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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 September 30, 2023         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/73b6b29af05eea5f768a634623d78944-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
(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)

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

    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

As of November 7, 2023, the Company had 13,894,419 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 (Unaudited)
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 (unaudited)

(in thousands except share data)September 30, 2023December 31, 2022
Assets
Cash and due from banks$13,767 $19,963 
Interest-bearing deposits at other financial institutions130,428 39,764 
Federal funds sold1,957 20,688 
Total cash and cash equivalents
146,152 80,415 
Investment securities available for sale206,055 252,481 
Restricted investments4,340 7,362 
Loans held for sale4,843 7,416 
U.S. Small Business Administration (“SBA”) Payroll Protection Program (“PPP”) loans receivable, net of fees and costs750 2,163 
Portfolio loans receivable, net of deferred fees and costs1,861,929 1,728,592 
Less allowance for credit losses(28,279)(26,385)
Total portfolio loans held for investment, net1,833,650 1,702,207 
Premises and equipment, net
5,297 3,386 
Accrued interest receivable11,231 9,489 
Deferred tax asset13,644 13,777 
Bank owned life insurance37,315 36,524 
Other assets9,207 8,435 
Total assets
$2,272,484 $2,123,655 
Liabilities
Deposits
Noninterest-bearing$680,803 $674,313 
Interest-bearing1,287,185 1,083,759 
Total deposits
1,967,988 1,758,072 
Federal Home Loan Bank advances22,000 107,000 
Other borrowed funds12,062 12,062 
Accrued interest payable5,204 1,031 
Other liabilities22,352 21,475 
Total liabilities
2,029,606 1,899,640 
Stockholders' equity
Common stock, $.01 par value; 49,000,000 shares authorized;
13,896,062 issued and outstanding at September 30, 2023;
14,138,829 issued and outstanding at December 31, 2022
139 141 
Additional paid-in capital54,549 58,190 
Retained earnings206,033 182,435 
Accumulated other comprehensive loss(17,843)(16,751)
Total stockholders' equity
242,878 224,015 
Total liabilities and stockholders' equity
$2,272,484 $2,123,655 


See accompanying Notes to Unaudited Consolidated Financial Statements
2

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

Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands except per share data)2023202220232022
Interest income
Loans, including fees$45,385 $36,451 $129,651 $105,645 
Investment securities available for sale1,089 1,362 3,732 2,510 
Federal funds sold and other1,267 527 2,854 1,143 
Total interest income47,741 38,340 136,237 109,298 
Interest expense
Deposits10,703 1,386 27,866 3,234 
Borrowed funds228 277 1,734 656 
Total interest expense10,931 1,663 29,600 3,890 
Net interest income36,810 36,677 106,637 105,408 
Provision for credit losses2,280 1,260 6,802 4,247 
Provision for credit losses on unfunded commitments24 — 5 — 
Net interest income after provision for credit losses34,506 35,417 99,830 101,161 
Noninterest income
Service charges on deposits250 199 724 545 
Credit card fees4,387 5,524 13,303 17,658 
Mortgage banking revenue1,243 969 3,730 4,312 
Other income446 416 1,282 1,296 
Total noninterest income6,326 7,108 19,039 23,811 
Noninterest expenses
Salaries and employee benefits
12,419 10,747 37,116 31,129 
Occupancy and equipment1,351 1,138 4,100 3,476 
Professional fees2,358 3,848 7,340 8,586 
Data processing6,469 7,178 19,558 22,721 
Advertising1,565 1,632 4,728 5,494 
Loan processing426 625 1,435 1,352 
Foreclosed real estate expenses (income), net1 — 7 (183)
Other operating3,457 2,926 9,576 9,804 
Total noninterest expenses28,046 28,094 83,860 82,379 
Income before income taxes12,786 14,431 35,009 42,593 
Income tax expense2,998 3,336 8,168 9,779 
Net income$9,788 $11,095 $26,841 $32,814 
Basic earnings per share$0.70 $0.79 $1.91 $2.34 
Diluted earnings per share$0.70 $0.77 $1.90 $2.29 
Weighted average common shares outstanding:
Basic13,932,848 14,030,408 14,038,230 14,008,885 
Diluted14,023,906 14,374,980 14,111,887 14,328,602 


