Capital Bancorp, Inc. (CBNK) is a dynamic financial institution that has navigated the industry's challenges with a resilient business model and a steadfast commitment to serving its customers. Headquartered in Rockville, Maryland, the company has steadily expanded its presence across the Washington D.C. and Baltimore metropolitan areas, as well as Fort Lauderdale, Florida, establishing itself as a prominent community bank.
Business Overview and History
Incorporated in 1998, Capital Bancorp, Inc. operates primarily through its wholly-owned subsidiary, Capital Bank, N.A., which received its charter in 1999 and commenced operations the same year. The company serves businesses, not-for-profit associations, entrepreneurs, and individuals through its five commercial bank branches, one mortgage office, and two loan production offices.
Capital Bancorp's operations are organized into three distinct divisions: Commercial Banking, Capital Bank Home Loans (CBHL), and OpenSky. The Commercial Banking division accounts for the majority of the company's total assets, with its commercial bankers focused on providing quality service, customized solutions, and tailored advice to commercial clients in the company's target markets. The CBHL division originates conventional and government-guaranteed residential mortgage loans on a nationwide basis, primarily for sale into the secondary market, while 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.
In 2014, the company expanded its product offerings and geographic reach by forming Church Street Capital, LLC, which provides short-term secured real estate financing to Washington, D.C. area investors and developers that may not meet all Bank credit criteria. Throughout its history, Capital Bancorp has maintained a strong capital position, consistently meeting or exceeding all applicable regulatory capital requirements.
The company demonstrated its resilience during the COVID-19 pandemic in 2020, when many of its commercial clients were significantly impacted by the economic disruption. Capital Bancorp worked closely with these clients and provided financial assistance, including Paycheck Protection Program loans, to help them navigate the difficult environment. Despite these challenges, the company remained profitable throughout 2020 and 2021, showcasing the strength of its diversified business model.
In October 2024, Capital Bancorp completed its previously announced merger with Integrated Financial Holdings, Inc. (IFHI), a move that further diversified the company's business model with IFHI's niche commercial and industrial (C&I) lending operations, which are capital-efficient, high-return, and generate meaningful fee income. The integration of IFHI has created opportunities to scale Windsor Advantage, one of IFHI's subsidiaries, and establish Capital Bancorp as a nationwide leader in government-guaranteed lending across both U.S. Department of Agriculture (USDA) and U.S. Small Business Administration (SBA) lending.
Financial Performance and Ratios
Capital Bancorp has consistently delivered strong financial results, demonstrating the resilience of its diversified business model. As of the latest reported quarter (Q3 2024), the company's net income stood at $8.7 million, or $0.62 per share. Adjusting for merger-related expenses, the company's net income was $9.2 million, or $0.66 per share, showcasing the underlying strength of its operations.
The company's tangible book value per share (non-GAAP) increased 4.5% to $20.13 as of Q3 2024, compared to $19.26 in the prior quarter. This growth in tangible book value highlights the company's ability to generate value for its shareholders. Capital Bancorp's return on average assets (ROAA) was 1.42% in Q3 2024, and its return on average equity (ROAE) was 12.59%, further demonstrating the company's profitability.
Net interest income for the third quarter of 2024 increased by $1.3 million, or 3.5%, from the prior quarter, driven by strong loan growth and higher yields. The company's net interest margin (NIM) decreased to 6.41% in Q3 2024, compared to 6.46% in the previous quarter, as the increase in funding costs outpaced the rise in asset yields. However, the company's core NIM, excluding the impact of credit card loans, increased to 4.08% in Q3 2024, up from 4.00% in the prior quarter, highlighting the strength of its traditional banking operations.
For the most recent fiscal year (2023), Capital Bancorp reported annual revenue of $166.5 million and annual net income of $35.9 million. The company's annual operating cash flow for 2023 was $47.4 million, with annual free cash flow of $45.3 million. In the most recent quarter (Q3 2024), the company's revenue was $45 million, representing a 4.3% increase compared to Q3 2023. Net income for Q3 2024 was $8.7 million, a decrease of 11.4% compared to Q3 2023, primarily due to a $0.5 million increase in merger-related expenses.
Liquidity
Capital Bancorp has maintained a strong liquidity position, which is crucial for its ongoing operations and ability to meet customer needs. The company's diverse funding sources, including its growing deposit base and access to wholesale funding markets, contribute to its robust liquidity profile. As of Q3 2024, the company's liquidity ratios remained well above regulatory requirements, demonstrating its ability to meet short-term obligations and potential funding needs.
