Executive Summary / Key Takeaways

• Strategic Growth Through Diversification and Acquisition: Capital Bancorp (CBNK) is executing a clear strategy of expanding its core commercial banking operations while leveraging specialized national platforms like OpenSky and the recently acquired Windsor Advantage. The transformative IFH acquisition in late 2024 has significantly broadened its revenue base and service offerings.
• Robust Financial Performance in Q2 2025: The company delivered strong Q2 2025 results, with net income surging 60.1% year-over-year to $13.1 million, and core net income reaching $14.2 million. This performance was underpinned by a 28.6% increase in net interest income and a remarkable 90.2% jump in noninterest income, largely driven by the IFH acquisition.
• Digital Transformation as a Competitive Edge: CBNK is actively investing in technology, exemplified by its OpenSky digital credit card platform and the recent launch of a new digital banking platform for business customers in partnership with Q2. These initiatives enhance customer experience, drive operational efficiency, and expand market reach, particularly to underserved segments.
• Solid Capital and Shareholder Returns: The company maintains a "well capitalized" status, supporting its growth initiatives. A recent 20% increase in its quarterly dividend to $0.12 per share, alongside an active stock repurchase program, signals confidence in future profitability and a commitment to shareholder returns.
• Managing Credit Quality Amidst Growth: While loan and deposit growth remains strong, the company is closely monitoring credit quality, with an increase in the provision for credit losses and net charge-offs in Q2 2025, particularly within the OpenSky and commercial loan portfolios. Proactive risk management and a refined credit rating system are in place to address these trends.

Setting the Stage: A Regional Powerhouse with National Ambitions

Capital Bancorp, Inc. (NASDAQ:CBNK) has evolved from its 1998 Maryland roots as a commercial-focused community bank into a dynamic financial institution with a diversified portfolio and a clear vision for growth. Headquartered in Rockville, Maryland, Capital Bank, N.A. initially served businesses and entrepreneurs in the Washington D.C. and Baltimore metropolitan areas. Over the years, it strategically expanded its reach and capabilities, establishing specialized divisions that now operate on a national scale. This blend of localized commercial banking expertise and innovative national platforms forms the bedrock of CBNK's investment thesis.

The company’s overarching strategy centers on leveraging its national banking charter to pursue growth in both traditional and niche financial services. This includes a robust Commercial Banking division, which has broadened its scope to include government-guaranteed lending and nationwide deposit verticals. Complementing this are its specialized segments: Capital Bank Home Loans (CBHL) for residential mortgages, OpenSky for digitally-driven credit card solutions, and the recently acquired Windsor Advantage, specializing in SBA and USDA loan servicing. This multi-pronged approach allows CBNK to capture diverse revenue streams and cater to a wide array of customer needs, from local businesses to under-banked populations across the country.

In the competitive financial services industry, CBNK faces formidable regional and national institutions. Larger players like Truist Financial (TFC), PNC Financial Services (PNC), Bank of America (BAC), and Regions Financial (RF) possess immense scale, extensive branch networks, and substantial resources for technology and marketing. However, CBNK carves out its niche through a focus on personalized service, agility, and targeted market penetration. Its strong local brand in its core Mid-Atlantic markets fosters deep customer loyalty, which can translate into stable, lower-cost deposit funding and resilient loan relationships. This personalized approach often allows for faster decision-making and more flexible terms, appealing to clients who may feel underserved by larger, more standardized banking operations.

Technological Edge and Digital Evolution

A critical differentiator for Capital Bancorp is its commitment to technological innovation, particularly evident in its OpenSky division and recent digital banking initiatives. OpenSky operates as a digitally-driven, nationwide credit card platform, providing secured, partially secured, and unsecured credit solutions. This platform allows CBNK to efficiently reach under-banked populations and individuals seeking to rebuild their credit scores, a segment often overlooked by traditional banks. The digital nature of OpenSky enables streamlined origination and servicing, contributing to a broader customer base and potentially enhanced yields from this portfolio.

