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Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.</font></div></div> 0001419536 2020-01-01 2020-06-30 0001419536 cbnk:PaycheckProtectionProgramMember 2020-01-01 2020-06-30 0001419536 2020-08-06 0001419536 2019-12-31 0001419536 2020-06-30 0001419536 2019-04-01 2019-06-30 0001419536 us-gaap:BankServicingMember 2020-01-01 2020-06-30 0001419536 2019-01-01 2019-06-30 0001419536 2020-04-01 2020-06-30 0001419536 us-gaap:CreditCardMember 2019-04-01 2019-06-30 0001419536 us-gaap:MortgageBankingMember 2019-04-01 2019-06-30 0001419536 us-gaap:BankServicingMember 2020-04-01 2020-06-30 0001419536 us-gaap:MortgageBankingMember 2020-01-01 2020-06-30 0001419536 us-gaap:BankServicingMember 2019-01-01 2019-06-30 0001419536 us-gaap:BankServicingMember 2019-04-01 2019-06-30 0001419536 us-gaap:MortgageBankingMember 2020-04-01 2020-06-30 0001419536 us-gaap:CreditCardMember 2019-01-01 2019-06-30 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 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/9d1d0a685dbbab2d14ab29ab2d959a1b-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
Non-accelerated filer
¨
 
Smaller reporting company
 
 
 
Emerging growth company
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.     
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 August 6, 2020, the Company had 13,820,223 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)
June 30, 2020 (unaudited)
 
December 31, 2019 (audited)
Assets
 
 
 
Cash and due from banks
$
15,636

 
$
10,530

Interest bearing deposits at other financial institutions
180,379

 
102,447

Federal funds sold
3,698

 
1,847

Total cash and cash equivalents
199,713

 
114,824

Investment securities available for sale
56,796

 
60,828

Restricted investments
4,085

 
3,966

Loans held for sale
116,969

 
71,030

Small Business Administration Payroll Protection Program (“SBA-PPP”) loans receivable, net of fees
229,646

 

Portfolio loans receivable, net of deferred fees and costs and net of allowance for loan losses of $18,680 and $13,301 at June 30, 2020 and December 31, 2019, respectively
1,192,797

 
1,157,820

Premises and equipment, net
5,544

 
6,092

Accrued interest receivable
6,865

 
4,770

Deferred income taxes
3,599

 
4,263

Foreclosed real estate
3,326

 
2,384

Other assets
3,025

 
2,518

Total assets
$
1,822,365

 
$
1,428,495

 
 
 
 
Liabilities
 
 
 
Deposits
 
 
 
Noninterest-bearing, including related party balances of $17,734 and $16,009 at June 30, 2020 and December 31, 2019, respectively
$
563,995

 
$
291,777

Interest-bearing, including related party balances of $128,655 and $125,304 at June 30, 2020 and December 31, 2019, respectively
1,044,731

 
933,644

Total deposits
1,608,726

 
1,225,421

Federal Home Loan Bank advances
25,556

 
32,222

Other borrowed funds
17,392

 
15,423

Accrued interest payable
1,284

 
1,801

Other liabilities
27,299

 
20,297

Total liabilities
1,680,257

 
1,295,164

 
 
 
 
Stockholders' equity
 
 
 
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding at June 30, 2020 and December 31, 2019

 

Common stock, $.01 par value; 49,000,000 shares authorized; 13,818,223 and 13,894,842 issued and outstanding at June 30, 2020 and December 31, 2019, respectively
138

 
139

Additional paid-in capital
51,052

 
51,561

Retained earnings
89,151

 
81,618

Accumulated other comprehensive income
1,767

 
13

Total stockholders' equity
142,108

 
133,331

Total liabilities and stockholders' equity
$
1,822,365

 
$
1,428,495




See Notes to Consolidated Financial Statements
2




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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands except per share data)
2020
 
2019
 
2020
 
2019
Interest income
 
 
 
 
 
 
 
Loans, including fees
$
21,609

 
$
19,804

 
$
42,683

 
$
37,648

Investment securities available for sale
316

 
234

 
656

 
492

Federal funds sold and other
75

 
251

 
405

 
467

Total interest income
22,000

 
20,289

 
43,744

 
38,607

 
 