See accompanying Notes to Unaudited Consolidated Financial Statements
3

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

Three Months Ended
September 30,		Nine Months Ended
September 30,
(in thousands)2023202220232022
Net income$9,788 $11,095 $26,841 $32,814 
Other comprehensive income (loss):
Unrealized loss on investment securities available for sale(1,820)(5,684)(883)(22,026)
Income tax benefit (expense) relating to the items above28 1,437 (209)5,519 
Other comprehensive loss(1,792)(4,247)(1,092)(16,507)
Comprehensive income$7,996 $6,848 $25,749 $16,307 

See accompanying Notes to Unaudited 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 LossTotal
Stockholders'
Equity
(dollars in thousands)SharesAmount
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 shares withheld for purchase price27,028 — 339 (95)— 244 
Shares issued as compensation11,158 — 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 shares withheld for purchase price6,638 — 84 (7)— 77 
Shares issued as compensation3,000 — 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 
Net income— — — 11,095 — 11,095 
Unrealized loss on investment securities available for sale, net of income taxes— — — — (4,247)(4,247)
Stock options exercised, net of shares withheld for purchase price28,441 — 355 (87)— 268 
Shares issued as compensation— — — — — — 
Stock-based compensation— — 415 — — 415 
Cash dividends to stockholders ($0.06 per share)
— — — (842)— (842)
Balance, September 30, 202214,038,599 $140 $56,532 $174,916 $(17,583)$214,005 
See accompanying Notes to Unaudited Consolidated Financial Statements
5

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

Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated Other Comprehensive LossTotal
Stockholders'
Equity
(dollars in thousands)SharesAmount
Balance, December 31, 202214,138,829 $141 $58,190 $182,435 $(16,751)$224,015 
Cumulative effect adjustment due to adoption of the CECL standard— — — (29)— (29)
Net income— — — 9,735 — 9,735 
Unrealized gain on investment securities available for sale, net of income taxes— — — — 2,792 2,792 
Stock options exercised, net of shares withheld for purchase price63,064 1 782 (194)— 589 
Shares issued as compensation28,081 — 585 (39)— 546 
Stock-based compensation— — 438 — — 438 
Cash dividends to stockholders ($0.06 per share)
— — — (850)— (850)
Shares repurchased and retired(146,937)(1)(2,718)(2,719)
Balance, March 31, 202314,083,037 $141 $57,277 $191,058 $(13,959)$234,517 
Net income— — — 7,318 — 7,318 
Unrealized loss on investment securities available for sale, net of income taxes— — — — (2,092)(2,092)
Stock options exercised, net of shares withheld for purchase price34,687 — 429 (6)— 423 
Shares issued as compensation2,097 — 26 (37)— (11)
Stock-based compensation— — 438 — — 438 
Cash dividends to stockholders ($0.06 per share)
— — — (843)— (843)
Shares repurchased and retired(138,407)(1)(2,314)— — (2,315)
Balance, June 30, 202313,981,414 $140 $55,856 $197,490 $(16,051)$237,435 
Net income— — — 9,788 — 9,788 
Unrealized loss on investment securities available for sale, net of income taxes— — — — (1,792)(1,792)
Stock options exercised, net of shares withheld for purchase price12,244 — 153 (130)— 23 
Stock-based compensation— — 441 — — 441 
Cash dividends to stockholders ($0.08 per share)
— — — (1,115)— (1,115)
Shares repurchased and retired(100,575)(1)(1,901)— — (1,902)
Balance, September 30, 202313,893,083 $139 $54,549 $206,033 $(17,843)$242,878 

See accompanying Notes to Unaudited Consolidated Financial Statements
6

Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
September 30,
(in thousands)20232022
Cash flows from operating activities
Net income$26,841 $32,814 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses6,802 4,247 
Provision for credit losses on unfunded commitments5 — 
Provision for mortgage put-back reserve, net12 6 
Net amortization on investments82 520 
Premises and equipment depreciation235 283 
Lease asset amortization396 807 
Increase in cash surrender value of BOLI(791)(761)
Executive long-term incentive plan expense297 436 
Stock-based compensation expense1,317 1,247 
Director and employee compensation paid in Company stock535 201 
Deferred income tax (benefit) expense(76)1,264 
Loss on marketable equity securities— 13 
Valuation decrease on derivatives8 5 
Gain on sale of foreclosed real estate— (20)
Increase (decrease) in valuation of loans held for sale carried at fair value6 (4,312)
Proceeds from sales of loans held for sale144,871 269,446 
Originations of loans held for sale(142,304)(256,020)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable(1,742)11 
Increase (decrease) in taxes payable450 (282)
Increase in other assets(781)(1,880)
Increase in accrued interest payable4,173 8 
Increase (decrease) in other liabilities889 (2,680)
Net cash provided by operating activities41,225 45,353 
Cash flows from investing activities
Purchases of securities available for sale— (113,078)
Proceeds from maturities, calls and paydowns of securities available for sale45,461 5,368 
Net sales (purchases) of restricted investments3,022 (129)
Net decrease in SBA-PPP loans receivable1,413 105,623 
Net increase in portfolio loans receivable(139,049)(127,356)
Net purchases of premises and equipment(2,542)(1,020)
Proceeds from sales of foreclosed real estate— 106 
Net cash used in investing activities(91,695)(130,486)
See accompanying Notes to Unaudited Consolidated Financial Statements
7

