What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2024-03-15 compared with 2023-03-15 · 650 added, 480 removed, 992 unchanged (53% of the section changed)

2 unchanged sentences

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, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

and Subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, 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, 2023, 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 15, 2024, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

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Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

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.

1 unchanged sentence

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No.

326, Financial Instruments – Credit Losses (“ASC 326”).

The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Our opinion is not modified with respect to this matter.

The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

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.

Allowance for Credit Losses

As described in Note 5 to the Company’s financial statements, the Company has a gross loan portfolio of $1.9 billion and related allowance for credit losses (“ACL”) of $28.6 million as of December 31, 2023.

As described by the Company in Note 1, the Company adopted ASC 326 on January 1, 2023.

In order to measure expected credit losses on a collective basis, 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.

Loans not sharing similar risk characteristics are evaluated on an individual basis.

Within the collectively evaluated component, the Company uses regression analysis of historical internal and peer data to determine suitable loss drivers for modeling lifetime probability of default, loss given default, and lifetime loss rates.

For the credit card portfolio, the Company calculates the credit card ACL collectively, applying segmentation based on collateral positions:

secured, partially secured, and unsecured.

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 related 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 evaluated the appropriateness of the methodology applied in the adoption of ASC 326.

■ We tested the design and operating effectiveness of controls relating to the Company’s determination of the allowance for credit losses, including controls over the establishment 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 in the development of 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.

/s/ Elliott Davis, PLLC

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March 15, 2024

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, 2023, 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, 2023, 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, 2023 and 2022 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ending December 31, 2023 of the Company and our report dated March 15, 2024 expressed an unqualified opinion.

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 Management’s Report 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.

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 15, 2024

Capital Bancorp, Inc.

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Investment securities available for sale 208,329 252,481

Marketable equity securities — 245

Restricted investments

Loans held for sale 7,481 7,416

Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans receivable, net of deferred fees and costs 2,163 108,285

Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans receivable, net of fees and costs 645 2,163

Portfolio loans receivable, net of deferred fees and costs 1,902,643 1,728,592

Less allowance for loan losses ( 26,385 ) ( 25,181 )

Less allowance for credit losses ( 28,610 ) ( 26,385 )

Total portfolio loans held for investment, net 1,874,033 1,702,207

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Deferred tax asset 12,252 13,777

Foreclosed real estate — 86

Bank owned life insurance 37,711 36,524

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Net interest income 141,526 140,607

Provision for loan losses 6,631 3,359

Net interest income after provision for loan losses

133,976 113,334

Provision for credit losses 9,610 6,631

Release of credit losses on unfunded commitments ( 101 ) —

Net interest income after provision for credit losses 132,017 133,976

Noninterest income

2 unchanged sentences

Mortgage banking revenue 4,896 4,866

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

Other income 1,842 1,767

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Loan processing 1,633 1,702

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

Foreclosed real estate expenses (income), net 7 ( 183 )

Operational losses 4,613 4,469

Outside service providers 1,932 3,338

Other operating 7,038 5,375

15 unchanged sentences

Net income $ 35,871 $ 41,804

Other comprehensive (loss):

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

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

( 20,912 ) ( 3,841 )

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

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

Other comprehensive income (loss):

Unrealized gain (loss) on investment securities available for sale 5,066 ( 20,912 )

Income tax benefit (expense) relating to the items above ( 1,412 ) 5,237

Other comprehensive income (loss) 3,654 ( 15,675 )

Comprehensive income $ 39,525 $ 26,129

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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 loss on investment securities available for sale, net of income taxes — — — — ( 15,675 ) ( 15,675 )

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

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— — — ( 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

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Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses 6,631 3,359

Provision for mortgage put-back reserve, net 9 4

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

Provision for credit losses 9,610 6,631

Release of credit losses on unfunded commitments ( 101 ) ( 54 )

(Release of) provision for mortgage put-back reserve, net ( 188 ) 9

Net amortization on investments 188 540

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Director and employee compensation paid in Company stock 547 171

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

Deferred income tax expense 142 1,240

Valuation allowance on derivatives 8 9

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

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

Gain on sale of foreclosed real estate — ( 20 )

Loss on disposal of premises and equipment — 14

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

Decrease in valuation of loans held for sale carried at fair value 6 —

Proceeds from sales of loans held for sale 176,373 308,549

2 unchanged sentences

Accrued interest receivable ( 2,005 ) ( 1,588 )

Taxes payable 179 ( 282 )

Other assets ( 2,448 ) ( 4,382 )

10 unchanged sentences

Purchases of securities available for sale ( 6,960 ) ( 113,078 )

Proceeds from maturities, calls and principal paydowns of securities available for sale 23,846 13,882

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

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

Proceeds from calls and maturities of securities available for sale 55,991 23,846

Net sales (purchases) of restricted investments 3,009 ( 3,864 )

Net decrease in SBA-PPP loans receivable 1,518 106,122

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

Net increase in portfolio loans receivable ( 182,240 ) ( 210,037 )

Net purchases of premises and equipment ( 2,156 ) ( 1,550 )

Proceeds from sales of foreclosed real estate — 106

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

Net cash used in investing activities ( 130,838 ) ( 198,455 )

3 unchanged sentences

Interest-bearing deposits 194,864 74,272

Federal Home Loan Bank advances, net 85,000 —

Federal Home Loan Bank (repayments) advances, net ( 85,000 ) 85,000

Other borrowed funds 15,000 —

Dividends paid ( 3,920 ) ( 3,085 )

Proceeds from exercise of stock options 1,235 967

Repurchase of common stock ( 8,826 ) —

Net proceeds from exercise of stock options 1,791 1,235

Net cash provided by financing activities 56,969 44,085

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

Net decrease in cash and cash equivalents ( 26,451 ) ( 102,980 )

Cash and cash equivalents, beginning of year 80,415 183,395

1 unchanged sentence

Noncash investing and financing activities:

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

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

Change in unrealized gains (losses) on investments $ 5,066 $ ( 20,912 )

Cash paid during the period for:

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The Bank is principally engaged in the business of investing in commercial, real estate, and credit card loans and attracting deposits.

