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 March 31, 2020         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
https://cdn.kscope.io/eb7807a561ec35c691a071ba6315a85a-capitalbancorplogoa19.jpg
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
x
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 May 6, 2020, the Company had 13,821,973 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)
March 31, 2020 (unaudited)
 
December 31, 2019 (audited)
Assets
 
 
 
Cash and due from banks
$
9,578

 
$
10,530

Interest bearing deposits at other financial institutions
164,313

 
102,447

Federal funds sold
979

 
1,847

Total cash and cash equivalents
174,870

 
114,824

Investment securities available for sale
59,524

 
60,828

Restricted investments
4,274

 
3,966

Loans held for sale
73,955

 
71,030

Loans receivable, net of allowance for loan losses of $15,514 and $13,301 at March 31, 2020 and December 31, 2019, respectively
1,172,285

 
1,157,820

Premises and equipment, net
5,641

 
6,092

Accrued interest receivable
5,052

 
4,770

Deferred income taxes
3,979

 
4,263

Foreclosed real estate
3,402

 
2,384

Other assets
4,865

 
2,518

Total assets
$
1,507,847

 
$
1,428,495

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing, including related party balances of $12,558 and $16,009 at March 31, 2020 and December 31, 2019, respectively
$
363,423

 
$
291,777

Interest-bearing, including related party balances of $119,204 and $125,304 at March 31, 2020 and December 31, 2019, respectively
939,490

 
933,644

Total deposits
1,302,913

 
1,225,421

Federal Home Loan Bank advances
28,889

 
32,222

Other borrowed funds
15,430

 
15,423

Accrued interest payable
1,678

 
1,801

Other liabilities
22,857

 
20,297

Total liabilities
1,371,767

 
1,295,164

 
 
 
 
Stockholders' equity
 
 
 
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding at March 31, 2020 and December 31, 2019

 

Common stock, $.01 par value; 49,000,000 shares authorized; 13,816,723 and 13,894,842 issued and outstanding at March 31, 2020 and December 31, 2019, respectively
138

 
139

Additional paid-in capital
50,786

 
51,561

Retained earnings
84,389

 
81,618

Accumulated other comprehensive income
767

 
13

Total stockholders' equity
136,080

 
133,331

Total liabilities and stockholders' equity
$
1,507,847

 
$
1,428,495



See Notes to Consolidated Financial Statements
2




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

 
Three Months Ended March 31,
 
(dollars in thousands except per share data)
2020
 
2019
 
Interest income
 
 
 
 
Loans, including fees
$
21,074

 
$
17,844

 
Investment securities available for sale
340

 
259

 
Federal funds sold and other
330

 
215

 
Total interest income
21,744

 
18,318

 
 
 
 
 
 
Interest expense

 

 
Deposits, includes payments to related parties of $383 and $519 for the three months ended March 31, 2020 and March 31, 2019, respectively.
3,613

 
3,243

 
Borrowed funds
444

 
331

 
Total interest expense
4,057

 
3,574

 
 
 
 
 
 
Net interest income
17,687

 
14,744

 
Provision for loan losses
2,409

 
121

 
Net interest income after provision for loan losses
15,278

 
14,623

 
 
 
 
 
 
Noninterest income
 
 
 
 
Service charges on deposits
149

 
98

 
Credit card fees
2,008

 
1,492

 
Mortgage banking revenue
4,017

 
2,376

 
Other fees and charges
405

 
126

 
Total noninterest income
6,579

 
4,092

 
 
 
 
 
 
Noninterest expenses
 
 
 
 
Salaries and employee benefits
8,457

 
6,787

 
Occupancy and equipment
1,178

 
1,094

 
Professional fees
770

 
619

 
Data processing
4,117

 
3,313

 
Advertising
636

 
443

 
Loan processing
447

 
305

 
Other real estate owned expenses, net
45

 
22

 
Other operating
2,193

 
1,747

 
Total noninterest expenses
17,843

 
14,330

 
Income before income taxes
4,014

 
4,385

 
Income tax expense
1,080

 
1,066

 
Net income
$
2,934

 
$
3,319

 
 