Capital Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) (Continued)
Nine Months Ended
September 30,
(in thousands)20232022
Cash flows from financing activities
Net increase (decrease) in:
Noninterest-bearing deposits6,490 18,383 
Interest-bearing deposits203,426 (77,929)
Federal Home Loan Bank repayments(85,000)— 
Dividends paid(2,808)(2,242)
Repurchase of common stock(6,936)— 
Net proceeds from exercise of stock options1,035 589 
Net cash provided by (used for) financing activities116,207 (61,199)
Net increase (decrease) in cash and cash equivalents65,737 (146,332)
Cash and cash equivalents, beginning of year$80,415 183,395 
Cash and cash equivalents, end of period$146,152 $37,063 
Noncash activities:
Change in unrealized losses on investments$(883)$(22,026)
Cash paid during the period for:
Taxes$7,704 $8,797 
Interest$25,427 $3,882 
See accompanying Notes to Unaudited Consolidated Financial Statements
8

Capital Bancorp, Inc. and Subsidiaries
Notes to Unaudited 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 digitally-driven nationwide credit card platform providing secured, partially secured, and unsecured credit solutions.
The Company formed Church Street Capital, LLC (“Church Street Capital”) in 2014 to provide short-term secured real estate financing to Washington, D.C. area investors and developers that may not meet all Bank credit criteria. At September 30, 2023, Church Street Capital had loans totaling $8.0 million with a collectively assessed allowance for credit losses (“ACL”) of $280 thousand. Refer to Note 5 - Portfolio Loans Receivable to the Unaudited Consolidated Financial Statements for further discussion of the consolidated ACL.
In addition, the Company owns all of the stock of Capital Bancorp (MD) Statutory Trust I (the “Trust”). 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 financial 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. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2022, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
The Company reports its activities as four business segments: commercial banking; mortgage lending; credit cards; and corporate activities. 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.
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
9

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

Note 1 - Nature of Business and Basis of Presentation (continued)
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.
Management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an ACL, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income.
Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no ACL related to the AFS portfolio.
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
10

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

Note 1 - Nature of Business and Basis of Presentation (continued)
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.
U.S. Small Business Administration Paycheck Protection Program
During the global COVID-19 pandemic, pursuant to the CARES Act and the Consolidated Appropriations Act, 2021, the United States Small Business Administration Payroll Protection Program (“SBA-PPP”) provided forgivable loans to small businesses to enable them to maintain payroll, hire back employees who had been laid off, and cover overhead. SBA-PPP loans have an interest rate of 1%, have two or five year terms, and carry a 100% guarantee of the SBA. The program ended on May 31, 2021. SBA-PPP loans are eligible to be forgiven by the SBA.
Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate balance sheet item. Origination fees received by the SBA are capitalized into the carrying amount of the loans. The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the effective interest method. The remaining net deferred income is recognized upon forgiveness of the loan.
Portfolio loans and the allowance for credit losses
Loans are stated at the principal amount outstanding, adjusted for deferred origination fees and costs, discounts on loans acquired, and the ACL. Interest is accrued based on the loan principal balances and stated interest rates. Origination fees and costs are recognized as an adjustment to the related loan yield using approximate interest methods. For credit card loans, loan origination fees and direct loan origination costs are amortized on a straight-line basis over a 12-month period.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. For reporting purposes, the Company discontinues the accrual of interest at the earlier of the date any portion of the principal and/or interest is 90 days past due, or at such time as we determine that it is probable that not all principal and interest payments will be collected, and that collateral is insufficient to discharge the debt in full. When the interest accrual is discontinued, all unpaid accrued interest is reversed from income. Generally, interest payments on nonaccrual loans are recorded as a reduction of the principal balance. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.
Loans are generally charged-off in part or in full when management determines the loan to be uncollectible. Factors for charge-off that may be considered include: repayments deemed to be extended out beyond reasonable time frames, customer bankruptcy and lack of assets, and/or collateral deficiencies.
On January 1, 2023, we adopted Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which replaces the incurred loss methodology for determining our provision for credit losses and ACL with an expected loss methodology that is referred to as the Current Expected Credit Loss model (“CECL”). The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity (“HTM”) debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan
11