The Company originates residential mortgages for sale in the secondary market through Capital Bank Home Loans, the Bank’s residential mortgage banking arm, and issues credit cards through OpenSky ® , a secured, digitally-driven, nationwide credit card platform.

The Company 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.

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, 2023, Church Street Capital had loans totaling $ 7.9 million with a collectively assessed allowance for credit losses (“ACL”) of $ 184 thousand.

Refer to Note 5 - Portfolio Loans Receivable 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”).

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Investment securities are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders’ equity on an after-tax basis.

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

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.

Unrealized losses are periodically reviewed to determine whether the loss represents an other than temporary impairment.

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

Marketable equity securities

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

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

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

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, 2023, there was no ACL related to the AFS portfolio.

Loans held for sale

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Gains and losses on loan sales are determined by the specific-identification method.

The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing.

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.

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

Portfolio loans and the allowance for loan losses

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

Small Business Administration Paycheck Protection Program

During the global COVID-19 pandemic, pursuant to the CARES Act and the Consolidated Appropriations Act, 2021, the United States Small Business Administration Payroll Protection Program (“SBA-PPP”) provided forgivable loans to small businesses to enable them to maintain payroll, hire back employees who had been laid off, and cover overhead.

SBA-PPP loans have an interest rate of 1%, have two or five year terms, and carry a 100% guarantee of the SBA.

The program ended on May 31, 2021.

SBA-PPP loans are eligible to be forgiven by the SBA.

Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate balance sheet item.

Origination fees received by the SBA are capitalized into the carrying amount of the loans.

The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the effective interest method.

The remaining net deferred income is recognized upon forgiveness of the loan.

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.

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

For reporting purposes, 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 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.

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)”.

Capital Bancorp, Inc.

3 unchanged sentences

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

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

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

Loans are considered impaired when, based on current information, management believes the Company will not collect all principal and interest payments according to contractual terms.

Generally, loans are reviewed for impairment when the risk grade for a loan is downgraded to a classified asset category.

The loans are evaluated for appropriate classification, accrual, impairment, and troubled debt restructure status.

If collection of principal is evaluated as doubtful, all payments are applied to principal.

A modification of a loan is considered a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession.

The Company may consider interest rate reductions, changes to payment terms, extensions of maturities and/or principal reductions.

Loans are generally charged-off in part or in full when management determines the loan to be uncollectible.

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, 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

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 )

Reserve for unfunded commitments $ 1,682 $ 907 $ ( 775 )

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, client bankruptcy and lack of assets, and/or collateral deficiencies.

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

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

The allowance consists of specific and general components.

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

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

trends in volume and terms of loans;

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

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

national and local economic trends and conditions;

commitments and concentrations of credit;

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

and the volume of loans with identified incomplete financial documentation.

Actual loan performance may differ materially from those estimates.

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

Collections of loans previously charged off are added to the allowance at the time of recovery.

The components of the allowance for loan losses represent an estimation done pursuant to Accounting Standards Codification (“ASC”) Topic 450, “Contingencies,” or ASC Topic 310, “Receivables.” Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred.

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

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

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.

See further detail regarding our forecasting methodology in the “Cash Flow Method” section below.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

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, 2023, 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 identified as Purchase Credit Impaired under the incurred loss model are identified as Purchased Credit Deteriorated (“PCD”) loans at January 1, 2023 without reassessment.

In future acquisitions, the Company may purchase loans, some of which 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.

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 prepayment speed 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 four quarters.

The Company uses economic projections from reputable and independent third parties to inform its loss driver forecast over the forecast period.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

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.

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.

Credit Losses on Off-Balance Sheet Credit Exposures

The Company’s financial instruments include off-balance sheet credit instruments such as unfunded commitments to make 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 (credit) for credit losses on off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income.

The RUC on 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.

Credit Losses on SBA-PPP loans and interest receivable

The ACL for SBA-PPP loans was separately evaluated given the explicit government guarantee.

The Company has incorporated historical experience with similar SBA guarantees and underwriting adjusted for reasonable and supportable forecasts and concluded the expected credit loss is zero and, therefore, no allowance has been assigned to these loans.

Capital Bancorp, Inc.

3 unchanged sentences

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

Management believes that the allowance for loan losses is adequate;

however, determination of the allowance is inherently subjective and requires significant estimates.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.

Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle.

In addition, various banking agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank’s loan portfolio and allowance for loan losses.

Such review may result in recognition of additions to the allowance based on their evaluation of information available to them at the time of their examination.

The review of the adequacy of the allowance for loan losses includes an assessment of the fair value adjustment for acquired loans in accordance with generally accepted accounting principles.

The Company does not measure an ACL on accrued interest receivable balances because these balances are written off as a reduction to interest income when loans are placed on nonaccrual status.

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 year ended December 31, 2023, the Company did not have any such modifications.

Premises and equipment

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Derivative financial instruments

The Company enters into commitments to fund residential mortgage loans (interest rate locks) with the intention of selling them in the secondary market.

The Company may enter into commitments to fund residential mortgage loans (interest rate locks) with the intention of selling them in the secondary market.

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

12 unchanged sentences

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

As of December 31, 2023, there were no derivative instruments held which would require recognition by the Company.

Fair value measurements

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See Note 17 - Fair Value.

Revenue Recognition

Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), establishes a revenue recognition model for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers.

A description of the revenue-generating activities that are within the scope of ASC 606, and included in other income in the Company’s consolidated statements of income are as follows:

Interest Income and Fees

Interest income and fees on loans and investment securities are recognized based on the contractual provisions of the underlying arrangements.

Loan origination fees, direct loan origination costs, premiums and discounts on loans held for investment are deferred and generally amortized into interest income as yield adjustments over the contractual life and/or commitment period using the interest method.

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.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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

The unamortized premiums, discounts and other basis adjustments on investment securities are included as components of the investment securities’ carrying value and are generally recognized in interest income as yield adjustments over the contractual lives of the securities using the interest method.

However, premiums for certain callable investment securities are amortized to the earliest call date.

