Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2019         OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission file number 001-38671
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13198467&doc=11
CAPITAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
52-2083046
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
2275 Research Boulevard, Suite 600,
Rockville, Maryland 20850
 
20850
(Address of principal executive offices)
 
(Zip Code)
(301) 468-8848
Registrant’s telephone number, including area code
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).             Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
x
 
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x




Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CBNK
NASDAQ Stock Market
As of October 31, 2019, the Company had 13,809,558 shares of common stock, par value $0.01 per share, outstanding.



Capital Bancorp, Inc. and Subsidiaries
Form 10-Q
INDEX

PART I - CONSOLIDATED FINANCIAL INFORMATION
Page
Item 1.
Consolidated Financial Statements
 
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
 
 
 
 
 
 



PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Capital Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands except share data)
September 30, 2019 (unaudited)
 
December 31, 2018 (audited)
Assets
 
 
 
Cash and due from banks
$
11,093

 
$
10,431

Interest bearing deposits at other financial institutions
40,521

 
22,007

Federal funds sold
3,464

 
2,285

Total cash and cash equivalents
55,078

 
34,723

Investment securities available for sale
37,073

 
46,932

Restricted investments
4,007

 
2,503

Loans held for sale
68,982

 
18,526

Loans receivable, net of allowance for loan losses of $12,808 and $11,308 at September 30, 2019 and December 31, 2018, respectively
1,127,502

 
988,960

Premises and equipment, net
6,667

 
2,975

Accrued interest receivable
4,636

 
4,462

Deferred income taxes
3,556

 
3,654

Foreclosed real estate
149

 
142

Prepaid income taxes
353

 
90

Other assets
3,403

 
2,091

Total assets
$
1,311,406

 
$
1,105,058

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing, including related party balances of $12,128 and $11,214 at September 30, 2019 and December 31, 2018, respectively
$
293,378

 
$
242,259

Interest-bearing, including related party balances of $127,964 and $144,624 at September 30, 2019 and December 31, 2018, respectively
819,066

 
712,981

Total deposits
1,112,444

 
955,240

Securities sold under agreements to repurchase

 
3,332

Federal funds purchased

 
2,000

Federal Home Loan Bank advances
35,556

 
2,000

Other borrowed funds
15,416

 
15,393

Accrued interest payable
2,113

 
1,565

Other liabilities
18,048

 
10,964

Total liabilities
1,183,577

 
990,494

 
 
 
 
Stockholders' equity
 
 
 
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding at September 30, 2019 and December 31, 2018

 

Common stock, $.01 par value; 49,000,000 shares authorized; 13,782,538 and 13,672,479 issued and outstanding at September 30, 2019 and December 31, 2018, respectively
138

 
137

Additional paid-in capital
50,585

 
49,321

Retained earnings
77,095

 
65,701

Accumulated other comprehensive income (loss)
11

 
(595
)
Total stockholders' equity
127,829

 
114,564

Total liabilities and stockholders' equity
$
1,311,406

 
$
1,105,058



See Notes to Consolidated Financial Statements
2




Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands except per share data)
2019
 
2018
 
2019
 
2018
Interest income
 
 
 
 
 
 
 
Loans, including fees
$
21,900

 
$
16,955

 
$
59,548

 
$
49,455

Investment securities available for sale
215

 
272

 
707

 
786

Federal funds sold and other
239

 
220

 
706

 
649

Total interest income
22,354

 
17,447

 
60,961

 
50,890

 
 
 
 
 
 
 
 
Interest expense

 

 
 
 
 
Deposits, includes payments to related parties of $479 and $1,448 for the three and nine months ended September 30, 2019, respectively, and $453 and $1,142 for the three and nine months ended September 30, 2018, respectively.
3,449

 
2,616

 
9,887

 
6,876

Borrowed funds
721

 
339

 
1,615

 
1,015

Total interest expense
4,170

 
2,955

 
11,502

 
7,891

 
 
 
 
 
 
 
 
Net interest income
18,184

 
14,492

 
49,459

 
42,999

Provision for loan losses
1,071

 
495

 
1,869

 
1,640

Net interest income after provision for loan losses
17,113

 
13,997

 
47,590

 
41,359

 
 
 
 
 
 
 
 
Noninterest income
 
 
 
 
 
 
 
Service charges on deposits
146

 
123

 
382

 
365

Credit card fees
2,059

 
1,592

 
5,521

 
4,609

Mortgage banking revenue
4,900

 
2,451

 
10,991

 
7,379

Gain (loss) on sale of investment securities available for sale

 