 
 
 
 
Basic earnings per share
$
0.21

 
$
0.24

 
Diluted earnings per share
$
0.21

 
$
0.24

 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
Basic
13,876,428

 
13,702,433

 
Diluted
14,075,756

 
13,877,625

 



See Notes to Consolidated Financial Statements
3


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

 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Net income
$
2,934

 
$
3,319

 
 
 
 
Other comprehensive income (loss):
 
 
 
Unrealized gain on investment securities available for sale
1,040

 
370

Unrealized loss on cash flow hedging derivative

 
(5
)
 
1,040

 
365

Income tax expense relating to the items above
(286
)
 
(100
)
Other comprehensive income
754

 
265

Comprehensive income
$
3,688

 
$
3,584



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 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

Adoption of ASC 842 Leases

 

 

 
(54
)
 

 
(54
)
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
21,706

 

 
155

 
(48
)
 

 
107

Shares issued as compensation
18,380

 

 
150

 

 

 
150

Stock-based compensation

 

 
199

 

 

 
199

Balance, March 31, 2019
13,712,565

 
$
137

 
$
49,825

 
$
68,918

 
$
(330
)
 
$
118,550

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
13,894,842

 
$
139

 
$
51,561

 
$
81,618

 
$
13

 
$
133,331

Net income

 

 

 
2,934

 

 
2,934

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

 

 

 

 
754

 
754

Stock options exercised
34,015

 

 
263

 
(163
)
 

 
100

Stock-based compensation

 

 
244

 

 

 
244

Shares repurchased and retired
(112,134
)
 
(1
)
 
(1,282
)
 

 

 
(1,283
)
Balance, March 31, 2020
13,816,723

 
$
138

 
$
50,786

 
$
84,389

 
$
767

 
$
136,080



See Notes to Consolidated Financial Statements
5

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


 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Cash flows from operating activities
 
 
 
Net income
$
2,934

 
$
3,319

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
2,409

 
121

Provision for losses on mortgage loans sold
106

 
24

Provision for (recovery of) off balance sheet credit risk
45

 
(10
)
Net amortization on investments
68

 
31

Depreciation and amortization
522

 
594

Stock-based compensation expense
244

 
199

Director and employee compensation paid in stock

 
150

Deferred income tax benefit
(2
)
 
(58
)
Amortization of debt issuance expense
7

 
8

Mortgage banking revenue
(4,017
)
 
(2,376
)
Proceeds from sales of loans held for sale
181,513

 
74,068

Originations of loans held for sale
(180,421
)
 
(74,796
)
Changes in assets and liabilities:
 
 
 
Accrued interest receivable
(282
)
 
(61
)
Prepaid income taxes and taxes payable

 
4

Other assets
(2,347
)
 
(737
)
Accrued interest payable
(123
)
 
405

Other liabilities
2,409

 
904

Net cash provided by operating activities
3,065

 
1,789

 
 
 
 
Cash flows from investing activities
 
 
 
Maturities, calls and principal paydowns of securities available for sale
2,276

 
1,191

Sales (purchases) of restricted investments
(308
)
 
19

Net increase in loans receivable
(17,892
)
 
(7,799
)
Net disposals (purchases) of premises and equipment
(71
)
 
111

Proceeds from sales of foreclosed real estate

 
50

Net cash used by investing activities
(15,995
)
 
(6,428
)
 
 
 
 
Cash flows from financing activities
 
 
 
Net increase (decrease) in:
 
 
 
Noninterest-bearing deposits
$
71,646

 
$
19,976

Interest-bearing deposits
5,846

 
(7,494
)
Securities sold under agreements to repurchase

 
(322
)
Federal funds purchased

 
(2,000
)
Federal Home Loan Bank advances, net
(3,333
)
 
(2,000
)
Repurchase of common stock
(1,283
)
 

Proceeds from exercise of stock options
100

 
107

Net cash provided by financing activities
72,976

 
8,267

 
 
 
 