 
 
 
 
 
 
Interest expense

 

 
 
 
 
Deposits, includes payments to related parties of $295 and $678 for the three and six months ended June 30, 2020, respectively, and $459 and $976 for the three and six months ended June 30, 2019, respectively.
2,954

 
3,195

 
6,567

 
6,438

Borrowed funds
422

 
563

 
866

 
894

Total interest expense
3,376

 
3,758

 
7,433

 
7,332

 
 
 
 
 
 
 
 
Net interest income
18,624

 
16,531

 
36,311

 
31,275

Provision for loan losses
3,300

 
677

 
5,709

 
798

Net interest income after provision for loan losses
15,324

 
15,854

 
30,602

 
30,477

 
 
 
 
 
 
 
 
Noninterest income
 
 
 
 
 
 
 
Service charges on deposits
110

 
138

 
259

 
236

Credit card fees
2,912

 
1,970

 
4,921

 
3,462

Mortgage banking revenue
10,119

 
3,715

 
14,136

 
6,091

Gain on sale of investment securities available for sale

 
26

 

 
26

Other fees and charges
758

 
78

 
1,163

 
204

Total noninterest income
13,899

 
5,927

 
20,479

 
10,019

 
 
 
 
 
 
 
 
Noninterest expenses
 
 
 
 
 
 
 
Salaries and employee benefits
11,296

 
8,111

 
19,753

 
14,898

Occupancy and equipment
1,152

 
1,102

 
2,330

 
2,196

Professional fees
894

 
609

 
1,664

 
1,228

Data processing
5,667

 
3,716

 
9,784

 
7,029

Advertising
606

 
531

 
1,242

 
973

Loan processing
740

 
340

 
1,187

 
645

Foreclosed real estate expenses, net
82

 
28

 
128

 
50

Other operating
2,266

 
1,773

 
4,459

 
3,521

Total noninterest expenses
22,703

 
16,210

 
40,547

 
30,540

Income before income taxes
6,520

 
5,571

 
10,534

 
9,956

Income tax expense
1,759

 
1,548

 
2,839

 
2,614

Net income
$
4,761

 
$
4,023

 
$
7,695

 
$
7,342

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.34

 
$
0.30

 
$
0.56

 
$
0.54

Diluted earnings per share
$
0.34

 
$
0.29

 
$
0.55

 
$
0.53

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
13,817,349

 
13,718,665

 
13,846,889

 
13,707,631

Diluted
13,817,349

 
13,914,042

 
13,877,326

 
13,888,050




See Notes to Consolidated Financial Statements
3


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
Net income
$
4,761

 
$
4,023

 
$
7,695

 
$
7,342

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on investment securities available for sale
1,380

 
440

 
2,421

 
810

Reclassification of realized gain on sale of investment securities available for sale

 
(26
)
 

 
(26
)
Unrealized loss on cash flow hedging derivative

 

 

 
(5
)
 
1,380

 
414

 
2,421

 
779

Income tax expense relating to the items above
(380
)
 
(114
)
 
(667
)
 
(214
)
Other comprehensive income
1,000

 
300

 
1,754

 
565

Comprehensive income
$
5,761

 
$
4,323

 
$
9,449

 
$
7,907



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

Net Income

 
$

 
$

 
$
4,023

 
$

 
$
4,023

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

 

 

 

 
300

 
300

Stock options exercised
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

 
 
 
 
 
 
 
 
 
 
 
 
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

Net income

 
$

 
$

 
$
4,761

 
$

 
$
4,761

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

 

 

 

 
1,000

 
1,000

Shares issued as compensation
3,000

 

 
37

 

 

 
37

Stock-based compensation

 

 
243

 
1

 

 
244

Shares repurchased and retired
(1,500
)
 

 
(14
)
 

 

 
(14
)
Balance, June 30, 2020
13,818,223

 
$
138

 
$
51,052

 
$
89,151

 
$
1,767

 
$
142,108




See Notes to Consolidated Financial Statements
5

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


 
Six Months Ended June 30,
(in thousands)
2020
 
2019
Cash flows from operating activities
 
 
 
