends paid ( 3,085 ) ( 1,382 ) Proceeds from exercise of stock options 1,235 967 Net cash provided by financing activities 44,085 142,640 Net increase (decrease) in cash and cash equivalents ( 102,980 ) 36,485 Cash and cash equivalents, beginning of year 183,395 146,910 Cash and cash equivalents, end of year $ 80,415 $ 183,395 Noncash investing and financing activities: Change in unrealized losses on investments $ ( 20,912 ) $ ( 3,841 ) Value of restricted shares withheld for payment of taxes $ ( 52 ) ( 44 ) Cash paid during the period for: Taxes $ 11,730 $ 15,920 Interest $ 9,481 $ 7,211 See Notes to Consolidated Financial Statements 63 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 1 - Nature of Business and Basis of Presentation Nature of operations: Capital Bancorp, Inc. is a Maryland corporation and bank holding company (the “Company”) for Capital Bank, N.A. (the “Bank”). The Company's primary operations are conducted by the Bank, which operates branches in Rockville and Columbia, Maryland; Reston, Virginia; and the District of Columbia. The Bank is principally engaged in the business of investing in commercial, real estate, and credit card loans and attracting deposits. 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. area investors and developers that may not meet all Bank credit criteria. In addition, the Company owns all of the stock of Capital Bancorp (MD) Statutory Trust I (the “Trust”). The Trust is a special purpose non-consolidated entity organized for the sole purpose of issuing trust preferred securities. Basis of presentation: The accompanying consolidated financial statements include the activity of the Company and its wholly-owned subsidiaries, the Bank and Church Street Capital. All intercompany transactions have been eliminated in consolidation. The Company reports its activities as four business segments: commercial banking; mortgage lending; credit cards; and corporate activities. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry. Significant accounting policies: The preparation of consolidated financial statements in accordance with GAAP requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The 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 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 financial institutions, interest-bearing deposits with financial institutions and federal funds sold. Generally, federal funds are sold for one-day periods. 64 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) Investment securities Investment securities are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders’ equity on an after-tax basis. Premiums and discounts on investment securities are amortized or accreted using the interest method. Changes in the fair value of debt securities available for sale are included in stockholder’s equity as unrealized gains and losses, net of the related tax effect. Unrealized losses are periodically reviewed to determine whether the loss represents an other than temporary impairment. Any unrealized losses judged to be other than a temporary impairment will be charged to income. 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 Mortgage loans originated and intended for sale are recorded at fair value, determined individually, as of the balance sheet date. Fair value is determined based on outstanding investor commitments, or in the absence of such commitments, based on current investor yield requirements. Gains and losses on loan sales are determined by the specific-identification method. The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing. Interest on loans held for sale is credited to income based on the principal amounts outstanding. Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third‑party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third‑party investors to put the mortgage loans back to the Company. Unrealized and realized gains on loan sales are determined using the specific-identification method and are recognized through mortgage banking activity in the Consolidated Statements of Income. The Company 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 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. For credit card loans, loan origination fees and direct loan origination costs are amortized on a straight-line basis over a 12-month period. 65 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 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. Loans are considered impaired when, based on current information, management believes the Company will not collect all principal and interest payments according to contractual terms. Generally, loans are reviewed for impairment when the risk grade for a loan is downgraded to a classified asset category. The loans are evaluated for appropriate classification, accrual, impairment, and troubled debt restructure status. If collection of principal is evaluated as doubtful, all payments are applied to principal. A modification of a loan is considered a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company may consider interest rate reductions, changes to payment terms, extensions of maturities and/or principal reductions. Loans are generally charged-off in part or in full when management determines the loan to be uncollectible. Factors for charge-off that may be considered include: repayments deemed to be 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. The allowance consists of specific and general components. For loans that are classified as impaired, an allowance is established when the collateral value, if the loan is collateral dependent, or the discounted cash flows of the impaired loan is lower than the carrying value of that loan. The general component covers pools of nonclassified loans and is based on historical loss experience adjusted 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. Collections of loans previously charged off are added to the allowance at the time of recovery. The components of the allowance for loan losses represent an estimation done pursuant to Accounting Standards Codification (“ASC”) Topic 450, “Contingencies,” or ASC Topic 310, “Receivables.” Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred. The process for determining an appropriate allowance for loan losses is based on a comprehensive, well-documented, and consistently applied analysis of the loan portfolio. 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. 66 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; however, determination of the allowance is inherently subjective and requires significant estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. In addition, various banking agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank’s loan portfolio and allowance for loan losses. Such review may result in recognition of additions to the allowance based on their evaluation of information available to them at the time of their examination. The review of the adequacy of the allowance for loan losses includes an assessment of the fair value adjustment for acquired loans in accordance with generally accepted accounting principles. