
Portfolio Loan Categories
(in thousands)	June 30, 2022		December 31, 2021
Real estate:
Residential	$	430,244	$	401,607
Commercial	608,646		556,339
Construction	241,249		255,147
Commercial and Industrial	193,262		175,956
Credit card	142,166		141,120
Other consumer	856		1,033
Portfolio loans receivable, gross	1,616,423		1,531,202
Deferred origination fees, net	(8,746)		(7,220)
Allowance for loan losses	(26,419)		(25,181)
Portfolio loans receivable, net	$	1,581,258	$	1,498,801

The Company makes loans to customers located primarily in the Washington, D.C. and Baltimore, Maryland metropolitan areas. Although the loan portfolio is diversified, its performance is influenced by the regional economy. The Company’s loan categories, excluding SBA-PPP loans, previously discussed in Note 4, are described below.

Residential Real Estate Loans. One-to-four family mortgage loans are primarily secured by owner-occupied primary residences and, to a lesser extent, investor owned residences. Residential loans are originated through the commercial sales teams and Capital Bank Home Loans division. Residential loans also include home equity lines of credit. Owner-occupied residential real estate loans usually have fixed rates for five or seven years and adjust on an annual basis after the initial term based on a typical maturity of 30 years. Investor residential real estate loans are generally based on 25-year terms with a balloon payment due after five years. Generally, the required minimum debt service coverage ratio is 115%.

Commercial Real Estate Loans. Commercial real estate loans are originated on owner-occupied and non-owner-occupied properties. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. Commercial loans that are secured by owner-occupied commercial real estate and primarily collateralized by operating cash flows are also included in this category of loans. As of June 30, 2022, there were approximately $350.3 million of owner-occupied commercial real estate loans, representing approximately 58% of the commercial real estate portfolio. Commercial real estate loan terms are generally extended for 10 years or less and amortize generally over 25 years or less. The interest rates on commercial real estate loans generally have initial fixed rate

terms that adjust typically at five years. Origination fees are routinely charged for services. Personal guarantees from the principal owners of the business are generally required, supported by a review of the principal owners’ personal financial statements and global debt service obligations. The properties securing the portfolio are diverse in type. This diversity may help reduce the exposure to adverse economic events that affect any single industry.

Construction Loans. Construction loans are offered within the Company’s Washington, D.C. and Baltimore, Maryland metropolitan operating areas to builders primarily for the construction of single-family homes and condominium and townhouse conversions or renovations and, to a lesser extent, to individuals. Construction loans typically have terms of 12 to 18 months. The Company frequently transitions the end purchaser to permanent financing or re-underwriting and sale into the secondary market through Capital Bank Home Loans. According to underwriting standards, the ratio of loan principal to collateral value, as established by an independent appraisal, cannot exceed 75% for investor-owned and 80% for owner-occupied properties. Exceptions are sometimes made. Semi-annual stress testing of the construction loan portfolio is conducted, and underlying real estate conditions are monitored as well as trends of sales outcomes versus underwriting valuations as part of ongoing risk management efforts. The borrowers’ progress in construction buildout is monitored to enforce the original underwriting guidelines for construction milestones and completion timelines.

Commercial and Industrial. In addition to other loan products, general commercial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, letters of credit and other loan products are offered, primarily in target markets, and underwritten based on each borrower’s ability to service debt from income. These loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower. Most commercial business loans are secured by a lien on general business assets including, among other things, available real estate, accounts receivable, promissory notes, inventory and equipment. Personal guaranties from the borrower or other principal are generally obtained.

Credit Cards. Through the OpenSky® credit card division, the Company offers secured, partially secured, and unsecured credit cards on a nationwide basis to under-banked populations and those looking to rebuild their credit scores through a fully digital and mobile platform. The secured lines of credit are secured by a noninterest bearing demand account at the Bank in an amount equal to the full credit limit of the credit card. For the partially secured lines of credit, the Bank offers certain customers an unsecured line in excess of their secured line of credit by using a proprietary scoring model, which considers credit score and repayment history (typically a minimum of six months of on-time repayments, but ultimately determined on a case-by-case basis). Partially secured and unsecured credit cards are only extended to existing secured card customers who have demonstrated sound credit behaviors. Approximately $122.5 million and $126.8 million of the $138.6 million and $140.2 million in secured and partially secured credit card balances were protected by savings deposits held by the Company as of June 30, 2022 and December 31, 2021, respectively, while $3.6 million and $951 thousand of the credit card balances were related to the unsecured credit cards for the same periods.

Loans acquired through acquisitions are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. In estimating the fair value of loans acquired, certain factors were considered, including the remaining lives of the acquired loans, payment history, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral and the net present value of cash flows expected. Discounts on loans that were not considered impaired at acquisition were

recorded as an accretable discount, which will be recognized in interest income over the terms of the related loans. For loans considered to be impaired at acquisition, the difference between the contractually required payments and expected cash flows are recorded as a non-accretable discount. The remaining non-accretable discounts on loans acquired was $285 thousand as of June 30, 2022 and December 31, 2021. Loans with non-accretable discounts had carrying values of $803 thousand and $818 thousand as of June 30, 2022 and December 31, 2021, respectively.