Net income
$
7,695

 
$
7,342

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
Provision for loan losses
5,709

 
798

Provision for losses on mortgage loans sold
262

 
67

Provision for off balance sheet credit risk
45

 
93

Net amortization on investments
136

 
63

Depreciation and amortization
878

 
569

Stock-based compensation expense
488

 
398

Director and employee compensation paid in stock
37

 
150

Deferred income tax benefit
(2
)
 
(64
)
Amortization of debt issuance expense
14

 
16

Gain on sale of securities available for sale

 
(26
)
Loss on sale of foreclosed real estate
75

 

Mortgage banking revenue
(14,136
)
 
(6,091
)
Proceeds from sales of loans held for sale
463,783

 
186,305

Originations of loans held for sale
(495,586
)
 
(209,432
)
Changes in assets and liabilities:
 
 
 
Accrued interest receivable
(2,095
)
 
(187
)
Prepaid income taxes and taxes payable

 
(178
)
Other assets
(507
)
 
(1,351
)
Accrued interest payable
(517
)
 
474

Other liabilities
6,695

 
1,357

Net cash used by operating activities
(27,026
)
 
(19,697
)
 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of securities available for sale

 
(8,202
)
Maturities, calls and principal paydowns of securities available for sale
6,316

 
13,444

Proceeds from sale of securities available for sale

 
3,280

Purchases of restricted investments
(119
)
 
(1,634
)
Net increase in SBA-PPP loans receivable, net
(229,646
)
 

Net increase in portfolio loans receivable, net
(41,703
)
 
(56,272
)
Net disposals (purchases) of premises and equipment
(330
)
 
362

Proceeds from sales of foreclosed real estate

 
50

Net cash used by investing activities
(265,482
)
 
(48,972
)

See Notes to Consolidated Financial Statements
6

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


 
Six Months Ended June 30,
(in thousands)
2020
 
2019
Cash flows from financing activities
 
 
 
Net increase (decrease) in:
 
 
 
Noninterest-bearing deposits
$
272,218

 
$
37,225

Interest-bearing deposits
111,087

 
44,539

Securities sold under agreements to repurchase

 
(3,332
)
Federal funds purchased

 
(2,000
)
Federal Home Loan Bank advances, net
(6,666
)
 
36,889

Other borrowed funds
1,955

 

Repurchase of common stock
(1,297
)
 

Proceeds from exercise of stock options
100

 
153

Net cash provided by financing activities
377,397

 
113,474

 
 
 
 
Net increase in cash and cash equivalents
84,889

 
44,805

 
 
 
 
Cash and cash equivalents, beginning of year
114,824

 
34,723

 
 
 
 
Cash and cash equivalents, end of period
$
199,713

 
$
79,528

 
 
 
 
Noncash activities:
 
 
 
Loans transferred to foreclosed real estate
$
1,017

 
$
57

Change in unrealized gains on investments
$
2,420

 
$
779

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
$
205

 
$
2,721

Interest
$
7,950

 
$
6,858


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.
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. In March 2020, the government and private sector responses to contain its spread began to significantly affect operations and continue to do so through the current period. It is likely operations will continue to be adversely affected, 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 which are most likely to affect 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 concomitant 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 values of collateral-dependent loans. Accordingly, estimates used in the preparation of the 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.

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

 
8
 


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

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

disclosures of contingent assets and liabilities. The primary reference point for the estimates is historical experience and assumptions believed to be reasonable regarding 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 materially differ from these estimates under different assumptions or conditions.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from financial institutions, interest bearing deposits with financial institutions and federal funds sold. Generally, federal funds are sold for one-day periods.
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 are 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.
Small Business Administration Paycheck Protection Program
The Small Business Administration Paycheck Protection Program (“SBA-PPP”) is one of the centerpieces of the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”), which was passed on March 27, 2020 in response to the outbreak of coronavirus (“COVID-19”) and was supplemented with subsequent legislation. Overseen by the United States (“U.S.”) Treasury Department, the SBA-PPP offers cash-flow assistance to nonprofit and small business employers through guaranteed loans for expenses incurred between February 15, 2020, and August 8, 2020. Borrowers are eligible for forgiveness of principal and accrued interest on SBA-PPP loans to the extent that the proceeds are used to cover eligible payroll costs,

