Capital Bancorp, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. Capital Bancorp is a bank holding company operating Capital Bank, Capital Bank Home Loans, OpenSky credit cards and Church Street Capital, with its commercial banking business concentrated in the Washington, D.C. and Baltimore metropolitan areas.
Financial performance and condition
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net interest income | $140.6 million | $116.7 million | +20.5% |
| Net interest margin | 6.92% | 5.86% | +1.06 percentage points |
| Provision for loan losses | $6.6 million | $3.4 million | +97.4% |
| Noninterest income | $29.4 million | $50.6 million | -42.0% |
| Noninterest expense | $109.1 million | $110.1 million | -0.9% |
| Net income | $41.8 million | $40.0 million | +4.6% |
| Diluted earnings per share | $2.91 | $2.84 | +2.5% |
- Net interest income grew as average portfolio loans increased $208.7 million and loan yields rose 73 basis points. Interest expense also increased, reflecting higher rates; the average cost of interest-bearing liabilities rose 35 basis points.
- Mortgage banking revenue fell to $4.9 million from $20.8 million as higher rates reduced originations and refinancing. Credit card fees declined 21.2% to $22.0 million, while credit card interest income increased.
- Total assets rose 3.3% to $2.124 billion. Portfolio loans, net of deferred fees and costs, increased 13.4% to $1.729 billion; deposits declined 2.2% to $1.758 billion. Borrowings rose $85.0 million to $119.1 million, primarily from FHLB advances.
- Cash and cash equivalents fell to $80.4 million from $183.4 million. Cash from operations was $51.4 million; investing activities used $198.5 million, and financing activities provided $44.1 million.
- Stockholders’ equity increased 13.2% to $224.0 million. The increase included net income, partly offset by $15.7 million in after-tax unrealized securities losses. The equity-to-assets ratio was 10.5%, compared with 9.6%.
- The Bank reported a 9.47% Tier 1 leverage ratio and a 14.21% total capital ratio and was classified as well capitalized. The allowance for loan losses was $26.4 million, or 1.53% of period-end portfolio loans excluding SBA-PPP loans.
Material changes and operating developments
- Commercial real estate loans grew $108.2 million, including $87.6 million in owner-occupied lending. Total portfolio loan growth was partly offset by $106.1 million in SBA-PPP runoff.
- OpenSky reported record segment profitability, with net income increasing $8.4 million. However, active accounts fell by 127,000 year over year; year-end credit card balances declined $12.7 million, and associated noninterest-bearing deposits fell $42.1 million to $187.4 million.
- Data processing expense decreased $9.8 million following a contract renegotiation. Salaries and benefits rose $5.1 million, professional fees rose $4.0 million, and advertising rose $1.4 million.
- Available-for-sale securities had $22.4 million of gross unrealized losses at year-end, versus $2.2 million in 2021; fair value was $252.5 million. Management attributed the losses to interest-rate and market changes rather than credit deterioration and stated it had the intent and ability to hold the securities.
- Net charge-offs increased to $5.4 million from $1.6 million, primarily due to credit card charge-offs. Special mention loans rose $13.5 million; the filing attributes part of the increase to an $18.4 million participation interest in two loans subject to a forbearance agreement. Payments were current at year-end.
Outlook, risks and other notable items
- The filing gives no formal earnings or financial guidance. Management expects historically low housing inventory, building-material shortages and fluctuating interest rates to continue suppressing mortgage origination volumes into 2023.
- CECL became effective for the Company on January 1, 2023. Management estimated adoption adjustments of less than $1.0 million to the loan-loss allowance and less than $1.0 million to the reserve for unfunded commitments; actual future allowance levels may be more volatile.
- Key risks include the geographic concentration of lending (88.2% of loans held for investment were to borrowers in the Washington, D.C. and Baltimore areas), commercial real estate and construction exposure, rising funding costs, deposit concentration, credit-card delinquencies and fraud, mortgage-market sensitivity, cybersecurity, and regulatory or capital requirements. The Bank’s construction loans were 108.6% of capital, exceeding the cited 100% regulatory concentration guideline.
- At year-end, the 10 largest non-brokered depositors held $389.9 million, or 22.2% of total deposits; estimated uninsured deposits were $834.5 million. Available borrowing capacity included $223.8 million from the FHLB, $21.4 million from the Federal Reserve and $76.0 million in correspondent-bank lines. Management stated liquidity resources were sufficient at year-end.
- The Company paid $3.1 million in dividends in 2022 and said it anticipated continuing a regular quarterly cash dividend, subject to Board discretion and regulatory, financial and contractual limits. A $10.0 million share repurchase authorization was announced, but no shares were repurchased in 2022.
- The filing reports no material pending legal proceedings. The auditor gave an unqualified opinion on the financial statements; no auditor attestation on internal control was included because of the Company’s emerging-growth-company transition period. Management assessed financial reporting controls as effective and reported additional allowance-review controls and governance changes in March 2023.
Important facts for investors to verify
- Whether deposit outflows, uninsured balances and greater use of wholesale time deposits or borrowings affect funding costs and liquidity after year-end.
- Subsequent trends in commercial real estate, construction and credit-card delinquencies, charge-offs, criticized loans and allowance adequacy, including the CECL adoption impact.
- Whether securities unrealized losses, mortgage-market weakness and rate movements affect capital, earnings or liquidity.
- Whether OpenSky can stabilize customer accounts and fee income while controlling credit losses, fraud and unsecured exposure.
- Whether the stated dividend outlook and unused repurchase authorization remain consistent with capital needs and regulatory constraints.