Accretable Discounts on Loans Acquired
(in thousands)	For the Three Months Ended				For the Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Accretable discount at beginning of period	$	164	$	218	$	166	$	221
Less: Accretion and payoff of loans	(5)		(6)		(7)		(9)

Accretable discount at end of period	$	159	$	212	$	159	$	212


Allowance for Loan Losses	Beginning Balance		Provision for Loan Losses		Charge-Offs		Recoveries		Ending Balance
(in thousands)
Three Months Ended June 30, 2022
Real estate:
Residential	$	5,832	$	31	$	—	$	—	$	5,863
Commercial	8,718		139		—		—		8,857
Construction	4,607		(134)		—		—		4,473
Commercial and Industrial	2,350		107		—		—		2,457
Credit card	3,735		1,892		(880)		12		4,759
Other consumer	10		—		—		—		10
Total	$	25,252	$	2,035	$	(880)	$	12	$	26,419

Six Months Ended June 30, 2022
Real estate:
Residential	$	5,612	$	251	$	—	$	—	$	5,863
Commercial	8,566		291		—		—		8,857
Construction	4,699		(226)		—		—		4,473
Commercial and Industrial	2,637		(180)		—		—		2,457
Credit card	3,655		2,853		(1,779)		30		4,759
Other consumer	12		(2)		—		—		10
Total	$	25,181	$	2,987	$	(1,779)	$	30	$	26,419

As mentioned in Note 1, the allowance for loan losses is estimated to adequately provide for probable future losses on existing loans. A major consideration in the determination of the allowance for loan loss on the credit card portfolio is based on historical loss experience in that portfolio and is calculated using both secured and unsecured loan balances.

The following tables present, by class and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.


Allowance for Loan Loss Composition
(in thousands)			Allowance for Loan Losses Ending Balance Evaluated for Impairment:				Outstanding Portfolio Loan Balances Evaluated for Impairment:
June 30, 2022	Individually	Collectively	Individually		Collectively
Real estate:
Residential			$	—	$	5,863	$	3,180	$	427,064
Commercial			—		8,857		961		607,685
Construction			—		4,473		2,041		239,208
Commercial and Industrial			160		2,297		871		192,391
Credit card			—		4,759		—		142,166
Other consumer			—		10		—		856
Total			$	160	$	26,259	$	7,053	$	1,609,370

December 31, 2021
Real estate:
Residential			$	—	$	5,612	$	2,835	$	398,772
Commercial			—		8,566		25		556,314
Construction			—		4,699		7,803		247,344
Commercial and Industrial			218		2,419		676		175,280
Credit card			—		3,655		—		141,120
Other consumer			—		12		—		1,033
Total			$	218	$	24,963	$	11,339	$	1,519,863


Portfolio Loans Past Due
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Portfolio Loans		Accruing Loans 90 or More Days Past Due		Non-accrual Loans
(in thousands)
June 30, 2022
Real estate:
Residential	$	1,424	$	2,878	$	4,302	$	425,942	$	430,244	$	—	$	3,180
Commercial	882		1,155		2,037		606,609		608,646		194		961
Construction	815		2,041		2,856		238,393		241,249		—		2,041
Commercial and Industrial	352		575		927		192,335		193,262		—		871
Credit card	16,586		90		16,676		125,490		142,166		90		—
Other consumer	—		—		—		856		856		—		—
Total	$	20,059	$	6,739	$	26,798	$	1,589,625	$	1,616,423	$	284	$	7,053



December 31, 2021
Real estate:
Residential	$	469	$	2,494	$	2,963	$	398,644	$	401,607	$	72	$	2,835
Commercial	367		25		392		555,947		556,339		—		25
Construction	—		7,803		7,803		247,344		255,147		—		7,803
Commercial and Industrial	183		593		776		175,180		175,956		—		676
Credit card	19,022		10		19,032		122,088		141,120		10		—
Other consumer	—		—		—		1,033		1,033		—		—
Total	$	20,041	$	10,925	$	30,966	$	1,500,236	$	1,531,202	$	82	$	11,339


Impaired Portfolio Loans
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
(in thousands)
June 30, 2022
Real estate:
Residential	$	3,337	$	3,180	$	—	$	3,180	$	—
Commercial	1,029		961		—		961		—
Construction	2,123		2,041		—		2,041		—
Commercial and Industrial	1,041		516		355		871		160


Total	$	7,530	$	6,698	$	355	$	7,053	$	160



December 31, 2021
Real estate:
Residential	$	3,022	$	2,835	$	—	$	2,835	$	—
Commercial	90		25		—		25		—
Construction	7,885		7,803		—		7,803		—
Commercial and Industrial	832		340		336		676		218