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related property, generally over two to seven years . Leasehold improvements are amortized over the estimated term of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is less. The costs of major renewals and improvements are capitalized with the corresponding costs associated with amortization or depreciation included as a component of occupancy and equipment expenses. Expenditures for maintenance, repairs, and minor replacements are charged to noninterest expenses as incurred. Leases 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 The Company enters into commitments to fund residential mortgage loans (interest rate locks) with the intention of selling them in the secondary market. The Company also enters into forward sales agreements for certain funded loans and loan commitments. 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 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. 67 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 Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value estimates, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines Level 1 valuations as those based on quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 valuations include inputs based on quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 valuations are based on at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed. Financial assets that are recorded at fair value on a recurring basis include investment securities available for sale, loans held for sale, and derivative financial instruments. Financial liabilities that are recorded at fair value on a recurring basis are comprised of derivative financial instruments. See 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. Income taxes The Company employs the asset and liability method of accounting for income taxes as required by ASC Topic 740, “ Income Taxes .” Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and limits risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are necessary for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves. In accordance with ASC Topic 740, the Company may establish a valuation allowance against deferred tax assets in those cases where realization is less than certain. 68 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) Earnings per share Earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options and restricted stock using the treasury stock method. At December 31, 2022 and 2021, there were 139,921 and 1,129 stock options, respectively, that were not included in the calculation as their effect would have been anti-dilutive. The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per common share: For the Years Ended December 31, 2022 2021 (dollars in thousands) Income Weighted Average Shares Per Share Amount Income Weighted Average Shares Per Share Amount Basic EPS Net income available to common stockholders $ 41,804 14,024,598 $ 2.98 $ 39,978 13,798,620 $ 2.90 Effect of dilutive securities — 337,605 — 282,783 Dilutive EPS per common share $ 41,804 14,362,203 $ 2.91 $ 39,978 14,081,403 $ 2.84 Comprehensive income The Company reports as comprehensive income all changes in stockholders' equity during the year from sources other than stockholders. Other comprehensive income refers to all components (income, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company's only 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 ) 69 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) Recently issued accounting pronouncements: 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. 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. The new standard is a result of London Interbank Offered Rate (“LIBOR”) likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and 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 70 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 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 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 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; 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 The investment securities portfolio consists primarily of U.S. government sponsored entity securities, asset-backed securities, securities issued by states, counties and municipalities, corporate bonds and mortgage-backed securities (“MBS”). The asset-backed securities are comprised of student loan collateral issued by the Federal Family Education Loan Program (“FFELP”) which includes a minimum of a 97% government repayment guarantee, as well as additional support in excess of the government guaranteed portion. 71 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 The amortized cost and estimated fair value of investment securities available for sale at December 31, 2022 and 2021 are summarized as follows: Amortized Cost Unrealized Gains Unrealized Losses Fair Value (in thousands) December 31, 2022 U.S. 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 Total $ 274,897 $ — $ ( 22,416 ) $ 252,481 December 31, 2021 U.S. 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 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 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) December 31, 2022 U.S. Treasuries $ 82,102 $ ( 1,396 ) $ 117,347 $ ( 14,641 ) $ 199,449 $ ( 16,037 ) 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 ) Total $ 111,777 $ ( 3,724 ) $ 140,704 $ ( 18,692 ) $ 252,481 $ ( 22,416 ) December 31, 2021 U.S. 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 ) 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. Management has the ability and the intent to hold these investment securities until maturity or until they recover in value. 72 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 3 - Investment Securities (continued) There were no pledged securities at December 31, 2022 or December 31, 2021. Contractual maturities of U.S. government-sponsored agencies, asset-backed, municipal, corporate and mortgage-backed securities at December 31, 2022 and 2021 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For the Years Ended December 31, 2022 2021 (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 53,739 $ 53,204 $ — $ — Over one to five years 88,165 82,538 58,602 57,650 Over five to ten years 79,090 68,805 78,850 78,285 Over ten years 10,307 7,514 10,825 10,474 Asset-backed securities (1) 7,970 7,711 10,093 10,140 Mortgage-backed securities (1) 35,626 32,709 27,589 27,906 $ 274,897 $ 252,481 $ 185,959 $ 184,455 (1) Mortgage-backed and Asset-backed securities are due in monthly installments. Note 4 - SBA-PPP Loans 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 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. 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 $ 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. 73 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable Major classifications of portfolio loans are as follows: December 31, 2022 2021 (in thousands) Amount Percent Amount Percent Real estate: Residential $ 484,735 28 % $ 401,607 26 % Commercial 664,551 38 556,339 36 Construction 238,099 14 255,147 17 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 — Portfolio loans receivable, gross 1,737,219 100 % 1,531,202 100 % Deferred origination fees, net ( 8,627 ) ( 7,220 ) Allowance for loan losses ( 26,385 ) ( 25,181 ) Portfolio loans receivable, net $ 1,702,207 $ 1,498,801 The Company makes loans to customers located primarily in the Washington, D.C. 