Net increase in cash and cash equivalents
60,046

 
3,628

 
 
 
 
Cash and cash equivalents, beginning of year
114,824

 
34,723

 
 
 
 
Cash and cash equivalents, end of period
$
174,870

 
$
38,351

 
 
 
 

See Notes to Consolidated Financial Statements
6

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


 
Three Months Ended March 31,
(in thousands)
2020
 
2019
Noncash activities:
 
 
 
Loans transferred to foreclosed real estate
$
1,018

 
$
57

Change in unrealized gains on investments
$
1,040

 
$
370

Change in fair value of cash flow hedging derivative
$

 
$
(5
)
Establishment of lease right-of-use asset
$

 
$
5,158

Establishment of lease liability
$

 
$
5,358

 
 
 
 
Cash paid during the period for:
 
 
 
Taxes
$
1

 
$
1

Interest
$
4,180

 
$
3,169


See Notes to Consolidated Financial Statements
7

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 (“CBHL”), 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”), in which 1,834,310 shares of common stock were issued at $12.50 per share, generating net proceeds of $19.8 million
Basis of presentation:
The accompanying consolidated financial statements include the activity of the Company and its wholly-owned subsidiaries, the Bank and Church Street Capital. All intercompany transactions have been eliminated in consolidation. The Company reports its activities as four business segments. 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.
Risks and Uncertainties
The novel coronavirus (“COVID-19”) spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operations in March and will likely adversely affect our operations in subsequent quarters, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic most likely to affect our future earnings, cash flows and financial condition in future quarters primarily include the nature and duration of the financial effects felt by our customers and the related impact on the customers' ability to fulfill their financial obligations to the Company as well as the potential decline of real estate values resulting from market disruption which may impair the recorded values of collateral-dependent loans. Accordingly, significant estimates used in the preparation of our financial statements may be subject to significant adjustments in future periods. The greater the duration and severity of the pandemic the more likely that estimates will be materially impacted by its effects.


 
8
 


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

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

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 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 servicing rights 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 and costs, discounts on loans acquired, and the allowance for loan losses. Interest is accrued based on the loan

 
9
 


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

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

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 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 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 (with a specific evaluation of COVID-19 impact); 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 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 Company determines 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, and ASC 310 for Troubled Debt Restructuring and 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. Additional disclosure on the allowance for loan losses, qualitative factors, and the potential COVID-19 impact can be found in the risk factors and Note 4 - loans receivable.
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.

 
10
 


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

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

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 elected to apply the package of practical expedients permitting entities to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Additionally, as provided by ASU 2016-02, the Company elected not to apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of 12 months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term.
The Company is largely accounting for 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 6 - 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 endeavors to manage the interest rate risk on rate lock commitments by entering into forward sale contracts, whereby the Company obtains the right to deliver securities to investors in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in mortgage banking revenue.
The Company 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

 
11
 


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

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

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 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 7 - 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 March 31, 2020 and 2019, there were 251,251 and 273,600 stock options, respectively, that were not included in the calculation as their effect would have been anti-dilutive.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31,
 
 
2020
 
2019
(dollars in thousands, except per share information)
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
Earnings per share - Basic
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
2,934

 
13,876,428

 
$
0.21

 
$
3,319

 
13,702,433

 
$
0.24

Effect of dilutive securities
 

 
199,328

 
 
 

 
175,192

 
 
Earnings per share - Diluted
 
$
2,934

 
14,075,756

 
$
0.21

 
$
3,319

 
13,877,625

 
$
0.24

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.

