Capital Bancorp Inc 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 69 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Capital Bancorp, Inc. and Subsidiaries 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, 2024 and 2023, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 17, 2025, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. 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 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. 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 70 Critical Audit Matters, Continued Allowance for Credit Losses As described in Note 5 to the Company’s financial statements, the Company has a gross loan portfolio of $2.6 billion and related allowance for credit losses (“ACL”) of $48.7 million as of December 31, 2024. As described by the Company in Note 1, in order to measure expected credit losses on a collective basis, the Company utilizes a discounted cash flow methodology for all segments, except for the credit card and other consumer portfolio segments, which apply a simplified, non‐discounted cash flow calculation. Loans not sharing similar risk characteristics are evaluated on an individual basis. Management also collectively evaluates purchased credit deteriorated (“PCD”) loans that do not meet the individually evaluated criteria. For these loans, management uses an adverse “through-the-cycle” (“TTC”) probably of default and loss given default to reflect the “greater-than-insignificant” credit deterioration. These loans are separated from the non-PCD and originated pools to ensure that these loans receive a reserve that is calculated based on unpaid principal balance (“UPB”) and not amortized cost. Within the collectively evaluated component, the Company uses regression analysis of historical internal and peer data to determine suitable loss drivers in order to incorporate a reasonable and supportable forecast of losses within the modeled future expected credit loss. Additionally, a qualitative scorecard is used by management to assess the need for adjustments to expected credit loss estimates for information not already captured in the quantitative loss estimation process. The qualitative scorecard evaluates certain risks such as lending policies and procedures, economic conditions, changes in the nature and volume of portfolios, changes in experience, depth, and ability of lending management, changes in volume and severity of past due loans, quality of loan review system, changes in the value of underlying collateral, concentrations of credit, and other external factors. We identified the Company’s estimate of the allowance for credit losses as a critical audit matter. The principal considerations for our determination of the ACL as a critical audit matter relate to the high degree of complexity and judgment in the determination of significant model assumptions, specifically, the qualitative factor adjustments to quantitative loss rates. Auditing these complex judgments and assumptions made by the Company involves challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address the critical audit matter include the following: ■ We tested the design and operating effectiveness of controls relating to the Company’s determination of the allowance for credit losses, including controls over management’s review and approval of qualitative factors. ■ We evaluated the relevance and the reasonableness of assumptions related to the evaluation of the loan portfolio, current and forecasted economic conditions, and other risk factors used within the qualitative factors. ■ We tested the completeness and accuracy of significant inputs to the model including the underlying data used to develop the qualitative factors. ■ We validated the mathematical accuracy of the calculation. ■ We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third‐party sources, and other audit evidence gathered. ■ We performed analytical procedures to evaluate the directional consistency of changes that occurred in the allowance for credit losses for loans. 71 Critical Audit Matters, Continued Business Combination - Valuation of Acquired Loan Portfolio As described in Note 2 to the Company’s financial statements, on October 1, 2024, the Company acquired Integrated Financial Holdings, Inc. (“IFH”). The transaction has been accounted for as a business combination and accordingly, the assets acquired and liabilities assumed from IFH were recorded at fair value as of the acquisition date. The fair value of acquired loans held for investments was $362.2 million. Determining the fair value of acquired loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from loan inception to the merger date. We identified the fair value of acquired loans held for investment as a critical audit matter due to the high degree of complexity and auditor judgment involved and the extent of effort involved, including the use of professionals with specialized skill and knowledge, in testing the Company’s estimates and assumptions, including the discount rates and prepayment rates used in the discounted cash flow methodology. The primary procedures we performed to address the critical audit matter include the following: ■ We tested the design and operating effectiveness of the Company’s process for estimating the acquired loans fair value, including management’s controls over establishing the discount rate used in the discounted cash flow methodology; and evaluating the completeness and accuracy of key inputs and assumptions used in the discounted cash flow methodology, including loan data. ■ We tested the completeness and accuracy of certain underlying loan data provided by management that was significant to the discounted cash flow model. ■ We utilized internal valuation specialists to assist in evaluating management’s valuation methodologies and significant assumptions, including application of discount rates and prepayment rates by comparing management’s selected assumptions to independently developed ranges based on third party market data. /s/ Elliott Davis, PLLC We have served as the Company’s auditor since 2017. Raleigh, North Carolina March 17, 2025 72 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Capital Bancorp, Inc. and Subsidiaries Opinion on the Internal Control Over Financial Reporting We have audited Capital Bancorp, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2024 and 2023 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2024 of the Company and our report dated March 17, 2025 expressed an unqualified opinion. As described in the Report by Management on Internal Control over Financial Reporting, management has excluded Integrated Financial Holdings, Inc. (“IFH”) from its assessment of internal control over financial reporting as of December 31, 2024, because it was acquired by the Company in a business combination in the fourth quarter of 2024. We have also excluded IFH from our audit of internal control over financial reporting. Total assets and net interest income and noninterest income of IFH represent approximately 14.6% and 6.8%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2024. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report by Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 73 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Elliott Davis, PLLC Raleigh, North Carolina March 17, 2025 74 Capital Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, 2024 and 2023 (dollars in thousands, except share data) 2024 2023 Assets Cash and due from banks $ 25,433 $ 14,513 Interest-bearing deposits at other financial institutions 179,841 39,044 Federal funds sold 58 407 Total cash and cash equivalents 205,332 53,964 Investment securities available-for-sale 223,630 208,329 Restricted investments 4,479 4,353 Loans held for sale 21,270 7,481 Portfolio loans receivable, net of deferred fees and costs 2,630,163 1,903,288 Less allowance for credit losses ( 48,652 ) ( 28,610 ) Total portfolio loans held for investment, net 2,581,511 1,874,678 Premises and equipment, net 15,525 5,069 Accrued interest receivable 16,664 11,494 Goodwill 21,126 — Intangible assets 14,072 — Core deposit intangibles 1,745 — Loan servicing assets 5,511 — Deferred tax asset 16,670 12,252 Bank owned life insurance 43,956 37,711 Other assets 35,420 10,845 Total assets $ 3,206,911 $ 2,226,176 Liabilities Deposits Noninterest-bearing $ 810,928 $ 617,373 Interest-bearing 1,951,011 1,278,623 Total deposits 2,761,939 1,895,996 Federal Home Loan Bank advances 22,000 22,000 Other borrowed funds 12,062 27,062 Accrued interest payable 9,393 5,583 Other liabilities 46,378 20,675 Total liabilities 2,851,772 1,971,316 Stockholders' equity Common stock, $ .01 par value; 49,000,000 shares authorized; 16,662,626 and 13,922,532 issued and outstanding 167 139 Additional paid-in capital 128,598 54,473 Retained earnings 237,843 213,345 Accumulated other comprehensive loss ( 11,469 ) ( 13,097 ) Total stockholders' equity 355,139 254,860 Total liabilities and stockholders' equity $ 3,206,911 $ 2,226,176 See Notes to Consolidated Financial Statements 75 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Income For the Years Ended December 31, 2024 and 2023 (dollars in thousands, except per share data) 2024 2023 Interest income Loans, including fees $ 202,915 $ 174,760 Investment securities available-for-sale 5,441 4,815 Federal funds sold and other 4,945 3,631 Total interest income 213,301 183,206 Interest expense Deposits 56,170 39,625 Borrowed funds 2,385 2,055 Total interest expense 58,555 41,680 Net interest income 154,746 141,526 Provision for credit losses 17,720 9,610 Provision for (release of) credit losses on unfunded commitments 385 ( 101 ) Net interest income after provision for credit losses 136,641 132,017 Noninterest income Service charges on deposits 883 964 Credit card fees 15,999 17,273 Mortgage banking revenue 7,146 4,896 Government lending revenue 2,301 — Government loan servicing revenue 3,993 — Loan servicing rights (government guaranteed) 1,013 — Non-recurring equity and debt investment write-down ( 2,620 ) — Other income 2,695 1,842 Total noninterest income 31,410 24,975 Noninterest expenses Salaries and employee benefits 56,037 48,754 Occupancy and equipment 8,244 5,673 Professional fees 7,846 9,270 Data processing 27,689 25,686 Advertising 6,359 6,161 Loan processing 2,431 1,633 Foreclosed real estate expenses, net 2 7 Merger-related expenses 3,930 — Operational losses 3,714 4,613 Outside service providers 1,878 1,932 Regulatory assessment expenses 1,937 1,649 Other operating 6,152 5,389 Total noninterest expenses 126,219 110,767 Income before income taxes 41,832 46,225 Income tax expense 10,860 10,354 Net income $ 30,972 $ 35,871 Basic earnings per share $ 2.12 $ 2.56 Diluted earnings per share $ 2.12 $ 2.55 Weighted average common shares outstanding: Basic 14,584,303 14,002,556 Diluted 14,640,177 14,080,547 See Notes to Consolidated Financial Statements 76 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2024 and 2023 (in thousands) 2024 2023 Net income $ 30,972 $ 35,871 Other comprehensive income: Unrealized gain on investment securities available-for-sale 2,194 5,066 Income tax expense relating to the items above ( 566 ) ( 1,412 ) Other comprehensive income 1,628 3,654 Comprehensive income $ 32,600 $ 39,525 See Notes to Consolidated Financial Statements 77 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity For the Years Ended December 31, 2024 and 2023 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, 2022 14,138,829 $ 141 $ 58,190 $ 182,435 $ ( 16,751 ) $ 224,015 Cumulative effect adjustment due to adoption of the CECL standard — — — ( 29 ) — ( 29 ) Net income — — — 35,871 — 35,871 Unrealized gain on investment securities available-for-sale, net of income taxes — — — — 3,654 3,654 Stock options exercised, net of shares withheld for purchase price 228,405 2 2,726 ( 937 ) — 1,791 Shares issued as compensation 30,644 — 622 ( 75 ) — 547 Stock-based compensation — — 1,757 — — 1,757 Cash dividends to stockholders ($ 0.28 per share) — — — ( 3,920 ) — ( 3,920 ) Shares repurchased and retired ( 475,346 ) ( 4 ) ( 8,822 ) — — ( 8,826 ) Balance, December 31, 2023 13,922,532 139 54,473 213,345 ( 13,097 ) 254,860 Net income — — — 30,972 — 30,972 Unrealized gain on investment securities available-for-sale, net of income taxes — — — — 1,628 1,628 Stock options exercised, net of shares withheld for purchase price 150,239 1 2,232 ( 1,156 ) — 1,077 Shares issued as compensation 25,877 — 560 ( 43 ) — 517 Stock-based compensation — — 1,895 — — 1,895 Cash dividends to stockholders ($ 0.36 per share) — — — ( 5,275 ) — ( 5,275 ) Shares repurchased and retired ( 67,869 ) — ( 1,399 ) — — ( 1,399 ) Issuance of common stock in acquisition of IFH 2,631,847 27 70,837 — — 70,864 Balance, December 31, 2024 16,662,626 $ 167 $ 128,598 $ 237,843 $ ( 11,469 ) $ 355,139 See Notes to Consolidated Financial Statements 78 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2024 and 2023 (in thousands) 2024 2023 Cash flows from operating activities Net income $ 30,972 $ 35,871 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 17,720 9,610 Provision for (release of) credit losses on unfunded commitments 385 ( 101 ) Release of mortgage put-back reserve, net ( 68 ) ( 188 ) Net amortization on investment securities available-for-sale 100 188 Premises and equipment depreciation 737 324 Lease asset amortization 1,215 149 Amortization