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

Note 1 - Nature of Business and Basis of Presentation (continued)
commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 “Leases (Topic 842)”.
In addition, ASU 2016-13 made changes to the accounting for AFS debt securities. One such change is to require credit-related impairments to be recognized as an ACL rather than as a write-down of the security’s amortized cost basis when the Company does not intend to sell or believes that the Company will be required to sell the securities prior to recovery of the security’s amortized cost basis. The Company adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company does not own HTM debt securities. There was no ACL on available for sale securities at September 30, 2023.
The following table illustrates the impact of the adoption of ASC 326, or the CECL standard. The adoption of the standard required an $804 thousand increase in the ACL and a $775 thousand reduction to the reserve for unfunded commitments (“RUC”). The improved precision of the calculation of the historical utilization of unfunded commitments gave rise to the reduction. The net impact of the adoption of the CECL standard to retained earnings was $29 thousand.
January 1, 2023
(in thousands)Pre-adoption of the CECL standardAs Reported Under ASC 326Impact of adoption of the CECL standard
Assets:
Real estate:
Residential$484,735 $484,735 $— 
Commercial664,551 664,551 — 
Construction238,099 238,099 — 
Commercial and Industrial220,221 220,221 — 
Credit card, net of reserve128,434 128,434 — 
Other consumer1,179 1,179 — 
Portfolio loans receivable, gross$1,737,219 $1,737,219 $— 
Deferred origination fees, net(8,627)(8,627)— 
Allowance for credit losses(26,385)(27,189)(804)
Portfolio loans receivable, net$1,702,207 $1,701,403 $(804)
Liabilities: Reserve for unfunded commitments$1,682 $907 $(775)
We maintain an ACL that represents management’s estimate of the expected credit losses and risks inherent in our loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts, or at all. The allowance immediately recognizes lifetime expected credit losses when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged-off against the allowance when they are deemed uncollectible. Factors for charge-off that may be considered include: repayments deemed to be extended out beyond reasonable time frames, customer bankruptcy and lack of assets, and/or collateral deficiencies. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
In determining the ACL, we estimate losses collectively based on quantitative analysis of historical
12

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

Note 1 - Nature of Business and Basis of Presentation (continued)
credit losses adjusted for current conditions and reasonable and supportable forecasts of collectability of future cash flows over the remaining term of each financial instrument. The Company has elected to utilize a discounted cash flow methodology for all segments, except for the other consumer portfolio segment, which applies a simplified, remaining life approach. See further detail regarding our forecasting methodology in the “Discounted Cash Flow Method” section below.
Quarterly, the Company utilizes a Qualitative Scorecard to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the quantitative loss estimation process, which may impact expected credit losses. The Qualitative Scorecard evaluates certain risk environments such as economic conditions, changes in the nature and volume of portfolios, changes in experience, depth, and ability of lending management, changes in volume and severity of past due loans and similar conditions, and changes in the value of underlying collateral. The scorecard results help the Company analyze directional consistency to risk conditions and circumstances that should be considered for each loan segment and to refine its estimates of expected credit losses. As of September 30, 2023, there have been no significant changes applied through the Qualitative Scorecard subsequent to implementation on January 1, 2023.
Purchased Credit Deterioration
Upon adoption of ASU 2016-13, loans which were identified as Purchase Credit Impaired under the incurred loss model are identified as Purchased Credit Deteriorated (“PCD”) loans at January 1, 2023 without reassessment. In future acquisitions, the Company may purchase loans, some of which have experienced more than insignificant credit deterioration since origination. In those cases, the Company will consider certain criteria including days past due, accrual status, risk rating, credit mark, and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at the amount paid and the Company will determine the initial ACL required for PCD assets with no impact to earnings. The loan’s purchase price and ACL is then the initial amortized cost basis for PCD loans. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the ACL recorded through provision expense.
Discounted Cash Flow Method
The Company uses the discounted cash flow (“DCF”) method to estimate expected credit losses for each portfolio loan segment, with the exception of other consumer loans. For each of these loan segments, the Company generates cash flow projections at the instrument level. Payment expectations are adjusted for estimated prepayment speed and for probability and severity of a loss. The expected credit losses derived from the DCF are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The modeling of expected prepayment speeds is based on historical internal data. The contractual term excludes expected extensions, renewals and modifications.
The Company uses regression analysis of historical internal and peer data to determine suitable portfolio segment level loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.
For the credit card portfolio, a major consideration in the determination of the ACL is our historical loss experience. The Company calculates the credit card ACL collectively, applying segmentation based on collateral positions: secured, partially secured, and unsecured.
13