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 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. Owner-occupied residential real estate loans usually have fixed rates for five or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years. Investor residential real estate loans are generally based on 25 -year terms with a balloon payment due after five years . Generally, the required minimum debt service coverage ratio is 1.15 . Commercial Real Estate Loans . Commercial real estate loans are originated on owner-occupied and non-owner-occupied properties. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. Commercial loans that are secured by owner-occupied commercial real estate and primarily collateralized by operating cash flows are also included in this category of loans. As of December 31, 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 diverse in type. This diversity may help reduce the exposure to adverse economic events that affect any single industry. 74 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) Construction Loans . Construction loans are offered within the Company’s Washington, D.C. and Baltimore, Maryland metropolitan operating areas to builders primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals. Construction loans typically have terms of 12 to 18 months. The Company 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. Personal guaranties from the borrower or other principal are generally obtained. Credit Cards . Through the OpenSky ® credit card division, the Company offers secured, partially secured, and unsecured credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores through a fully digital and mobile platform. The secured lines of credit are secured by a noninterest-bearing demand account at the Bank in an amount equal to the full credit limit of the credit card. For the partially secured lines of credit, the Bank offers certain customers an unsecured line in excess of their secured line of credit by using a proprietary scoring model, which considers credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis). Partially secured and unsecured credit cards are only extended to existing 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. 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 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. 75 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors. The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans as of December 31, 2022 and 2021. (in thousands) Provision for Loan Losses Allowance for Loan Losses Ending Balance Evaluated for Impairment: Outstanding Loan Balances Evaluated for Impairment: December 31, 2022 Beginning Balance Charge-Offs Recoveries Ending Balance Individually Collectively Individually Collectively Real estate: Residential $ 5,612 $ ( 131 ) $ — $ — $ 5,481 $ — $ 5,481 $ 4,288 $ 480,447 Commercial 8,566 ( 468 ) — — 8,098 — 8,098 1,563 662,988 Construction 4,699 ( 900 ) ( 17 ) — 3,782 — 3,782 2,837 235,262 Commercial and Industrial 2,637 298 — — 2,935 372 2,563 705 219,516 Credit card (1) 3,655 7,833 ( 5,461 ) 51 6,078 — 6,078 — 128,434 Other consumer 12 ( 1 ) — — 11 — 11 — 1,179 Total $ 25,181 $ 6,631 $ ( 5,478 ) $ 51 $ 26,385 $ 372 $ 26,013 $ 9,393 $ 1,727,826 December 31, 2021 Real estate: Residential $ 7,153 $ ( 1,541 ) $ — $ — $ 5,612 $ — $ 5,612 $ 2,835 $ 398,772 Commercial 6,786 1,941 ( 161 ) — 8,566 — 8,566 25 556,314 Construction 4,595 103 — 1 4,699 — 4,699 7,803 247,344 Commercial and Industrial 2,417 253 ( 39 ) 6 2,637 218 2,419 676 175,280 Credit card (1) 2,462 2,612 ( 1,454 ) 35 3,655 — 3,655 — 141,120 Other consumer 21 ( 9 ) — — 12 — 12 — 1,033 Total $ 23,434 $ 3,359 $ ( 1,654 ) $ 42 $ 25,181 $ 218 $ 24,963 $ 11,339 $ 1,519,863 _______________ (1) Credit cards loans are collectively evaluated by past due status and as such are not individually risk rated. 76 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) Past due portfolio loans, segregated by delinquency and class of loans, as of December 31, 2022 and 2021 were as follows: Loans 30-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or More days Past Due Nonaccrual Loans (in thousands) December 31, 2022 Real estate: Residential $ 146 $ 4,284 $ 4,430 $ 480,305 $ 484,735 $ — $ 4,288 Commercial — 1,563 1,563 662,988 664,551 — 1,563 Construction 1,804 2,837 4,641 233,458 238,099 — 2,837 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 — — Total $ 18,381 $ 9,616 $ 27,997 $ 1,709,222 $ 1,737,219 $ 363 $ 9,393 December 31, 2021 Real estate: Residential $ 469 $ 2,494 $ 2,963 $ 398,644 $ 401,607 $ 72 $ 2,835 Commercial 367 25 392 555,947 556,339 — 25 Construction — 7,803 7,803 247,344 255,147 — 7,803 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 — — 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: Unpaid Contractual Principal Balance Recorded Investment with no Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance Average Recorded Investment Interest Recognized (in thousands) December 31, 2022 Real estate: Residential $ 4,476 $ 4,288 $ — $ 4,288 $ — $ 4,629 $ 149 Commercial 1,647 1,563 — 1,563 — 1,656 52 Construction 2,939 2,837 — 2,837 — 2,938 75 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 Real estate: Residential $ 3,022 $ 2,835 $ — $ 2,835 $ — $ 4,578 $ 345 Commercial 90 25 — 25 — 90 82 Construction 7,885 7,803 — 7,803 — 9,746 209 Commercial and Industrial 832 340 336 676 218 1,056 282 Total $ 11,829 $ 11,003 $ 336 $ 11,339 $ 218 $ 15,470 $ 918 77 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) 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 general economic conditions in the Company’s market. The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of loans characterized as classified is as follows: Special Mention A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers. Substandard A substandard loan is inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Company management. Doubtful A doubtful loan has all the weaknesses associated with a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 78 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) The following table presents the balances of classified loans based on the risk grade. Classified loans include Special Mention, Substandard, and Doubtful loans: (in thousands) Pass (1) Special Mention Substandard Doubtful Ungraded (2) Total December 31, 2022 Real estate: Residential $ 469,304 $ 9,966 $ 5,465 $ — $ — $ 484,735 Commercial 657,411 5,577 1,563 — — 664,551 Construction 235,262 — 2,837 — — 238,099 Commercial and Industrial 196,381 22,469 1,371 — — 220,221 Credit card — — — — 128,434 128,434 Other consumer 1,179 — — — — 1,179 Portfolio loans receivable, gross $ 1,559,537 $ 38,012 $ 11,236 $ — $ 128,434 $ 1,737,219 December 31, 2021 Real estate: Residential $ 394,488 $ 2,540 $ 4,579 $ — $ — $ 401,607 Commercial 548,244 8,070 25 — — 556,339 Construction 243,848 3,496 7,803 — — 255,147 Commercial and Industrial 164,066 10,417 1,473 — — 175,956 Credit card — — — — 141,120 141,120 Other consumer 1,033 — — — — 1,033 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. (2) Credit card loans are not individually graded. 