of intangible assets 262 — Extinguishment of leases ( 2,881 ) — Increase in cash surrender value of BOLI ( 1,466 ) ( 1,187 ) Net change in loan servicing assets ( 996 ) — Executive long-term incentive plan expense 516 148 Stock-based compensation expense 1,895 1,757 Director and employee compensation paid in Company stock 517 547 Deferred income tax (benefit) expense ( 1,814 ) 142 Valuation allowance on derivatives — 8 Decrease in valuation of loans held for sale carried at fair value 32 6 Proceeds from sales of loans held for sale 281,384 176,373 Originations of loans held for sale ( 292,872 ) ( 176,444 ) Government lending revenue ( 2,301 ) — Changes in assets and liabilities: Accrued interest receivable ( 762 ) ( 2,005 ) Taxes payable 3,358 179 Other assets ( 15,517 ) ( 2,448 ) Accrued interest payable 2,533 4,552 Other liabilities 11,977 ( 63 ) Net cash provided by operating activities 34,926 47,418 Cash flows from investing activities Purchases of securities available-for-sale ( 65,396 ) ( 6,960 ) Proceeds from calls and maturities of securities available-for-sale 53,208 55,991 Net (purchases) sales of restricted investments ( 126 ) 3,009 Net increase in portfolio loans receivable ( 320,651 ) ( 180,722 ) Net purchases of premises and equipment ( 2,157 ) ( 2,156 ) Cash received from acquisitions, net 65,170 — See Notes to Consolidated Financial Statements 79 Capital Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended December 31, 2024 and 2023 (in thousands) 2024 2023 Net cash used in investing activities ( 269,952 ) ( 130,838 ) Cash flows from financing activities Net increase (decrease) in: Noninterest-bearing deposits 107,946 ( 56,940 ) Interest-bearing deposits 299,045 194,864 Federal Home Loan Bank repayments, net — ( 85,000 ) Other borrowed funds ( 15,000 ) 15,000 Dividends paid ( 5,275 ) ( 3,920 ) Repurchase of common stock ( 1,399 ) ( 8,826 ) Net proceeds from exercise of stock options 1,077 1,791 Net cash provided by financing activities 386,394 56,969 Net decrease in cash and cash equivalents 151,368 ( 26,451 ) Cash and cash equivalents, beginning of year 53,964 80,415 Cash and cash equivalents, end of year $ 205,332 $ 53,964 Noncash investing and financing activities: Change in unrealized gains (losses) on investments $ 2,194 $ 5,066 Fair value of assets acquired, net of cash received 460,455 — Goodwill from acquisition 21,126 — Fair value of liabilities assumed 475,886 — Common Stock issued related to acquisition 27 — Cash paid during the period for: Taxes $ 9,098 $ 7,704 Interest $ 54,745 $ 37,128 See Notes to Consolidated Financial Statements 80 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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 is headquartered in Rockville, Maryland. The Company serves businesses, not-for-profit associations, entrepreneurs and others throughout Washington D.C., Baltimore, other Maryland metropolitan areas, Florida, Illinois and North Carolina through six commercial bank branches, one mortgage banking office, two loan production offices, three government loan servicing offices, and one credit card operations office. 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 (“CBHL”), the Bank’s residential mortgage banking arm, and issues credit cards through OpenSky ™ , a digitally-driven, nationwide credit card platform providing secured, partially secured, and unsecured credit solutions. As discussed further in Note 2, on October 1, 2024 the Company completed its previously announced merger (the “Merger”) with Integrated Financial Holdings, Inc., a North Carolina corporation (“IFH”). IFH was the holding company of West Town Bank & Trust, an Illinois state-chartered bank which provides banking services through its full-service office located in the greater Chicago area and is a nationwide originator of U.S. Department of Agriculture (“USDA”) and U.S. Small Business Administration (“SBA”) government guaranteed loans. IFH was also the parent company of Windsor Advantage, LLC (“Windsor Advantage”), a loan service provider that offers community banks and credit unions a comprehensive outsourced SBA 7(a) and USDA lending platform. Immediately following the Merger, West Town Bank & Trust merged with and into the Bank, with the Bank as the surviving bank. 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. At December 31, 2024, Church Street Capital had loans totaling $ 6.8 million with a collectively assessed allowance for credit losses (“ACL”) of $ 184 thousand. Refer to Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses to the Consolidated Financial Statements for further discussion of the consolidated ACL. 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, Windsor Advantage, and Church Street Capital. All intercompany transactions have been eliminated in consolidation. The Company reports its activities as five business segments: commercial banking; mortgage banking; credit cards; government loan servicing; 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. 81 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) 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. Business Combinations The Company accounts for its acquisitions under the Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. This method requires the use of fair values in determining the carrying values of the purchased assets and assumed liabilities, which are recorded at fair value at acquisition date, and identifiable intangible assets which are recorded at fair value. Costs directly related to the business combinations are recorded as expenses as they are incurred. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available. 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. 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 on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. 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. Management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an ACL, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At December 31, 2024, there was no ACL related to the AFS portfolio. 82 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) Loans held for sale Mortgage loans originated and intended for sale are recorded at fair value, determined individually, as of the balance sheet date. The fair value of mortgage loans are determined based on outstanding investor commitments, or in the absence of such commitments, based on current investor yield requirements. Gains or losses on sales of government guaranteed loans are recognized based on the difference between the net sales proceeds and the carrying value of the sold portion of the loan, less the fair value of the servicing asset recognized, and are reflected as operating activities in the Consolidated Statements of Cash Flows. The difference between the initial carrying balance of the retained portion of the loan and the relative fair value of the sold portion is recorded as a discount to the retained portion of the loan, establishing a new carrying balance. The recorded discount is accreted to earnings on a level yield basis. Government guaranteed loans are generally sold with servicing retained. 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. 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 Consolidated Balance Sheet. Portfolio loans and the ACL Loans are stated at the principal amount outstanding, adjusted for deferred origination fees and costs, discounts on loans acquired, and the ACL. 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 or 24 month period. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The Company discontinues the accrual of interest at the earlier of the date any portion of the principal and/or interest is 90 days past due, or at such time as we determine that it is probable that not all principal and interest payments will be collected, and that collateral is insufficient to discharge the debt in full. When the interest accrual is discontinued, all unpaid accrued interest is reversed from income. Generally, interest payments on nonaccrual loans are recorded as a reduction of the principal balance. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are generally charged-off in part or in full when management determines the loan, or a portion of the loan is expected, to be uncollectible. Factors for charge-off that may be considered include: repayments deemed to be extended out beyond reasonable time frames, customer bankruptcy and lack of assets, and/or collateral deficiencies. 83 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) On January 1, 2023, we adopted Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which replaces the incurred loss methodology for determining our provision for credit losses and ACL with an expected loss methodology that is referred to as the Current Expected Credit Loss model (“CECL”). The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity (“HTM”) debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 “Leases (Topic 842)”. In addition, ASU 2016-13 made changes to the accounting for AFS debt securities. One such change is to require credit-related impairments to be recognized as an ACL rather than as a write-down of the security’s amortized cost basis when the Company does not intend to sell or believes that the Company will be required to sell the securities prior to recovery of the security’s amortized cost basis. The Company adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company does not own HTM debt securities. There was no ACL on available-for-sale securities at December 31, 2024 or at December 31, 2023. The following table illustrates the impact of the adoption of ASC 326, or the CECL standard. The adoption of the standard required an $ 804 thousand increase in the ACL and a $ 775 thousand reduction to the reserve for unfunded commitments (“RUC”). The improved precision of the calculation of the historical utilization of unfunded commitments gave rise to the reduction. The net impact of the adoption of the CECL standard to retained earnings was $ 29 thousand. January 1, 2023 (in thousands) Pre-adoption of the CECL standard As Reported Under ASC 326 Impact of adoption of the CECL standard Assets: Real estate: Residential $ 484,735 $ 484,735 $ — Commercial 664,551 664,551 — Construction 238,099 238,099 — Commercial and Industrial 220,221 220,221 — Credit card, net of reserve 128,434 128,434 — Other consumer 1,179 1,179 — Portfolio loans receivable, gross $ 1,737,219 $ 1,737,219 $ — Deferred origination fees, net ( 8,627 ) ( 8,627 ) — Allowance for credit losses ( 26,385 ) ( 27,189 ) ( 804 ) Portfolio loans receivable, net $ 1,702,207 $ 1,701,403 $ ( 804 ) Liabilities: Reserve for unfunded commitments $ 1,682 $ 907 $ ( 775 ) 84 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) We maintain an ACL that represents management’s estimate of the expected credit losses and risks inherent in our loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. The allowance immediately recognizes lifetime expected credit losses when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged-off against the allowance when they are deemed uncollectible. Factors for charge-off that may be considered include: repayments deemed to be extended out beyond reasonable time frames, customer bankruptcy and lack of assets, and/or collateral deficiencies. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. In determining the ACL, we estimate losses collectively based on quantitative analysis of historical credit losses adjusted for current conditions and reasonable and supportable forecasts of collectability of future cash flows over the remaining term of each financial instrument. The Company has elected to utilize a discounted cash flow methodology for all segments, except for the credit card and other consumer portfolio segments, which apply a simplified, non-discounted cash flow calculation. Management also collectively evaluates purchased credit deteriorated ("PCD") loans that do not meet the individually evaluated criteria. For those loans, management uses an adverse "through the cycle" probability of default (PD) and loss given default (LGD) to reflect the "greater than insignificant" credit deterioration. These loans are separated from the non-PCD and originated pools to ensure that these loans receive a reserve that is calculated based on unpaid principal balance (UPB) and not amortized costs. See further detail regarding our forecasting methodology in the “Cash Flow Method” section below. Quarterly, the Company utilizes a Qualitative Scorecard to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the quantitative loss estimation process, which may impact expected credit losses. The Qualitative Scorecard evaluates certain risk environments such as economic conditions, changes in the nature and volume of portfolios, changes in experience, depth, and ability of lending management, changes in volume and severity of past due loans and similar conditions, and changes in the value of underlying collateral. The scorecard results help the Company analyze directional consistency to risk conditions and circumstances that should be considered for each loan segment and to refine its estimates of expected credit losses. As of December 31, 2024, there have been no significant changes applied through the Qualitative Scorecard subsequent to implementation on January 1, 2023. Purchased Credit Deterioration Upon adoption of ASU 2016-13, loans which were previously identified as Purchase Credit Impaired under the incurred loss model are identified as Purchased Credit Deteriorated (“PCD”) loans at January 1, 2023 without reassessment. When acquiring loans, some may have experienced more than insignificant credit deterioration since origination. In those cases, the Company will consider certain criteria including days past due, accrual status, risk rating, credit mark, and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at the amount paid and the Company will determine the initial ACL required for PCD assets with no impact to earnings. The loan’s purchase price and ACL is then the initial amortized cost basis for PCD loans. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the ACL recorded through provision expense. In connection with the business combination with IFH, the Company acquired PCD and non-PCD loans. Information regarding the PCD and non-PCD activity can be found within Note 2 - Business Combination and Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses, respectively. 85 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) Cash Flow Method The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for each portfolio loan segment, with the exception of credit card and other consumer loans, which use a non-discounted cash flow calculation. For each of these loan segments, the Company generates cash flow projections at the instrument level. Payment expectations are adjusted for estimated prepayments and for probability and severity of a loss. The expected credit losses derived from the cash flow calculations are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The modeling of expected prepayment speeds is primarily based on historical internal data. Industry benchmark data is utilized when a statistically insufficient history exists. The contractual term excludes expected extensions, renewals and modifications. The Company uses regression analysis of historical internal and peer data to determine suitable portfolio segment level loss drivers to utilize when modeling lifetime probability of default, lifetime loss given default, and lifetime loss rates. This analysis also determines how expected probability of default, loss given default, and lifetime loss rates will react to forecasted levels of the loss drivers. For the credit card portfolio, the Company calculates the credit card ACL collectively, applying segmentation based on collateral positions: secured, partially secured, and unsecured. For all DCF and loss rate models, the Company has elected to use a four quarter forecast period across all portfolio segments. After the forecasted period, the models will revert to a long run average of each economic factor over the following four quarters. The Company uses economic projections from reputable and independent third parties to inform its loss driver forecast over the forecast period. For the non-credit card and consumer portfolios, the combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. An effective interest rate is calculated by the Company, adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition, to produce an instrument-level net present value of expected cash flows. The ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows. During 2024, as part of the Company's ongoing model monitoring procedures, the annual loss driver analysis was performed. In addition, the Company performed new rates studies for prepayment rates, and funding rates. These changes were part of the Company's standard process and included updates to the peer group and incorporated more recent historical data. Individual Evaluation The Company will evaluate individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated on a collective basis. Instruments may be evaluated whether or not there is an expectation of collectability in place. Instruments evaluated individually are not included in the Company’s collective analysis. Collateral dependent or secured loans with respect to which the Company expects repayment to be provided substantially through the operation or sale of the collateral utilize a collateral-based methodology in which ACL is measured based on the difference between the net realizable value of the collateral and the amortized cost basis of the asset as of the measurement date. If the collateral valuation is equal to or greater than amortized cost, no reserve is applied. If a loan is not collateral dependent, the loan will be analyzed based on a forecast of future cash flows. 86 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) Credit Losses on Off-Balance Sheet Credit Exposures The Company’s financial instruments include off-balance sheet credit instruments such as unfunded commitments to originate loans, commercial letters of credit issued, and commitments to fund other investments. The Company’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by 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. The Company maintains a RUC on off-balance sheet credit exposures through a provision reflected in other liabilities. Increases or decreases in the reserve are charged to or released from the provision for credit losses for unfunded commitments in the consolidated statements of income. The provision for (recovery of) credit losses for off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income. The RUC for off-balance credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model based on the segment loss factor and the estimated utilization rate of the unfunded commitments. The Company has analyzed its historic funding behavior at the segment level to determine an expected utilization rate. The above methodology for determining an appropriate ACL is based on a comprehensive analysis of the loan portfolio in accordance with ASC 326. The analysis considers all significant factors that affect the expected collectability of the portfolio and supports the expected credit losses estimated by this process. It is important to recognize that the related process, methodology, and underlying assumptions require a substantial degree of judgment. Additional disclosure on the ACL, and qualitative factors can be found in Part II, Item 1A - Risk Factors and Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses. Loan modifications Effective January 1, 2023, the Company adopted ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. From time to time, the Company may elect to modify the contractual terms of loans to a borrower experiencing financial difficulties as a way to mitigate loss, to proactively work with borrowers in financial difficulty, or to comply with regulations regarding the treatment of certain bankruptcy filing and discharge situations. These modifications may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Under ASU 2022-02, modifications to a loan for a borrower experiencing financial difficulty that have occurred in the current reporting period are disclosed along with the impact of the modifications. During the years ended December 31, 2024 and 2023, the Company modified loans to borrowers experiencing financial difficulty as disclosed in Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses. 87 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) Loan servicing assets When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect included in noninterest income. Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur and are included with noninterest income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Servicing fee income, which is reported in the consolidated statements of income as loan servicing rights (government guaranteed), is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are not material. 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. 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. 88 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) 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, and loans held for sale. See Note 17 - Fair Value. Goodwill and Other Intangible Assets The excess of the cost of an acquisition over the fair value of the net assets acquired consists primarily of goodwill. The Company reviews long-lived assets and other intangible assets for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in which case an impairment charge would be recorded. Goodwill is not amortized and is tested for impairment at least annually, or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of each reporting unit is calculated and compared to the recorded book value. If the calculated fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and no further testing is considered necessary. If a reporting unit’s carrying amount exceeds its fair value, the Company will record an impairment charge based on the difference. The impairment charge will be limited to the amount of goodwill allocated to the reporting unit. Other intangible assets are intangible assets with finite useful lives, consisting primarily of customer list, trade name and core deposit intangibles. Intangible assets are amortized using straight-line or accelerated methods over their estimated weighted average useful lives, ranging from 10 to 17 years years. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Revenue Recognition In addition to lending and related activities, the Company offers various services to customers that generate revenue, certain of which are governed by ASC Topic 606 Revenue from Contracts with Customers. The Company's services that fall within the scope of this topic are presented within noninterest income and include service charges and fees and other transaction-based fees. Revenue is recognized when the transactions occur or as services are preformed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur. Fees may be fixed or, where applicable, based on a percentage of transaction size. 89 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) Bank-owned life insurance The Company has purchased life insurance policies on certain current and past key employees where the insurance policy benefits and ownership are retained by the employer. These policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. The Company had $ 44.0 million of bank-owned life insurance at December 31, 2024 and $ 37.7 million at December 31, 2023. The Company recognized income on bank-owned life insurance, which is included in other noninterest income, of $ 1.5 million and $ 1.2 million for the years ended December 31, 2024 and December 31, 2023, 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. 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, 2024 and 2023, there were 417,045 and 277,066 stock options, respectively, excluded from the calculation as their effect would have been anti-dilutive. 90 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per common share: For the Years Ended December 31, 2024 2023 (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 $ 30,972 14,584,303 $ 2.12 $ 35,871 14,002,556 $ 2.56 Effect of dilutive securities — 55,874 — 77,991 Dilutive EPS per common share $ 30,972 14,640,177 $ 2.12 $ 35,871 14,080,547 $ 2.55 Comprehensive loss The Company reports as comprehensive income (loss) all changes in stockholders' equity during the year from non-stockholder sources. Other comprehensive loss refers to all components (income, expenses, gains, and losses) of comprehensive loss that are excluded from net income. The Company's only component of other comprehensive loss 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, 2024 and 2023 are as follows: As of December 31, (in thousands) 2024 2023 Unrealized losses on securities available-for-sale $ ( 15,156 ) $ ( 17,350 ) Deferred tax benefit 3,687 4,253 Total accumulated other comprehensive loss $ ( 11,469 ) $ ( 13,097 ) Reportable segments The Company currently operates four divisions: Commercial Banking, Capital Bank Home Loans, OpenSky ™ , and Windsor Advantage. The Company reports its activities in five business segments: commercial banking; mortgage banking; credit cards; government loan servicing; 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 Company’s chief operating decision maker is the Chief Executive Officer of Capital Bancorp, Inc. For further discussion of management’s operating segments, see Note 18 - Segments. 91 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 1 - Nature of Business and Basis of Presentation (continued) Adoption of New Accounting Standards In December 2023, the FASB issued Accounting Standards Update ("ASU") 2023-07, "Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). ASU 2023-07 requires public entities to disclose significant segment expenses, an amount and description for other segment items, the title and position of the entity’s chief operating decision maker ("CODM") and an explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and, on an interim basis, certain segment related disclosures that previously were required only on an annual basis. ASU 2023-07 also clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met. ASU 2023-07 is effective for the Company for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company adopted ASU 2023-07 effective December 31, 2024. See Note 18 - Segments for new disclosures required by ASU 2023-07. Recently issued accounting pronouncements: In December 2023, the FASB issued Accounting Standards Update 2023-09, “Income Taxes (Topic 740), Improvements to Income Tax Disclosures" ("ASU 2023-09"). ASU 2023-09 requires public entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold. ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things. ASU 2023-09 is effective for the Company for fiscal years beginning after December 15, 2024 with early adoption permitted. The Company will update its income tax disclosures upon adoption. In November 2024, the FASB issued Accounting Standards Update 2024-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40)" ("ASU 2024-03"). ASU 2024-03 requires public entities to provide disaggregated disclosures, in the notes to the financial statements, of certain categories of expenses that are included in expense line items on the face of the income statement. ASU 2024-03 is effective for the Company for fiscal years beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. The Company will update its expense disclosures upon adoption. 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. 92 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 2 - Business Combination On October 1, 2024, the Company completed its Merger with IFH, pursuant to the Merger Agreement, dated as of March 27, 2024. On October 1 2024, IFH merged with and into the Company, with the Company continuing as the surviving corporation in the Merger. Pursuant to the terms of the Merger Agreement, each share of IFH Common Stock was converted into the right to receive (a) 1.115 shares of the Company’s common stock, par value $ 0.01 per share (“Common Stock”); and (b) $ 5.36 in cash per share of IFH Common Stock held immediately prior to the Merger, in addition to cash in lieu of fractional shares. In addition, each stock option granted by IFH to purchase shares of IFH Common Stock, whether vested or unvested, outstanding immediately prior to the Merger, was assumed by the Company and converted into an equivalent option to purchase the Company’s Common Stock, with the same terms and conditions as applied to the IFH stock option. The assets acquired and liabilities assumed were recorded at their estimated fair value as of the acquisition date and have been accounted for under the acquisition method of accounting. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Goodwill is established when the fair value of consideration paid exceeds the fair value of the identifiable assets acquired and liabilities assumed. Fair values are considered preliminary for a period not to exceed one year after the acquisition date and are subject to refinement as information relative to closing date fair values becomes available. The following is a description of the valuation methodologies used to estimate the fair value of major categories of assets acquired and liabilities assumed. In many cases, the fair values of the assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and applying the appropriate market discount rates. Cash and cash equivalents : The estimated fair value of cash and cash equivalents approximate their stated value. Loans: The Company recorded $ 403.9 million of net acquired loans, including $ 41.7 million of loans held for sale. The fair value for loans was based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors. Loan cash flows were generated on an individual loan basis. The probability of default, loss given default, exposure at default and prepayment assumptions are the key factors driving credit losses which are embedded into the estimated cash flows. Deferred tax asset: The Company recorded a deferred tax asset of $ 9.3 million related to tax attributes of IFH along with the effects of fair value adjustments resulting from acquisition accounting for the combination. The deferred tax assets recorded were based on the expected federal and state tax benefits of when the acquired tax attributes and purchase accounting adjustments will reverse. In recording the deferred tax asset, consideration was given to potential limitations on the realizability of such acquired tax attributes. Deposits: The Company recorded $ 459.0 million of assumed deposits. The approximate fair value for deposits was determined by the acquisition date outstanding balance for nonmaturity deposits and by the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration for time deposits. 93 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 2 - Business Combination (continued) The following table summarizes the consideration paid for IFH and the amounts of the assets acquired and liabilities assumed at the acquisition date: Purchase Price Consideration and Net Assets Acquired (dollars in thousands, except shares issued and price per share) Common share consideration Shares of common stock issued 2,631,847 Price per share on September 30, 2024 $ 25.71 Common stock consideration $ 67,665 Cash consideration 12,652 Consideration for other equity instruments 3,199 Purchase price consideration $ 83,516 Assets Cash and cash equivalents $ 77,822 Investment securities available-for-sale 1,019 Loans held for sale 41,723 Portfolio loans held for investment, net 362,180 Premises and equipment, net 7,104 Customer list intangible 12,200 Trade name intangible 2,100 Core deposits intangible 1,779 Loan servicing assets 4,515 Deferred tax asset 9,324 Bank owned life insurance 4,779 Other assets 13,731 Total assets acquired $ 538,276 Liabilities Deposits $ 458,952 Other liabilities 16,934 Total liabilities assumed $ 475,886 Total identifiable net assets $ 62,390 Goodwill $ 21,126 94 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Supplementary Information on Acquired Loans October 1, 2024 PCD loans: Par value $ 124,566 ACL at acquisition ( 11,325 ) Non-credit discount ( 5,797 ) Purchase price $ 107,444 Non-PCD loans: Fair value $ 254,736 Gross contractual amounts receivable 260,183 Estimate of contractual cash flows not expected to be collected 4,110 Goodwill represents the intangible value of IFH’s business and reputation within the markets it previously served and is not expected to be deductible for income tax purposes. The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. The Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit deteriorated loans, which have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans, including loans held for sale, with a fair value and gross contractual amounts receivable of $ 296.5 million and $ 301.9 million on the date of acquisition. The fair value of purchased financial assets with more-than-insignificant credit deterioration was $ 107.4 million on the date of acquisition. The gross contractual amounts receivable relating to the purchased financial assets with more-than-insignificant credit deterioration was $ 124.6 million. The Company estimates, on the date of acquisition, that $ 11.3 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected. In connection with the business combination with IFH, the Company recorded $ 21.1 million of goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. Information regarding the allocation of goodwill to the Company’s reportable segments, as well as the carrying amounts and amortization of other transaction related intangible assets, can be found within Note 18 – Segments and Note 8 - Goodwill and Intangible Assets, respectively. The Company recorded $ 12.2 million of customer list intangible and $ 2.1 million of trade name intangible which is being amortized over its expected useful life of 17 years and 15 years, respectively, using the straight-line method. The $ 1.8 million of core deposit intangible will be amortized over its expected useful life of 10 years using the sum-of-the-years-digits method. 95 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 2 - Business Combination (continued) The following table presents supplemental pro forma information as if the acquisition had occurred at the beginning of 2024. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates: (unaudited) (unaudited) (in thousands) 2024 2023 Total revenue (1) $ 225,443 $ 215,161 Net income $ 52,991 $ 46,322 (1) Total revenue is calculated by the sum of net interest income and noninterest income. Note 3 - Investment Securities The following table summarizes the amortized cost, fair value and allowance for credit losses of securities available-for-sale at December 31, 2024 and 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value (in thousands) December 31, 2024 U.S. Treasuries $ 136,831 $ 42 $ ( 10,038 ) $ — $ 126,835 Municipal 11,698 5 ( 2,420 ) — 9,283 Corporate 5,000 — ( 289 ) — 4,711 Asset-backed securities 5,501 25 — — 5,526 Mortgage-backed securities 79,939 2 ( 2,666 ) — 77,275 Total $ 238,969 $ 74 $ ( 15,413 ) $ — $ 223,630 December 31, 2023 U.S. Treasuries $ 161,420 $ — $ ( 12,192 ) $ — $ 149,228 Municipal 11,699 4 ( 2,331 ) — 9,372 Corporate 5,000 — ( 587 ) — 4,413 Asset-backed securities 7,069 13 ( 37 ) — 7,045 Mortgage-backed securities 40,491 — ( 2,220 ) — 38,271 Total $ 225,679 $ 17 $ ( 17,367 ) $ — $ 208,329 There was no ACL required on available-for-sale debt securities in an unrealized loss position at December 31, 2024 or 2023. There were no securities sold during the year ended December 31, 2024 or December 31, 2023. 96 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 3 - Investment Securities (continued) The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. For the Years Ended December 31, 2024 2023 (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 20,003 $ 19,882 $ 39,918 $ 39,294 One to five years 97,052 90,570 101,688 93,218 Five to ten years 29,785 25,446 26,215 22,511 Beyond ten years 6,689 4,931 10,298 7,990 Asset-backed securities (1) 5,501 5,526 7,069 7,045 Mortgage-backed securities (1) 79,939 77,275 40,491 38,271 Total $ 238,969 $ 223,630 $ 225,679 $ 208,329 (1) Asset-backed and Mortgage-backed securities are due in monthly installments. There were no securities pledged at December 31, 2024 and 2023 to secure public deposits and repurchase agreements. Pledged securities at the Federal Reserve's Bank Term Funding Program (“BTFP”) totaled $ 170.7 million at par value at December 31, 2023 with no securities pledged as of December 31, 2024 as the program ended during the first quarter 2024. At December 31, 2024 and 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity. The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at December 31, 2024 and 2023, aggregated by major security type and length of time in a continuous unrealized loss position: 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, 2024 U.S. Treasuries $ 10,883 $ ( 93 ) $ 111,196 $ ( 9,945 ) $ 122,079 $ ( 10,038 ) Municipal — — 8,373 ( 2,420 ) 8,373 ( 2,420 ) Corporate — — 4,711 ( 289 ) 4,711 ( 289 ) Asset-backed securities — — — — — — Mortgage-backed securities 55,243 ( 901 ) 18,272 ( 1,765 ) 73,515 ( 2,666 ) Total $ 66,126 $ ( 994 ) $ 142,552 $ ( 14,419 ) $ 208,678 $ ( 15,413 ) December 31, 2023 U.S. Treasuries $ — $ — $ 149,228 $ ( 12,192 ) $ 149,228 $ ( 12,192 ) Municipal — — 8,473 ( 2,331 ) 8,473 ( 2,331 ) Corporate — — 4,413 ( 587 ) 4,413 ( 587 ) Asset-backed securities — — 5,154 ( 37 ) 5,154 ( 37 ) Mortgage-backed securities 6,057 ( 8 ) 32,214 ( 2,212 ) 38,271 ( 2,220 ) Total $ 6,057 $ ( 8 ) $ 199,482 $ ( 17,359 ) $ 205,539 $ ( 17,367 ) 97 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 3 - Investment Securities (continued) At December 31, 2024 management determined the Company does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at December 31, 2024 before it is able to recover the amortized cost basis. Further, management reviewed the Company’s holdings as of December 31, 2024 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at December 31, 2024, other than securities issued or guaranteed by U.S. Government entities or agencies including U.S. Treasuries and substantially all of the Company’s mortgage-backed securities, is as follows: Corporate Securities – There have been no payment defaults on any of the Company’s holdings of corporate debt securities. There are five securities all of which are subordinated debt of other financial institutions with face amounts ranging from $ 0.5 million to $ 2 million. Municipal Securities – All of the Company’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at December 31, 2024, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows: AAA – 82 % of the portfolio; AA+ – 8 %; AA – 10 %. Asset-backed Securities – There were three investment grade asset-backed securities, and there have been no payment defaults on these securities. As such, it is deemed the above listed securities are not in an unrealized loss position due to credit-related issues and no further analysis is warranted as of December 31, 2024. Note 4 - Loan Servicing Activity for loan servicing rights and the related valuation allowance follows: Loan servicing rights: 2024 2023 Beginning of year $ — $ — Additions 5,096 — Disposals — — Other changes in fair value 415 — End of year $ 5,511 $ — The fair value at December 31, 2024 was determined using a discount rate of 13.5 %, prepayment speeds ranging from 12.8 % to 18.2 %, depending on the stratification of the specific right, and a weighted average default rate of 0.7 %. There were no such loan servicing rights during 2023. 