Finance charges and fees on credit card loans are recorded in revenue when earned and presented on our consolidated balance sheets within portfolio loans receivable.

Annual membership fees are classified as interest income in our consolidated statements of income and are deferred and amortized over 12 months on a straight-line basis.

Bank-owned life insurance

The Company had $ 37.7 million of bank-owned life insurance at December 31, 2023 and $ 36.5 million at December 31, 2022.

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

The Company recognized income on bank-owned life insurance, which is included in other noninterest income, of $ 1.2 million and $ 1.0 million for the years ended December 31, 2023 and December 31, 2022, respectively.

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

2 unchanged sentences

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, 2023 and 2022, there were 277,066 and 139,921 stock options, respectively, excluded from the calculation as their effect would have been anti-dilutive.

Capital Bancorp, Inc.

3 unchanged sentences

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

Earnings per share

Earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding.

At December 31, 2022 and 2021, there were 139,921 and 1,129 stock options, respectively, that were not included in the calculation as their effect would have been anti-dilutive.

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

5 unchanged sentences

Dilutive EPS per common share $ 35,871 14,080,547 $ 2.55 $ 41,805 14,362,203 $ 2.91

Comprehensive income

The Company reports as comprehensive income all changes in stockholders' equity during the year from sources other than stockholders.

Other comprehensive income refers to all components (income, expenses, gains, and losses) of comprehensive income that are excluded from net income.

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

Comprehensive loss

The Company reports as comprehensive 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, 2023 and 2022 are as follows:

For the Years Ended December 31,

As of December 31,

(in thousands) 2023 2022

8 unchanged sentences

Recently issued accounting pronouncements:

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

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

This ASU introduced a new model known as CECL.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In March 2020, the FASB released ASU 2020-04 - Reference Rate Reform, Topic 848, which provides temporary guidance to ease the potential accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting.

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

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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

Troubled Debt Restructurings and Vintage Disclosures.

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

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

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

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

The Company has completed the transition from LIBOR with no material impact on the Company’s financial position or results of operations.

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 will update its segment related disclosures upon adoption.

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.

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.

2 unchanged sentences

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 2 - Cash and Cash Equivalents

4 unchanged sentences

Note 3 - Investment Securities

The investment securities portfolio consists primarily of U.S.

government sponsored entity securities, asset-backed securities, securities issued by states, counties and municipalities, corporate bonds and mortgage-backed securities (“MBS”).

The asset-backed securities are comprised of student loan collateral issued by the Federal Family Education Loan Program (“FFELP”) which includes a minimum of a 97% government repayment guarantee, as well as additional support in excess of the government guaranteed portion.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

Cost Unrealized

Gains Unrealized

The following table summarizes the amortized cost, fair value and allowance for credit losses of securities available-for-sale at December 31, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

Cost Gross Unrealized

Gains Gross Unrealized

Losses Allowance for Credit Losses Fair

(in thousands)

6 unchanged sentences

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, 2023.

The following table summarizes the amortized cost and fair value of securities available-for-sale at December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

Cost Gross Unrealized

Gains Gross Unrealized

(in thousands)

December 31, 2022

5 unchanged sentences

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

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

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

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

There were no securities sold during the year ended December 31, 2023 or December 31, 2022.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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,

(in thousands) Amortized

Value Amortized

Within one year $ 39,918 $ 39,294 $ 53,739 $ 53,204

One to five years 101,688 93,218 88,165 82,538

Five to ten years 26,215 22,511 79,090 68,805

Beyond ten years 10,298 7,990 10,307 7,514

Asset-backed securities (1)

7,069 7,045 7,970 7,711

Mortgage-backed securities (1)

40,491 38,271 35,626 32,709

$ 225,679 $ 208,329 $ 274,897 $ 252,481

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

There were no securities pledged at December 31, 2023 and 2022 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 and $ 0 at December 31, 2022.

At December 31, 2023 and 2022, 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 shareholders’ 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, 2023 and 2022, aggregated by major security type and length of time in a continuous unrealized loss position:

Less than 12 months 12 months or longer Total

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

At December 31, 2022, there were sixteen treasury securities, one asset-backed security, seven municipal securities, five corporate securities, and three mortgage-backed securities that have been in a loss position for greater than twelve months.

Management believes that all unrealized losses have resulted from temporary changes in interest rates and current market conditions and not as a result of credit deterioration.

Management has the ability and the intent to hold these investment securities until maturity or until they recover in value.

Capital Bancorp, Inc.

3 unchanged sentences

Note 3 - Investment Securities (continued)

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

Contractual maturities of U.S.

government-sponsored agencies, asset-backed, municipal, corporate and mortgage-backed securities at December 31, 2022 and 2021 are shown below.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the Years Ended December 31,

(in thousands) Amortized

Value Amortized

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

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

Over five to ten years 79,090 68,805 78,850 78,285

Over ten years 10,307 7,514 10,825 10,474

Asset-backed securities (1)

7,970 7,711 10,093 10,140

Mortgage-backed securities (1)

35,626 32,709 27,589 27,906

$ 274,897 $ 252,481 $ 185,959 $ 184,455

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

At December 31, 2023 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, 2023 before it is able to recover the amortized cost basis.

Further, management reviewed the Company’s holdings as of December 31, 2023 and concluded there were no credit-related declines in fair value.

Additional information related to the types of securities held at December 31, 2023, other than securities issued or guaranteed by U.S.

Government entities or agencies, is as follows:

Corporate Securities – There have been no payment defaults on any of the Company’s holdings of corporate debt securities.

There are 5 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, 2023, 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;

Asset-backed Securities – There were 3 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, 2023.

Note 4 - SBA-PPP Loans

During the global COVID-19 pandemic, pursuant to the CARES Act and the Consolidated Appropriations Act, 2021, the SBA-PPP provided forgivable loans to small businesses to enable them to maintain payroll, hire back employees who have been laid off, and cover applicable overhead.

SBA-PPP loans have an interest rate of 1%, have 2- and 5-year terms, and carry a 100% guarantee of the SBA.

The program ended on May 31, 2031.