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

Note 1 - Nature of Business and Basis of Presentation (continued)
For all DCF models, the Company has elected to use a four quarter forecast period across all portfolio segments. After the forecasted period, the models will revert to a long run average of each economic factor over four quarters. The Company uses economic projections from reputable and independent third parties to inform its loss driver forecast over the forecast period.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. An effective interest rate is calculated by the Company, adjusted for any net deferred fees or costs, premium, or discount existing at the origination or acquisition, to produce an instrument-level net present value of expected cash flows. The ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows.
Individual Evaluation
The Company will evaluate individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated on a collective basis. Instruments may be evaluated whether or not there is an expectation of collectability in place. Instruments evaluated individually are not included in the Company’s collective analysis. Collateral dependent or secured loans with respect to which the Company expects repayment to be provided substantially through the operation or sale of the collateral utilize a collateral-based methodology in which ACL is measured based on the difference between the net realizable value of the collateral and the amortized cost basis of the asset as of the measurement date. If the collateral valuation is equal to or greater than amortized cost, no reserve is applied. If a loan is not collateral dependent, the loan will be analyzed based on a forecast of future cash flows.
Credit Losses on Off-Balance Sheet Credit Exposures
The Company’s financial instruments include off-balance sheet credit instruments such as unfunded commitments to make loans, commercial letters of credit issued, and commitments to fund other investments. The Company’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of the credit commitment. Loan commitments and lines of credit are generally made on the same terms, including with regard to collateral, as outstanding loans.
The Company maintains RUC on off-balance sheet credit exposures through a provision reflected in other liabilities. Increases or decreases in the reserve are charged to or released from the provision for credit losses for unfunded commitments in the consolidated statements of income. The provision (credit) for credit losses on off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income. The RUC on off-balance credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model based on the segment loss factor and the estimated utilization rate of the unfunded commitments. The Company has analyzed its historic funding behavior at the segment level to determine an expected utilization rate.
The above methodology for determining an appropriate ACL is based on a comprehensive analysis of the loan portfolio in accordance with ASC 326. The analysis considers all significant factors that affect the expected collectability of the portfolio and supports the expected credit losses estimated by this process. It is important to recognize that the related process, methodology, and underlying assumptions require a substantial degree of judgment. Additional disclosure on the ACL, and qualitative factors can be found in Part II, Item 1A - Risk Factors and Note 5 - Portfolio Loans Receivable.
14

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

Note 1 - Nature of Business and Basis of Presentation (continued)
Credit Losses on SBA-PPP loans and interest receivable
The ACL for SBA-PPP loans was separately evaluated given the explicit government guarantee. The Company has incorporated historical experience with similar SBA guarantees and underwriting adjusted for reasonable and supportable forecasts and concluded the expected credit loss is zero and, therefore, no allowance has been assigned to these loans.
The Company does not measure an ACL on accrued interest receivable balances because these balances are written off as a reduction to interest income when loans are placed on nonaccrual status.
Loan modifications
Effective January 1, 2023, the Company adopted ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. From time to time, the Company may elect to modify the contractual terms of loans to a borrower experiencing financial difficulties as a way to mitigate loss, to proactively work with borrowers in financial difficulty, or to comply with regulations regarding the treatment of certain bankruptcy filing and discharge situations. These modifications may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Under ASU 2022-02, modifications to a loan for a borrower experiencing financial difficulty that have occurred in the current reporting period, are disclosed along with the impact of the modifications. During the three and nine months ended September 30, 2023, the Company did not have any such modifications.
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 life 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.
15

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

Note 1 - Nature of Business and Basis of Presentation (continued)
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 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. As of September 30, 2023, there were no derivative instruments held which would require recognition by the Company.
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.
16