The company's debt-to-equity ratio as of September 30, 2024, was 0.23, indicating a conservative approach to leverage. Cash and cash equivalents stood at $156.7 million, providing a solid liquidity buffer. Capital Bancorp also has access to significant borrowing capacity, including $391.1 million from the Federal Home Loan Bank (FHLB), $109.2 million from the Federal Reserve Bank of Richmond, and $76 million in available lines of credit with other correspondent banks. The company's current ratio and quick ratio both stood at 0.32 as of September 30, 2024, reflecting its ability to meet short-term obligations.
Loan and Deposit Growth
Capital Bancorp has demonstrated robust organic growth, with portfolio loans increasing by $85.9 million, or 16.9% annualized, in the third quarter of 2024. This growth was driven by the company's diverse lending activities, including commercial real estate, commercial and industrial, and residential real estate loans. The company's deposit base also grew significantly, with total deposits increasing by $85.8 million, or 16.2% annualized, during the same period, including a $33.5 million, or 19.5% annualized, increase in noninterest-bearing deposits.
The company's credit quality remains strong, with nonperforming loans to total portfolio loans decreasing to 0.73% as of Q3 2024, compared to 0.84% at the end of 2023. The allowance for credit losses to total portfolio loans stood at 1.51% as of September 30, 2024, relatively stable compared to the prior year-end.
Business Segments
Capital Bancorp operates through three primary business segments: Commercial Banking, Capital Bank Home Loans (CBHL), and OpenSky.
The Commercial Banking segment represents the core of Capital Bancorp's operations, providing a range of banking products and services to businesses, non-profit associations, entrepreneurs, and other commercial customers primarily in the Washington D.C. and Baltimore metropolitan areas. As of September 30, 2024, this segment accounted for the majority of the company's total assets. The loan portfolio in this segment includes owner-occupied commercial real estate loans, non-owner-occupied commercial real estate loans, construction loans, and commercial and industrial loans. Commercial real estate loans totaled $787.2 million and represented 37% of the total portfolio loans, while commercial and industrial loans amounted to $271.8 million or 13% of total portfolio loans.
The Capital Bank Home Loans (CBHL) division is the residential mortgage banking arm of Capital Bancorp. CBHL originates conventional and government-guaranteed residential mortgage loans primarily for sale into the secondary market. During Q3 2024, CBHL experienced a 49.3% increase in mortgage origination volumes compared to the prior year period, originating $74.7 million in loans versus $50 million in Q3 2023. However, gain on sale margins decreased from 2.57% in Q3 2023 to 2.44% in Q3 2024.
The OpenSky division provides secured, partially secured, and unsecured credit cards on a nationwide basis to underbanked populations and those looking to rebuild their credit scores. As of September 30, 2024, the OpenSky credit card portfolio totaled $127.1 million, net of reserves, and represented 6% of the total portfolio loans. For Q3 2024, net charge-offs related to the secured and partially secured credit cards were $1 million, while net charge-offs for the unsecured credit cards were $0.7 million.
Geographic Markets
Capital Bancorp operates primarily in the Washington D.C. and Baltimore metropolitan areas. The company does not have significant operations or sales outside of this regional footprint. This focused geographic presence allows the company to maintain deep relationships with local businesses and customers while capitalizing on the economic growth in these metropolitan areas.
Industry Trends
The banking industry in the Washington D.C. and Baltimore markets has experienced moderate loan and deposit growth. However, elevated competition and pressure on net interest margins due to the rising interest rate environment have presented challenges for banks operating in the region. Capital Bancorp's diversified business model and strong local presence have helped it navigate these industry trends effectively.
Outlook and Risks
Moving forward, Capital Bancorp remains well-positioned to capitalize on the growth opportunities in its target markets. The successful integration of IFHI is expected to further enhance the company's diversified business model and drive synergies that will benefit its customers and shareholders.
However, the company is not without its risks. Like all financial institutions, Capital Bancorp is exposed to interest rate risk, credit risk, and economic conditions in its operating markets. Regulatory changes, competition from larger regional and national banks, and the potential for loan quality deterioration are also areas of concern that the company must navigate.
Conclusion
Capital Bancorp, Inc. has demonstrated its ability to navigate the challenges of the banking industry and deliver consistent financial performance. The company's diversified business model, featuring its Commercial Banking, CBHL, and OpenSky divisions, has proven resilient and adaptable to changing market conditions. The recent acquisition of IFHI has further strengthened the company's capabilities and positioned it for continued growth. As Capital Bancorp continues to execute its strategic initiatives, investors should closely monitor the company's ability to maintain its competitive edge, manage risks, and deliver value to its shareholders in the dynamic banking landscape of the Washington D.C. and Baltimore metropolitan areas.