Total	$	11,829	$	11,003	$	336	$	11,339	$	218


Interest Recognized on Impaired Portfolio Loans
	For the Three Months Ended June 30, 2022				For the Six Months Ended June 30, 2022
(in thousands)	Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
Real estate:
Residential	$	3,342	$	11	$	3,344	$	18
Commercial	1,030		2		1,031		4
Construction	2,123		—		2,123		—
Commercial and Industrial	1,266		9		1,277		14


Total	$	7,761	$	22	$	7,775	$	36


Interest Recognized on Impaired Portfolio Loans
	For the Three Months Ended June 30, 2021				For the Six Months Ended June 30, 2021
(in thousands)	Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
Real estate:
Residential	$	4,952	$	15	$	4,955	$	21
Commercial	1,080		3		1,094		17
Construction	2,720		—		2,720		—
Commercial and Industrial	1,154		31		1,155		34


Total	$	9,906	$	49	$	9,924	$	72

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of loans, the level of classified loans, net charge-offs, nonperforming loans, and the general economic conditions in the Company’s market.

A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers.

A substandard loan is inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

A doubtful loan has all the weaknesses associated with a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.


Portfolio Loan Classifications
(in thousands)	Pass(1)		Special Mention		Substandard		Doubtful		Total
June 30, 2022
Real estate:
Residential	$	423,366	$	1,733	$	5,145	$	—	$	430,244
Commercial	601,627		6,058		961		—		608,646
Construction	239,208		—		2,041		—		241,249
Commercial and Industrial	187,682		3,976		1,604		—		193,262
Credit card	142,166		—		—		—		142,166
Other consumer	856		—		—		—		856
Portfolio loans receivable, gross	$	1,594,905	$	11,767	$	9,751	$	—	$	1,616,423

December 31, 2021
Real estate:
Residential	$	394,488	$	2,540	$	4,579	$	—	$	401,607
Commercial	548,244		8,070		25		—		556,339
Construction	243,848		3,496		7,803		—		255,147
Commercial and Industrial	164,066		10,417		1,473		—		175,956
Credit card	141,120		—		—		—		141,120
Other consumer	1,033		—		—		—		1,033
Portfolio loans receivable, gross	$	1,492,799	$	24,523	$	13,880	$	—	$	1,531,202

Impaired loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after confirmation of the borrower’s sustained repayment performance for a reasonable period, generally six months.


Troubled Debt Restructurings
(in thousands)	Number of Contracts	Recorded Investment
June 30, 2022		Performing		Nonperforming		Total
Real estate:
Residential	4	$	—	$	443	$	443


Commercial and Industrial	1	—		76		76


Total	5	$	—	$	519	$	519



December 31, 2021
Real estate:
Residential	4	$	—	$	450	$	450


Commercial and Industrial	1	—		83		83


Total	5	$	—	$	533	$	533


Loan Commitments
(in thousands)	June 30, 2022		December 31, 2021
Unused lines of credit
Real Estate:
Residential	$	18,255	$	15,747
Residential - Home Equity	37,390		37,640
Commercial	30,879		17,225
Construction	100,974		118,518
Commercial and Industrial	48,919		45,135
Credit card(1)	126,079		123,874
Other consumer	2,295		2,247
Total	$	364,791	$	360,386

Commitments to originate residential loans held for sale	$	183	$	1,385

Letters of credit	$	5,085	$	5,105

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition of the contract. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will, at any given time, draw upon their lines in full. Loan commitments generally have variable interest rates, fixed expiration dates, and may require payment of a fee.

The Company's maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments and lines of credit are generally made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss to be incurred by funding these loan commitments. The Company maintains an estimated reserve for off balance sheet items such as unfunded lines of credit, which is reflected in other liabilities, with increases or decreases in the reserve being charged to or released from operating expense. Activity for this account is as follows for the periods presented:


Off Balance Sheet Reserve
(in thousands)	For the Three Months Ended				For the Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Balance at beginning of period	$	1,586	$	1,822	$	1,736	$	1,775
Provision for (reversal of) off balance sheet credit commitments	45		(77)		(105)		(30)


Balance at end of period	$	1,631	$	1,745	$	1,631	$	1,745

The Company makes representations and warranties that loans sold to investors meet their program's guidelines and that the information provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may have the right to make a claim for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations.

The Company maintains an estimated reserve for potential losses on mortgage loans sold, which is reflected in other liabilities, with changes being charged to or released from operating expense. Activity in this reserve is as follows for the periods presented:


Mortgage Loan Put-back Reserve
(in thousands)	For the Three Months Ended				For the Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Balance at beginning of period	$	1,164	$	1,284	$	1,164	$	1,160
Provision for mortgage loan put backs	2		86		2		210


Balance at end of period	$	1,166	$	1,370	$	1,166	$	1,370