 
12
 


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

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

The Company's only component of other comprehensive income is unrealized gains and losses on investment securities available for sale, net of income taxes. Information concerning the Company's accumulated other comprehensive income (loss) as of March 31, 2020 and December 31, 2019 is as follows:
(in thousands)
 
March 31, 2020
 
December 31, 2019
Unrealized gains on securities available for sale
 
$
1,057

 
$
18

Deferred tax expense
 
(290
)
 
(5
)
Total accumulated comprehensive income
 
$
767

 
$
13

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. The FASB subsequently revised ASU 2019-10, which delayed 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.
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 has been permitted since first quarter 2019, the Company does not expect to early adopt. In addition to the 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 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.
In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on loan losses, hedging, and recognition and measurement of financial instruments. The amendments related to loan losses will be effective for the Company for reporting periods beginning after December 15, 2022. The amendments related to hedging were effective for the Company for interim and annual periods beginning after December 15, 2018. The amendments related to recognition and measurement of financial instruments were adopted by the Company during the first quarter of 2018.
In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected loan losses (CECL). The new effective dates will be fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. In addition, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments-loan losses (Topic 326): Measurement of loan losses on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted

 
13
 


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

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

the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2020, the FASB issued ASU 2020-04, ‘‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting’’. This new ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Entities that make such elections would not have to remeasure contracts at the modification date or reassess a previous accounting determination.  Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met.  This amended guidance and the ability to elect its temporary optional expedients and exceptions are effective for the Company as of March 12, 2020 through December 31, 2022.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of March 31, 2020, the Company has offered payment deferrals for commercial and consumer customers for up to six months. The loan modifications offered to specific loan types are as follows:
Full payment-balloon or full amortization loans - Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the balloon maturity/payoff date occurs.
Full payment ARM loans - Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the ARM repricing occurs.

 
14
 


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

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

Full Payment Rate Reset Loans - Once the deferral period has ended, the Company will go back to billing principal and interest. As payments are made, all funds will go towards interest until all accrued interest has been caught up. Once the accrued interest is satisfied, future payments will be broken out for both principal and interest. The amount of principal that had been deferred will be re-amortized when the rate reset occurs.
Principal deferral only loans (any type) - Once the deferral period has ended, the Company will go back to billing principal and interest. The principal amount that has been deferred will be re-amortized when either the maturity, ARM repricing or rate reset occurs.
Consumer loans - Borrowers are required to sign a change in the terms and agreements at the time of deferral, which re-amortizes the loan and extends the maturity date based on the number of months deferred.
This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.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 - Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest bearing deposits and federal funds sold. The Bank is required by regulations to maintain an average cash reserve balance based on a percentage of deposits. At March 31, 2020 and December 31, 2019, the requirements were satisfied by amounts on deposit with the Federal Reserve Bank and cash on hand.
Note 3- Investment Securities
The amortized cost and estimated fair value of investment securities at March 31, 2020 and December 31, 2019 are summarized as follows:
Investment Securities Available for Sale
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
March 31, 2020
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Available for sale
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
 
$
1,000

 
$
2

 
$

 
$
1,002

Municipal
 
514

 

 
(43
)
 
471

Corporate
 
2,260

 
25

 
(82
)
 
2,203

Mortgage-backed securities
 
54,693

 
1,155

 

 
55,848

 
 
$
58,467

 
$
1,182

 
$
(125
)
 
$
59,524

 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
 
$
1,000

 
$

 
$
(1
)
 
$
999

Municipal
 
515

 
13

 

 
528

Corporate
 
2,542

 
46

 
(23
)
 
2,565

Mortgage-backed securities
 
56,754

 
117

 
(135
)
 
56,736

 
 
$
60,811

 
$
176

 
$
(159
)
 
$
60,828

There were no securities sold during the three months ended March 31, 2020 and 2019.

 
16
 


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

 
Note 3 - Investment Securities (continued)

Information related to unrealized losses in the investment portfolio as of March 31, 2020 and December 31, 2019 is summarized as follows:
Investment Securities Unrealized Losses
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Less than 12 months
 
12 months or longer
 
Total
March 31, 2020
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Municipal
 
471

 
(43
)
 

 

 
471

 
(43
)
Corporate
 
999

 
(2
)
 
179

 
(80
)
 
1,178

 
(82
)
 
 
$
1,470

 
$
(45
)
 
$
179

 
$
(80
)
 
$
1,649

 
$
(125
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-sponsored enterprises
 
$

 
$

 
$
999

 
$
(1
)
 
$
999

 
$
(1
)
Corporate
 

 