98 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses The following is a summary of the major categories of total loans outstanding: December 31, 2024 2023 (in thousands) Amount Percent Amount Percent Real estate: Residential $ 688,552 26 % $ 573,104 30 % Commercial 943,019 36 684,229 35 Construction 321,252 12 290,108 15 Commercial and Industrial 554,550 21 239,208 13 Credit card, net of reserve (1) 127,766 5 123,331 7 Other consumer 2,089 — 950 — Portfolio loans receivable, gross 2,637,228 100 % 1,910,930 100 % Deferred origination fees, net ( 7,065 ) ( 7,642 ) Allowance for credit losses ( 48,652 ) ( 28,610 ) Portfolio loans receivable, net $ 2,581,511 $ 1,874,678 (1) Credit card loans are presented net of reserve for interest and fees. The following tables set forth the changes in the ACL and an allocation of the ACL by loan segment class for the year ended December 31, 2024 and 2023. During the year ended December 31, 2023, the Company recorded a $ 284 thousand increase to the ACL, reflected in “Other,” from residual non-accretable discounts on acquired loans post CECL adoption. The ACL on loans at December 31, 2024 included $ 11.3 million of allowance for credit losses on acquired PCD loans established through acquisition accounting adjustments on the IFH acquisition date. In addition, the provision for credit losses on loans in the year ended December 31, 2024 included $ 4.2 million to establish an ACL on non-PCD loans acquired in the IFH acquisition. (in thousands) Beginning Balance Initial Allowance on Acquired PCD Loans Provision for Credit Losses (1) Charge-Offs Recoveries Ending Balance Year Ended December 31, 2024 Real estate: Residential $ 5,518 $ 394 $ 1,940 $ ( 907 ) $ — $ 6,945 Commercial 10,316 4,007 2,277 ( 570 ) 11 16,041 Construction 2,271 — 702 — — 2,973 Commercial and Industrial 4,406 6,924 5,560 ( 606 ) 93 16,377 Credit card 6,087 — 7,238 ( 7,145 ) 121 6,301 Other consumer 12 — 3 — — 15 Total $ 28,610 $ 11,325 $ 17,720 $ ( 9,228 ) $ 225 $ 48,652 (1) Includes $ 4.2 million initial provision for credit losses on non-PCD loans. 99 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) (in thousands) Beginning Balance, Prior to Adoption of the CECL Standard Impact of Adopting the CECL Standard Other Provision (Release of Provision) for Credit Losses Charge-Offs Recoveries Ending Balance Year Ended December 31, 2023 Real estate: Residential $ 5,481 $ ( 1,198 ) $ 91 $ 1,814 $ ( 670 ) $ — $ 5,518 Commercial 8,098 3,941 193 ( 1,075 ) ( 943 ) 102 10,316 Construction 3,782 ( 1,973 ) — 462 — — 2,271 Commercial and Industrial 2,935 1,073 — 475 ( 98 ) 21 4,406 Credit card 6,078 ( 1,045 ) — 7,939 ( 7,076 ) 191 6,087 Other consumer 11 6 — ( 5 ) — — 12 Total $ 26,385 $ 804 $ 284 $ 9,610 $ ( 8,787 ) $ 314 $ 28,610 Past due loans, segregated by age and class of loans, as of December 31, 2024 and 2023 were as follows: Portfolio Loans Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Portfolio Loans Accruing Loans 90 or More days Past Due Nonaccrual Loans Loans 30-59 Days Past Due Loans 60-89 Days Past Due (in thousands) December 31, 2024 Real estate: Residential $ 1,656 $ 4,913 $ 6,644 $ 13,213 $ 675,339 $ 688,552 $ — $ 8,652 Commercial 4,957 7,570 7,001 19,528 923,491 943,019 100 14,312 Construction 1,000 415 4,309 5,724 315,528 321,252 — 4,309 Commercial and Industrial 10,981 1,245 1,049 13,275 541,275 554,550 — 2,968 Credit card 6,923 6,561 1,544 15,028 112,738 127,766 1,544 — Other consumer — — — — 2,089 2,089 — — Total $ 25,517 $ 20,704 $ 20,547 $ 66,768 $ 2,570,460 $ 2,637,228 $ 1,644 $ 30,241 December 31, 2023 Real estate: Residential $ 2,201 $ 3,096 $ 11,066 $ 16,363 $ 556,741 $ 573,104 $ 17 $ 11,398 Commercial 1,577 322 582 2,481 681,748 684,229 — 582 Construction — 1,165 3,296 4,461 285,647 290,108 — 3,288 Commercial and Industrial 1,356 74 454 1,884 237,324 239,208 — 774 Credit card 7,767 6,877 519 15,163 108,168 123,331 519 — Other consumer — — — — 950 950 — — Total $ 12,901 $ 11,534 $ 15,917 $ 40,352 $ 1,870,578 $ 1,910,930 $ 536 $ 16,042 There were $ 7.2 million and $ 8.1 million of loans secured by one-to-four family residential properties in the process of foreclosure as of December 31, 2024 and 2023, respectively. The increase in loans 60-89 days past due at December 31, 2024 from December 31, 2023 includes a single owner-occupied commercial real estate loan relationship with a total outstanding exposure amount of $ 11.6 million. The borrower fell behind in payments due to unexpected timing delays in the collection of outstanding receivables. Payments have resumed. The borrower remains actively engaged with the Company in resolving the past due status. Of the total outstanding exposure, $ 3.9 million is now considered current at December 31, 2024. 100 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) The following presents the nonaccrual loans as of December 31, 2024 and December 31, 2023: December 31, 2024 Nonaccrual with No Allowance for Credit Loss Nonaccrual with an Allowance for Credit Loss Total Nonaccrual Loans Interest Recognized on Nonaccrual Loans (in thousands) Real estate: Residential $ 8,055 $ 597 $ 8,652 $ 38 Commercial 3,205 11,107 14,312 122 Construction 4,309 — 4,309 144 Commercial and Industrial 247 2,721 2,968 106 Total $ 15,816 $ 14,425 $ 30,241 $ 410 December 31, 2023 Nonaccrual with No Allowance for Credit Loss Nonaccrual with an Allowance for Credit Loss Total Nonaccrual Loans Interest Recognized on Nonaccrual Loans Real estate: Residential $ 11,152 $ 246 $ 11,398 $ 236 Commercial 582 — 582 46 Construction 3,288 — 3,288 185 Commercial and Industrial 407 367 774 71 Total $ 15,429 $ 613 $ 16,042 $ 538 The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans: • Residential real estate loans are primarily secured by owner-occupied primary residences and, to a lesser extent, investor-owned residences. • Commercial real estate loans can be secured by either owner-occupied commercial real estate or non-owner-occupied investment commercial real estate. Typically, owner-occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner-occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development and/or industrial properties, as well as other commercial or industrial real estate. • Construction loans are typically secured by owner-occupied commercial real estate or non-owner-occupied investment real estate. Typically, owner occupied construction loans are secured by office buildings, warehouses, manufacturing facilities, and other commercial and industrial properties that are in process of construction. Non-owner-occupied commercial construction loans are generally secured by office buildings and complexes, multi-family complexes, land under development and/or other commercial and industrial real estate in process of construction. • Commercial and industrial loans are generally secured by equipment, inventory, accounts receivable and/or other commercial property. 101 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) Collateral dependent loans amortized cost (in thousands) December 31, 2024 December 31, 2023 Real estate: Residential $ 8,780 $ 11,152 Commercial 14,803 582 Construction 4,301 3,288 Commercial and Industrial 6,551 657 Total $ 34,435 $ 15,679 Of the collateral dependent loans as of December 31, 2024, a specific reserve of $ 147 thousand, $ 4.1 million and $ 4.8 million was assessed for residential real estate, commercial real estate and commercial and industrial loans, respectively. Of the collateral dependent loans as of December 31, 2023, a specific reserve of $ 9.0 million was assessed for commercial and industrial loans. The Company made 13 loan modifications on loans to borrowers experiencing financial difficulty during the year ended December 31, 2024 as follows: Modifications (in thousands) Amortized Cost Basis % of Total Loan Type Financial Effect Real estate: Residential $ 806 0.126 % Payment recast based on new extended maturity to lower payments on one loan; Reduced contractual interest rate from 8.375 % to 6.375 % on one loan. Residential - Home Equity 90 0.181 % Reduced contractual interest rate from 10.490 % to 6.375 % on one loan. Commercial 1,577 0.167 % Provided 3 months, 6 months and 12 months payment deferral on three different loans through the Bank’s standard deferral program. The deferred payments were added to the end of the original loan terms. Commercial and Industrial 2,530 0.456 % Provided 9 months payment deferral on two loans and 12 months payment deferral on two loans through the Bank’s standard deferral program. The deferred payments were added to the end of the original loan terms; Extended maturity date of one loan which reduced monthly payment amount for the borrower; Reduced contractual floating interest rate based on Prime to 6.000 % fixed rate and extended terms for 60 months on one loan; Reduced contractual floating interest rate based on Prime to 6.000 % fixed rate, extended terms for 60 months and provided 3 months payment deferral on one loan with the deferred payments added to the end of the original loan terms. Total $ 5,003 The Company did not make any modifications on loans to borrowers experiencing financial difficulty during the year ended December 31, 2023. 102 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) 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. From a credit risk standpoint, the Company utilizes a risk grading matrix to assign a risk grade to each of its loans. The classifications of loans reflect a judgment about the risk of expected credit loss associated with each loan. Credit quality indicators are reviewed and adjusted regularly to account for the degree of risk and expected credit loss that the Company believes to be appropriate for each financial asset. A description of the general characteristics of loans characterized as classified is as follows: Pass Loans characterized as pass includes loans graded exceptional, very good, good, satisfactory and pass/watch. The Company believes that there is a low likelihood of credit deterioration related to those loans that are considered pass. 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. The following table presents the balances of classified loans based on the most recent credit quality indicator analysis. Classified loans include Special Mention, Substandard and Doubtful loans. Pass classified loans include loans graded exceptional, very good, good, satisfactory, and pass/watch. Credit card loans are ungraded as they are not individually graded. Charge-offs presented represent gross charge-offs recognized in the current period: 103 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) December 31, 2024 Term Loans by Origination Year (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Total Residential – Real estate Pass $ 155,867 $ 129,639 $ 122,203 $ 76,906 $ 69,647 $ 117,272 $ — $ 671,534 Special Mention — — 2,065 1,242 3,604 — — 6,911 Substandard — — — 3,422 189 6,496 — 10,107 Doubtful — — — — — — — — Total 155,867 129,639 124,268 81,570 73,440 123,768 — 688,552 Commercial – Real estate Pass 235,929 61,372 170,611 146,642 92,038 207,631 — 914,223 Special Mention — 2,300 10,747 5,052 — 788 — 18,887 Substandard — — 7,558 — 320 2,031 — 9,909 Doubtful — — — — — — — — Total 235,929 63,672 188,916 151,694 92,358 210,450 — 943,019 Construction – Real estate Pass 98,942 129,202 46,532 20,634 15,458 6,175 — 316,943 Special Mention — — — — — — — — Substandard — — — — 2,252 2,057 — 4,309 Doubtful — — — — — — — — Total 98,942 129,202 46,532 20,634 17,710 8,232 — 321,252 Commercial and Industrial Pass 129,043 130,647 117,346 42,747 21,356 107,953 — 549,092 Special Mention 232 — 489 — — 270 — 991 Substandard — 209 712 205 3,239 102 — 4,467 Doubtful — — — — — — — — Total 129,275 130,856 118,547 42,952 24,595 108,325 — 554,550 Other consumer Pass 1,226 278 73 95 76 341 — 2,089 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total 1,226 278 73 95 76 341 — 2,089 Credit card Ungraded — — — — — — 127,766 127,766 Portfolio loans receivable, gross $ 621,239 $ 453,647 $ 478,336 $ 296,945 $ 208,179 $ 451,116 $ 127,766 $ 2,637,228 December 31, 2024 (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Total Gross Charge-offs Residential real estate $ — $ — $ — $ — $ — $ 907 $ — $ 907 Commercial real estate — — 570 — — — — 570 Commercial and Industrial 84 80 306 — — 136 — 606 Credit card — — — — — — 7,145 7,145 Total $ 84 $ 80 $ 876 $ — $ — $ 1,043 $ 7,145 $ 9,228 104 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) December 31, 2023 Term Loans by Origination Year (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total Residential – Real estate Pass $ 140,394 $ 137,362 $ 76,556 $ 76,938 $ 36,122 $ 88,055 $ — $ 555,427 Special Mention — — 134 3,670 1,176 288 — 5,268 Substandard — 33 — — 26 12,350 — 12,409 Doubtful — — — — — — — — Total 140,394 137,395 76,690 80,608 37,324 100,693 — 573,104 Commercial – Real estate Pass 62,095 185,776 145,756 68,748 96,238 116,347 — 674,960 Special Mention — 6,897 — — 805 985 — 8,687 Substandard — — — — 582 — — 582 Doubtful — — — — — — — — Total 62,095 192,673 145,756 68,748 97,625 117,332 — 684,229 Construction – Real estate Pass 142,157 72,240 46,180 16,859 6,246 2,517 — 286,199 Special Mention — — — — — 614 — 614 Substandard — — — 1,254 597 1,444 — 3,295 Doubtful — — — — — — — — Total 142,157 72,240 46,180 18,113 6,843 4,575 — 290,108 Commercial and Industrial Pass 70,540 71,689 28,007 9,364 18,036 37,392 — 235,028 Special Mention — 156 — 2,406 47 273 — 2,882 Substandard 30 814 211 — 42 201 — 1,298 Doubtful — — — — — — — — Total 70,570 72,659 28,218 11,770 18,125 37,866 — 239,208 Other consumer Pass 75 278 147 116 — 334 — 950 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total 75 278 147 116 — 334 — 950 Credit card Ungraded — — — — — — 123,331 123,331 Portfolio loans receivable, gross $ 415,291 $ 475,245 $ 296,991 $ 179,355 $ 159,917 $ 260,800 $ 123,331 $ 1,910,930 December 31, 2023 (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total Gross Charge-offs Residential real estate $ — $ — $ — $ — $ — $ 670 $ — $ 670 Commercial real estate — — — — 943 — — 943 Commercial and Industrial — 98 — — — — — 98 Credit card — — — — — — 7,076 7,076 Total $ — $ 98 $ — $ — $ 943 $ 670 $ 7,076 $ 8,787 105 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) Outstanding loan commitments were as follows: December 31, (in thousands) 2024 2023 Unused lines of credit Real Estate: Residential $ 20,996 $ 15,436 Residential - Home Equity 46,900 43,892 Commercial 44,201 20,424 Construction 85,984 98,777 Commercial and Industrial 79,961 42,751 Credit card (1) 124,732 114,882 Other consumer 255 310 Total $ 403,029 $ 336,472 Letters of credit $ 3,122 $ 4,641 _______________ (1) Outstanding loan commitments in the credit card portfolio include $ 97.2 million and $ 98.2 million in secured and partially secured balances as of December 31, 2024 and 2023, 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. 