79 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) Impaired loans also include certain loans that have been modified in troubled debt restructurings (“TDRs”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after confirmation of the borrower’s sustained repayment performance for a reasonable period, generally six months. The status of TDRs is as follows: Number of Contracts Recorded Investment (dollars in thousands) Performing Nonperforming Total December 31, 2022 Real estate: Residential 1 $ — $ 288 $ 288 Total 1 $ — $ 288 $ 288 December 31, 2021 Real estate: Residential 4 $ — $ 450 $ 450 Commercial and Industrial 1 — 83 83 Total 5 $ — $ 533 $ 533 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. 80 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) Outstanding loan commitments were as follows: December 31, (in thousands) 2022 2021 Unused lines of credit Real Estate: Residential $ 14,336 $ 15,747 Residential - Home Equity 43,128 37,640 Commercial 36,609 17,225 Construction 93,913 118,518 Commercial and Industrial 45,747 45,135 Credit card (1) 111,227 123,874 Other consumer 102 2,247 $ 345,062 $ 360,386 Commitments to originate residential loans held for sale $ — $ 1,385 Letters of credit $ 5,105 $ 5,105 _______________ (1) Outstanding loan commitments in the credit card portfolio include $ 106.9 million and $ 121.7 million in secured balances as of December 31, 2022 and 2021, respectively. Lines of credit are agreements to lend to a customer as long as there is no violation of any condition of the contract. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will, 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. Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The Company's maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments and lines of credit are 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. 81 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 5 - Portfolio Loans Receivable (continued) 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 for (reversal of) off balance sheet credit commitments ( 54 ) ( 40 ) Add: Recoveries — — Less: Charge-offs — — Balance at end of period $ 1,682 $ 1,736 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: (in thousands) 2022 2021 Balance at beginning of period $ 1,164 $ 1,160 Provision for mortgage loan put backs 9 4 Add: Recoveries — — Less: Charge-offs — — Balance at end of period $ 1,173 $ 1,164 Note 6 - Premises and Equipment Premises and equipment and the related depreciation and amortization consist of the following: (in thousands) 2022 2021 Leasehold improvements $ 1,683 $ 1,718 Furniture and equipment 4,775 4,657 Vehicle 54 54 Software 2,517 2,518 Construction in progress 694 — 9,723 8,947 Less: Accumulated depreciation and amortization ( 8,434 ) ( 8,131 ) Premises and equipment 1,289 816 Net lease asset 2,097 2,466 Premises and equipment, net $ 3,386 $ 3,282 Depreciation and amortization expense $ 364 $ 561 82 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 7 - Leases 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. 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. The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets are included in premises and equipment, and operating lease liabilities are included as other liabilities in the consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The 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. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which the Company has elected to account for separately as the non-lease component amounts are readily determinable under most leases. As of December 31, 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. The Company’s lease information is summarized as follows: (in thousands) 2022 2021 Lease Right-of-Use Asset Lease asset $ 5,171 $ 5,364 Less: Accumulated amortization ( 3,074 ) ( 2,898 ) Net lease asset $ 2,097 $ 2,466 Lease Liability Lease liability $ 5,327 $ 5,535 Less: Accumulated amortization ( 2,968 ) ( 2,800 ) Net lease liability $ 2,359 $ 2,735 83 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 7 - Leases (continued) Future minimum payments for operating leases with initial or remaining terms of one year or more are as follows at December 31, 2022: (in thousands) 2022 Amounts due in: 2023 $ 1,056 2024 715 2025 259 2026 255 2027 and thereafter 137 Total future lease payments 2,422 Discount of cash flows ( 63 ) Present value of net future lease payments $ 2,359 Operating lease and rent expense were $ 1.3 million and $ 1.2 million for the years ended December 31, 2022 and 2021, respectively. Note 8 - Derivative Financial Instruments As part of its mortgage banking activities, the Company enters into interest rate lock commitments, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Company then either locks the loan and rate in with an investor and commits to deliver the loan if settlement occurs (Best Efforts). Certain loans under rate lock commitments are covered under forward sales contracts. Forward sales contracts are recorded at fair value with changes in fair value recorded in mortgage banking revenue. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best-efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and takes into consideration the probability that the rate lock commitments will close or will be funded. The following table reports the commitment and fair value amounts on the outstanding derivatives: (in thousands) December 31, 2022 December 31, 2021 Notional amount of open forward sales agreements $ 1,750 $ 22,500 Fair value of open forward delivery sales agreements 9 ( 16 ) Notional amount of interest rate lock commitments 626 18,053 Fair value of interest rate lock commitments 1 34 84 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 9 - Interest-Bearing Deposits Major categories of interest-bearing deposits are as follows: (in thousands) 2022 2021 Interest-bearing demand accounts $ 207,836 $ 330,924 Money market accounts 574,978 493,919 Savings 7,530 6,994 Certificates of deposit of $250,000 or more 96,291 108,827 Other time deposits 197,124 68,823 Total Interest-bearing deposits $ 1,083,759 $ 1,009,487 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: (in thousands) 2023 $ 181,455 2024 59,140 2025 51,339 2026 677 2027, and thereafter 804 Total $ 293,415 Note 10 - Borrowed Funds As of December 31, 2022 and 2021, the Company was indebted as follows: 2022 2021 (dollars in thousands) Balance Interest Balance Interest 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 Total - Other borrowed funds $ 12,062 5.28 % $ 12,062 4.50 % 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 85 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 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) The proceeds of the issuance of the Capital Securities and trust common securities were invested in the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Floating