Capital Bancorp IncCBNK
Capital Bancorp Inc Fair Value Disclosure
Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. This includes certain U.S. Treasury and other U.S. Government and government agency securities actively traded in over-the-counter markets.
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value on a recurring basis:
Investment securities available-for-sale - The fair values for investment securities available-for-sale are provided by an independent pricing service and are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Loans held for sale - The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).
Loan servicing assets - The fair values of loan servicing assets are determined at a tranche level, based on market prices for comparable servicing contracts (Level 2), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).
Derivative financial instruments - The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Note 17 - Fair Value (continued)
The Company has categorized its financial instruments measured at fair value on a recurring basis as of December 31, 2024 and December 31, 2023 as follows:
| Fair Value Measurements Using: | ||||||||||||||||||||||||||
| (in thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||||||||
| U.S. Treasuries | $ | 126,835 | $ | 126,835 | $ | — | $ | — | ||||||||||||||||||
| Municipal | 9,283 | — | 9,283 | — | ||||||||||||||||||||||
| Corporate | 4,711 | — | 4,711 | — | ||||||||||||||||||||||
| Asset-backed securities | 5,526 | — | 5,526 | — | ||||||||||||||||||||||
| Mortgage-backed securities | 77,275 | — | 77,275 | — | ||||||||||||||||||||||
| Total | $ | 223,630 | $ | 126,835 | $ | 96,795 | $ | — | ||||||||||||||||||
| Loans held for sale | $ | 21,270 | $ | — | $ | 21,270 | $ | — | ||||||||||||||||||
| Loan servicing assets | $ | 5,511 | $ | — | $ | 5,511 | $ | — | ||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||||||||
| U.S. Treasuries | $ | 149,228 | $ | 149,228 | $ | — | $ | — | ||||||||||||||||||
| Municipal | 9,372 | — | 9,372 | — | ||||||||||||||||||||||
| Corporate | 4,413 | — | 4,413 | — | ||||||||||||||||||||||
| Asset-backed securities | 7,045 | — | 7,045 | — | ||||||||||||||||||||||
| Mortgage-backed securities | 38,271 | — | 38,271 | — | ||||||||||||||||||||||
| Total | $ | 208,329 | $ | 149,228 | $ | 59,101 | $ | — | ||||||||||||||||||
| Loans held for sale | $ | 7,481 | $ | — | $ | 7,481 | $ | — | ||||||||||||||||||
| Loan servicing assets | $ | — | $ | — | ||||||||||||||||||||||
Financial instruments recorded using FASB ASC 825-10
Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made.
Note 17 - Fair Value (continued)
The following table reflects the difference between the fair value carrying amount of loans held for sale, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Company is contractually entitled to receive at maturity:
| Fair Value of Loans Held for Sale | ||||||||||||||
| (in thousands) | December 31, 2024 | December 31, 2023 | ||||||||||||
| Aggregate fair value | $ | 21,270 | $ | 7,481 | ||||||||||
| Contractual principal | 16,721 | 5,168 | ||||||||||||
| Difference | $ | 4,549 | $ | 2,313 | ||||||||||
The Company has elected to account for loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market. As of December 31, 2024 and December 31, 2023, there were no held for sale loans which were classified as nonaccrual.
Fair value measurements on a nonrecurring basis
Individually evaluated loans - The Company has measured expected credit losses based on the fair value of the loan's collateral and discounted cash flow analysis, where appropriate. Fair value of the collateral is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values. As of December 31, 2024 and December 31, 2023, the fair values consist of loan balances of $34.9 million and $16.0 million, with specific reserves of $9.3 million and $0.4 million, respectively.
Foreclosed real estate - The Company's foreclosed real estate is measured at fair value less cost to sell. Fair value is determined based on offers and/or appraisals. Cost to sell the real estate is based on standard market factors. The Company categorizes its foreclosed real estate as Level 3. As of December 31, 2024 and December 31, 2023, there was no foreclosed real estate held by the Company.