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

Note 1 - Nature of Business and Basis of Presentation (continued)
Bank-owned life insurance
The Company had $37.3 million of bank-owned life insurance at September 30, 2023 and $36.5 million at December 31, 2022.
The Company recognized income on bank-owned life insurance, which is included in other noninterest income, of $274 thousand for the three months ended September 30, 2023 and $255 thousand for the three months ended September 30, 2022, and recognized $791 thousand for the nine months ended September 30, 2023 and $761 thousand for the nine months ended September 30, 2022.
Income taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized when it is deemed more likely than not that the benefits of such deferred income taxes will be realized.
Earnings per share
Earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding, adjusted for the dilutive effect of stock options and restricted stock using the treasury stock method. At September 30, 2023, there were 282 thousand stock options excluded from the calculation as their effect would have been anti-dilutive, whereas at September 30, 2022 there were 141 thousand such options.
Comprehensive loss
The Company reports as comprehensive loss all changes in stockholders' equity during the year from non-stockholder sources. Other comprehensive loss refers to all components (income, expenses, gains, and losses) of comprehensive loss that are excluded from net income.
The Company's only component of other comprehensive loss is unrealized losses on investment securities available for sale, net of income taxes. Information concerning the Company's accumulated other comprehensive loss as of September 30, 2023 and December 31, 2022 is as follows:
(in thousands)September 30, 2023December 31, 2022
Unrealized losses on securities available for sale$(23,299)$(22,416)
Deferred tax benefit5,456 5,665 
Total accumulated comprehensive loss $(17,843)$(16,751)
Recently issued accounting pronouncements:
In March 2020, the Financial Accounting Standards Board (“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 of, 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, or other transactions that reference LIBOR, or another
17

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

Note 1 - Nature of Business and Basis of Presentation (continued)
reference rate expected to be discontinued. The amendments in the update are effective for all entities between March 12, 2020 and an extended sunset date of December 31, 2024 which was extended by ASU 2022-06 issued by FASB in December 2022. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
Reclassifications:
Certain reclassifications have been made to 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; however, on March 15, 2020, the Federal Reserve announced that reserve requirement ratios would be reduced to zero percent effective March 26, 2020, due to economic conditions, which eliminated the reserve requirement for all depository institutions. The reserve requirement is still at zero percent as of September 30, 2023.
Note 3 - Investment Securities
The amortized cost and estimated fair value of investment securities at September 30, 2023 and December 31, 2022 are summarized as follows:
18

Capital Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 3 - Investment Securities (continued)
(in thousands)
Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair
Value
September 30, 2023
U.S. Treasuries$171,496 $— $(16,683)$154,813 
Municipal10,807 — (2,890)7,917 
Corporate5,000 — (660)4,340 
Asset-backed securities7,318 14 (66)7,266 
Mortgage-backed securities34,733 — (3,014)31,719 
Total$229,354 $14 $(23,313)$206,055 
December 31, 2022
U.S. Treasuries$215,486 $— $(16,037)$199,449 
Municipal10,815 — (2,803)8,012 
Corporate5,000 — (400)4,600 
Asset-backed securities7,970 — (259)7,711 
Mortgage-backed securities35,626 — (2,917)32,709 
Total$274,897 $— $(22,416)$252,481 
There were no securities sold during the nine months ended September 30, 2023 or the nine months ended September 30, 2022. There was no ACL on available for sale securities at September 30, 2023.
Information related to unrealized losses in the investment portfolio as of September 30, 2023 and December 31, 2022 is summarized as follows:
Less than 12 months12 months or longerTotal
(in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
September 30, 2023
U.S. Treasuries$— $— $154,813 $(16,683)$154,813 $(16,683)
Municipal— — 7,917 (2,890)7,917 (2,890)
Corporate— — 4,340 (660)4,340 (660)
Asset-backed securities— — 5,297 (66)5,297 (66)
Mortgage-backed securities
— — 31,719 (3,014)31,719 (3,014)
Total$— $— $204,086 $(23,313)$204,086 $(23,313)
December 31, 2022
U.S. Treasuries$82,102 $(1,396)$117,347 $(14,641)$199,449 $(16,037)
Municipal1,452 (207)6,560 (2,596)8,012 (2,803)
Corporate— — 4,600 (400)4,600 (400)
Asset-backed securities6,156 (237)1,555 (22)7,711 (259)
Mortgage-backed securities22,067 (1,884)10,642 (1,033)32,709 (2,917)
Total$111,777