 
26

 
(2
)
Other fees and charges
116

 
74

 
320

 
306

Total noninterest income
7,221

 
4,240

 
17,240

 
12,657

 
 
 
 
 
 
 
 
Noninterest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
9,238

 
6,571

 
24,136

 
19,083

Occupancy and equipment
1,111

 
1,070

 
3,307

 
3,241

Professional fees
724

 
520

 
1,952

 
1,365

Data processing
4,193

 
3,636

 
11,222

 
10,858

Advertising
584

 
358

 
1,557

 
1,113

Loan processing
634

 
202

 
1,279

 
811

Other real estate owned expenses, net
7

 
7

 
57

 
38

Other operating
1,737

 
1,536

 
5,258

 
4,519

Total noninterest expenses
18,228

 
13,900

 
48,768

 
41,028

Income before income taxes
6,106

 
4,337

 
16,062

 
12,988

Income tax expense
1,625

 
1,190

 
4,239

 
3,706

Net income
$
4,481

 
$
3,147

 
$
11,823

 
$
9,282

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.33

 
$
0.27

 
$
0.86

 
$
0.80

Diluted earnings per share
$
0.32

 
$
0.26

 
$
0.85

 
$
0.77

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
13,727,519

 
11,719,946

 
13,714,260

 
11,631,927

Diluted
13,986,382

 
12,102,692

 
13,921,995

 
12,033,175




See Notes to Consolidated Financial Statements
3


Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Net income
$
4,481

 
$
3,147

 
$
11,823

 
$
9,282

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities available for sale
57

 
(157
)
 
867

 
(860
)
Reclassification of realized (gain) loss on sale of investment securities available for sale

 

 
(26
)
 
2

Unrealized gain (loss) on cash flow hedging derivative

 
(4
)
 
(5
)
 
2

 
57

 
(161
)
 
836

 
(856
)
Income tax (expense) benefit relating to the items above
(16
)
 
44

 
(230
)
 
235

Other comprehensive income (loss)
41

 
(117
)
 
606

 
(621
)
Comprehensive income
$
4,522

 
$
3,030

 
$
12,429

 
$
8,661




See Notes to Consolidated Financial Statements
4


Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Total
Stockholders'
Equity
(dollars in thousands)
Shares
 
Amount
 
 
 
 
Balance, December 31, 2017
11,537,196

 
$
115

 
$
27,051

 
$
53,200

 
$
(247
)
 
$
80,119

Net income

 

 

 
2,990

 

 
2,990

Unrealized loss on investment securities available for sale, net of income taxes

 

 

 

 
(297
)
 
(297
)
Unrealized gain on cash flow hedging derivative, net of income taxes

 

 

 

 
5

 
5

Stock options exercised, including tax benefit
10,408

 

 
285

 

 

 
285

Shares issued as compensation
4,068

 

 
122

 

 

 
122

Stock-based compensation

 

 
143

 

 

 
143

Balance, March 31, 2018
11,551,672

 
$
115

 
$
27,601

 
$
56,190

 
$
(539
)
 
$
83,367

Net income

 

 

 
3,145

 

 
3,145

Unrealized loss on investment securities available for sale, net of income taxes

 

 

 

 
(212
)
 
(212
)
Unrealized loss on cash flow hedging derivative, net of income taxes

 

 

 

 
(1
)
 
(1
)
Stock options exercised, including tax benefit
63,124

 
1

 
198

 

 

 
199

Shares issued as compensation
36,076

 
1

 
199

 

 

 
200

Stock-based compensation

 

 
142

 

 

 
142

Shares issued
16,000

 

 
198

 

 

 
198

Shares repurchased and retired
(5,500
)
 

 
(44
)
 

 

 
(44
)
Balance, June 30, 2018
11,661,372

 
$
117

 
$
28,294

 
$
59,335

 
$
(752
)
 
$
86,994

Net income

 

 

 
3,147

 

 
3,147

Unrealized loss on investment securities available for sale, net of income taxes

 

 

 

 
(114
)
 
(114
)
Unrealized loss on cash flow hedging derivative, net of income taxes

 

 

 
 
 
(2
)
 
(2
)
Stock options exercised, including tax benefit
29,652

 

 
156

 

 

 
156

Shares issued as compensation

 

 

 

 

 

Stock-based compensation

 

 
143

 

 

 
143

Shares issued

 

 

 

 

 

Shares repurchased and retired

 

 

 

 

 

