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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, 2022         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/33a21dba2cfb22c3e34cba09cc1aeba0-cbnk-20220630_g1.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
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareCBNKNASDAQ Stock Market
As of August 5, 2022, the Company had 14,034,490 shares of common stock, par value $0.01 per share, outstanding.


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

PART I - CONSOLIDATED FINANCIAL INFORMATIONPage
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, 2022 (unaudited)December 31, 2021 (audited)
Assets
Cash and due from banks$14,776 $42,914 
Interest bearing deposits at other financial institutions234,823 136,824 
Federal funds sold1,285 3,657 
Total cash and cash equivalents
250,884 183,395 
Investment securities available for sale226,509 184,455 
Marketable equity securities 245 245 
Restricted investments
3,615 3,498 
Loans held for sale11,708 15,989 
Small Business Administration Payroll Protection Program loans receivable, net of fees and costs15,864 108,285 
Portfolio loans receivable, net of deferred fees and costs1,607,677 1,523,982 
Less allowance for loan losses(26,419)(25,181)
Total portfolio loans held for investment, net1,581,258 1,498,801 
Premises and equipment, net
3,315 3,282 
Accrued interest receivable7,276 7,901 
Deferred tax asset12,929 9,793 
Foreclosed real estate 86 
Bank owned life insurance36,011 35,506 
Other assets5,232 4,064 
Total assets
$2,154,846 $2,055,300 
Liabilities
Deposits
Noninterest-bearing$842,363 $787,650 
Interest-bearing1,046,557 1,009,487 
Total deposits
1,888,920 1,797,137 
Federal Home Loan Bank advances22,000 22,000 
Other borrowed funds12,062 12,062 
Accrued interest payable300 473 
Other liabilities24,248 25,725 
Total liabilities
1,947,530 1,857,397 
Stockholders' equity
Common stock, $.01 par value; 49,000,000 shares authorized; 14,010,158 and 13,962,334 issued and outstanding
140 140 
Additional paid-in capital55,762 54,306 
Retained earnings164,750 144,533 
Accumulated other comprehensive loss(13,336)(1,076)
Total stockholders' equity
207,316 197,903 
Total liabilities and stockholders' equity
$2,154,846 $2,055,300 


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)2022202120222021
Interest income
Loans, including fees$35,304 $28,641 $69,193 $54,709 
Investment securities available for sale779 544 1,149 1,021 
Federal funds sold and other473 104 615 197 
Total interest income36,556 29,289 70,957 55,927 
Interest expense
Deposits964 1,582 1,847 3,589 
Borrowed funds192 187 379 375 
Total interest expense1,156 1,769 2,226 3,964 
Net interest income35,400 27,520 68,731 51,963 
Provision for loan losses2,035 781 2,987 1,284 
Net interest income after provision for loan losses
33,365 26,739 65,744 50,679 
Noninterest income
Service charges on deposits183 165 346 312 
Credit card fees6,210 7,715 12,134 13,655 
Mortgage banking revenue1,528 5,270 3,318 13,013 
Gain on sale of investment securities available for sale, net 153  153 
Other fees and charges441 168 852 288 
Total noninterest income8,362 13,471 16,650 27,421 
Noninterest expenses
Salaries and employee benefits
10,071 8,750 20,381 17,317 
Occupancy and equipment1,313 1,195 2,339 2,324 
Professional fees2,417 1,362 4,738 2,987 
Data processing7,266 10,122 15,542 19,433 
Advertising2,223 1,293 3,862 2,126 
Loan processing335 975 727 2,026 
Other operating3,505 3,508 6,643 6,759 
Total noninterest expenses27,130 27,205 54,232 52,972 
Income before income taxes14,597 13,005 28,162 25,128 
Income tax expense3,089 3,357 6,443 6,499 
Net income$11,508 $9,648 $21,719 $18,629 
Basic earnings per share$0.82 $0.70 $1.55 $1.35 
Diluted earnings per share$0.80 $0.68 $1.52 $1.32 
Weighted average common shares outstanding:
Basic14,007,240 13,766,318 13,997,946 13,761,676 
Diluted14,312,848 14,172,438 14,323,400 14,070,427 


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)2022202120222021
Net income$11,508 $9,648 $21,719 $18,629 
Other comprehensive loss:
Unrealized (loss) gain on investment securities available for sale(7,054)333 (16,342)(1,964)
Reclassification of realized gain on sale of investment securities available for sale
 (153) (153)
(7,054)180 (16,342)(2,117)
Income tax benefit (expense) relating to the items above1,541 (50)4,082 548 
Other comprehensive (loss) income (5,513)130 (12,260)(1,569)
Comprehensive income$5,995 $9,778 $9,459 $17,060 