Rate Debentures”). The Floating Rate Debentures for the Trust will mature on June 15, 2036, which may be shortened if certain conditions are met (including the Company having received prior approval of the Board of Governors of the Federal Reserve System and any other required regulatory approvals). These Floating Rate Debentures, which are the only assets of the Trust, are subordinate and junior in right of payment to all present and future senior indebtedness (as defined in the Indenture dated June 15, 2006) of the Company. The Floating Rate Debentures for the Trust accrue interest at a floating rate equal to the three-month LIBOR plus 1.89 %, payable quarterly. As of December 31, 2022 and 2021, the rate for the Trust was 6.64 % and 2.07 %, respectively. The quarterly distributions on the Capital Securities will be paid at the same rate that interest is paid on the Floating Rate Debentures. The Company has fully and unconditionally guaranteed the Trust’s obligation under the Capital Securities. The Trust must redeem the Capital Securities when the Floating Rate Debentures are paid at maturity or upon any earlier prepayment of the Floating Rate Debentures. The Floating Rate Debentures may be prepaid if certain events occur, including a change in the tax status or regulatory capital treatment of the Capital Securities, or a change in existing laws that requires the Trust to register as an investment company. The junior subordinated debentures are treated as Tier 1 capital by the Company, to a limited extent, by the Federal Reserve. Other subordinated notes On November 30, 2020, the Company issued $ 10.0 million of subordinated notes. The notes mature on November 30, 2030 and are redeemable in whole or part on November 30, 2025. The notes bear interest at a fixed annual rate of 5.00 % for the first five years , then adjust quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be the three-month SOFR, plus 490 basis points. There were related debt issuance costs incurred totaling $ 50,000 which were fully expensed at the time of issuance. The Company used the proceeds from the offering to redeem the outstanding $ 13.5 million, 6.95 % fixed-to-floating rate subordinated notes issued in November 2015 and called on December 1, 2020. Available lines of credit The Company has available lines of credit of $ 76.0 million with other correspondent banks. There were no outstanding line of credit balances at December 31, 2022 and December 31, 2021. The Company may borrow up to 25 % of its assets from the FHLB, based on collateral available to pledge to secure the borrowings. Borrowings from the FHLB are secured by a portion of the Company’s loan and/or investment portfolio. As of December 31, 2022 and 2021, the Company had pledged loans providing borrowing capacity of $ 330.8 million and $ 205.3 million, respectively. 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. 86 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 10 - Borrowed Funds (continued) 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 were 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. The Company had $ 131.8 million outstanding as of December 31, 2022 and zero outstanding as of December 31, 2021. Note 11 - Retirement Plans The Company provides a defined contribution plan qualifying under Section 401(k) of the Internal Revenue Code to eligible employees. The Company contributes 3 % of eligible compensation on behalf of all full‑time employees up to limits prescribed by the Internal Revenue Code. The Company’s contribution to the plan was $ 850 thousand in 2022 and $ 398 thousand in 2021. The Bank adopted a Long-Term Incentive Plan (“LTIP”) for executive management members in 2021. The LTIP is in the form of a nonqualified deferred compensation plan and complies with IRC Section 409A as well as related guidance and regulations. The LTIP was introduced in order to align long-term interests of the Bank with the Bank’s key executive management members. Under the LTIP, the CEO is eligible to earn an annual contribution of 20 percent of salary for achieving targeted performance levels while other executive management members are eligible to earn an annual contribution of 15 percent of salary for achieving targeted performance levels. The Compensation Committee may award more for overachievement of the targets, and all targets are set for participants at the beginning of a fiscal year. All participants are subject to the following vesting schedule for any earnings (or losses) on the investment of the contribution: 100 percent vesting following completion of either (i) ten years of service by the applicable executive from the later of the effective date of the LTIP or the executive’s hire date or (ii) ten years of continuous, full-time employment with the Bank by the applicable executive (to include continuous employment prior to the effective date of the LTIP) and retirement, which is defined in the LTIP as the later of a participant’s separation from service or the executive attaining 67 years of age. 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. Note 12 - Related-Party Transactions Certain executive officers and directors of the Company and Bank, and companies with which they are affiliated, are clients of and have banking transactions with the Company in the ordinary course of business. These transactions are conducted on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Company. Activity in related-party loans during 2022 and 2021 is shown below: (in thousands) 2022 2021 Balance at beginning of year $ 32,524 $ 19,275 Add: New loans 18,326 15,717 Less: Amounts collected ( 14,545 ) ( 2,468 ) Balance at end of year $ 36,305 $ 32,524 87 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 12 - Related-Party Transactions (continued) Deposits from officers and directors and their related interests were $ 92.0 million at December 31, 2022, and $ 113.8 million at December 31, 2021. A director of the Company owns an interest in an entity from which the Company leases space for one of its Rockville, Maryland locations. Payments made in accordance with the lease were $ 82 thousand and $ 79 thousand in 2022 and 2021, respectively. Company directors, or their related interests, held $ 2.5 million of the subordinated notes outstanding as of December 31, 2022. These notes hold a fixed rate of interest until November 30, 2025, after which it converts to variable rate. Note 13 - Income Taxes The components of income tax expense were as follows: For the Years Ended December 31, (in thousands) 2022 2021 Current: Federal $ 9,906 $ 12,990 State 1,284 2,835 Total current expense 11,190 15,825 Deferred tax expense (benefit) 1,240 ( 1,927 ) Total income tax expense $ 12,430 $ 13,898 The components of the net deferred tax asset at December 31, 2022 and 2021 were: (in thousands) 2022 2021 Deferred tax assets: Allowance for loan and credit losses $ 7,073 $ 6,674 Reserve for recourse on mortgage loans sold 297 364 Deferred loan fees - PPP 8 1,076 Stock-based compensation 257 320 Long-term incentive program 428 507 Unrealized loss on investment securities available for sale 5,665 428 Net operating loss carryforward — 67 Other 85 532 13,813 9,968 Deferred tax liabilities: Accumulated depreciation 34 107 Other 2 1 36 108 Net deferred tax asset before valuation allowance 13,777 9,860 Less: Valuation allowance — 67 Net deferred tax asset $ 13,777 $ 9,793 88 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 13 - Income Taxes (continued) The differences between the federal income tax rate and the effective tax rate for the Company are reconciled as follows: 2022 2021 Statutory federal income tax rate 21.00 % 21.00 % Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 2.58 3.97 Nondeductible expenses 0.56 0.44 Tax exempt income ( 0.41 ) ( 0.20 ) Other ( 0.78 ) 0.59 Effective Tax Rate 22.95 % 25.80 % Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the net deferred tax assets to net realizable value. As of December 31, 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, 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. 