Initial public offering, common stock issued, net of costs and underwriting discount of $2.4 million
1,500,000

 
15

 
16,318

 

 

 
16,333

Balance, September 30, 2018
13,191,024

 
$
132

 
$
44,911

 
$
62,482

 
$
(868
)
 
$
106,657







See Notes to Consolidated Financial Statements
5


Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders'
Equity
(dollars in thousands)
Shares
 
Amount
 
 
 
 
Balance, December 31, 2018
13,672,479

 
$
137

 
$
49,321

 
$
65,701

 
$
(595
)
 
$
114,564

Net income

 

 

 
3,319

 

 
3,319

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

 

 

 

 
270

 
270

Unrealized loss on cash flow hedging derivative, net of income taxes

 

 

 

 
(5
)
 
(5
)
Stock options exercised, including tax benefit
21,706

 

 
155

 
(48
)
 

 
107

Shares issued as compensation
18,380

 

 
150

 

 

 
150

Stock-based compensation

 

 
199

 

 

 
199

Adoption of lease standard

 

 

 
(54
)
 

 
(54
)
Balance, March 31, 2019
13,712,565

 
$
137

 
$
49,825

 
$
68,918

 
$
(330
)
 
$
118,550

Net income

 

 

 
4,023

 

 
4,023

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

 

 

 

 
300

 
300

Stock options exercised, including tax benefit
6,100

 

 
47

 
(1
)
 

 
46

Stock-based compensation

 

 
199

 

 

 
199

Balance, June 30, 2019
13,718,665

 
$
137

 
$
50,071

 
$
72,940

 
$
(30
)
 
$
123,118

Net income

 

 

 
4,481

 

 
4,481

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

 

 

 

 
41

 
41

Stock options exercised, including tax benefit
85,003

 
1

 
578

 
(326
)
 

 
253

Stock-based compensation

 

 
199

 

 

 
199

Shares repurchased and retired
(21,130
)
 

 
(263
)
 

 

 
(263
)
Balance, September 30, 2019
13,782,538

 
$
138

 
$
50,585

 
$
77,095

 
$
11

 
$
127,829



See Notes to Consolidated Financial Statements
6

Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)


 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
11,823

 
$
9,282

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
Provision for loan losses
1,869

 
1,640

Provision for losses on mortgage loans sold
128

 
83

Provision for off balance sheet credit risk
138

 
56

Net amortization on investments
113

 
183

Depreciation
844

 
795

Stock-based compensation expense
597

 
428

Director and employee compensation paid in Company stock
150

 
323

Deferred income tax benefit (expense)
(132
)
 
(94
)
Amortization of debt issuance expense
23

 
25

(Gain) loss on sale of securities available for sale
(26
)
 
2

Loss on sale of foreclosed real estate

 
17

Mortgage banking revenue
(10,991
)
 
(7,379
)
Proceeds from sales of loans held for sale
367,986

 
278,436

Originations of loans held for sale
(407,451
)
 
(266,299
)
Changes in assets and liabilities:
 
 
 
Accrued interest receivable
(174
)
 
(294
)
Prepaid income taxes and taxes payable
(263
)
 
1,003

Other assets
(1,312
)
 
(1,298
)
Accrued interest payable
548

 
588

Other liabilities
1,601

 
412

Net cash provided (used) by operating activities
(34,529
)
 
17,909

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of securities available for sale
(8,202
)
 

Maturities, calls and principal paydowns of securities available for sale
15,535

 
4,573

Proceeds from sale of securities available for sale
3,280

 
345

Purchases of restricted investments
(1,504
)
 
(756
)
Net increase in loans receivable
(140,468
)
 
(69,200
)
Net disposals (purchases) of premises and equipment
622

 
(1,036
)
Proceeds from sales of foreclosed real estate
50

 
257

Net cash used by investing activities
(130,687
)
 
(65,817
)

See Notes to Consolidated Financial Statements
7

Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)


 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
Cash flows from financing activities
 
 
 
Net increase (decrease) in:
 
 
 
Noninterest-bearing deposits
$
51,119

 
$
37,459

Interest-bearing deposits
106,085

 
(31,242
)
Securities sold under agreements to repurchase
(3,332
)
 
(21
)
Federal funds purchased
(2,000
)
 

Federal Home Loan Bank advances, net
33,556

 
15,000

Other borrowed funds

 
(2,000
)
Repurchase of common stock
(263
)
 
(44
)
Proceeds from exercise of stock options
406

 
640

Proceeds from shares issued

 
16,530

Net cash provided by financing activities
185,571

 
36,322

 
 