 
9
 


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

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

interest costs, rent, and utility costs over a period between eight and 24-weeks after the loan is made as long as the borrower retains its employees and their compensation levels. The CARES Act authorized the SBA to fully guarantee these loans.
Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate balance sheet item. Origination fees received by the SBA are capitalized into the carrying amount of the loans. The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the effective interest method. SBA-PPP loans receivable as of June 30, 2020 totaled $236.3 million with $6.7 million in unearned fees and generated $1.0 million of interest income during the second quarter of 2020.
Loans and the Allowance for Loan Losses
Loans are stated at the principal amount outstanding, adjusted for deferred origination fees and costs, discounts on loans acquired, and the allowance for loan losses. Interest is accrued based on the loan principal balances and stated interest rates. Origination fees and costs are recognized as an adjustment to the related loan yield using approximate interest methods. 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 materially from those estimates. A loss is recognized as a charge to the allowance when management believes that collection of the loan is unlikely. Collections of loans previously charged off are added to the allowance at the time of recovery.
The Company determines the allowance for loan losses based on the accumulation of various components that are calculated independently in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 450 for pools of loans, and ASC 310 for TDRs and for

 
10
 


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

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

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 Part II, Item 1A - Risk Factors and Note 5 - Portfolio Loans Receivable.
The allowance for loan losses for SBA-PPP loans were separately evaluated given the explicit government guarantee. This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore no allowance for loan losses was assigned to these loans.
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 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 $5.5 million and $5.6 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 7 - 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

 
11
 


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

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

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 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 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 8 - 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

 
12
 


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

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

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 June 30, 2020 and 2019, there were 512,142 and 273,600 stock options, respectively, that were not included in the calculation as their effect would have been anti-dilutive.

Comprehensive income:
The Company reports as comprehensive income all changes in stockholders' equity during the year from sources other than stockholders. Other comprehensive income refers to all components (income, expenses, gains, and losses) of comprehensive income that are excluded from net income.
The Company's only component of other comprehensive income is unrealized gains and losses on investment securities available for sale, net of income taxes. Information concerning the Company's accumulated other comprehensive income as of June 30, 2020 and December 31, 2019 is as follows:
(in thousands)
 
June 30, 2020
 
December 31, 2019
Unrealized gains on securities available for sale
 
$
2,438

 
$
18

Deferred tax expense
 
(671
)
 
(5
)
Total accumulated comprehensive income
 
$
1,767

 
$
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.
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 the amendments in ASU 2016-13. While the Company does not expect these amendments to have a material effect on its financial statements, 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 ASU through a cumulative-effect adjustment to beginning retained earnings in 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.

 
13
 


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

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

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 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 the London Interbank Offered Rate (“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. The adoption of ASU 2020-04 Topic 848 is not expected to have a material impact on the financial statements.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a 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 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. Such modifications include short-term (e.g., six months) modifications that include payment deferrals of (i) principal and interest, (ii) interest only and (iii) principal only, fee waivers, extensions of repayment terms, or other delays in payment that are deemed 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 June 30, 2020, the Company has offered payment deferrals for commercial and consumer customers for up to six months. The loan modifications offered to borrowers provided the borrower with payment relief in the form of reduced or deferred payments for up to 90 days (six months in selected instances) during which time interest is continuing to accrue.
This interagency guidance may 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.

 
14
 


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

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

Reclassifications:
Certain reclassifications have been made to amounts reported in prior periods to conform to the current period presentation. The reclassifications had no material effect on net income or total stockholders' equity.
Subsequent Events:
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.
Note 2 - Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from banks, interest bearing deposits and federal funds sold. The Bank is required by regulations to maintain an average cash reserve balance based on a percentage of deposits. At June 30, 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 June 30, 2020 and December 31, 2019 are summarized as follows:
Investment Securities Available for Sale
 
 
 
 
 
 
 
 
(in thousands)