89 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 14 - Capital Standards The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can precipitate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established and defined by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 2022 and 2021, the capital levels of the Company and the Bank exceeded all applicable capital adequacy requirements. As of December 31, 2022 the most recent notification from the OCC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table. There have been no conditions or events since that notification that management believes have changed the Bank’s category. The following table presents actual and required capital ratios as of December 31, 2022 and 2021 for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2022 and 2021 based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are presented in the following table as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. 90 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 14 - Capital Standards (continued) Regulatory Capital Actual Minimum Capital Adequacy To Be Well Capitalized Full Phase In of Basel III (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio December 31, 2022 The Company Tier 1 leverage ratio (to average assets) $ 242,829 11.24 % $ 86,442 4.00 % N/A N/A N/A N/A Tier 1 capital (to risk-weighted assets) 242,829 15.13 % 96,315 6.00 % N/A N/A 136,447 8.50 % Common equity tier 1 capital ratio (to risk-weighted assets) 240,767 15.00 % $ 72,237 4.50 % N/A N/A 112,368 7.00 % Total capital ratio (to risk-weighted assets) 262,217 16.33 % $ 128,421 8.00 % N/A N/A 168,552 10.50 % The Bank Tier 1 leverage ratio (to average assets) $ 199,846 9.47 % $ 84,416 4.00 % $ 105,521 5.00 % N/A N/A Tier 1 capital (to risk-weighted assets) 199,846 12.95 % 92,574 6.00 % 123,432 8.00 % 131,147 8.50 % Common equity tier 1 capital ratio (to risk-weighted assets) 199,846 12.95 % 69,431 4.50 % 100,289 6.50 % 108,003 7.00 % Total capital ratio (to risk-weighted assets) 219,234 14.21 % 123,432 8.00 % 154,290 10.00 % 162,005 10.50 % December 31, 2021 The Company Tier 1 leverage ratio (to average assets) $ 201,040 9.73 % $ 82,683 4.00 % N/A N/A N/A N/A Tier 1 capital (to risk-weighted assets) 201,040 14.43 % 83,596 6.00 % N/A N/A 118,428 8.50 % Common equity tier 1 capital ratio (to risk-weighted assets) 198,978 14.28 % 62,697 4.50 % N/A N/A 97,529 7.00 % Total capital ratio (to risk-weighted assets) 228,574 16.41 % 111,462 8.00 % N/A N/A 146,294 10.50 % The Bank 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 % Common equity tier 1 capital ratio (to risk-weighted assets) 169,384 12.53 % 60,823 4.50 % 87,856 6.50 % 94,614 7.00 % Total capital ratio (to risk-weighted assets) 186,397 13.79 % 108,130 8.00 % 135,162 10.00 % 141,921 10.50 % 91 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 15 - Stock-Based Compensation Compensation cost is recognized for stock options and restricted stock awards issued to employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The expense recognition of employee stock option and restricted stock awards resulted in net expense of approximately $ 1.8 million and $ 1.4 million during the years ended December 31, 2022 and 2021, respectively. Stock options: The Company currently has two incentive compensation plans with outstanding stock options, the 2002 Stock Option Plan and the 2017 Stock and Incentive Compensation Plan (“the Plan”). Only the Plan, which authorizes the use of stock options, stock appreciation rights, restricted stock and/or restricted stock, is available to grant options and shares to employees and directors. At inception the Plan allowed for up to 1,120,000 shares of common stock to be issued. In 2021, an additional 900,000 shares were authorized for a total of 2,020,000 . As of December 31, 2022, there are 896,462 shares available for future grant. Shares of common stock related to any unexercised or unvested award granted under the Plan that terminate or expire, or are subsequently forfeited or cancelled for any reason, become available for re-grant under the Plan. Option prices are equal to or greater than the estimated fair value of the common stock at the date of grant. Options outstanding vest over a four-year period, whereby 25 % of the options become exercisable on each anniversary of the grant date. Information with respect to options outstanding during the years ended December 31, 2022 and 2021 is as follows: 2022 2021 Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Outstanding at beginning of year 1,060,023 $ 14.77 1,169,413 $ 12.21 Add: Granted 2,000 24.25 170,244 24.51 Less: Exercised ( 160,590 ) 12.46 ( 186,461 ) 9.61 Less: Retired on exercise ( 63,697 ) 12.52 ( 54,192 ) 9.41 Less: Expired/cancelled/forfeited ( 26,576 ) 12.82 ( 38,981 ) 7.43 Outstanding at end of year 811,160 $ 15.37 1,060,023 $ 14.77 Exercisable at end of year 538,066 $ 13.63 551,804 $ 12.55 The weighted average fair value of options granted during the years ended December 31, 2022 and 2021, was $ 11.49 and $ 12.56 , respectively. 92 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 15 - Stock-Based Compensation (continued) A summary of information about stock options outstanding is as follows: Exercise Price Range Weighted Average Exercise Price Average Remaining Life (years) Outstanding Shares Exercisable Shares December 31, 2022 $ 10.70 - 14.63 $ 13.02 1.73 648,651 492,909 14.64 - 18.56 14.96 2.14 22,750 10,688 18.57 - 22.49 21.86 3.07 2,500 625 22.50 - 26.41 26.38 3.86 137,259 33,844 Total outstanding options $ 15.37 2.11 811,160 538,066 Intrinsic value on December 31, 2022 $ 7,020,560 $ 5,428,713 December 31, 2021 $ 10.70 - 14.63 $ 12.89 2.45 892,529 546,804 14.64 - 18.56 14.96 3.14 22,750 5,000 18.57 - 22.49 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 Intrinsic value on December 31, 2021 $ 12,143,007 $ 7,529,711 The aggregate intrinsic value as presented in the preceding tables is the difference between the estimated fair value of the stock as of December 31, 2022 and 2021, and the exercise price of the option multiplied by the number of options outstanding. Stock options with exercise prices greater than the estimated fair value of the stock are not included in this calculation. Total unrecognized compensation expense related to stock options to be recognized over the next five years was $ 1.2 million and $ 2.9 million at December 31, 2022 and 2021, 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: 2022 2021 Dividend yield 0.99 % 0.80 % Risk free interest rate 3.25 % 0.25 % Expected volatility 55.91 % 60.97 % Expected life in years 5 5 93 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 15 - Stock-Based Compensation (continued) Restricted stock: The Company from time-to-time also grants shares of restricted stock to key employees. These awards help align the interests of these employees with the interests of the stockholders of the Company by providing economic value directly related to increases in the value of the Company’s stock. These awards typically hold service requirements over various vesting periods. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. All restricted stock agreements are conditioned upon continued employment. Termination of employment prior to a vesting date, as described below, would terminate any interest in non-vested shares. All restricted shares will fully vest in the event of change in control of the Company. Nonvested restricted stock for the years ended December 31, 2022 and 2021 is summarized in the following table. 2022 2021 Shares Weighted Average Grant-Date Fair Value Shares Weighted Average Grant-Date Fair Value Nonvested at beginning of year 49,047 $ 14.33 30,713 $ 13.46 Add: Granted 11,495 24.66 29,405 14.88 Less: Vested ( 15,905 ) 14.01 ( 11,071 ) 13.38 Less: Retired on vesting ( 4,968 ) 14.44 — — Less: Forfeited — — — — Nonvested at end of year 39,669 $ 17.45 49,047 $ 14.33 The vesting schedule of restricted shares as of December 31, 2022 is as follows: Year Shares 2023 22,206 2024 13,632 2025 3,831 39,669 There was $ 429 thousand and $ 189 thousand of total unrecognized compensation expense related to nonvested restricted stock at December 31, 2022 and 2021, respectively. 94 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 16 - Parent Company Financial Information The balance sheets as of December 31, 2022 and 2021 and statements of income and cash flows for the years then ended, for Capital Bancorp, Inc. (Parent only) are presented below. Parent Company Only Balance Sheets (in thousands) 2022 2021 Assets Cash and cash equivalents $ 272 $ 630 Investment in Bank 183,095 168,308 Investment in Church Street Capital 5,402 4,607 Investment in Trust 62 62 Loans receivable, net of allowance for loan losses of $ 328 and $ 328 at December 31, 2022 and 2021, respectively 47,517 36,198 Accrued interest receivable 288 217 Deferred income taxes 100 100 Other assets 45 14 Total assets $ 236,781 $ 210,136 Liabilities and Stockholders’ Equity Borrowed funds $ 12,062 $ 12,062 Accrued interest payable 48 44 Other liabilities 656 127 Total liabilities 12,766 12,233 Stockholders’ equity Common stock 141 140 Additional paid-in capital 58,190 54,306 Retained earnings 182,435 144,533 Accumulated other comprehensive loss ( 16,751 ) ( 1,076 ) Total stockholders’ equity 224,015 197,903 Total liabilities and stockholders’ equity $ 236,781 $ 210,136 Parent Company Only Statements of Income (in thousands) 2022 2021 Interest and dividend income $ 2,146 $ 1,663 Dividend from Bank 11,400 6,500 Total interest and dividend revenue 13,546 8,163 Interest expense 576 542 Net interest income 12,970 7,621 Provision for loan losses — 70 Net interest income after provision for loan losses 12,970 7,551 Noninterest income 2 2 Noninterest expenses 447 393 Income before income taxes 12,525 7,160 Income tax expense 315 138 Income before undistributed net income of subsidiaries 12,210 7,022 Undistributed net income of subsidiaries 29,594 32,956 Net income $ 41,804 $ 39,978 95 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 16 - Parent Company Financial Information (continued) Parent Company Only Statements of Cash Flows (in thousands) 2022 2021 Cash flows from operating activities Net Income $ 41,804 $ 39,978 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses — 70 Undistributed net income of subsidiaries ( 29,594 ) ( 32,956 ) Stock-based compensation expense 1,662 1,347 Director and employee compensation paid in Company stock 171 519 Deferred income tax benefit — ( 14 ) Changes in assets and liabilities: Accrued interest receivable ( 71 ) 83 Other assets ( 31 ) ( 14 ) Accrued interest payable 4 1 Other liabilities 528 ( 130 ) Net cash provided by operating activities 14,473 8,884 Cash flows from investing activities Net increase in loans receivable ( 11,319 ) ( 9,269 ) Capital contributions to subsidiaries ( 1,662 ) ( 1,347 ) Net cash used by investing activities ( 12,981 ) ( 10,616 ) Cash flows from financing activities Dividends paid ( 3,085 ) ( 1,382 ) Proceeds from exercise of stock options 1,235 967 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 Cash and cash equivalents, end of year $ 272 $ 630 96 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 17 - Fair Value Generally accepted accounting principles define fair value, establish a framework for measuring fair value, recommend disclosures about fair value, and establish a hierarchy for determining fair value measurement. The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows: Level 1 - Inputs to the valuation method are quoted prices (unadjusted) for identical assets or liabilities in active markets; Level 2 - Inputs to the valuation method include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and Level 3 - Inputs to the valuation method are unobservable and significant to the fair value measurement. Fair value measurements on a recurring basis Investment securities available for sale - The fair values of the Company's investment securities available for sale are provided by an independent pricing service. The fair values of the Company's securities are determined based on quoted prices for similar securities under Level 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. Derivative financial instruments - Derivative instruments used to hedge residential mortgage loans held for sale and the related interest rate lock commitments include forward commitments to sell mortgage loans and are reported at fair value utilizing Level 2 inputs. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments. 