The allowance for loan losses for SBA-PPP loans was separately evaluated given the explicit government guarantee.

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

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

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

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

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

SBA-PPP gross loans receivable totaled $ 0.7 million and $ 2.2 million at December 31, 2023 and 2022, respectively and were all rated as pass credits and were not past due, nonaccrual or otherwise impaired.

Unearned net fees associated with the SBA-PPP loans amounted to $ 15.3 thousand and $ 31.0 thousand at December 31, 2023 and 2022, respectively.

SBA-PPP loans generated income of $ 29.5 thousand for the year ended December 31, 2023 and $ 3.5 million for the year ended December 31, 2022, of which, earned fees, primarily on loans forgiven by the SBA, represented $ 15.7 thousand and $ 3.2 million of the income, respectively.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable

Major classifications of portfolio loans are as follows:

Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses

The following is a summary of the major categories of total loans outstanding:

(in thousands) Amount Percent Amount Percent

4 unchanged sentences

Credit card, net of reserve (1)

123,331 7 128,434 7

Other consumer 950 — 1,179 —

1 unchanged sentence

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

Allowance for loan losses ( 26,385 ) ( 25,181 )

Allowance for credit losses ( 28,610 ) ( 26,385 )

Portfolio loans receivable, net $ 1,874,033 $ 1,702,207

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

and Baltimore, Maryland metropolitan areas.

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

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

Residential Real Estate Loans .

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

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

Residential loans also include home equity lines of credit.

Owner-occupied residential real estate loans usually have fixed rates for five or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years.

Investor residential real estate loans are generally based on 25 -year terms with a balloon payment due after five years .

Generally, the required minimum debt service coverage ratio is 1.15 .

Commercial Real Estate Loans .

Commercial real estate loans are originated on owner-occupied and non-owner-occupied properties.

These loans may be more adversely affected by conditions in the real estate markets or in the general economy.

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

As of December 31, 2022, there were approximately $ 378.7 million of owner-occupied commercial real estate loans, representing approximately 21.8 % of the commercial real estate portfolio.

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

The interest rates on commercial real estate loans generally have initial fixed rate terms that adjust typically at five years .

Origination fees are routinely charged for services.

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

The properties securing the portfolio are diverse in type.

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 5 - Portfolio Loans Receivable (continued)

Construction Loans .

Construction loans are offered within the Company’s Washington, D.C.

and Baltimore, Maryland metropolitan operating areas to builders primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals.

Construction loans typically have terms of 12 to 18 months.

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

According to underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, cannot exceed 75 % for investor-owned and 80 % for owner-occupied properties, although exceptions are sometimes made.

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

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

(1) Credit card loans are presented net of reserve for interest and fees.

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 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, 2023 and the activity in the allowance for loan losses by loan segment class for the year ended December 31, 2022.

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

(in thousands)

Year Ended December 31, 2023

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

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

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

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

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

Credit Cards .

Through the OpenSky ® credit card division, the Company offers secured, partially secured, and unsecured credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores through a fully digital and mobile platform.

The secured lines of credit are secured by a noninterest-bearing demand account at the Bank in an amount equal to the full credit limit of the credit card.

For the partially secured lines of credit, the Bank offers certain customers an unsecured line in excess of their secured line of credit by using a proprietary scoring model, which considers credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis).

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

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

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

Other Consumer Loans .

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

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

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

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

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

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

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

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

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable (continued)

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

The specific component relates to loans that are individually classified as impaired.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.

The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans as of December 31, 2022 and 2021.

(in thousands) Provision for

Loan Losses Allowance for Loan Losses

Ending Balance Evaluated

for Impairment:

Outstanding Loan

Balances Evaluated

for Impairment:

December 31, 2022 Beginning

Balance Charge-Offs Recoveries Ending

Balance Individually Collectively Individually Collectively

Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued)

(in thousands) Beginning

Balance Provision (Release of Provision) for

Loan Losses Charge-Offs Recoveries Ending

Year Ended December 31, 2022

Residential $ 5,612 $ ( 131 ) $ — $ — $ 5,481

3 unchanged sentences

Credit card 3,655 7,833 ( 5,461 ) 51 6,078

3,655 7,833 ( 5,461 ) 51 6,078 — 6,078 — 128,434

Other consumer 12 ( 1 ) — — 11

12 ( 1 ) — — 11 — 11 — 1,179

Total $ 25,181 $ 6,631 $ ( 5,478 ) $ 51 $ 26,385

December 31, 2021

The following tables present a summary of loan balances and the related allowance for loan losses summarized by loan category for each impairment method used as of December 31, 2022.

(in thousands) Allowance for Loan Losses

Ending Balance Evaluated

for Impairment:

Outstanding Portfolio

Loan Balances Evaluated

for Impairment:

December 31, 2022 Individually Collectively Individually Collectively

Residential $ — $ 5,481 $ 4,288 $ 480,447

3 unchanged sentences

Credit card — 6,078 — 128,434

2,462 2,612 ( 1,454 ) 35 3,655 — 3,655 — 141,120

Other consumer — 11 — 1,179

Total $ 372 $ 26,013 $ 9,393 $ 1,727,826

_______________

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

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable (continued)

Past due portfolio loans, segregated by delinquency and class of loans, as of December 31, 2022 and 2021 were as follows:

Past Due Loans

Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued)

Past due loans, segregated by age and class of loans, as of December 31, 2023 and 2022 were as follows:

Portfolio Loans Past Due Loans

Past Due Total

Loans Current

Loans Accruing

Portfolio Loans Accruing

Past Due Nonaccrual

Past Due Loans

(in thousands)

15 unchanged sentences

Total $ 9,758 $ 8,623 $ 9,616 $ 27,997 $ 1,709,222 $ 1,737,219 $ 363 $ 9,393

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

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

There were $ 8.1 million and $ 1.3 million, respectively, of loans secured by one-to-four family residential properties in the process of foreclosure as of December 31, 2023 and 2022.