Further demonstrating its digital ambition, Capital Bank recently launched a new digital banking platform for business customers in partnership with Q2 (QTWO). This upgrade delivers a secure, modern experience, marking a significant step in the bank's ongoing digital evolution. While specific quantitative metrics on efficiency gains or customer adoption rates are not publicly detailed, the strategic intent is clear: to improve customer satisfaction, enhance operational efficiency, and strengthen its competitive moat against rivals. This technological advancement is crucial for retaining and attracting business clients who increasingly demand seamless digital interactions, helping CBNK to bridge potential technological gaps it might otherwise face against larger, more resource-rich competitors like PNC, which are known for their innovative digital platforms. The ability to develop and use technology to satisfy customer demands is a stated priority, underscoring its importance to the company's long-term growth strategy and market positioning.

Strategic Acquisitions and Operational Synergy

The acquisition of Integrated Financial Holdings, Inc. (IFH) on October 1, 2024, marked a pivotal moment in CBNK's growth trajectory. This strategic move brought West Town Bank & Trust into Capital Bank and, crucially, added Windsor Advantage, LLC as a wholly-owned subsidiary. Windsor Advantage significantly expands CBNK's fee income capabilities by offering a comprehensive SBA 7a and USDA lending platform to community banks and credit unions. This acquisition has not only diversified CBNK's revenue streams but also broadened its geographic footprint, extending its presence into Florida, Illinois, and North Carolina.

The integration of IFH's banking systems and operations onto Capital Bank's platforms was successfully completed in the first quarter of 2025, demonstrating effective execution of the merger. This integration is expected to unlock synergies and efficiencies, although merger-related expenses of $1.4 million in Q2 2025 and $2.7 million year-to-date 2025 reflect the ongoing costs of this transition. A $1.4 million increase in goodwill during the first six months of 2025, stemming from revised estimates of adjusted servicing assets and other liabilities, further highlights the accounting complexities and potential for value creation from this acquisition. The expansion of Commercial Banking operations into Delaware in May 2025, with the addition of experienced relationship managers, further underscores CBNK's commitment to Mid-Atlantic growth and market penetration.

Robust Financial Performance: Q2 2025 Highlights

Capital Bancorp's strategic initiatives and diversified business model translated into strong financial performance for the second quarter and first half of 2025. Net income for the three months ended June 30, 2025, surged by 60.1% year-over-year to $13.1 million, compared to $8.2 million in the prior-year period. On a core basis, excluding merger-related expenses, net income reached $14.2 million. For the six months ended June 30, 2025, net income increased by an impressive 83.3% to $27.1 million, demonstrating significant momentum.

Net interest income, the largest component of revenue, increased by $10.6 million, or 28.6%, to $47.6 million in Q2 2025, primarily driven by organic growth and the IFH acquisition. Year-to-date, net interest income grew 30.0% to $93.7 million. While the overall net interest margin decreased by 42 basis points to 6.04% in Q2 2025, largely due to the dilutive impact of commercial loans acquired from IFH, the Commercial Bank segment's non-GAAP net interest margin actually increased to 4.36% from 3.90% in the prior year, indicating healthy core banking profitability.

Noninterest income experienced substantial growth, increasing by $6.2 million, or 90.2%, to $13.1 million in Q2 2025. This significant rise was primarily attributable to contributions from the acquired IFH businesses, particularly government loan servicing revenue from Windsor Advantage ($3.6 million net of intercompany charges) and government lending revenue ($3.1 million gain on sale). For the six-month period, noninterest income nearly doubled, increasing by $12.8 million, or 99.5%, to $25.7 million. This diversification of revenue streams beyond traditional interest income is a key component of CBNK's growth strategy.

Total assets at June 30, 2025, reached $3.39 billion, an increase of $181.8 million, or 5.7%, from December 31, 2024. Net portfolio loans, excluding mortgage loans held for sale, grew by $109.6 million, or 4.2%, to $2.70 billion. This loan growth was funded by a robust increase in deposits, which rose by $178.8 million, or 6.5%, to $2.94 billion. Notably, credit card customers continue to be a significant source of low-cost deposits, supporting the OpenSky division's funding needs.

