Capital Bancorp, Inc. (CBNK) is a Maryland-based bank holding company that operates primarily through its wholly-owned subsidiary, Capital Bank, N.A. The Bank serves businesses, not-for-profit associations, entrepreneurs, and individuals throughout the Washington, D.C. and Baltimore metropolitan areas, as well as Fort Lauderdale, Florida. With a focus on commercial banking, mortgage lending, and credit card operations, Capital Bancorp has established itself as a growth-oriented community bank with a diversified business model.

Company Background

The company's origins date back to 1998 when it was incorporated as a Maryland corporation. In 1999, the Bank received its charter and commenced operations, establishing its headquarters in Rockville, Maryland. Over the years, Capital Bancorp has expanded its footprint, opening five commercial bank branches, a mortgage office, and two loan production offices to serve its growing customer base.

Business Segments

Capital Bancorp operates through three main business segments: Commercial Banking, Capital Bank Home Loans (CBHL), and OpenSky.

The Commercial Banking segment accounts for the majority of the company's total assets and is the primary driver of its lending activities. Capital Bancorp's commercial bankers strive to provide quality service, customized solutions, and tailored advice to commercial clients in its target markets. The Bank's loan portfolio consists of a mix of real estate-secured loans, commercial and industrial loans, and credit card loans, with a focus on higher risk-adjusted returns, shorter maturities, and interest rate sensitivity.

The Capital Bank Home Loans (CBHL) division originates conventional and government-guaranteed residential mortgage loans on a nationwide basis, primarily for sale into the secondary market, and in certain circumstances, for the Bank's loan portfolio.

The OpenSky division, a digitally-driven credit card platform, offers secured, partially secured, and unsecured credit cards to underbanked populations and those seeking to rebuild their credit scores through a fully digital and mobile platform. OpenSky's credit card operations are conducted almost entirely through its website and mobile applications.

In 2014, the Company formed Church Street Capital, LLC to provide short-term secured real estate financing to Washington, D.C. area investors and developers that may not meet all Bank credit criteria. As of September 30, 2024, Church Street Capital had loans totaling $6.2 million with a collectively assessed allowance for credit losses of $184,000.

Asset Quality

Throughout its history, the Bank has maintained a high-quality loan portfolio with relatively low levels of net charge-offs and low delinquency rates. This focus on maintaining sound asset quality has been a priority for the Company, although it has faced challenges such as the need to increase its allowance for credit losses to address portfolio loan growth and specific reserves for collateral-dependent loans.

Financials

Capital Bancorp's financial performance has been characterized by steady growth and profitability. As of September 30, 2024, the Bank reported total assets of $2.56 billion, an increase of 15.0% from the previous year-end. Net portfolio loans grew by 10.7% to $2.11 billion, driven by strong demand across the Bank's lending verticals. Deposits also saw robust growth, increasing by 15.3% to $2.19 billion, with noninterest-bearing deposits comprising a significant portion of the deposit base.

The Bank's net interest income for the nine months ended September 30, 2024 increased by 3.5% to $110.4 million, compared to the same period in 2023. However, the net interest margin (NIM) declined by 29 basis points to 6.37%, primarily due to rising funding costs. To mitigate the impact of the compressed NIM, Capital Bancorp has focused on growing its higher-yielding loan portfolio and optimizing its deposit mix.

Noninterest income for the nine-month period ended September 30, 2024 grew by 2.4% to $19.5 million, with increases in mortgage banking revenue and credit card fees partially offsetting declines in service charges on deposit accounts. The Bank's noninterest expenses increased by 5.8% to $88.7 million, driven by higher salaries and employee benefits, occupancy and equipment costs, and merger-related expenses related to the acquisition of Integrated Financial Holdings, Inc. (IFHI) in October 2024.

For the most recent quarter ended September 30, 2024, Capital Bancorp reported revenue of $52.61 million and net income of $8.672 million. The company's operating cash flow (OCF) for the quarter was -$3.286 million, while free cash flow (FCF) stood at -$2.503 million.

Net interest income increased by 4.2% to $38.35 million for the three months ended September 30, 2024, compared to the same period in 2023. This was primarily due to increased average balances of $205.8 million in portfolio loans, partially offset by increases in the cost of funding.

Noninterest income increased by 4.9% to $6.63 million for the three months ended September 30, 2024, compared to the same period in 2023. This was driven by a $0.6 million increase in mortgage banking revenue partially offset by a $0.3 million decrease in credit card fees.

Noninterest expense increased by 6.0% to $29.73 million for the three months ended September 30, 2024, compared to the same period in 2023. This was primarily due to increases in salaries and employee benefits, data processing, merger-related expenses, and occupancy and equipment expenses.

The provision for credit losses was $3.75 million for the three months ended September 30, 2024, an increase of $1.5 million from the same period in 2023, attributable mainly to portfolio loan growth.

Liquidity and Capital Position

Despite the challenges, Capital Bancorp remained well-capitalized as of September 30, 2024, with a Tier 1 leverage ratio of 9.84% and a total risk-based capital ratio of 13.76%, well above the regulatory requirements for a "well-capitalized" institution. The Bank's tangible book value per share increased by 9.9% to $20.13 compared to the prior year-end.

As of September 30, 2024, the company reported cash holdings of $156.70 million. Additionally, Capital Bancorp has $391.10 million in available borrowing capacity from the Federal Home Loan Bank (FHLB), providing a substantial liquidity cushion.

Risks and Challenges

Looking ahead, Capital Bancorp faces several key risks and challenges, including interest rate volatility, competition in its markets, regulatory changes, and the potential for asset quality deterioration. The Bank's ability to navigate these headwinds while continuing to grow its franchise and diversify its revenue streams will be critical to its long-term success.

Conclusion

Overall, Capital Bancorp's track record of steady growth, disciplined risk management, and diversified business model has positioned the Bank as a well-capitalized and resilient community banking institution. As it navigates the evolving financial landscape, the Bank's focus on serving the needs of its commercial, residential, and credit card customers in its target markets should continue to drive its performance and create value for shareholders. The company's primary operations in the Washington, D.C. and Baltimore metropolitan areas provide a strong foundation for its continued growth and development in these key markets.