The following presents the nonaccrual loans as of December 31, 2023 and December 31, 2022:

December 31, 2023 December 31, 2022

Nonaccrual with No Allowance for Credit Loss Nonaccrual with an Allowance for Credit Loss Total Nonaccrual Loans Interest Recognized on Nonaccrual Loans Total Nonaccrual Loans

(in thousands)

Residential $ 11,152 $ 246 $ 11,398 $ 236 $ 4,288

Commercial 582 — 582 46 1,563

Construction 3,288 — 3,288 185 2,837

Commercial and Industrial 598 176 774 71 705

Total $ 15,620 $ 422 $ 16,042 $ 538 $ 9,393

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.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued)

• 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, 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 other commercial and industrial real estate in process of construction.

• Commercial and industrial loans are generally secured by equipment, inventory, accounts receivable, and other commercial property.

Collateral dependent loans amortized cost

(in thousands) December 31, 2023

Residential $ 11,152

Commercial 582

Construction 3,288

Commercial and Industrial 657

Total $ 15,679

Of the collateral dependent loans as of December 31, 2023, a specific reserve of $ 115 thousand was assessed for commercial and industrial loans.

The Company had no modifications on loans to borrowers experiencing financial difficulty during the year ended December 31, 2023.

Prior to the adoption of the CECL standard, loans were considered impaired when, based on current information, management believed the Company would not collect all principal and interest payments according to contractual terms.

Generally, loans were reviewed for impairment when the risk grade for a loan was downgraded to a classified asset category.

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

Loans were generally charged-off in part or in full when management determined the loan to be uncollectible.

The following table presents information related to impaired loans by class of loans as of and for the years ended December 31, 2022:

Balance Recorded

11 unchanged sentences

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

December 31, 2021

Residential $ 3,022 $ 2,835 $ — $ 2,835 $ — $ 4,578 $ 345

Commercial 90 25 — 25 — 90 82

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

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

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

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable (continued)

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

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.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans.

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:

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

10 unchanged sentences

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:

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable (continued)

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

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

(in thousands) Pass (1)

Special Mention Substandard Doubtful Ungraded (2)

December 31, 2022

$ 469,304 $ 9,966 $ 5,465 $ — $ — $ 484,735

657,411 5,577 1,563 — — 664,551

235,262 — 2,837 — — 238,099

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

Credit card — — — — 128,434 128,434

Pass 70,540 71,689 27,884 8,827 18,036 37,392 — 234,368

Special Mention — 156 — 2,406 47 273 — 2,882

Substandard 30 814 211 — 42 201 — 1,298

Doubtful — — — — — — — —

Total 70,570 72,659 28,095 11,233 18,125 37,866 — 238,548

Other consumer

Pass 75 278 147 116 — 334 — 950

Special Mention — — — — — — — —

Substandard — — — — — — — —

Doubtful — — — — — — — —

Total 75 278 147 116 — 334 — 950

Ungraded — — — — — — 123,331 123,331

Portfolio loans receivable, gross $ 415,291 $ 475,245 $ 296,868 $ 178,818 $ 159,917 $ 260,800 $ 123,331 $ 1,910,270

December 31, 2023

(in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total

Gross Charge-offs

Residential $ — $ — $ — $ — $ — $ 670 $ — $ 670

Commercial — — — — 943 — — 943

Commercial and Industrial — 98 — — — — — 98

Credit card — — — — — — 7,076 7,076

Total $ — $ 98 $ — $ — $ 943 $ 670 $ 7,076 $ 8,787

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued)

The following table presents the balances of classified loans based on the credit quality indicator:

(in thousands) Pass (1)

Special Mention Substandard Doubtful Ungraded (2)

December 31, 2022

$ 469,304 $ 9,966 $ 5,465 $ — $ — $ 484,735

6 unchanged sentences

________________________

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

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

(2) Credit card loans are not individually graded.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 5 - Portfolio Loans Receivable (continued)

Impaired loans also include certain loans that have been modified in troubled debt restructurings (“TDRs”) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.

Certain loans have been modified where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties disclosed as troubled debt restructurings (“TDRs”).

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

4 unchanged sentences

December 31, 2022

1 $ — $ 288 $ 288

Total 1 $ — $ 288 $ 288

December 31, 2021

4 $ — $ 450 $ 450

Commercial and Industrial 1 — 83 83

Residential 1 $ — $ 288 $ 288

Total 1 $ — $ 288 $ 288

1 unchanged sentence

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

There were no new TDRs added in 2022.

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

There were no material financial effects as a direct result of this modification.

There was one commercial TDR that was paid off during the twelve months ended December 31, 2021 for $ 200 thousand.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 5 - Portfolio Loans Receivable (continued)

Note 5 - Portfolio Loans Receivable and Allowance for Credit Losses (continued)

Outstanding loan commitments were as follows:

9 unchanged sentences

Other consumer 310 102

$ 345,062 $ 360,386

Commitments to originate residential loans held for sale $ — $ 1,385

Total $ 336,472 $ 345,062

Letters of credit $ 4,641 $ 5,105

_______________

(1) Outstanding loan commitments in the credit card portfolio include $ 106.9 million and $ 121.7 million in secured balances as of December 31, 2022 and 2021, respectively.

(1) Outstanding loan commitments in the credit card portfolio include $ 98.2 million and $ 106.9 million in secured and partially secured balances as of December 31, 2023 and 2022, respectively.

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

2 unchanged sentences

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

Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party.

In the event of nonperformance by the customer in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment.

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

1 unchanged sentence

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 5 - Portfolio Loans Receivable (continued)

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

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:

1 unchanged sentence

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

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

Recoveries — —

Charge-offs — —

Impact of adopting the CECL standard on January 1, 2023 ( 775 ) —

Release of credit losses on unfunded commitments ( 101 ) ( 54 )

Balance at end of period $ 806 $ 1,682

1 unchanged sentence

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

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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 a provision for credit loss expense.

During the year ended December 31, 2022, this increase or decrease in reserve activity was included in other operating expense.