97 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 17 - Fair Value (continued) The Company has categorized its financial instruments measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021 as follows: (in thousands) Total Level 1 Inputs Level 2 Inputs Level 3 Inputs December 31, 2022 Investment securities available for sale U.S. Treasuries $ 199,449 $ 199,449 $ — $ — Asset-backed securities 7,711 — 7,711 — Municipal 8,012 — 8,012 — Corporate 4,600 — 4,600 — Mortgage-backed securities 32,709 — 32,709 — Total $ 252,481 $ 199,449 $ 53,032 $ — Loans held for sale $ 7,416 $ — $ 7,416 $ — Derivative assets $ 10 $ — $ 10 $ — Derivative liabilities $ — $ — $ — $ — December 31, 2021 Investment securities available for sale U.S. Treasuries $ 131,001 $ 131,001 $ — $ — Asset-backed securities 10,140 — 10,140 — Municipal 10,474 — 10,474 — Corporate 4,934 — 4,934 — Mortgage-backed securities 27,906 — 27,906 — Total $ 184,455 $ 131,001 $ 53,454 $ — Marketable equity securities $ 245 $ 245 $ — $ — Loans held for sale $ 15,989 $ — $ 15,989 $ — Derivative assets $ 34 $ — $ 34 $ — Derivative liabilities $ 16 $ — $ 16 $ — Financial instruments recorded using FASB ASC 825-10 Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made. The following table reflects the difference between the fair value carrying amount of loans held for sale, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity: Fair Value of Loans Held for Sale (in thousands) December 31, 2022 December 31, 2021 Aggregate fair value $ 7,416 $ 15,989 Contractual principal 6,808 14,504 Difference $ 608 $ 1,485 98 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 17 - Fair Value (continued) 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. Fair value measurements on a nonrecurring basis Impaired loans - The Company has measured impairment generally based on the fair value of the loan's collateral and discounted cash flow analysis. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. As of December 31, 2022 and December 31, 2021, the fair values consist of loan balances of $ 9.4 million and $ 11.3 million, with valuation allowances of $ 372 thousand and $ 218 thousand, respectively. Foreclosed real estate - The Company's foreclosed real estate is measured at fair value less cost to sell. Fair value was determined based on offers and/or appraisals. Cost to sell the real estate was based on standard market factors. The Company has categorized its foreclosed real estate as Level 3. Fair Value of Impaired Loans and Foreclosed Real Estate (in thousands) 2022 2021 Impaired loans Level 3 Inputs 9,021 11,121 Total $ 9,021 $ 11,121 Foreclosed real estate Level 3 Inputs — 86 Total $ — $ 86 The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2022 and 2021: Inputs Valuation Technique Unobservable Inputs General Range of Inputs Impaired Loans Appraised Value/Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs 0 - 25 % Foreclosed Real Estate Appraised Value/Comparable Sales Discounts to appraisals for estimated holding and/or selling costs 0 - 25 % Fair value of financial instruments Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument. 99 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 17 - Fair Value (continued) The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different. As of December 31, 2022, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2021, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. The fair value of the Company’s loan portfolio has always included a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans, and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. The fair value of cash and cash equivalents, interest-bearing deposits at other financial institutions, federal funds sold and restricted investments is the carrying amount. Restricted stock includes equity of the Federal Reserve and other banker’s banks. The fair value of noninterest-bearing deposits and securities sold under agreements to repurchase is the carrying amount. The fair value of checking and savings deposits, and money market accounts, is the amount payable on demand at the reporting date. Fair value of fixed maturity term accounts and individual retirement accounts is estimated using rates currently offered for accounts of similar remaining maturities. The fair value of certificates of deposit in other financial institutions is estimated based on interest rates currently offered for deposits of similar remaining maturities. The fair value of borrowings is estimated by discounting the value of contractual cash flows using current market rates for borrowings with similar terms and remaining maturities. The fair value of outstanding loan commitments, unused lines of credit, and letters of credit are not included in the table since the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments. 100 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 17 - Fair Value (continued) The table below presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments (in thousands). Fair Value of Financial Assets and Liabilities December 31, 2022 December 31, 2021 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets Level 1 Cash and due from banks $ 19,963 $ 19,963 $ 42,914 $ 42,914 Interest-bearing deposits at other financial institutions 39,764 39,764 136,824 136,824 Marketable equity securities — — 245 245 Federal funds sold 20,688 20,688 3,657 3,657 Level 3 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 Level 1 Noninterest-bearing deposits $ 674,313 $ 674,313 $ 787,650 $ 787,650 Level 3 Interest-bearing deposits $ 1,083,759 $ 1,090,553 $ 1,009,487 $ 1,011,121 FHLB advances and other borrowed funds 119,062 116,544 34,062 34,263 101 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2022 and 2021 Note 18 - Segments The Company’s reportable segments represent business units with discrete financial information whose results are regularly reviewed by management. The four segments include Commercial Banking, Capital Bank Home Loans (the Company’s mortgage loan division), and OpenSky ® (the Company’s credit card division) and the Corporate Office. The following schedule presents financial information for each reportable segment at December 31, 2022 and 2021. Segments (in thousands) December 31, 2022 Commercial Bank CBHL OpenSky ® Corporate (2) Eliminations Consolidated Interest income $ 82,182 $ 435 $ 64,859 $ 3,349 $ ( 179 ) $ 150,646 Interest expense 9,245 218 — 755 ( 179 ) 10,039 Net interest income 72,937 217 64,859 2,594 — 140,607 Provision for (reversal of) loan losses ( 980 ) — 7,611 — — 6,631 Noninterest income 2,122 5,276 21,972 2 — 29,372 Noninterest expense (1) 52,552 8,450 47,647 465 — 109,114 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 December 31, 2021 Interest income $ 69,433 $ 1,217 $ 50,422 $ 2,307 $ ( 136 ) $ 123,243 Interest expense 5,142 874 — 670 ( 136 ) 6,550 Net interest income 64,291 343 50,422 1,637 — 116,693 Provision for loan losses 433 — 2,856 70 — 3,359 Noninterest income 1,759 20,911 27,884 82 — 50,636 Noninterest expense (1) 44,729 12,713 52,231 421 — 110,094 Net income before taxes $ 20,888 $ 8,541 $ 23,219 $ 1,228 $ — $ 53,876 Total assets $ 1,859,201 $ 16,698 $ 138,232 $ 217,993 $ ( 176,824 ) $ 2,055,300 _______________ (1) Noninterest expense includes $ 27.0 million and $ 36.1 million in data processing expenses in OpenSky’s ® segment for the years ended December 31, 2022 and 2021, respectively. (2) The Corporate segment invests idle cash in revenue producing assets including interest-bearing cash accounts, loan participations and other appropriate investments for the Company. Note 19 - Litigation The Company is involved in legal proceedings occurring in the ordinary course of business. The aggregate effect of these, in management’s opinion, would not be material to the results of operations or financial condition of the Company. 102 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. 103 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.