 
519

 
(23
)
 
519

 
(23
)
Mortgage-backed securities
 
21,487

 
(78
)
 
5,246

 
(57
)
 
26,733

 
(135
)
 
 
$
21,487

 
$
(78
)
 
$
6,764

 
$
(81
)
 
$
28,251

 
$
(159
)
At March 31, 2020, there was one corporate security that had been in a loss position for greater than twelve months. At December 31, 2019, there was one U.S. government-sponsored enterprises security, two corporate securities, and four mortgage-backed securities that had been in a loss position for greater than twelve months. Management believes that the unrealized loss at March 31, 2020 has 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 March 31, 2020 and December 31, 2019 is shown below:
Pledged Securities
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
December 31, 2019
(in thousands)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Federal Home Loan Bank advances
 
$
1,435

 
$
1,481

 
$
1,508

 
$
1,522


 
17
 


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

 
Note 3 - Investment Securities (continued)

Contractual maturities of U.S. government-sponsored enterprises, municipals and corporate securities at March 31, 2020 and December 31, 2019 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
 
 
 
 
 
 
 
 
 
 
March 31, 2020
 
December 31, 2019
(in thousands)
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Within one year
 
$
1,000

 
$
1,002

 
$
1,542

 
$
1,518

Over one to five years
 

 

 

 

Over five to ten years
 
2,000

 
2,023

 
2,000

 
2,046

Over ten years
 
774

 
651

 
515

 
528

Mortgage-backed securities(1)
 
54,693

 
55,848

 
56,754

 
56,736

 
 
$
58,467

 
$
59,524

 
$
60,811

 
$
60,828

_______________
(1) 
Mortgage-backed securities contractually repay in monthly installments.


 
18
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable

Major classifications of loans as are as follows:
Loan Categories
 
 
 
 
(in thousands)
 
March 31, 2020
 
December 31, 2019
Real estate
 
 
 
 
Residential
 
$
430,870

 
$
427,926

Commercial
 
360,601

 
348,091

Construction
 
204,047

 
198,702

Commercial
 
151,551

 
151,109

Credit card
 
41,881

 
46,412

Other consumer
 
1,103

 
1,285

 
 
1,190,053

 
1,173,525

Deferred origination fees, net
 
(2,254
)
 
(2,404
)
Allowance for loan losses
 
(15,514
)
 
(13,301
)
Loans receivable, net
 
$
1,172,285

 
$
1,157,820

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. 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 115%. Residential real estate loans have represented a stable and growing portion of our loan portfolio.
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 March 31, 2020, there were approximately $163.8 million of owner-occupied commercial real estate loans, representing approximately 45.4% 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 somewhat diverse in terms and type. This diversity may help 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. 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

 
19
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable (continued)

established by an independent appraisal, cannot exceed 75% for investor-owned and 80% for owner-occupied properties. Semi-annual stress testing of the construction loan portfolio is conducted, and underlying real estate conditions are closely monitored as well as the borrower’s trends of sales valuations as compared to underwriting valuations as part of ongoing risk management efforts. The borrowers’ progress in construction buildout is closely monitored and the original underwriting guidelines for construction milestones and completion timelines are strictly enforced.
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. 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 $39.6 million and $43.3 million of the credit card balances were secured by savings deposits held by the Company as of March 31, 2020 and December 31, 2019, 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. The remaining nonaccretable discounts on loans acquired was $285 thousand as of March 31, 2020 and December 31, 2019. Loans with nonaccretable discounts had a carrying value of $855 thousand and $864 thousand as of March 31, 2020 and December 31, 2019.

