Capital Bancorp, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY2022. This is an annual filing, not a standalone fourth-quarter report. Capital Bancorp is a Maryland bank holding company operating Capital Bank, with commercial banking concentrated in the Washington, D.C. and Baltimore areas, plus nationwide mortgage and OpenSky credit-card businesses.
Financial performance and condition
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Net interest income | $141.5 million | $140.6 million |
| Net income | $35.9 million; diluted EPS $2.55 | $41.8 million; diluted EPS $2.91 |
| Provision for credit losses | $9.6 million | $6.6 million |
| Noninterest income | $25.0 million | $29.4 million |
| Noninterest expense | $110.8 million | $109.1 million |
| Net interest margin | 6.60%; adjusted, excluding card and SBA-PPP loans, 3.96% | 6.92%; adjusted 3.93% |
| Total assets | $2.226 billion | $2.124 billion |
| Deposits | $1.896 billion | $1.758 billion |
| Cash and cash equivalents | $54.0 million | $80.4 million |
| Total stockholders’ equity | $254.9 million | $224.0 million |
Net portfolio loans, net of deferred fees and costs, grew 10.1% to $1.903 billion; loans held for investment after the allowance were $1.874 billion. The allowance for credit losses was $28.6 million, or 1.50% of portfolio loans. Nonperforming loans were $16.0 million, 0.84% of portfolio loans, versus $9.8 million and 0.56% a year earlier.
Net interest income rose just 0.7% as higher asset yields and loan growth were largely offset by sharply higher funding costs. Average interest-bearing liability cost increased to 3.29% from 0.95%; deposit migration from noninterest-bearing accounts also raised funding expense. Operating cash flow was $47.4 million, investing cash flow was negative $130.8 million, and financing cash flow was $57.0 million. Cash declined by $26.5 million during the year.
At year-end, borrowings totaled $49.1 million: $22.0 million of FHLB advances and $27.1 million of other borrowings, including $15.0 million under the Bank Term Funding Program (BTFP). The BTFP borrowing was repaid in January 2024. The company reported $291.5 million of available FHLB capacity, $16.6 million of Federal Reserve discount-window capacity, $76.0 million in correspondent-bank lines, and $150.0 million available through BTFP at year-end. The Bank was classified as well capitalized; its total capital ratio was 14.81% and leverage ratio 10.51%.
Material changes versus FY2022
- Net income fell 14.2%, while net interest income was nearly flat. The reported margin contracted 32 basis points, although the adjusted margin edged up to 3.96%.
- Credit card fees declined $4.7 million; OpenSky open accounts fell to 525,314 from 533,855. Credit-card net charge-offs increased to $6.9 million, and the card portfolio’s net charge-off rate rose to 6.02% from 4.28%.
- Total noninterest income fell 15.0%. Higher salaries and benefits (+13.7%) were mostly offset by lower data-processing and professional-fee expense; total noninterest expense increased 1.5%.
- Average noninterest-bearing deposits decreased $127.0 million, while total deposits increased 7.8%. Uninsured deposits were approximately $789.4 million, or 41.6% of deposits.
- Available-for-sale securities declined to $208.3 million from $252.5 million. Gross unrealized losses improved to $17.4 million from $22.4 million; management reported no credit-related impairment and no intent or expected requirement to sell before recovery.
- The company adopted CECL on January 1, 2023. The adoption increased the loan allowance by $804,000 and reduced the unfunded-commitment reserve by $775,000, a net $29,000 reduction to retained earnings. Prior-year figures were not restated.
Outlook, risks and unusual items
Management provided no numerical earnings or growth guidance. It described continued emphasis on commercial loan and core-deposit growth, technology and digital consumer platforms, and purchase-oriented mortgage originations. Mortgage production remains exposed to elevated rates and historically low housing inventory; purchase originations were 91.7% of mortgage volume in 2023.
- Credit and concentrations: 86.8% of loans were to borrowers in the Washington, D.C. and Baltimore metropolitan areas. The Bank exceeded regulatory CRE concentration guideline thresholds: construction loans were 107% of total capital and non-owner-occupied CRE loans, including construction, were 304%. Management cited monitoring and risk controls; local economic, property-value, construction, and refinancing stress remain key risks.
- Liquidity and funding: Uninsured deposits represented 41.6% of deposits, and the ten largest non-brokered depositors represented 14.1%. Deposit competition, withdrawals, and further migration to higher-cost accounts could pressure liquidity and margins.
- OpenSky credit risk: Management disclosed that approximately 20% of secured cards historically charge off within the first year; 12.3% of the secured card portfolio was at least 30 days delinquent at year-end. Fraud, delinquencies, and lower account volumes can affect losses and fee income.
- Interest-rate and securities risk: The company was asset-sensitive in its gap analysis, but modeled rate scenarios are assumption-dependent. AFS securities carried $17.4 million of gross unrealized losses, and higher funding costs materially offset asset-yield gains.
- Other notable items: The company repurchased 475,346 shares for $8.8 million and paid $3.9 million in dividends during 2023. It reported no legal proceedings expected to materially affect its financial statements and no cybersecurity incident known to have materially affected, or reasonably likely to materially affect, the company as of the filing date.
The independent auditor issued an unqualified opinion on the financial statements and on the effectiveness of internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter because of the judgment involved in qualitative adjustments. Management said it added or enhanced allowance-related controls in the first quarter of 2024.
Investor verification priorities
- Track deposit mix, uninsured and large-depositor balances, deposit pricing, and liquidity after repayment of the BTFP borrowing.
- Monitor CRE and construction concentrations, loan maturities, criticized and nonperforming loans, collateral values, and future allowance provisions and charge-offs.
- Assess whether OpenSky account trends, delinquency and charge-off rates, and fee revenue stabilize or continue to weaken.
- Compare reported and adjusted net interest margins and test whether asset-yield gains can outpace deposit and borrowing costs.
- Review securities fair values and unrealized losses, regulatory capital and CRE oversight, and the effect of repurchases and dividends on capital.
- Confirm subsequent results against management’s qualitative outlook, including mortgage origination conditions and the execution of commercial-loan and core-deposit growth plans.