Capital Bancorp, Inc. (NASDAQ:CBNK) is a diversified community bank that has been serving the Washington, D.C. and Baltimore metropolitan areas for over two decades. Capital Bancorp operates through its wholly-owned subsidiary, Capital Bank, N.A., and has established a strong presence in the region with four commercial bank branches, one mortgage office, and two loan production offices.

Business Overview

Capital Bancorp's business model is centered around three key divisions: Commercial Banking, Capital Bank Home Loans, and OpenSky™. The Commercial Banking division accounts for the majority of the bank's total assets and focuses on providing quality service, customized solutions, and tailored advice to commercial clients in Capital Bancorp's primary markets. The Capital Bank Home Loans division originates conventional and government-guaranteed residential mortgage loans on a nationwide basis, primarily for sale into the secondary market. The OpenSky™ division offers secured, partially secured, and unsecured credit cards to underbanked populations and those looking to rebuild their credit scores through a digital and mobile-enabled platform.

Financials

For the fiscal year ended December 31, 2023, Capital Bancorp reported annual net income of $35.9 million, annual revenue of $208.2 million, annual operating cash flow of $47.5 million, and annual free cash flow of $45.3 million. These strong financial results demonstrate Capital Bancorp's ability to consistently deliver value to its shareholders.

In the first quarter of 2024, Capital Bancorp continued its solid performance, reporting net income of $6.6 million, a decrease of 32.6% compared to the same period in 2023. This decline was primarily due to a $1.1 million increase in the provision for credit losses and a $3.3 million increase in noninterest expenses, which included $0.7 million in merger-related expenses related to the pending acquisition of Integrated Financial Holdings, Inc. (IFHI).

Capital Bancorp's net interest income increased by $0.5 million, or 1.5%, to $35.0 million in the first quarter of 2024, driven by a $174.7 million increase in average portfolio loan balances. However, this was partially offset by a significant increase in the cost of funding, as Capital Bancorp's average cost of interest-bearing liabilities increased by 97 basis points to 3.90% during the quarter.

Noninterest income remained relatively stable, decreasing by $0.1 million, or 0.9%, to $6.0 million in the first quarter of 2024. This was primarily due to a $0.3 million decrease in credit card fees, which was partially offset by a $0.3 million increase in mortgage banking revenue.

Asset Quality

Capital Bancorp's asset quality remained strong, with nonperforming assets to total assets of 0.62% as of March 31, 2024, compared to 0.73% as of March 31, 2023. The allowance for credit losses to total portfolio loans was 1.49% as of March 31, 2024, compared to 1.47% as of March 31, 2023.

Liquidity

Capital Bancorp's balance sheet remained well-capitalized, with a Tier 1 leverage ratio of 10.29% and a total risk-based capital ratio of 14.36% as of March 31, 2024. These ratios exceed the regulatory requirements for a "well-capitalized" institution, providing Capital Bancorp with a strong foundation to support its growth initiatives.

Recent Developments

In March 2024, Capital Bancorp announced that it had entered into an agreement to acquire IFHI, a financial holding company based in Raleigh, North Carolina with approximately $548 million in total assets as of December 31, 2023. The merger is expected to close in the fourth quarter of 2024, subject to regulatory approval and the satisfaction of other customary closing conditions.

The acquisition of IFHI is expected to enhance Capital Bancorp's geographic diversification and expand its government-guaranteed lending capabilities through IFHI's wholly-owned bank subsidiary, West Town Bank & Trust, and its loan service provider, Windsor Advantage, LLC. Capital Bancorp believes the transaction will create meaningful synergies and provide opportunities for growth in the future.

Outlook

Looking ahead, Capital Bancorp remains focused on executing its strategic initiatives, which include continued growth in its commercial banking and mortgage lending businesses, as well as the expansion of its OpenSky™ credit card platform. Capital Bancorp's management team is committed to maintaining a high-quality loan portfolio, prudent risk management, and a strong capital position to support Capital Bancorp's long-term success.

Conclusion

Overall, Capital Bancorp's diversified business model, consistent financial performance, and strategic initiatives position Capital Bancorp well for the future. The pending acquisition of IFHI is expected to further enhance Capital Bancorp's capabilities and geographic reach, positioning it for continued growth and value creation for its shareholders.