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. The Company maintains an estimated reserve for unfunded commitments and certain 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) 2024 2023 Balance at beginning of period $ 806 $ 1,682 Impact of adopting the CECL standard on January 1, 2023 — ( 775 ) Provision for (release of) credit losses on unfunded commitments 385 ( 101 ) Balance at end of period $ 1,191 $ 806 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. 106 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued) 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) 2024 2023 Balance at beginning of period $ 985 $ 1,173 Provision for (release of) mortgage loan put-back reserve 1,275 ( 188 ) Balance at end of period $ 2,260 $ 985 The Company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows: (in thousands) 2024 Purchase price of loans at acquisition $ 107,444 Allowance for credit losses at acquisition 11,325 Non-credit discount at acquisition 5,797 Par value of acquired loans at acquisition $ 124,566 Note 6 - Premises and Equipment Year end premises and equipment owned and utilized in the operations of the Company and the related depreciation and amortization expense were as follows: (in thousands) 2024 2023 Leasehold improvements $ 2,710 $ 2,710 Furniture and equipment 4,973 4,926 Vehicle 54 54 Software 3,440 2,517 Construction in progress 1,292 33 Land 700 — Building 6,320 — 19,489 10,240 Less: Accumulated depreciation and amortization ( 9,228 ) ( 8,758 ) Premises and equipment 10,261 1,482 Net lease asset 5,264 3,587 Premises and equipment, net $ 15,525 $ 5,069 Depreciation and amortization expense $ 737 $ 324 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 five of its full service branches and seven 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. 107 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 7 - Leases (continued) 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 5.08 % at December 31, 2024 and 3.79 % at December 31, 2023. 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, 2024, the Company’s net lease ROU assets and related lease liabilities were $ 5.3 million and $ 5.9 million, respectively, compared to December 31, 2023 balances of $ 3.6 million of ROU assets and $ 3.8 million of lease liabilities, and have remaining terms ranging from one to eight years , including extension options that the Company is reasonably certain will be exercised. As of December 31, 2024, 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) 2024 2023 Lease Right-of-Use Asset: Lease asset $ 6,821 $ 6,810 Less: Accumulated amortization ( 1,557 ) ( 3,223 ) Net lease asset $ 5,264 $ 3,587 Lease Liability: Lease liability $ 7,154 $ 6,892 Less: Accumulated amortization ( 1,282 ) ( 3,101 ) Net lease liability $ 5,872 $ 3,791 Future minimum payments for operating leases with initial or remaining terms of one year or more are as follows at December 31, 2024: (in thousands) 2024 Amounts due in: 2025 $ 2,030 2026 1,933 2027 626 2028 449 2029 441 Thereafter 1,188 Total future lease payments 6,667 Discount of cash flows ( 795 ) Present value of net future lease payments $ 5,872 Operating lease and rent expense totaled $ 1.5 million and $ 1.3 million for the years ended December 31, 2024 and 2023, respectively. 108 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 8 - Goodwill and Intangible Assets The change in goodwill during the years ended December 31, 2024 and 2023 is as follows: (in thousands) 2024 2023 Balance at beginning of period $ — $ — Acquired goodwill 21,126 — Impairment — — Balance at end of period $ 21,126 $ — At December 31, 2024, the Company’s reporting units where goodwill was pushed down had positive equity and earnings. The Company has elected to perform a qualitative assessment annually as of October 1 to determine if it is more than likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more than likely than not that the fair value of the reporting unit exceeded the carrying value, resulting in no impairment. Acquired amortizing intangible assets were as follows at December 31: 2024 2023 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortized intangible assets: Customer list intangible $ 12,200 $ ( 188 ) $ — $ — Trade name intangible 2,100 ( 40 ) — — Core deposits intangible 1,779 ( 34 ) — — Total amortized intangible assets $ 16,079 $ ( 262 ) $ — $ — Goodwill represents the intangible value of IFH’s business and reputation within the markets it previously served and is not expected to be deductible for income tax purposes. The customer list intangible and trade name intangible will be amortized over its expected useful life of 17 years and 15 years, respectively, using the straight-line method. The core deposit intangible will be amortized over its expected useful life of 10 years using the sum-of-the-years-digits method. Aggregate amortization expense was $ 262,000 and zero for the years ended December 31, 2024 and 2023, respectively. At December 31, 2024, scheduled amortization of the intangible assets for each of the next five years is as follows: (in thousands) 2025 $ 1,046 2026 1,043 2027 1,038 2028 1,033 2029 1,026 Thereafter 10,631 Total $ 15,817 109 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 9 - Deposits Time deposits that meet or exceed the FDIC Insurance Limit of $250,000 at year-end 2024 and 2023 were $ 250.8 million and $ 124.7 million. Scheduled maturities of time deposits for the next five years were as follows: (in thousands) 2025 $ 726,992 2026 69,474 2027 56,100 2028 28,613 2029 735 Thereafter 20 Total $ 881,934 Note 10 - Borrowed Funds As of December 31, 2024 and 2023, the Company was indebted as follows: 2024 2023 (dollars in thousands) Balance Interest Balance Interest FHLB fixed rate advance due October 16, 2025 $ 22,000 0.93 % $ 22,000 0.93 % Junior subordinated debentures due June 15, 2036 $ 2,062 6.49 % $ 2,062 7.52 % Other subordinated notes due November 30, 2030 10,000 5.00 10,000 5.00 Bank Term Funding Program borrowings — — 15,000 4.84 Total - Other borrowed funds $ 12,062 5.25 % $ 27,062 5.10 % The FHLB fixed rate advances accrue interest on a daily basis and are paid semi-annually. Junior subordinated debentures In June 2006, the Company formed Capital Bancorp (MD) Statutory Trust I (the “Trust”) and on June 15, 2006, the Trust issued 2,000 floating rate capital securities (the “Capital Securities”) with an aggregate liquidation value of $ 2.0 million 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 thousand. 110 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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 CME Term SOFR plus a spread adjustment of 0.26161 % (or 26.161 basis points) plus 187 basis points, payable quarterly. As of December 31, 2024 and 2023, the rate for the Trust was 6.49 % and 7.52 %, 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”). 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 Notes 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. Federal Reserve’s Bank Term Funding Program On March 12, 2023, in response to liquidity concerns in the banking system, the Federal Deposit Insurance Corporation, Federal Reserve and U.S. Department of Treasury, collaboratively approved certain actions with a stated intention to reduce stress across the financial system, support financial stability and minimize any impact on business, households, taxpayers, and the broader economy. Among other actions, the Federal Reserve Board created the BTFP to make additional funding available to eligible depository institutions to help assure institutions can meet the needs of their depositors. During the first quarter of 2023, we established a line of credit under the BTFP. As of March 31, 2024, participation in the BTFP had concluded and the Company had no outstanding balances under the BTFP at December 31, 2024. 111 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 10 - Borrowed Funds (continued) Available lines of credit The Company has available lines of credit of $ 76.0 million with other correspondent banks. There were no outstanding line of credit balances at December 31, 2024 and December 31, 2023. 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, 2024 and 2023, the Company had pledged loans providing borrowing capacity of $ 507.5 million and $ 313.5 million, respectively. The Company did no t have any pledged investment securities to the FHLB at December 31, 2024 or December 31, 2023. As of December 31, 2024 and 2023, the Company had available borrowing capacity, net of advances and amounts pledged for letters of credit, from the FHLB of $ 485.5 million and $ 291.5 million, respectively. As of December 31, 2024 and 2023, the Company had pledged commercial loans to the Federal Reserve Bank of Richmond to secure a borrowing capacity totaling $ 20.6 million and $ 16.6 million, respectively, under its discount window program. Further, the Company had pledged available-for-sale securities to the Federal Reserve Bank of Richmond to secure an additional borrowing capacity of $ 89.6 million at December 31, 2024 as compared to a borrowing capacity of $ 155.7 million under the BTFP as previously mentioned at December 31, 2023. The Company limits its certificate of deposit funding through financial networks to 15 % of the Bank’s assets, or approximately $ 471.3 million and $ 326.5 million as of December 31, 2024 and 2023, respectively. The Company had $ 333.0 million outstanding as of December 31, 2024 and $ 142.4 million outstanding as of December 31, 2023. 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 $ 1.1 million in 2024 and $ 1.0 million in 2023. 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 Internal Revenue Code 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 % of salary for achieving targeted performance levels while other executive management members are eligible to earn an annual contribution of 15 % 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 % 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. 112 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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 2024 and 2023 is shown below: (in thousands) 2024 2023 Balance at beginning of year $ 32,074 $ 36,305 Add: New loans — — Less: Amounts collected ( 3,431 ) ( 4,231 ) Balance at end of year $ 28,643 $ 32,074 Deposits from officers and directors and their related interests were $ 92.0 million at December 31, 2024, and $ 81.3 million at December 31, 2023. 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 $ 84 thousand and $ 85 thousand in 2024 and 2023, respectively. Company directors, or their related interests, held $ 2.5 million of the subordinated notes outstanding as of December 31, 2024. These notes hold a fixed rate of interest until November 30, 2025, after which it converts to variable rate. 113 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 13 - Income Taxes Income tax expense was as follows: For the Years Ended December 31, (in thousands) 2024 2023 Current expense Federal $ 10,472 $ 8,192 State 2,202 2,020 Total current expense 12,674 10,212 Deferred tax expense (benefit) ( 1,814 ) 142 Total income tax expense $ 10,860 $ 10,354 The components of the net deferred tax asset at December 31, 2024 and 2023 were: (in thousands) 2024 2023 Deferred tax assets: Allowance for credit losses $ 11,928 $ 7,230 Reserve for recourse on mortgage loans sold 553 242 Stock-based compensation 793 309 Long-term incentive program 497 372 Write-down of equity investments 1,054 — Unrealized loss on investment securities available-for-sale 3,789 4,253 Lease liability, net of right of use asset 149 45 Purchase accounting adjustments - loans and deposits 4,137 — Other reserves 904 16 Deferred tax asset before valuation allowance 23,804 12,467 Valuation allowance 1,054 — Deferred tax asset 22,750 12,467 Deferred tax liabilities: Accumulated depreciation 249 214 Intangible assets 2,405 — Mortgage and other servicing rights 1,347 — Purchase accounting adjustments - fixed assets 1,717 — Other 362 1 Deferred tax liability 6,080 215 Net deferred tax asset $ 16,670 $ 12,252 Based on the Company’s history of prior earnings and its expectations of the future, it is anticipated that operating income and the reversal pattern of its temporary differences will, more likely than not, be sufficient to realize a net deferred tax asset of $ 16.7 million at December 31, 2024 from continuing operations. The Company reduces the carrying amounts of deferred tax assets by a valuation allowance, if, based on the available evidence, it is more likely than not that such assets will not be realized. At December 31, 2024 a valuation allowance of $ 1.1 million was established for a deferred tax asset arising from the write-down of a legacy IFH equity investment for which realizability is uncertain. At December 31, 2023, no valuation allowance was recognized. The Company’s net deferred tax asset of $ 16.7 million at December 31, 2024 increased $ 4.4 million, compared to $ 12.3 million at December 31, 2024. The variance in net deferred tax asset year over year included the allowance for credit losses of $ 4.7 million and was also augmented in part by the IFH acquisition, including net purchase accounting adjustments of $ 2.4 million, intangible assets of $ 2.4 million, mortgage and other servicing rights of $ 1.3 million and a write-down on an equity investment of $ 1.1 million for which a valuation allowance of $ 1.1 million was established. 