 
 
Net increase (decrease) in cash and cash equivalents
20,355

 
(11,586
)
 
 
 
 
Cash and cash equivalents, beginning of year
34,723

 
52,311

 
 
 
 
Cash and cash equivalents, end of period
$
55,078

 
$
40,725

 
 
 
 
Noncash activities:
 
 
 
Loans transferred to foreclosed real estate
$
57

 
$
427

Change in unrealized gains (losses) on investments
$
841

 
$
(858
)
Change in fair value of cash flow hedging derivative
$
(5
)
 
$
2

Establishment of lease right-of-use asset
$
5,158

 
$

Establishment of lease liability
$
5,358

 
$

 
 
 
 
Cash paid during the period for:
 
 
 
Taxes
$
4,406

 
$
1,955

Interest
$
10,954

 
$
7,303


See Notes to Consolidated Financial Statements
8


Capital Bancorp, Inc. and Subsidiaries
Form 10-Q
INDEX


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

 
Note 1 - Nature of Business and Basis of Presentation
Nature of operations:
Capital Bancorp, Inc. is a Maryland corporation and bank holding company (the “Company”) for Capital Bank, N.A. (the “Bank”). The Company's primary operations are conducted by the Bank, which operates branches in Rockville, Columbia and North Bethesda, Maryland, Reston, Virginia, and the District of Columbia. The Bank is principally engaged in the business of investing in commercial, real estate, and credit card loans and attracting deposits. The Company originates residential mortgages for sale in the secondary market through Capital Bank Home Loans, our residential mortgage banking arm; and issues credit cards through OpenSky®, a secured, digitally-driven nationwide credit card platform.
The Company formed Church Street Capital, LLC (“Church Street Capital”) in 2014 to provide short-term secured real estate financing to Washington, D.C. area investors and developers that may not meet all Bank credit criteria.
In addition, the Company owns all of the stock of Capital Bancorp (MD) Statutory Trust I (the “Trust”). The Trust is a special purpose non-consolidated entity organized for the sole purpose of issuing trust preferred securities.
In October 2018, the Company completed its initial public offering (“IPO”) of 2,563,046 shares of its common stock at a price to the public of $12.50 per share, 1,834,310 shares of which were sold by the Company and 728,736 shares of which were sold by certain of the Company’s shareholders (the “selling shareholders”).  The net proceeds to the Company from the IPO were $19.8 million after deducting the underwriting discount and offering expenses of $3.2 million. The Company did not receive any proceeds from the sales of shares by the selling shareholders.
Basis of presentation:
The accompanying consolidated financial statements include the activity of the Company and its wholly-owned subsidiaries, the Bank and Church Street Capital. All intercompany transactions have been eliminated in consolidation. The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and conform to general practices within the banking industry.
On August 15, 2018, the Company completed a four-for-one stock split of the Company's authorized, issued, and outstanding common stock, par value $0.01 per share (the “Stock Split”). At the effective time of the Stock Split, each share of the Company's issued and outstanding common stock was automatically increased to four shares issued and outstanding. No fractional shares were issued in connection with the Stock Split. All share and share-related information presented in these consolidated financial statements have been retroactively adjusted to reflect the increased number of shares resulting from the Stock Split.
Significant Accounting Policies:
The preparation of consolidated financial statements in accordance with GAAP requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The basis of the estimates is on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are

 
9
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from financial institutions, interest bearing deposits with financial institutions and federal funds sold. Generally, federal funds are sold for one-day periods.
Investment securities
Investment securities are classified as available for sale and carried at fair value with unrealized gains and losses included in stockholders’ equity on an after-tax basis. Premiums and discounts on investment securities are amortized or accreted using the interest method. Changes in the fair value of debt securities available for sale are included in stockholders’ 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.
Loans held for sale
Mortgage loans originated and intended for sale are recorded at fair value, determined individually, as of the balance sheet date. Fair value is determined based on outstanding investor commitments, or in the absence of such commitments, based on current investor yield requirements. Gains and losses on loan sales are determined by the specific-identification method. The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing. Interest on loans held for sale is credited to income based on the principal amounts outstanding.
Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third‑party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third‑party investors to put the mortgage loans back to the Company. Unrealized and realized gains on loan sales are determined using the specific-identification method and are recognized through mortgage banking activity in the Consolidated Statements of Income.
The Company elected to measure loans held for sale at fair value to better align reported results with the underlying economic changes in value of the loans on the Company’s balance sheet.
Loans and the Allowance for Loan Losses
Loans are stated at the principal amount outstanding, adjusted for deferred origination fees, deferred origination costs, discounts on loans acquired, and the allowance for loan losses. Interest is accrued based on the loan principal balances and stated interest rates. Origination fees and costs are recognized as an adjustment to the related loan yield using approximate interest methods. The Company discontinues the accrual of interest when any portion of the principal and interest is 90 days past due and collateral is insufficient to discharge the debt in full. 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