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

1 unchanged sentence

Balance at beginning of period $ 1,173 $ 1,164

Provision for mortgage loan put backs

Recoveries — —

Charge-offs — —

(Release of) provision for mortgage loan put-back reserve ( 188 ) 9

Balance at end of period $ 985 $ 1,173

Note 6 - Premises and Equipment

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

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) 2023 2022

9 unchanged sentences

Depreciation and amortization expense $ 324 $ 364

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 7 - Leases

The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch operations and back office operations.

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

The Company leases four of its full service branches and four 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.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 7 - Leases (continued)

The Company determines if an arrangement is a lease at inception.

8 unchanged sentences

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

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

As of December 31, 2023, the Company’s net lease ROU assets and related lease liabilities were $ 3.6 million and $ 3.8 million, respectively, and have remaining terms ranging from one to nine years , including extension options that the Company is reasonably certain will be exercised.

As of December 31, 2023, the Company had not entered into any material leases that have not yet commenced.

9 unchanged sentences

Net lease liability $ 3,791 $ 2,359

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 7 - Leases (continued)

Future minimum payments for operating leases with initial or remaining terms of one year or more are as follows at December 31, 2023:

1 unchanged sentence

Amounts due in:

2027 and thereafter 137

thereafter 1,182

Total future lease payments 4,385

1 unchanged sentence

Present value of net future lease payments $ 3,791

Operating lease and rent expense were $ 1.3 million and $ 1.2 million for the years ended December 31, 2022 and 2021, respectively.

Operating lease and rent expense totaled $ 1.3 million for both the years ended December 31, 2023 and 2022.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 8 - Derivative Financial Instruments

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

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

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

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

Forward sales contracts are recorded at fair value with changes in fair value recorded in mortgage banking revenue.

Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives.

Interest rate lock commitments and commitments to deliver loans to investors are considered to be derivatives.

The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets.

The Company determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and takes into consideration the probability that the rate lock commitments will close or will be funded.

The Company determines the fair value of rate lock commitments by estimating the fair value of the underlying asset, which is impacted by current interest rates and takes into consideration the probability that the rate lock commitments will close or will be funded.

The following table reports the commitment and fair value amounts on the outstanding derivatives:

4 unchanged sentences

Fair value of interest rate lock commitments — 1

Note 9 - Deposits

Time deposits that meet or exceed the FDIC Insurance Limit of $250,000 at year-end 2023 and 2022 were $ 124.7 million and $ 96.3 million.

Scheduled maturities of time deposits for the next five years were as follows:

(in thousands)

2024 $ 350,658

Total $ 410,954

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 9 - Interest-Bearing Deposits

Major categories of interest-bearing deposits are as follows:

(in thousands) 2022 2021

Interest-bearing demand accounts $ 207,836 $ 330,924

Money market accounts 574,978 493,919

Savings 7,530 6,994

Certificates of deposit of $250,000 or more 96,291 108,827

Other time deposits 197,124 68,823

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

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

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

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

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

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

(in thousands)

2023 $ 181,455

2027, and thereafter 804

Total $ 293,415

Note 10 - Borrowed Funds

7 unchanged sentences

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 $ 27,062 5.10 % $ 12,062 5.28 %

1 unchanged sentence

Junior subordinated debentures

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

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

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

Note 10 - Borrowed Funds (continued)

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.

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”).

1 unchanged sentence

These Floating Rate Debentures, which are the only assets of the Trust, are subordinate and junior in right of payment to all present and future senior indebtedness (as defined in the Indenture dated June 15, 2006) of the Company.

The Floating Rate Debentures for the Trust accrue interest at a floating rate equal to the three-month LIBOR plus 1.89 %, payable quarterly.

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, 2023 and 2022, the rate for the Trust was 7.52 % and 6.64 %, respectively.

4 unchanged sentences

The junior subordinated debentures are treated as Tier 1 capital by the Company, to a limited extent, by the Federal Reserve.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 10 - Borrowed Funds (continued)

Other subordinated notes

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

1 unchanged sentence

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

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

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 has created the BTFP to make additional funding available to eligible depository institutions to help assure institutions can meet the needs of their depositors.

Eligible institutions may obtain liquidity against a wide range of collateral, at par value.

BTFP advances can be requested through at least March 11, 2024.

At December 31, 2023, the Company had $ 15.0 million of BTFP borrowings.

In January 2024, the Company paid off the $ 15.0 million of BTFP borrowings.

Available lines of credit

6 unchanged sentences

As of December 31, 2023 and 2022, the Company had available borrowing capacity, net of advances and amounts pledged for letters of credit, from the FHLB of $ 291.5 million and $ 223.8 million, respectively.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 10 - Borrowed Funds (continued)

As of December 31, 2023 and 2022, the Company had pledged commercial loans to the Federal Reserve Bank of Richmond to secure a borrowing capacity totaling $ 16.6 million and $ 21.4 million, respectively, under its discount window program.

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

The Company limits its certificate of deposit funding through financial networks to 15 % of the Bank’s assets, or approximately $ 326.5 million and $ 310.5 million as of December 31, 2023 and 2022, respectively.

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

The Company had $ 142.4 million outstanding as of December 31, 2023 and $ 131.8 million outstanding as of December 31, 2022.

Note 11 - Retirement Plans

1 unchanged sentence

The Company contributes 3 % of eligible compensation on behalf of all full‑time employees up to limits prescribed by the Internal Revenue Code.

The Company’s contribution to the plan was $ 850 thousand in 2022 and $ 398 thousand in 2021.

The Company’s contribution to the plan was $ 1.0 million in 2023 and $ 850 thousand in 2022.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 11 - Retirement Plans (continued)

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

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

The LTIP 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 percent of salary for achieving targeted performance levels while other executive management members are eligible to earn an annual contribution of 15 percent of salary for achieving targeted performance levels.

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

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.

9 unchanged sentences

Balance at end of year $ 32,074 $ 36,305

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 12 - Related-Party Transactions (continued)

Deposits from officers and directors and their related interests were $ 81.3 million at December 31, 2023, and $ 92.0 million at December 31, 2022.