114 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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: 2024 2023 Statutory federal income tax rate 21.00 % 21.00 % Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 3.63 3.13 Valuation allowance on deferred tax asset 1.32 — Nondeductible merger expenses 0.64 — Stock-based compensation expense 0.56 ( 0.05 ) Bank-owned life insurance ( 0.74 ) ( 0.54 ) Tax credits, net of amortization ( 0.26 ) — Tax-exempt interest and dividend income ( 0.01 ) 0.01 Other, net ( 0.18 ) ( 1.15 ) Effective Tax Rate 25.96 % 22.40 % The Company’s effective tax rate of 25.96 % for 2024 increased 3.56 %, compared to 22.40 % for 2023. The change in effective tax rate was due, in part, to the write-down of a legacy IFH equity investment which resulted in a deferred tax asset with an offsetting valuation allowance, certain nondeductible merger related expenses and stock-based compensation expense. Offsetting this includes tax credits, net of amortization, arising from the Company’s 2024 investment in low income housing tax credits reduced the effective tax rate in 2024.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, 2020. 115 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 14 - Regulatory Capital Matters The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of December 31, 2024, that the Company and Bank meet all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If not adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2024 and 2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. At December 31, 2024 the Company reached the $3 billion asset level and is subject to separate minimum capital measurements. The Company exceeded the minimum capital measurements and remains “well-capitalized.” Actual and required capital amounts and ratios are presented below at year-end. 116 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 14 - Regulatory Capital Matters (continued) Regulatory Capital Actual Minimum Capital Adequacy To Be Well Capitalized (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2024 The Company Tier 1 leverage ratio (to average assets) $ 346,840 11.07 % $ 125,348 4.00 % $ 156,685 5.00 % Tier 1 capital (to risk-weighted assets) 346,840 13.83 % 150,512 6.00 % 200,683 8.00 % Common equity tier 1 capital ratio (to risk-weighted assets) 344,778 13.74 % 112,884 4.50 % 163,055 6.50 % Total capital ratio (to risk-weighted assets) 388,425 15.48 % 200,683 8.00 % 250,853 10.00 % The Bank Tier 1 leverage ratio (to average assets) $ 283,828 9.17 % $ 123,818 4.00 % $ 154,772 5.00 % Tier 1 capital (to risk-weighted assets) 281,563 11.54 % 146,451 6.00 % 195,268 8.00 % Common equity tier 1 capital ratio (to risk-weighted assets) 281,563 11.54 % 109,838 4.50 % 158,655 6.50 % Total capital ratio (to risk-weighted assets) 312,304 12.79 % 195,268 8.00 % 244,085 10.00 % December 31, 2023 The Company Tier 1 leverage ratio (to average assets) $ 270,019 12.14 % $ 89,004 4.00 % N/A N/A Tier 1 capital (to risk-weighted assets) 270,019 15.55 % 104,175 6.00 % N/A N/A Common equity tier 1 capital ratio (to risk-weighted assets) 267,957 15.43 % 78,132 4.50 % N/A N/A Total capital ratio (to risk-weighted assets) 301,817 17.38 % 138,900 8.00 % N/A N/A The Bank Tier 1 leverage ratio (to average assets) $ 228,794 10.51 % $ 87,068 4.00 % $ 108,835 5.00 % Tier 1 capital (to risk-weighted assets) 228,794 13.56 % 101,251 6.00 % 135,001 8.00 % Common equity tier 1 capital ratio (to risk-weighted assets) 228,794 13.56 % 75,938 4.50 % 109,688 6.50 % Total capital ratio (to risk-weighted assets) 249,984 14.81 % 135,001 8.00 % 168,751 10.00 % 117 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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 $ 2.1 million and $ 1.8 million during the years ended December 31, 2024 and 2023, respectively. Stock options: The Company currently has two incentive compensation plans with outstanding stock options, the 2002 Stock Option Plan and the Amended and Restated 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, 2024, there are 446,794 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, 2024 and 2023 is as follows: 2024 2023 Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Outstanding at beginning of year 550,718 $ 19.21 811,160 $ 15.37 Add: Granted 358,847 20.97 168,819 23.34 Less: Exercised ( 150,247 ) 14.97 ( 228,405 ) 11.96 Less: Retired on exercise ( 89,352 ) 14.59 ( 124,939 ) 12.29 Less: Expired/cancelled/forfeited ( 55,606 ) 23.22 ( 75,917 ) 20.49 Outstanding at end of year 614,360 $ 21.02 550,718 $ 19.21 Exercisable at end of year 287,136 $ 18.52 295,450 $ 16.69 The weighted average fair value of options granted during the years ended December 31, 2024 and 2023, was $ 8.70 and $ 10.81 , respectively. 118 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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, 2024 $ 8.77 - 13.18 $ 8.77 0.39 4,036 4,036 13.19 - 17.59 14.21 0.63 180,744 161,658 17.60 - 22.00 18.85 3.31 42,883 14,415 22.01 - 26.41 24.57 3.16 386,697 107,027 Total outstanding options $ 21.02 2.41 614,360 287,136 Intrinsic value on December 31, 2024 $ 2,390,720 $ 2,131,880 December 31, 2023 $ 10.70 - 14.63 $ 14.18 1.52 267,527 221,460 14.64 - 18.56 15.27 1.57 24,000 15,000 18.57 - 22.49 20.15 3.98 3,250 1,250 22.50 - 26.41 24.82 3.56 255,941 57,740 Total outstanding options $ 19.21 2.48 550,718 295,450 Intrinsic value on December 31, 2023 $ 2,999,807 $ 2,346,106 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, 2024 and 2023, 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 $ 1.6 million and $ 1.4 million at December 31, 2024 and 2023, respectively. The intrinsic value of stock options exercised was $ 1.8 million and $ 1.9 million during the years ended December 31, 2024 and 2023, respectively. The weighted average fair value of options granted during 2024 and 2023 were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: 2024 2023 Dividend yield 1.33 % 1.04 % Risk free interest rate 4.02 % 4.52 % Expected volatility 50.80 % 54.64 % Expected life in years 5 5 119 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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, 2024 and 2023 is summarized in the following table. 2024 2023 Shares Weighted Average Grant-Date Fair Value Shares Weighted Average Grant-Date Fair Value Nonvested at beginning of year 28,176 $ 21.66 39,669 $ 17.45 Add: Granted 37,311 23.94 10,714 25.77 Less: Vested ( 11,829 ) 18.32 ( 13,652 ) 15.92 Less: Retired on vesting ( 5,375 ) 18.12 ( 8,555 ) 16.46 Less: Forfeited ( 1,333 ) 17.90 — — Nonvested at end of year 46,950 $ 24.83 28,176 $ 21.66 The vesting schedule of restricted shares as of December 31, 2024 is as follows: Year Shares 2025 34,574 2026 7,639 2027 4,737 46,950 There was $ 570 thousand and $ 78 thousand of total unrecognized compensation expense related to nonvested restricted stock at December 31, 2024 and 2023, respectively. 120 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 16 - Parent Company Financial Information The balance sheets as of December 31, 2024 and 2023 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) 2024 2023 Assets Cash and cash equivalents $ 5,358 $ 3,499 Investment in Bank 292,185 215,698 Investment in Church Street Capital 7,357 6,574 Investment in Windsor 5,939 — Investment in Trust 62 62 Loans receivable, net of allowance for credit losses of $ 475 and $ 416 at December 31, 2024 and 2023, respectively 41,693 41,310 Accrued interest receivable 92 370 Goodwill 3,521 — Intangible assets 14,072 — Deferred income taxes ( 3,081 ) 165 Other assets 336 21 Total assets $ 367,534 $ 267,699 Liabilities and Stockholders’ Equity Borrowed funds $ 12,062 $ 12,062 Accrued interest payable 49 299 Other liabilities 284 478 Total liabilities 12,395 12,839 Stockholders’ equity Common stock 167 139 Additional paid-in capital 128,598 54,473 Retained earnings 237,843 213,345 Accumulated other comprehensive loss ( 11,469 ) ( 13,097 ) Total stockholders’ equity 355,139 254,860 Total liabilities and stockholders’ equity $ 367,534 $ 267,699 Parent Company Only Statements of Income (in thousands) 2024 2023 Interest and dividend income $ 2,415 $ 2,646 Dividend from Bank 19,500 6,500 Total interest and dividend revenue 21,915 9,146 Interest expense 656 649 Net interest income 21,259 8,497 Provision for credit losses 59 88 Net interest income after provision for credit losses 21,200 8,409 Noninterest income ( 2,615 ) 4 Noninterest expenses 1,119 629 Income before income taxes 17,466 7,784 Income tax expense 152 304 Income before undistributed net income of subsidiaries 17,314 7,480 Undistributed net income of subsidiaries 13,658 28,391 Net income $ 30,972 $ 35,871 121 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 16 - Parent Company Financial Information (continued) Parent Company Only Statements of Cash Flows (in thousands) 2024 2023 Cash flows from operating activities Net Income $ 30,972 $ 35,871 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 59 88 Undistributed net income of subsidiaries ( 13,658 ) ( 28,391 ) Stock-based compensation expense 1,895 1,757 Director and employee compensation paid in Company stock 517 547 Deferred income tax expense (benefit) 4 ( 65 ) Amortization of intangible assets 228 — Changes in assets and liabilities: Accrued interest receivable 278 ( 82 ) Other assets ( 25 ) 24 Accrued interest payable ( 250 ) 251 Other liabilities ( 194 ) 597 Net cash provided by operating activities 19,826 10,597 Cash flows from investing activities Net decrease (increase) in portfolio loans receivable ( 442 ) 5,314 Capital contributions to subsidiaries ( 5,512 ) ( 1,729 ) Cash paid from acquisitions, net ( 6,416 ) — Net cash (used) provided by investing activities ( 12,370 ) 3,585 Cash flows from financing activities Dividends paid ( 5,275 ) ( 3,920 ) Repurchase of common stock ( 1,399 ) ( 8,826 ) Net proceeds from exercise of stock options 1,077 1,791 Net cash used by financing activities ( 5,597 ) ( 10,955 ) Net increase in cash and cash equivalents 1,859 3,227 Cash and cash equivalents, beginning of year 3,499 272 Cash and cash equivalents, end of year $ 5,358 $ 3,499 122 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 17 - Fair Value Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. This includes certain U.S. Treasury and other U.S. Government and government agency securities actively traded in over-the-counter markets. Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate fair value on a recurring basis: Investment securities available-for-sale - The fair values for investment securities available-for-sale are provided by an independent pricing service and are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Loans held for sale - The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). Loan servicing assets - The fair values of loan servicing assets are determined at a tranche level, based on market prices for comparable servicing contracts (Level 2), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2). Derivative financial instruments - The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. 123 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 17 - Fair Value (continued) The Company has categorized its financial instruments measured at fair value on a recurring basis as of December 31, 2024 and December 31, 2023 as follows: Fair Value Measurements Using: (in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2024 Investment securities available-for-sale U.S. Treasuries $ 126,835 $ 126,835 $ — $ — Municipal 9,283 — 9,283 — Corporate 4,711 — 4,711 — Asset-backed securities 5,526 — 5,526 — Mortgage-backed securities 77,275 — 77,275 — Total $ 223,630 $ 126,835 $ 96,795 $ — Loans held for sale $ 21,270 $ — $ 21,270 $ — Loan servicing assets $ 5,511 $ — $ 5,511 $ — December 31, 2023 Investment securities available-for-sale U.S. Treasuries $ 149,228 $ 149,228 $ — $ — Municipal 9,372 — 9,372 — Corporate 4,413 — 4,413 — Asset-backed securities 7,045 — 7,045 — Mortgage-backed securities 38,271 — 38,271 — Total $ 208,329 $ 149,228 $ 59,101 $ — Loans held for sale $ 7,481 $ — $ 7,481 $ — Loan servicing assets $ — $ — 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. 