 
10
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

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 (“TDR”) status. If collection of principal is evaluated as doubtful, all payments are applied to principal. A modification of a loan is considered a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company may consider interest rate reductions, changes to payment terms, extensions of maturities and/or principal reductions.
Loans are generally charged-off in part or in full when management determines the loan to be uncollectible. Factors for charge-off that may be considered include: repayments deemed to be projected beyond reasonable time frames, client bankruptcy and lack of assets, and/or collateral deficiencies.
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 for qualitative factors. There may be an unallocated component of the allowance, which reflects the margin of imprecision inherent in the underlying assumptions used in the method for estimating specific and general losses in the portfolio. Actual loan performance may differ from those estimates. 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.
We determine the allowance for loan losses based on the accumulation of various components that are calculated independently in accordance with ASC 450 for pools of loans, ASC 310 for Troubled Debt Restructuring, and ASC 310 for individually evaluated loans. The process for determining an appropriate allowance for loan losses is based on a comprehensive and consistently applied analysis of the loan portfolio. The analysis considers all significant factors that affect the collectibility of the portfolio and supports the 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.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization over two to seven years. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related property. Leasehold improvements are amortized over the estimated useful lives of the improvements, approximately ten years, or the term of the lease, whichever is less. Expenditures for maintenance, repairs, and minor replacements are charged to noninterest expenses as incurred.
Leases
During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. The Company has elected to apply the package of practical expedients permitting entities to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Additionally, as provided by ASU 2016-02, the Company has elected not to apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of

 
11
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

12 months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term.
We adopted the guidance using the modified retrospective approach on January 1, 2019 and elected the practical expedients for transition including the transition option provided in ASU 2018-11, Leases (Topic 842) Targeted Improvements, which allowed the Company to initially apply the new leases standard at the adoption date. Consequently, the reporting for the comparative periods presented continued to be in accordance with ASC Topic 840, Leases. Therefore, the 2018 financial results and disclosures have not been adjusted.
The Company is largely accounting for our existing operating leases consistent with prior guidance except for the incremental balance sheet recognition for leases. The adoption of this standard resulted in the Company recognizing lease right-of-use assets and related lease liabilities totaling $5.2 million and $5.4 million, respectively, as of January 1, 2019. The difference between the lease assets and the lease liabilities was $146 thousand of deferred rent, which was reclassified to lease liabilities, and the remainder was recorded as an adjustment to retained earnings in the amount of $54 thousand. The adoption of this ASU did not have a significant impact on the Company’s consolidated statement of income. Additional information is included in Note 5 - Leases.
Derivative Financial Instruments
The Company enters into commitments to fund residential mortgage loans (interest rate locks) with the intention of selling them in the secondary market. The Company also enters into forward sales agreements for certain funded loans and loan commitments. The Company records unfunded commitments intended for loans held for sale and forward sales agreements at fair value with changes in fair value recorded as a component of mortgage banking revenue. Loans originated and intended for sale in the secondary market are carried at fair value. For pipeline loans which are not pre-sold to an investor, the Company manages the interest rate risk on rate lock commitments by entering into forward sale contracts, whereby the Company obtains the right to deliver securities to investors in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in mortgage banking revenue.
The Company accounts for derivative instruments and hedging activities according to guidelines established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10, Accounting for Derivative Instruments and Hedging Activities, as amended. The Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income, net of deferred taxes. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value estimates, we endeavor to maximize the use of observable

 
12
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

inputs and minimize the use of unobservable inputs.
The fair value hierarchy defines Level 1 valuations as those based on quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 valuations include inputs based on quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 valuations are based on at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed.
Financial assets that are recorded at fair value on a recurring basis include investment securities available for sale, loans held for sale, and derivative financial instruments. Financial liabilities that are recorded at fair value on a recurring basis are comprised of derivative financial instruments. Additional information is included in Note 6 - Fair Value.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized when it is deemed more likely than not that the benefits of such deferred income taxes will be realized.
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 September 30, 2019 and 2018, there were 273,600 and 266,600 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 as adjusted for the Stock Split:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30,
 