 
20
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable (continued)

Accretable discounts on loans acquired is summarized as follows:
Accretable Discounts on Loans Acquired
 
 
 
 
(in thousands)
 
 
 
 
 
 
For the Three Months Ended March 31, 2020
 
For the Year Ended December 31, 2019
Accretable discount at beginning of period
 
$
429

 
$
438

Accretion and payoff of loans
 
(196
)
 
(9
)
Accretable discount at end of period
 
$
233

 
$
429

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 months ended March 31, 2020 and March 31, 2019.
Allowance for Loan Losses
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Beginning
Balance
 
Provision for
Loan Losses
 
Charge-Offs
 
 
 
Ending
Balance
Three Months Ended March 31, 2020
 
 
 
 
Recoveries
 
Real estate
 
 
 
 
 
 
 
 
 
 
Residential
 
$
4,135

 
$
836

 
$

 
$

 
$
4,971

Commercial
 
3,572

 
851

 

 

 
4,423

Construction
 
2,668

 
364

 

 

 
3,032

Commercial
 
1,548

 
140

 
(25
)
 

 
1,663

Credit card
 
1,368

 
217

 
(179
)
 
8

 
1,414

Other consumer
 
10

 
1

 

 

 
11

 
 
$
13,301

 
$
2,409

 
$
(204
)
 
$
8

 
$
15,514

Allowance for Loan Losses
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Beginning
Balance
 
Provision for
Loan Losses
 
Charge-Offs
 
 
 
Ending
Balance
Three Months Ended March 31, 2019
 
 
 
 
Recoveries
 
Real estate
 
 
 
 
 
 
 
 
 
 
Residential
 
$
3,541

 
$
334

 
$

 
$

 
$
3,875

Commercial
 
3,003

 
(157
)
 

 
2

 
2,848

Construction
 
2,093

 
(64
)
 

 

 
2,029

Commercial
 
1,578

 
(151
)
 

 

 
1,427

Credit card
 
1,084

 
159

 
(93
)
 
9

 
1,159

Other consumer
 
9

 

 

 

 
9

 
 
$
11,308

 
$
121

 
$
(93
)
 
$
11

 
$
11,347


 
21
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable (continued)

The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans. 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.
Allowance for Loan Loss Composition
 
 
 
 
 
 
 
(in thousands)
Allowance for Loan Losses
Ending Balance Evaluated
for Impairment:
 
Outstanding Loan
Balances Evaluated
for Impairment:
March 31, 2020
Individually
 
Collectively
 
Individually
 
Collectively
Real estate
 
 
 
 
 
 
 
Residential
$

 
$
4,971

 
$
1,633

 
$
429,237

Commercial

 
4,423

 
1,408

 
359,193

Construction

 
3,032

 
1,503

 
202,544

Commercial
89

 
1,574

 
440

 
151,111

Credit card

 
1,414

 

 
41,881

Other consumer

 
11

 

 
1,103

 
$
89

 
$
15,425

 
$
4,984

 
$
1,185,069

 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
Real estate
 
 
 
 
 
 
 
Residential
$

 
$
4,135

 
$
2,192

 
$
425,734

Commercial

 
3,572

 
1,433

 
346,658

Construction

 
2,668

 

 
198,702

Commercial
119

 
1,429

 
474

 
150,635

Credit card

 
1,368

 

 
46,412

Other consumer

 
10

 

 
1,285

 
$
119

 
$
13,182

 
$
4,099

 
$
1,169,426


 
22
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable (continued)

Past due loans, segregated by age and class of loans, as of March 31, 2020 and December 31, 2019 were as follows:
Loans Past Due
 
 
 
 
 
 
 
 
 
 
 
Accruing
Loans 90 or
More Days
Past Due
 
 
 
 
Loans
30-89 Days
Past Due
 
Loans
90 or More
Days
Past Due
 
Total Past
Due Loans
 
Current
Loans
 
Total
Loans
 
 
Non-accrual
Loans
(in thousands)
 
 
 
 
 
 
 
March 31, 2020
 
 
 
 
 
 
 
Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
8,986

 
$
1,653

 
$
10,639

 
$
420,231

 
$
430,870

 
$
229

 
$
1,633

Commercial
 
4,616

 
1,678

 
6,294

 
354,307

 
360,601

 
270

 
1,408

Construction
 
2,103

 
353

 
2,456

 
201,591

 
204,047

 
297

 
1,503

Commercial
 
3,014

 
323

 
3,337

 
148,214

 
151,551

 