See Notes to Consolidated Financial Statements
4


Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
Common StockAdditional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Total
Stockholders'
Equity
(dollars in thousands)SharesAmount
Balance, December 31, 202013,753,529 $138 $50,602 $106,854 $1,717 $159,311 
Net income— — — 8,982 — 8,982 
Unrealized loss on investment securities available for sale, net of income taxes— — — — (1,699)(1,699)
Stock options exercised, net of repurchased shares1,795 — 21 (31)— (10)
Shares issued as compensation
3,894 — 86 — — 86 
Stock-based compensation
— — 333 — — 333 
Balance, March 31, 202113,759,218 $138 $51,042 $115,805 $18 $167,003 
Net income— — — 9,648 — 9,648 
Unrealized gain on investment securities available for sale, net of income taxes— — — — 130 130 
Stock options exercised, net of repurchased shares10,301 — 121 (22)— 99 
Shares issued as compensation
2,096 — 26 — — 26 
Stock-based compensation
— — 298 — — 298 
Balance, June 30, 202113,771,615 $138 $51,487 $125,431 $148 $177,204 
Balance, December 31, 202113,962,334 $140 $54,306 $144,533 $(1,076)$197,903 
Net income   10,211  10,211 
Unrealized loss on investment securities available for sale, net of income taxes    (6,747)(6,747)
Stock options exercised, net of repurchased shares27,028  339 (95) 244 
Shares issued as compensation
11,158  164   164 
Stock-based compensation
  417   417 
Cash dividends to stockholders ($0.05 per share)
   (700) (700)
Balance, March 31, 202214,000,520 $140 $55,226 $153,949 $(7,823)$201,492 
Net income   11,508  11,508 
Unrealized loss on investment securities available for sale, net of income taxes    (5,513)(5,513)
Stock options exercised, net of repurchased shares6,638  84 (7) 77 
Shares issued as compensation
3,000  37   37 
Stock-based compensation
  415   415 
Cash dividends to stockholders ($0.05 per share)
   (700) (700)
Balance, June 30, 202214,010,158 $140 $55,762 $164,750 $(13,336)$207,316 

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)20222021
Operating activities
Net income$21,719 $18,629 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses2,987 1,284 
Provision for mortgage put-back reserve, net2 210 
Reversal of provision for off balance sheet credit commitments(105)(30)
Amortization on investments, net532 217 
Depreciation and amortization749 986 
Increase in cash surrender value of bank-owned life insurance policies(505)(4)
Stock-based compensation expense832 631 
Employee compensation paid in Company stock201 26 
Deferred income tax expense946 243 
Gain on sale of securities available for sale (153)
Valuation allowance on derivatives39 (221)
(Gain) loss on sale of foreclosed real estate(20)28 
Increase in valuation of loans held for sale carried at fair value(3,318)(13,013)
Proceeds from sales of loans held for sale203,103 691,510 
Originations of loans held for sale(195,504)(619,277)
Changes in assets and liabilities:
Decrease in accrued interest receivable625 348 
(Increase) decrease in other assets(1,191)730 
Decrease in accrued interest payable(173)(175)
Decrease in other liabilities(1,391)(5,845)
Net cash provided by operating activities29,528 76,124 
Investing activities
Purchases of securities available for sale(62,542)(139,318)
Proceeds from maturities, calls and principal paydowns of securities available for sale3,614 9,617 
Proceeds from sale of securities available for sale 66,534 
(Purchases) sales of restricted investments(117)235 
Purchases of bank-owned life insurance (35,000)
Decrease (increase) in SBA-PPP loans receivable, net92,421 (1,745)
Increase in portfolio loans receivable, net(85,444)(77,608)
Purchases of premises and equipment, net(782)(656)
Proceeds from sales of foreclosed real estate106 61 
Net cash used for investing activities(52,744)(177,880)
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)20222021
Financing activities
Net increase (decrease) in:
Noninterest-bearing deposits
54,713 219,749 
Interest-bearing deposits
37,070 45,542 
Repayment of advances from Federal Reserve Bank (1,954)
Dividends paid(1,400) 
Net proceeds from exercise of stock options321 175 
Net cash provided by financing activities90,704 263,512 
Net increase in cash and cash equivalents67,488 161,756 
Cash and cash equivalents, beginning of year$183,396 146,910 
Cash and cash equivalents, end of period$250,884 $308,666 
Noncash activities:
Change in unrealized losses on investments$(16,342)$(2,117)
Cash paid during the period for:
Taxes$5,179 $9,140 
Interest$2,399 $4,139 
See Notes to Consolidated Financial Statements
7