 
2019
 
2018
(dollars in thousands, except per share information)
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
4,480

 
13,727,519

 
$
0.33

 
$
3,147

 
11,719,946

 
$
0.27

 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities
 

 
258,863

 
 
 

 
382,746

 
 
Dilutive EPS per common share
 
$
4,480

 
13,986,382

 
$
0.32

 
$
3,147

 
12,102,692

 
$
0.26

 
 
 
 
 
 
 
 
 
 
 
 
 


 
13
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

 
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
(dollars in thousands, except per share information)
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
11,822

 
13,714,260

 
$
0.86

 
$
9,282

 
11,631,927

 
$
0.80

 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities
 

 
207,735

 
 
 

 
401,248

 
 
Dilutive EPS per common share
 
$
11,822

 
13,921,995

 
$
0.85

 
$
9,282

 
12,033,175

 
$
0.77

 
 
 
 
 
 
 
 
 
 
 
 
 
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 two components of other comprehensive income are unrealized gains and losses on investment securities available for sale, net of income taxes, and unrealized gains and losses on cash flow hedges, net of income taxes. Information concerning the Company's accumulated other comprehensive income (loss) as of September 30, 2019 and December 31, 2018 are as follows:
(in thousands)
 
September 30, 2019
 
December 31, 2018
Unrealized gains (losses) on securities available for sale
 
$
16

 
$
(825
)
Deferred tax (expense) benefit
 
(4
)
 
227

Other comprehensive income (loss), net of tax
 
12

 
(598
)
 
 
 
 
 
Unrealized gains on cash flow hedges
 

 
5

Deferred tax expense
 

 
(2
)
Other comprehensive income, net of tax
 

 
3

 
 
 
 
 
Total accumulated comprehensive income (loss)
 
$
12

 
$
(595
)
Recently issued accounting pronouncements:
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. In October 2019, the FASB voted to delay implementation and the new standard is now effective for fiscal years beginning after December 15, 2022, including the interim periods within those fiscal years. The Company expects the provisions of this standard to impact the Company’s consolidated financial statements, in particular, the level of the reserve for credit losses. The Company is continuing to evaluate the extent of the potential impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.

 
14
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, the Company does not expect to elect that option. The Company is evaluating the impact of the ASU on our consolidated financial statements. In addition to our allowance for loan losses, the Company will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
In August 2018, the FASB amended the Fair Value Measurement Topic 820 disclosure framework. These amendments include additions, removals and modifications to the fair value disclosure requirements in Topic 820, and are effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted on removed or modified disclosures. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2019, the FASB issued codification improvements to ASU Topic 842 - Leases, which clarifies fair value of leases, cash presentation and accounting change disclosures. These codification improvements were adopted to coincide with the adoption of ASU Topic 842 Leases. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.
In April 2019, the FASB issued codification improvements to ASU Topic 326 - Financial Instruments - Credit Loss, Topic 815 - Derivatives and Hedging, and Subtopic 825-10 - Financial Instruments. This codification provides technical corrections and clarifies issues related to fair value hedges. The Company early adopted this guidance upon issuance, and it did not have a material impact on the Company’s Consolidated Financial Statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
Reclassifications:
Certain reclassifications have been made to the amounts reported in prior periods to conform to the current period presentation. The reclassifications had no effect on net income or total stockholders' equity.

 
15
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 2 - Investment Securities



The amortized cost and estimated fair value of investment securities at September 30, 2019 and December 31, 2018 are summarized as follows:
Investment Securities Available for Sale
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
September 30, 2019
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Available for sale
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
 
$
6,000

 
$

 
$
(8
)
 
$
5,992

Municipal
 
515

 
13

 

 
528

Corporate
 
2,663

 
41

 
(32
)
 
2,672

Mortgage-backed securities
 
27,879

 
86

 
(84
)
 
27,881

 
 
$
37,057

 
$
140

 
$
(124
)
 
$
37,073

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
 
$
17,496

 
$

 
$
(136
)
 
$
17,360

Municipal
 
517

 

 
(16
)
 
501

Corporate
 
2,908

 
28

 
(51
)
 
2,885

Mortgage-backed securities
 
26,836

 
46

 
(696
)
 
26,186

 
 
$
47,757

 
$
74

 
$
(899
)
 
$
46,932

Proceeds from sales of securities sold during the nine months ended September 30, 2019 and 2018 were $3.3 million and $345 thousand, respectively. The investment sales resulted in realized gains of $26 thousand for the nine months ended September 30, 2019 period. Investment sales resulted in losses of $2 thousand for the nine months ended September 30, 2018 period. There were no securities sold during the three months ended September 30, 2019 or 2018.