Note 17 - Fair Value (continued)
The Company has categorized its financial instruments measured at fair value on a nonrecurring basis as of December 31, 2024 and December 31, 2023 as follows:
| Fair Value of Individually Evaluated Loans | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Individually evaluated loans for credit loss, net | ||||||||||||||
| Level 3 Inputs | 25,521 | 15,620 | ||||||||||||
| Total | $ | 25,521 | $ | 15,620 | ||||||||||
The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2024 and 2023:
| Valuation Technique | Unobservable Inputs | General Range of Inputs | |||||||||||||||
| 2024 | |||||||||||||||||
| Individually evaluated loans | Appraised Value/Discounted Cash Flows | Discounts to appraisals or cash flows for estimated holding and/or selling costs | 0 - 30% | ||||||||||||||
| Valuation Technique | Unobservable Inputs | General Range of Inputs | |||||||||||||||
| 2023 | |||||||||||||||||
| Individually evaluated loans | Appraised Value/Discounted Cash Flows | Discounts to appraisals or cash flows for estimated holding and/or selling costs | 0 - 30% | ||||||||||||||
Fair value of financial instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument.
The information used to determine fair value is highly subjective in nature and, therefore, the results are imprecise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
Note 17 - Fair Value (continued)
As of December 31, 2024, the techniques used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2023. The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, individually analyzed loans, and all other loans. The results are then adjusted to account for credit risk as described above and a further credit risk discount is applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan.
For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for individually evaluated loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.
The fair value of cash and cash equivalents and investments in restricted stocks is the carrying amount. Restricted investments includes equity of the Federal Reserve and other banker’s banks.
The fair value of noninterest-bearing deposits and securities sold under agreements to repurchase is the carrying amount.
The fair value of checking, savings, and money market deposits is the amount payable on demand at the reporting date. Fair value of fixed maturity term accounts and individual retirement accounts is estimated using rates currently offered for accounts of similar remaining maturities.
The fair value of certificates of deposit in other financial institutions is estimated based on interest rates currently offered for deposits of similar remaining maturities.
The fair value of borrowings is estimated by discounting the value of contractual cash flows using current market rates for borrowings with similar terms and remaining maturities.
The fair value of outstanding loan commitments, unused lines of credit, and letters of credit are not included in the table since the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments.
Note 17 - Fair Value (continued)
The table below presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.
| Fair Value of Financial Assets and Liabilities | |||||||||||||||||||||||
| December 31, 2024 | December 31, 2023 | ||||||||||||||||||||||
| (in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Financial assets | |||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||
Cash and due from banks | $ | 25,433 | $ | 25,433 | $ | 14,513 | $ | 14,513 | |||||||||||||||
| Interest-bearing deposits at other financial institutions | 179,841 | 179,841 | 39,044 | 39,044 | |||||||||||||||||||
Federal funds sold | 58 | 58 | 407 | 407 | |||||||||||||||||||
| Level 2 | |||||||||||||||||||||||
| Accrued interest receivable | $ | 16,664 | $ | 16,664 | $ | 11,494 | $ | 11,494 | |||||||||||||||
| Level 3 | |||||||||||||||||||||||
| Portfolio loans receivable, net | $ | 2,581,511 | $ | 2,499,578 | $ | 1,874,678 | $ | 1,855,158 | |||||||||||||||
Restricted investments | 4,479 | 4,479 | 4,353 | 4,353 | |||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||
| Level 1 | |||||||||||||||||||||||
Noninterest-bearing deposits | $ | 810,928 | $ | 810,928 | $ | 617,373 | $ | 617,373 | |||||||||||||||
| Level 2 | |||||||||||||||||||||||
| Accrued interest payable | $ | 9,393 | $ | 9,393 | $ | 5,583 | $ | 5,583 | |||||||||||||||
| Level 3 | |||||||||||||||||||||||
Interest-bearing deposits | $ | 1,951,011 | $ | 1,960,728 | $ | 1,278,623 | $ | 1,280,682 | |||||||||||||||
FHLB advances and other borrowed funds | 34,062 | 32,372 | 49,062 | 46,634 | |||||||||||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2024 | Mar 17, 2025 | Showing above |
| 2018 | Apr 1, 2019 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.