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 the 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 and Columbia, 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”), the Bank’s 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. At June 30, 2022, Church Street Capital had loans totaling $6.4 million.
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 unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”) and include the activity of the Company and its wholly-owned subsidiaries, the Bank and Church Street Capital. The statements do not include all of the information and footnotes required by GAAP for complete financials statements. All adjustments have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2021, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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.
Risks and uncertainties
The Company has been, and may continue to be, impacted by the coronavirus disease 2019 pandemic (“COVID-19”). The direct impacts of COVID-19 appear to be waning, but the pandemic’s residual impact manifests itself in supply chain and labor market imbalances and ongoing inflationary pressures. To address the economic impact of the pandemic in the U.S., multiple stimulus packages have been enacted to provide economic relief to individuals and businesses, including the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which established the Small Business Administration
8


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

Note 1 - Nature of Business and Basis of Presentation (continued)
Paycheck Protection Program (“SBA-PPP”) and the American Rescue Plan Act of 2021 which was enacted in March 2021.
As the pandemic evolves, the Company remains watchful of COVID-19 surges and new variants and continues to evaluate processes in place to execute our business continuity plan and promote the health and safety of our employees.
Overall economic activity appears to have increased in the U.S. during the second quarter of 2022 after a slight regression in the first quarter as the unemployment rate remained low and job gains have been robust. The future direct and indirect impact of the pandemic on the Company’s businesses, results of operations and financial condition continues to remain uncertain as inflationary concerns remain elevated due to continuing supply and demand imbalances associated with the pandemic. Should current economic conditions deteriorate or if the pandemic worsens, including as the result of the spread of the more easily communicable variants of COVID-19, the macroeconomic environment could have an adverse effect on our businesses, results of operations and financial condition.
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 primary reference point for the estimates is historical experience and assumptions believed to be reasonable regarding the value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may materially differ from these estimates under different assumptions or conditions.
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.
Marketable equity securities
Marketable equity securities are carried at fair value with realized gains and losses included in earnings. Premiums and discounts on investment securities are amortized or accreted using the interest method. Changes in the fair value of equity securities are also included in earnings as gain or loss on marketable equity securities.
9


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

Note 1 - Nature of Business and Basis of Presentation (continued)
Loans held for sale
Mortgage loans originated and intended for sale are recorded at fair value, determined individually, as of the balance sheet date. 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. Interest on loans held for sale is credited to income based on the principal amounts outstanding.
Upon sale and delivery, loans are legally isolated from the Company and the Company has no ability to restrict or constrain the ability of third‑party investors to pledge or exchange the mortgage loans. The Company does not have the entitlement or ability to repurchase the mortgage loans or unilaterally cause third‑party investors to put the mortgage loans back to the Company. Unrealized and realized gains on loan sales are determined using the specific-identification method and are recognized through mortgage banking activity in the Consolidated Statements of Income.
The Company elects to measure loans held for sale at fair value to better align reported results with the underlying economic changes in value of the loans on the Company’s balance sheet.
Small Business Administration Paycheck Protection Program
The SBA-PPP is one of the centerpieces of the CARES Act which was passed on March 27, 2020 in response to the outbreak of COVID-19 and was supplemented with subsequent legislation. Overseen by the United States (“U.S.”) Treasury Department, the SBA-PPP offered cash-flow assistance to nonprofit and small business employers through guaranteed loans. 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, interest costs, rent, and utility costs over a period between eight and twenty four 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.
On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA provides several amendments to the SBA-PPP, including additional funding for the first and second draws of PPP loans up to March 13, 2021. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the program to May 31, 2021.
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, 2022 totaled $16.2 million with $301 thousand of net unearned fees. SBA-PPP loans generated interest income of $1.1 million and $3.2 million for the three and six months ended June 30, 2022 and $2.3 million and $4.7 million for the three and six months ended June 30, 2021.
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/or interest is 90 days past due, or when it is probable that
10


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

Note 1 - Nature of Business and Basis of Presentation (continued)
not all principal and interest payments will be collected, and collateral is insufficient to discharge the debt in full. Generally, interest payments on nonaccrual loans are recorded as a reduction of the principal balance.
Loans are considered impaired when, based on current information, management believes the Company will not collect all principal and interest payments according to contractual terms. Generally, loans are reviewed for impairment when the risk grade for a loan is downgraded to a classified asset category. The loans are evaluated for appropriate classification, accrual, impairment, and troubled debt restructure (“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; however, the CARES Act provided financial institutions optional temporary relief from TDR and impairment accounting for certain loan modifications related to the COVID-19 pandemic. Under Section 4013 of the CARES Act, banks may suspend (1) the requirement under GAAP for certain modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. To be eligible, each loan modification must be (1) related to the COVID-19 event; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The December 31, 2020 deadline was subsequently extended to January 1, 2022, by the CAA.
All other 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 TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, and 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.
Loans are generally charged-off in part or in full when management determines the loan to be uncollectible. Factors for charge-off that may be considered include: repayments deemed to be extended out beyond reasonable time frames, 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 individually evaluated loans. The process for determining an appropriate allowance for loan losses is
11