 
16
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

 
Note 2 - Investment Securities (continued)

Information related to unrealized losses in the investment portfolio as of September 30, 2019 and December 31, 2018 are as follows:
Investment Securities Unrealized Losses
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Less than 12 months
 
12 months or longer
 
Total
September 30, 2019
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
U.S. government-sponsored enterprises
 
$

 
$

 
$
5,992

 
$
(8
)
 
$
5,992

 
$
(8
)
Municipal
 

 

 

 

 

 

Corporate
 

 

 
631

 
(32
)
 
631

 
(32
)
Mortgage-backed securities
 
3,786

 
(9
)
 
8,346

 
(75
)
 
12,132

 
(84
)
 
 
$
3,786

 
$
(9
)
 
$
14,969

 
$
(115
)
 
$
18,755

 
$
(124
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
 
$
496

 
$
(2
)
 
$
16,864

 
$
(134
)
 
$
17,360

 
$
(136
)
Municipal
 

 

 
501

 
(16
)
 
501

 
(16
)
Corporate
 

 

 
857

 
(51
)
 
857

 
(51
)
Mortgage-backed securities
 
2,294

 
(7
)
 
21,037

 
(689
)
 
23,331

 
(696
)
 
 
$
2,790

 
$
(9
)
 
$
39,259

 
$
(890
)
 
$
42,049

 
$
(899
)
At September 30, 2019, there were three U.S. government-sponsored enterprises securities, two corporate securities, and six mortgage-backed securities that had been in a loss position for greater than twelve months. At December 31, 2018, there were nine U.S. government-sponsored enterprises securities, two corporate securities, and fifteen mortgage-backed securities that had been in a loss position for greater than twelve months. Management believes that all unrealized losses have resulted from changes in the 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.
A summary of pledged securities at September 30, 2019 and December 31, 2018 are shown below:
Pledged Securities
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
(in thousands)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Securities sold under agreements to repurchase
 
$

 
$

 
$
16,032

 
$
15,862

Federal Home Loan Bank advances
 
1,587

 
1,596

 
6,713

 
6,662

 
 
$
1,587

 
$
1,596

 
$
22,745

 
$
22,524


 
17
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

 
Note 2 - Investment Securities (continued)

Contractual maturities of U.S. government-sponsored enterprises, municipals and corporate securities at September 30, 2019 and December 31, 2018 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Contractual Maturities
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
(in thousands)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Within one year
 
$
6,000

 
$
5,992

 
$
16,496

 
$
16,377

Over one to five years
 

 

 
1,000

 
983

Over five to ten years
 
2,000

 
2,041

 
2,000

 
2,028

Over ten years
 
1,178

 
1,159

 
1,425

 
1,358

Mortgage-backed securities(1)
 
27,879

 
27,881

 
26,836

 
26,186

 
 
$
37,057

 
$
37,073

 
$
47,757

 
$
46,932

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


 
18
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

 
Note 3 - Loans Receivable

Major classifications of loans as are as follows:
Loan Categories
 
 
 
 
(in thousands)
 
September 30, 2019
 
December 31, 2018
Real estate
 
 
 
 
Residential
 
$
443,961

 
$
407,844

Commercial
 
339,448

 
278,691

Construction
 
182,224

 
157,586

Commercial
 
132,935

 
122,264

Credit card
 
44,058

 
34,673

Other consumer
 
1,148

 
1,202

 
 
1,143,774

 
1,002,260

Deferred origination fees, net
 
(3,464
)
 
(1,992
)
Allowance for loan losses
 
(12,808
)
 
(11,308
)
Loans receivable, net
 
$
1,127,502

 
$
988,960

The Company makes loans to customers located primarily in the Washington, D.C. and Baltimore metropolitan areas. Although the loan portfolio is diversified, its performance is influenced by the regional economy. The Company’s loan categories 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. One-to-four family residential loans have a relatively small balance spread between many individual borrowers compared to our other loan categories. 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. The required minimum debt service coverage ratio is 1.15. Residential real estate loans have represented a stable and growing portion of our loan portfolio. The emphasis will continue to be on residential real estate lending.
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 September 30, 2019, there were approximately $171.7 million of owner-occupied commercial real estate loans, representing approximately 51% 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 have initial fixed rate terms that adjust typically at 5 years and 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 located primarily throughout the Company’s markets and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.
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.