 
440

Credit card
 
3,834

 
7

 
3,841

 
38,040

 
41,881

 
7

 

Other consumer
 

 

 

 
1,103

 
1,103

 

 

 
 
$
22,553

 
$
4,014

 
$
26,567

 
$
1,163,486

 
$
1,190,053

 
$
803

 
$
4,984

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans included in total above
 
$
22

 
$
1,263

 
$
1,285

 
$
4,599

 
$
5,884

 
$
498

 
$
818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
704

 
$
2,436

 
$
3,140

 
$
424,786

 
$
427,926

 
$
374

 
$
2,192

Commercial
 
275

 
1,671

 
1,946

 
346,145

 
348,091

 
237

 
1,433

Construction
 
756

 

 
756

 
197,946

 
198,702

 

 

Commercial
 
172

 
353

 
525

 
150,584

 
151,109

 

 
474

Credit card
 
5,526

 
8

 
5,534

 
40,878

 
46,412

 
9

 

Other consumer
 

 

 

 
1,285

 
1,285

 

 

 
 
$
7,433

 
$
4,468

 
$
11,901

 
$
1,161,624

 
$
1,173,525

 
$
620

 
$
4,099

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans included in total above
 
$
305

 
$
1,243

 
$
1,548

 
$
4,873

 
$
6,421

 
$
464

 
$
880

As of March 31, 2020 and December 31, 2019, there was a $159 thousand loan secured by a one to four family residential property in the process of foreclosure.

 
23
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable (continued)

Impaired loans were as follows:
Impaired Loans
 
 
 
 
 
 
 
 
 
 
 
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
(in thousands)
 
 
 
 
 
March 31, 2020
 
 
 
 
 
Real estate
 
 
 
 
 
 
 
 
 
 
Residential
 
$
1,838

 
$
1,633

 
$

 
$
1,633

 
$

Commercial
 
1,551

 
1,408

 

 
1,408

 

Construction
 
1,528

 
1,503

 

 
1,503

 

Commercial
 
559

 
201

 
239

 
440

 
89

 
 
$
5,476

 
$
4,745

 
$
239

 
$
4,984

 
$
89

 
 
 
 
 
 
 
 
 
 
 
Acquired loans included above
 
$
987

 
$
818

 
$

 
$
818

 
$

 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
 
 
 
 
 
 
Residential
 
$
2,309

 
$
2,192

 
$

 
$
2,192

 
$

Commercial
 
1,477

 
1,433

 

 
1,433

 

Commercial
 
574

 
201

 
273

 
474

 
119

 
 
$
4,360

 
$
3,826

 
$
273

 
$
4,099

 
$
119

 
 
 
 
 
 
 
 
 
 
 
Acquired loans included above
 
$
1,148

 
$
880

 
$

 
$
880

 
$

The following table summarizes interest recognized on impaired loans:
Interest Recognized on Impaired Loans
 
 
 
 
For the Three Months Ended March 31, 2020
 
For the Three Months Ended March 31, 2019
(in thousands)
Average
Recorded
Investment
 
Interest
Recognized
 
Average
Recorded
Investment
 
Interest
Recognized
Real estate
 
 
 
 
 
 
 
Residential
$
1,840

 
$

 
$
2,399

 
$

Commercial
1,575

 
3

 
1,572

 

Construction
1,528

 
9

 
2,132

 

Commercial
661

 

 
1,513

 

 
$
5,604

 
$
12

 
$
7,616

 
$

Impaired loans include loans acquired on which management has recorded a nonaccretable discount.
Credit quality indicators
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of loans, the level of classified loans, net charge-offs, nonperforming loans, and the general economic conditions in the Company’s market.

 
24
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable (continued)

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of loans characterized as classified is as follows:
Special Mention
A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.
Substandard
A substandard loan is inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Company management.
Doubtful
A doubtful loan has all the weaknesses inherent as 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.

 
25
 


Capital Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 
Note 4 - Loans Receivable (continued)

The following table presents the balances of classified lo