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

Note 1 - Nature of Business and Basis of Presentation (continued)
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 was separately evaluated given the explicit government guarantee. This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded that the likelihood of loss was remote and therefore no allowance for loan losses was assigned to these loans.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related property, generally over two to seven years. Leasehold improvements are amortized over the estimated term of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is less. The costs of major renewals and improvements are capitalized with the corresponding costs associated with amortization or depreciation included as a component of occupancy and equipment expense. Expenditures for maintenance, repairs, and minor replacements are charged to noninterest expenses as incurred.
Leases
The Company accounts for leases according to ASU 2016-02, Leases (Topic 842), and applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. The Company elected to apply the package of practical expedients permitting entities to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Additionally, as provided by ASU 2016-02, the Company elected not to apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of 12 months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term.
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.
12


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

Note 1 - Nature of Business and Basis of Presentation (continued)
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.
Bank-owned life insurance
The Company had $36.0 million of bank-owned life insurance at June 30, 2022 and $35.0 million at June 30, 2021. The Company recognized income, which is included in other noninterest income, of $254 thousand and $505 thousand for the three and six months ended June 30, 2022, respectively, and $4 thousand for both the three and six months ended June 30, 2021.
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
13


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

Note 1 - Nature of Business and Basis of Presentation (continued)
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 June 30, 2022, there were 141 thousand stock options excluded from the calculation as their effect would have been anti-dilutive, whereas at June 30, 2021 there were no such options.

Comprehensive loss:
The Company reports as comprehensive loss all changes in stockholders' equity during the year from sources other than stockholders. Other comprehensive loss refers to all components (income, expenses, gains, and losses) of comprehensive loss that are excluded from net income.
The Company's only component of other comprehensive loss is unrealized losses on investment securities available for sale, net of income taxes. Information concerning the Company's accumulated other comprehensive loss as of June 30, 2022 and December 31, 2021 is as follows:
(in thousands)June 30, 2022December 31, 2021
Unrealized losses on securities available for sale$(17,846)$(1,504)
Deferred tax benefit4,510 428 
Total accumulated comprehensive loss $(13,336)$(1,076)
Recently issued accounting pronouncements:
In June 2016, the FASB issued guidance to change the accounting for loan losses and modify the impairment model for certain debt securities. In October 2019, the FASB voted to delay implementation and the new standard is now effective for fiscal years beginning after December 15, 2022, including the interim periods within those fiscal years. The Company expects the provisions of this standard to impact the Company’s consolidated financial statements, in particular, the level of the reserve for loan losses. The Company engaged a consultant to assist with the implementation of this ASU and has completed various milestones so as to ensure the timely implementation of the ASU. The Company has preliminary results and has continued to refine the model in Q2 2022. The Company plans to refine assumptions, establish policy, complete model validation and identify expected financial statement impact over the next quarter. 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 was permitted, the Company did not elect that option. In addition to its allowance for loan losses, the Company will also record an allowance for credit losses on held-to-maturity 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 March 2020, the FASB released ASU 2020-04 - Reference Rate Reform, Topic 848, which provides temporary guidance to ease the potential accounting burden in accounting for, or recognizing the effects from, reference rate reform on financial reporting. The new standard is a result of London Interbank Offered Rate (“LIBOR”) likely being discontinued as an available benchmark rate. The standard is elective and provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR, or another reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and December 31, 2022. The Company is currently evaluating products and preparing to offer new rates. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
14


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

Note 1 - Nature of Business and Basis of Presentation (continued)
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, and other delays in payment that are deemed insignificant. Borrowers considered current were those that were less than 30 days past due on their contractual payments at the time a modification program was implemented. As of June 30, 2022, the Company had 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.
In February 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the accounting guidance for troubled debt restructurings by creditors and enhances disclosure requirements for certain loan re-financings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments also add requirements to disclose current-period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements and are currently evaluating the timing of adoption.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
Reclassifications:
Certain reclassifications have been made to amounts reported in prior periods to conform to the current period presentation. The reclassifications had no material effect on net income or total stockholders' equity.
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.
15


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

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, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 are summarized as follows:
Investment Securities Available for Sale
(in thousands)