 
19
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

 
Note 3 - Loans Receivable (continued)

Construction loans typically have terms of 12 to 18 months with the goal of transitioning the borrowers to permanent financing or re-underwriting and selling into the secondary market through Capital Bank Home Loans. According to underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, cannot exceed 75% for investor-owned and 80% for owner-occupied properties. On a case by case basis, exceptions to these limits may be granted with appropriate credit mitigants. Semi-annual stress testing of the construction loan portfolio is conducted, and underlying real estate conditions are closely monitored as well as the borrower’s trends of sales valuations as compared to underwriting valuations as part of the ongoing risk management efforts. The borrowers’ progress in construction buildout is monitored.
Commercial Business Loans. In addition to other loan products, general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products are offered, primarily in target markets, and underwritten based on each borrower’s ability to service debt from income. These loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower. Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment, and personal guaranties from the borrower or other principal are generally obtained.
Credit Cards. Our OpenSky® credit card division provides 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. Substantially all of the 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. In addition, 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), the Bank has recently begun to offer certain customers an unsecured line in excess of their secured line of credit. Approximately $41.4 million and $32.5 million of the credit card balances were secured by savings deposits held by the Company as of September 30, 2019 and December 31, 2018, 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, the difference between the contractually required payments and expected cash flows was recorded as a nonaccretable discount. Generally, the nonaccretable discount will be recognized after collection of the discounted fair value of the related loan. The remaining nonaccretable discounts on loans acquired were $345 thousand and $354 thousand as of September 30, 2019 and December 31, 2018, respectively. Loans with nonaccretable discounts had a carrying value of approximately $1.2 million as of both September 30, 2019 and December 31, 2018.

 
20
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

 
Note 3 - Loans Receivable (continued)

Accretable discounts on loans acquired is summarized as follows:
Accretable Discounts on Loans Acquired
 
 
 
 
 
 
 
 
(in thousands)
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Accretable discount at beginning of period
 
$
424

 
$
519

 
$
438

 
$
543

Accretion and payoff of loans
 
(13
)
 
(52
)
 
(27
)
 
(76
)
Other changes, net
 
22

 

 
22

 

Accretable discount at end of period
 
$
433

 
$
467

 
$
433

 
$
467

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by class for the three and nine months ended September 30, 2019 and September 30, 2018.
Allowance for Loan Losses
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Beginning
Balance
 
Provision for
Loan Losses
 
Charge-Offs
 
 
 
Ending
Balance
Three Months Ended September 30, 2019
 
 
 
 
Recoveries
 
Real estate
 
 
 
 
 
 
 
 
 
 
Residential
 
$
3,915

 
$
269

 
$
(8
)
 
$

 
$
4,176

Commercial
 
3,116

 
307

 

 
3

 
3,426

Construction
 
2,204

 
173

 

 

 
2,377

Commercial
 
1,472

 
140

 
(54
)
 

 
1,558

Credit card
 
1,199

 
181

 
(120
)
 
3

 
1,263

Other consumer
 
7

 
1

 

 

 
8

 
 
$
11,913

 
$
1,071

 
$
(182
)
 
$
6

 
$
12,808

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
 
 
 
 
 
 
Residential
 
$
3,541

 
$
643

 
$
(8
)
 
$

 
$
4,176

Commercial
 
3,003

 
413

 

 
10

 
3,426

Construction
 
2,093

 
284

 

 

 
2,377

Commercial
 
1,578

 
62

 
(82
)
 

 
1,558

Credit card
 
1,084

 
468

 
(303
)
 
14

 
1,263

Other consumer
 
9

 
(1
)
 

 

 
8

 
 
$
11,308

 
$
1,869

 
$
(393
)
 
$
24

 
$
12,808


 
21
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

 
Note 3 - Loans Receivable (continued)

Allowance for Loan Losses
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Beginning
Balance
 
Provision for
Loan Losses
 
Charge-Offs
 
 
 
Ending
Balance
Three Months Ended September 30, 2018
 
 
 
 
Recoveries
 
Real estate
 
 
 
 
 
 
 
 
 
 
Residential
 
$
3,207

 
$
290

 
$
(122
)
 
$
1

 
$
3,376

Commercial
 
2,948

 
(110
)
 

 
143

 
2,981

Construction
 
1,889

 
(68
)
 

 

 
1,821

Commercial
 
1,396

 
222

 

 
33

 
1,651

Credit card
 
997

 
161