Credit Quality and Risk Management

While growth has been robust, Capital Bancorp is diligently managing its credit quality. The provision for credit losses for Q2 2025 increased by $0.7 million to $4.1 million, primarily due to higher volumes in OpenSky's secured and unsecured credit card portfolios. For the six-month period, the provision rose to $6.3 million, driven by overall portfolio loan growth and higher specific reserves for collateral-dependent loans, which increased to $6.5 million at June 30, 2025, from $1.1 million at June 30, 2024.

Net charge-offs for Q2 2025 were $5.1 million, or 0.75% on an annualized basis of average portfolio loans, up from $1.9 million (0.39% annualized) in Q2 2024. These charge-offs included $3.0 million from the Commercial Bank (primarily owner-occupied commercial real estate and commercial and industrial loans) and $2.1 million from OpenSky (unsecured and secured/partially secured credit cards). The allowance for credit losses (ACL) as a percentage of portfolio loans stood at 1.73% at June 30, 2025, compared to 1.85% at December 31, 2024. Management believes the current ACL coverage ratio adequately reflects forecasted economic conditions and risks. The company maintains a strong credit review function, employing a risk grading matrix and continuous monitoring of delinquency trends to identify and address potential weaknesses proactively. This disciplined approach is crucial, especially as the credit card portfolio has evolved to include partially secured and unsecured exposures.

Capital Strength and Shareholder Returns

Capital Bancorp demonstrates solid capital strength, with both the Company and Capital Bank, N.A. in compliance with all applicable regulatory capital requirements and the Bank classified as "well capitalized" as of June 30, 2025. Stockholders' equity increased by $24.9 million for the six months ended June 30, 2025, largely due to strong net income generation.

The company is committed to returning value to shareholders. In July 2025, the Board of Directors declared a $0.12 per share dividend, representing a 20.0% increase from the prior quarterly dividend. This significant increase underscores management's confidence in the company's earnings power and future outlook. Additionally, CBNK is actively executing a stock repurchase program, having repurchased 93,170 shares for $2.5 million in Q2 2025, with $11.9 million remaining under the authorized program. This balanced approach to capital deployment, combining dividends and buybacks, enhances shareholder value.

Outlook and Analyst Sentiment

The outlook for Capital Bancorp appears positive, supported by its strategic growth initiatives and strong recent performance. Analysts are optimistic, with Zacks Equity Research assigning a "Strong Buy" rating and noting a noticeable improvement in the company's earnings outlook. Consensus estimates project current quarter EPS at $0.89, representing a robust 50.85% year-over-year increase, and full-year EPS at $3.41, a 24.91% change from the prior year. These upward revisions in earnings estimates reflect growing analyst confidence in CBNK's ability to capitalize on its diversified business model and strategic acquisitions.

The company's continued focus on digital transformation, particularly through the Q2 partnership and the OpenSky platform, positions it to meet evolving customer demands and drive efficiency. The successful integration of IFH and the expansion of Windsor Advantage's fee-generating services are expected to contribute meaningfully to future revenue and profitability. While the competitive landscape remains intense, CBNK's blend of personalized regional banking and innovative national niche platforms provides a compelling growth narrative.

Conclusion

Capital Bancorp stands as a compelling investment story, demonstrating a strategic blend of organic expansion and transformative acquisitions, all underpinned by a commitment to digital innovation. The company's Q2 2025 results underscore the effectiveness of its diversified business model, with significant growth in net income and noninterest income driven by the successful integration of IFH and the robust performance of its Commercial Banking and specialized divisions. Its technological advancements, particularly in digital banking and the OpenSky platform, are crucial for enhancing customer experience and expanding market reach, providing a distinct advantage in an increasingly digital financial landscape.

Despite facing intense competition from larger regional and national institutions, CBNK's focus on personalized service, niche market penetration, and efficient digital solutions allows it to maintain a strong competitive position. The company's solid capital base, coupled with a recent 20% dividend increase and an active share repurchase program, reflects management's confidence in its sustained profitability and commitment to shareholder returns. While vigilant management of credit quality remains essential, Capital Bancorp's strategic trajectory, financial momentum, and technological leadership position it favorably for continued value creation.