3 unchanged sentences

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

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

Note 13 - Income Taxes

The components of income tax expense were as follows:

Income tax expense was as follows:

For the Years Ended December 31,

(in thousands) 2023 2022

Current expense

Federal $ 8,192 $ 9,906

6 unchanged sentences

Deferred tax assets:

Allowance for loan and credit losses $ 7,073 $ 6,674

Allowance for credit losses $ 7,230 $ 7,073

Reserve for recourse on mortgage loans sold 242 297

3 unchanged sentences

Unrealized loss on investment securities available for sale 4,253 5,665

Net operating loss carryforward — 67

12,467 13,813

Deferred tax liabilities:

Accumulated depreciation 214 34

Net deferred tax asset before valuation allowance 13,777 9,860

Valuation allowance — 67

Net deferred tax asset $ 12,252 $ 13,777

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 13 - Income Taxes (continued)

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

3 unchanged sentences

Nondeductible expenses 0.73 0.56

Tax exempt income ( 0.41 ) ( 0.20 )

Other ( 0.78 ) 0.59

Tax-exempt interest income and dividend income ( 0.55 ) ( 0.41 )

Stock-based compensation expense ( 0.68 ) ( 0.48 )

Bank-owned life insurance ( 0.54 ) ( 0.40 )

Other, net ( 0.69 ) 0.10

Effective Tax Rate 22.40 % 22.95 %

1 unchanged sentence

As of December 31, 2023, management has determined that it is more likely than not that the majority of the deferred tax asset from continuing operations will be realized.

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

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

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

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

At December 31, 2023 and December 31, 2022, no valuation allowance was recognized.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 14 - Capital Standards

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can precipitate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.

Quantitative measures established and defined by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total, Tier 1 and Common Equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.

As of December 31, 2022 and 2021, the capital levels of the Company and the Bank exceeded all applicable capital adequacy requirements.

As of December 31, 2022 the most recent notification from the OCC has categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

To be categorized as well capitalized, the Bank must maintain ratios as set forth in the table.

There have been no conditions or events since that notification that management believes have changed the Bank’s category.

The following table presents actual and required capital ratios as of December 31, 2022 and 2021 for the Bank under the Basel III Capital Rules.

The minimum required capital amounts presented include the minimum required capital levels as of December 31, 2022 and 2021 based on the phase-in provisions of the Basel III Capital Rules.

Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.

Note 13 - Income Taxes (continued)

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, 2019.

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, 2023, 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 2023 and 2022, 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.

Based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements.

1 unchanged sentence

For comparison purposes, the Company’s ratios are presented in the following table as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

Actual and required capital amounts and ratios are presented below at year-end.

Capital Bancorp, Inc.

2 unchanged sentences

December 31, 2023 and 2022

Note 14 - Capital Standards (continued)

Note 14 - Regulatory Capital Matters (continued)

Regulatory Capital

1 unchanged sentence

Adequacy To Be Well

Capitalized Full Phase In of Basel III

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

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

December 31, 2023

Tier 1 leverage ratio (to average assets) $ 242,829 11.24 % $ 86,442 4.00 % N/A N/A N/A N/A

Tier 1 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

2 unchanged sentences

Total capital ratio (to risk-weighted assets) 301,817 17.38 % $ 138,900 8.00 % N/A N/A

Tier 1 leverage ratio (to average assets) $ 199,846 9.47 % $ 84,416 4.00 % $ 105,521 5.00 % N/A N/A

Tier 1 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 %

3 unchanged sentences

December 31, 2022

Tier 1 leverage ratio (to average assets) $ 201,040 9.73 % $ 82,683 4.00 % N/A N/A N/A N/A

Tier 1 leverage ratio (to average assets) $ 242,829 11.24 % $ 86,442 4.00 % N/A N/A

Tier 1 capital (to risk-weighted assets) 242,829 15.13 % 96,315 6.00 % N/A N/A

2 unchanged sentences

Total capital ratio (to risk-weighted assets) 262,217 16.33 % 128,421 8.00 % N/A N/A

Tier 1 leverage ratio (to average assets) $ 169,384 8.36 % $ 81,070 4.00 % $ 101,338 5.00 % N/A N/A

Tier 1 leverage ratio (to average assets) $ 199,846 9.47 % $ 84,416 4.00 % $ 105,521 5.00 %

Tier 1 capital (to risk-weighted assets) 199,846 12.95 % 92,574 6.00 % 123,432 8.00 %

90 unchanged sentences

Retired on vesting ( 8,555 ) 16.46 ( 4,968 ) 14.44

Forfeited — — — —

Nonvested at end of year 28,176 $ 21.66 39,669 $ 17.45

14 unchanged sentences

Investment in Trust 62 62

Loans receivable, net of allowance for loan losses of $ 328 and $ 328 at December 31, 2022 and 2021, respectively

Loans receivable, net of allowance for credit losses of $ 416 and $ 328 at December 31, 2023 and 2022, respectively

41,310 47,517

23 unchanged sentences

Net interest income 8,497 12,970

Provision for loan losses — 70

Net interest income after provision for loan losses 12,970 7,551

Provision for credit losses 88 —

Net interest income after provision for credit losses 8,409 12,970

Noninterest income 4 2

15 unchanged sentences

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses — 70

Provision for credit losses 88 —

Undistributed net income of subsidiaries ( 28,391 ) ( 29,594 )

9 unchanged sentences

Cash flows from investing activities

Net increase in loans receivable

( 11,319 ) ( 9,269 )

Net decrease (increase) in portfolio loans receivable 5,314 ( 11,319 )

Capital contributions to subsidiaries ( 1,729 ) ( 1,662 )

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

Net cash provided (used) by investing activities 3,585 ( 12,981 )

Cash flows from financing activities

Dividends paid ( 3,920 ) ( 3,085 )

Proceeds from exercise of stock options 1,235 967

Repurchase of common stock ( 8,826 ) —

Net proceeds from exercise of stock options 1,791 1,235

Net cash used by financing activities ( 10,955 ) ( 1,850 )

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

Net increase (decrease) in cash and cash equivalents 3,227 ( 358 )

Cash and cash equivalents, beginning of year 272 630

5 unchanged sentences

Note 17 - Fair Value

Generally accepted accounting principles define fair value, establish a framework for measuring fair value, recommend disclosures about fair value, and establish a hierarchy for determining fair value measurement.

The hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities.

The three levels are as follows:

Level 1 - Inputs to the valuation method are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 - Inputs to the valuation method include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3 - Inputs to the valuation method are unobservable and significant to the fair value measurement.

Fair value measurements on a recurring basis

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

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

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

Derivative financial instruments - Derivative instruments used to hedge residential mortgage loans held for sale and the related interest rate lock commitments include forward commitments to sell mortgage loans and are reported at fair value utilizing Level 2 inputs.

The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for rate lock commitments.

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 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).

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.

Capital Bancorp, Inc.

4 unchanged sentences

The Company has categorized its financial instruments measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 as follows:

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

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, 2023

1 unchanged sentence

Treasuries $ 149,228 $ 149,228 $ — $ —

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

Municipal 9,372 — 9,372 —

Corporate 4,413 — 4,413 —

Asset-backed securities 7,045 — 7,045 —

Mortgage-backed securities 38,271 — 38,271 —

6 unchanged sentences

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

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

Municipal 8,012 — 8,012 —

Corporate 4,600 — 4,600 —

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

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

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

Marketable equity securities $ 245 $ 245 $ — $ —

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

5 unchanged sentences

The fair value election, with respect to an item, may not be revoked once an election is made.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2023 and 2022

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:

4 unchanged sentences

Difference $ 2,313 $ 608

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 17 - Fair Value (continued)

The Company elects to account for loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

Fair value measurements on a nonrecurring basis

Impaired loans - The Company has measured impairment generally based on the fair value of the loan's collateral and discounted cash flow analysis.

Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.

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, 2022 and December 31, 2021, the fair values consist of loan balances of $ 9.4 million and $ 11.3 million, with valuation allowances of $ 372 thousand and $ 218 thousand, respectively.

As of December 31, 2023 and December 31, 2022, the fair values consist of loan balances of $ 16.0 million and $ 9.4 million, with specific reserves of $ 422 thousand and $ 372 thousand, respectively.

Foreclosed real estate - The Company's foreclosed real estate is measured at fair value less cost to sell.

Fair value was determined based on offers and/or appraisals.

Cost to sell the real estate was based on standard market factors.

The Company has categorized its foreclosed real estate as Level 3.

Fair Value of Impaired Loans and Foreclosed Real Estate

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, 2023 and December 31, 2022, there was no foreclosed real estate held by the Company.

Fair Value of Individually Evaluated Loans

(in thousands) 2023 2022

Impaired loans

Level 3 Inputs 9,021 11,121

Total $ 9,021 $ 11,121

Foreclosed real estate

Individually evaluated loans for credit loss, net

Level 3 Inputs 15,620 9,021

1 unchanged sentence

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2023 and 2022:

Unobservable Inputs

Valuation Technique Unobservable Inputs General Range of Inputs

Impaired Loans Appraised Value/Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs 0 - 25 %

Foreclosed Real Estate Appraised Value/Comparable Sales Discounts to appraisals for estimated holding and/or selling costs 0 - 25 %

Fair value of financial instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information.

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

Individually evaluated loans Appraised Value/Discounted Cash Flows Discounts to appraisals or cash flows for estimated holding and/or selling costs 0 - 25 %

Capital Bancorp, Inc.

3 unchanged sentences

Note 17 - Fair Value (continued)

The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise.

Fair value of financial instruments

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.

10 unchanged sentences

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.

Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

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, interest-bearing deposits at other financial institutions, federal funds sold and restricted investments is the carrying amount.

Restricted stock includes equity of the Federal Reserve and other banker’s banks.

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 and savings deposits, and money market accounts, is the amount payable on demand at the reporting date.

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.

1 unchanged sentence

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.

Capital Bancorp, Inc.

3 unchanged sentences

Note 17 - Fair Value (continued)

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.

The table below presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments (in thousands).

6 unchanged sentences

Interest-bearing deposits at other financial institutions 39,044 39,044 39,764 39,764

Marketable equity securities — — 245 245

Federal funds sold

18 unchanged sentences

The four segments include Commercial Banking, Capital Bank Home Loans (the Company’s mortgage loan division), and OpenSky ™ (the Company’s credit card division) and the Corporate Office.

The following schedule presents financial information for each reportable segment at December 31, 2022 and 2021.

(in thousands)

December 31, 2022 Commercial Bank CBHL OpenSky ®

The following schedule presents financial information for each reportable segment at and for the years ended December 31, 2023 and 2022.

For the Year Ended December 31, 2023

(in thousands) Commercial Bank CBHL OpenSky ™

Corporate (2)

3 unchanged sentences

Net interest income 75,512 247 62,476 3,291 — 141,526

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

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

3 unchanged sentences

Total assets $ 2,051,945 $ 8,589 $ 117,477 $ 277,565 $ ( 229,400 ) $ 2,226,176

December 31, 2021

For the Year Ended December 31, 2022

(in thousands) Commercial Bank CBHL OpenSky ™

Corporate (2)

Eliminations Consolidated

Interest income $ 82,182 $ 435 $ 64,859 $ 3,349 $ ( 179 ) $ 150,646

1 unchanged sentence

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

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

(Reversal of) provision for loan losses ( 980 ) — 7,611 — — 6,631

Net interest income after provision 73,917 217 57,248 2,594 — 133,976

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

1 unchanged sentence

52,552 8,450 47,647 465 — 109,114

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

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

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

2 unchanged sentences

(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.

Beginning in 2024, the Company allocated certain expenses previously recorded directly to the Commercial Bank segment to the other segments.

This change in allocation will be reflected in 2024 segment performance reporting.

Note 19 - Litigation

The Company is involved in legal proceedings occurring in the ordinary course of business.

The aggregate effect of these, in management’s opinion, would not be material to the results of operations or financial condition of the Company.

Capital Bancorp, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2022 and 2021

Note 20 - Subsequent Events

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

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

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

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

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

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 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, 2023.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data