124 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 17 - Fair Value (continued) 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, 2024 December 31, 2023 Aggregate fair value $ 21,270 $ 7,481 Contractual principal 16,721 5,168 Difference $ 4,549 $ 2,313 The Company has elected to account for loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market. As of December 31, 2024 and December 31, 2023, there were no held for sale loans which were classified as nonaccrual. Fair value measurements on a nonrecurring basis Individually evaluated loans - The Company has measured expected credit losses based on the fair value of the loan's collateral and discounted cash flow analysis, where appropriate. Fair value of the collateral 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, 2024 and December 31, 2023, the fair values consist of loan balances of $ 34.9 million and $ 16.0 million, with specific reserves of $ 9.3 million and $ 0.4 million, respectively. Foreclosed real estate - The Company's foreclosed real estate is measured at fair value less cost to sell. Fair value is determined based on offers and/or appraisals. Cost to sell the real estate is based on standard market factors. The Company categorizes its foreclosed real estate as Level 3. As of December 31, 2024 and December 31, 2023, there was no foreclosed real estate held by the Company. 125 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 17 - Fair Value (continued) The Company has categorized its financial instruments measured at fair value on a nonrecurring basis as of December 31, 2024 and December 31, 2023 as follows: Fair Value of Individually Evaluated Loans (in thousands) 2024 2023 Individually evaluated loans for credit loss, net Level 3 Inputs 25,521 15,620 Total $ 25,521 $ 15,620 The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2024 and 2023: Valuation Technique Unobservable Inputs General Range of Inputs 2024 Individually evaluated loans Appraised Value/Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs 0 - 30 % Valuation Technique Unobservable Inputs General Range of Inputs 2023 Individually evaluated loans Appraised Value/Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs 0 - 30 % 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. The information used to determine fair value is highly subjective in nature and, therefore, the results are imprecise. 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. 126 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 17 - Fair Value (continued) As of December 31, 2024, the techniques used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2023. The fair value of the Company’s loan portfolio includes 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, individually analyzed loans, and all other loans. The results are then adjusted to account for credit risk as described above and a further credit risk discount is 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. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for individually evaluated 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 and investments in restricted stocks is the carrying amount. Restricted investments 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, savings, and money market deposits 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. 127 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 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. Fair Value of Financial Assets and Liabilities December 31, 2024 December 31, 2023 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Financial assets Level 1 Cash and due from banks $ 25,433 $ 25,433 $ 14,513 $ 14,513 Interest-bearing deposits at other financial institutions 179,841 179,841 39,044 39,044 Federal funds sold 58 58 407 407 Level 2 Accrued interest receivable $ 16,664 $ 16,664 $ 11,494 $ 11,494 Level 3 Portfolio loans receivable, net $ 2,581,511 $ 2,499,578 $ 1,874,678 $ 1,855,158 Restricted investments 4,479 4,479 4,353 4,353 Financial liabilities Level 1 Noninterest-bearing deposits $ 810,928 $ 810,928 $ 617,373 $ 617,373 Level 2 Accrued interest payable $ 9,393 $ 9,393 $ 5,583 $ 5,583 Level 3 Interest-bearing deposits $ 1,951,011 $ 1,960,728 $ 1,278,623 $ 1,280,682 FHLB advances and other borrowed funds 34,062 32,372 49,062 46,634 128 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 18 - Segments The Company’s reportable segments represent business units with discrete financial performance and information whose results are regularly reviewed by management. The five segments include Commercial Banking, Capital Bank Home Loans (the Company’s mortgage loan division), OpenSky ™ (the Company’s credit card division), Windsor Advantage (the Company’s government loan servicing division), and the Corporate Office. The Company’s reportable segments are determined by the Chief Executive Officer, who is the designated chief operating decision maker, based upon organizational design, leadership structure and the Company’s products and services offered. The Company’s reportable segments are also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business, which are then aggregated if operating performance, products/services, and customers are similar. The chief operating decision maker evaluates the financial performance of the Company’s business components by evaluating revenue streams, significant expenses, and variance to the annual financial plan to assess the performance of the Company’s segments and in the determination of allocating resources and investments. The chief operating decision maker uses revenue streams and other relevant market data to evaluate product pricing and significant expenses to assess segment performance. Segment pretax income or loss, return on assets and the efficiency ratio is used to assess the performance of the commercial bank segment by monitoring the margin between interest income and interest expense. Segment pretax income or loss is used to assess the performance of the CBHL segment by monitoring the mortgage banking revenue from loan originations and sales. Segment pretax income or loss is used to assess the performance of the OpenSky ™ segment by monitoring credit card interest income, interchange fees, and other fees. Segment pretax income or loss is used to assess the performance of the Windsor Advantage segment by monitoring the service charge revenues from Windsor customers. Loans, investments, and deposits and fees provide the revenues in the commercial bank, loan sales provide the revenues in CBHL, credit card loan interest and fees provide the revenues in OpenSky ™ , and service charges and ancillary fees provide the revenues in Windsor Advantage. Interest expense, provisions for credit losses and personnel provide the significant expenses in the commercial bank, cost of loan sales and personnel provide the significant expenses in CBHL, data processing and personnel provide the significant expenses in OpenSky ™ , and personnel provide the significant expenses in Windsor Advantage. Segment pretax income or loss is used to assess the performance of the Corporate segment by monitoring net interest income generated by revenue-producing assets from idle cash. The Corporate segment includes non-recurring expenses, merger-related expenses, and operational expenses related to the Bank Holding Company. All operations are domestic. Effective January 1, 2024, the Company allocated certain expenses previously recorded directly to the Commercial Bank segment to the other segments. These expenses are for shared services also consumed by OpenSky ™ , CBHL, Windsor Advantage and Corporate. The Company performs an allocation process based on several metrics the Company believes more accurately ascribe shared service overhead to each segment. The Company believes this reflects the cost of support for each segment that should be considered in assessing segment performance. Historical information has been recast to reflect financial information consistently with the 2024 presentation. Accounting policies for segments are the same as those described in Note 1. Segment performance is evaluated using income (loss) before taxes. Indirect expenses are allocated on revenue. Transactions among segments are made at fair value. The following schedule reported internally for performance assessment by the chief operating decision maker presents financial information for each reportable segment at and for the years ended December 31, 2024 and 2023. 129 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 18 - Segments (continued) For the Year Ended December 31, 2024 (in thousands) Commercial Bank CBHL OpenSky ™ Windsor Advantage Corporate (2) Eliminations Consolidated Interest income $ 147,464 $ 568 $ 61,785 $ — $ 3,646 $ ( 162 ) $ 213,301 Interest expense 57,536 363 — — 818 ( 162 ) 58,555 Net interest income 89,928 205 61,785 2,828 — 154,746 Provision for credit losses 10,331 — 7,329 — 60 — 17,720 Provision for credit losses on unfunded commitments 385 — — — — — 385 Net interest income after provision 79,212 205 54,456 2,768 — 136,641 Noninterest income 6,654 6,684 16,122 4,566 ( 2,616 ) — 31,410 Noninterest expense (1) 53,429 9,377 53,245 2,670 7,498 — 126,219 Net income (loss) before taxes $ 32,437 $ ( 2,488 ) $ 17,333 $ 1,896 $ ( 7,346 ) $ — $ 41,832 Total assets (3) $ 2,994,356 $ 21,691 $ 125,913 $ 25,515 $ 359,337 $ ( 319,901 ) $ 3,206,911 For the Year Ended December 31, 2023 (in thousands) Commercial Bank CBHL OpenSky ™ Windsor Advantage Corporate (2) Eliminations Consolidated Interest income $ 116,408 $ 382 $ 62,476 $ — $ 4,238 $ ( 298 ) $ 183,206 Interest expense 40,896 135 — — 947 ( 298 ) 41,680 Net interest income 75,512 247 62,476 — 3,291 — 141,526 Provision for credit losses 1,540 — 7,948 — 122 — 9,610 Release of credit losses on unfunded commitments ( 101 ) — — — — — ( 101 ) Net interest income after provision 74,073 247 54,528 — 3,169 — 132,017 Noninterest income 2,737 4,909 17,325 — 4 — 24,975 Noninterest expense (1) 48,347 8,155 52,752 — 1,513 — 110,767 Net income (loss) before taxes $ 28,463 $ ( 2,999 ) $ 19,101 $ — $ 1,660 $ — $ 46,225 Total assets $ 2,051,945 $ 8,589 $ 117,477 $ — $ 277,565 $ ( 229,400 ) $ 2,226,176 _______________ (1) Noninterest expense includes $ 24.9 million and $ 23.7 million in data processing expense in OpenSky’s™ segment for the years ended December 31, 2024 and 2023, 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. (3) Total assets includes goodwill and intangible assets of $ 19.3 million at the Commercial Bank and $ 17.6 million within Windsor Advantage. (4) Commercial Bank’s return on assets of 1.08 % and 1.39 % for the years ended December 31, 2024 and 2023, respectively, is calculated by dividing net income before taxes by total assets. (5) Commercial Bank’s efficiency ratio of 55.3 % and 61.8 % for the years ended December 31, 2024 and 2023, respectively, is calculated by dividing noninterest expense by total revenue (net interest income plus noninterest income). (6) CBHL’s mortgage banking revenue from loans sales, included within noninterest income, totaled $ 6.1 million and $ 4.0 million for the years ended December 31, 2024 and 2023, respectively. (7) OpenSky’s™ credit card interchange fees and other fees, included within noninterest income, totaled $ 16.0 million and $ 17.3 million for the years ended December 31, 2024 and 2023, respectively. (8) Windsor Advantage’s service charge revenues from Windsor customers, included within noninterest income, totaled $ 4.6 million, including $ 0.6 million of Capital Bank related servicing fees, for the year ended December 31, 2024. (9) Personnel expense for Commercial Bank, CBHL, OpenSky™ and Windsor Advantage, included within noninterest expense, totaled $ 44.5 million, $ 4.2 million, $ 6.0 million and $ 1.3 million, respectively, for the year ended December 31, 2024 (10) Personnel expense for Commercial Bank, CBHL and OpenSky™, included within noninterest expense, totaled $ 40.0 million, $ 3.6 million and $ 5.1 million, respectively, for the year ended December 31, 2023. (11) CBHL’s cost of loan sales, or non-personnel noninterest expense, totaled $ 5.2 million and $ 4.6 million, respectively for the years ended December 31, 2024 and December 31, 2023. 130 Capital Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2024 and 2023 Note 19 - Litigation In accordance with the current accounting standards for loss contingencies, the Company establishes reserves for litigation-related matters that arise in the ordinary course of its business activities when it is probable or reasonably possible that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. In addition, the Company's defense of litigation claims may result in legal fees, which it expenses as incurred. None of the amounts the Company currently has recorded individually or in the aggregate are considered to be material to our financial condition as of December 31, 2024. Note 20 - Subsequent Events In January 2025, the Company’s Board of Directors declared a $ 0.10 per share dividend, payable on February 26, 2025 to shareholders of record on February 10, 2025. Management has reviewed all events through the date the audited consolidated financial statements were filed with the SEC and concluded that no other events required accrual or disclosure. 131 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.