Capital Bancorp, Inc. — FY 2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are with FY 2020. Capital Bancorp is a Maryland bank holding company operating Capital Bank, Capital Bank Home Loans, OpenSky credit cards and Church Street Capital, primarily serving the Washington, D.C. and Baltimore region, with national mortgage and credit-card businesses.
Financial performance and condition
| Metric | FY 2021 / year-end | FY 2020 / comparison |
|---|---|---|
| Net income | $40.0 million; diluted EPS $2.84 | $25.8 million; diluted EPS $1.87 |
| Net interest income | $116.7 million | $84.1 million |
| Net interest margin | 5.86% | 5.14% |
| Provision for loan losses | $3.4 million | $11.2 million |
| Noninterest income / expense | $50.6 million / $110.1 million | $50.1 million / $87.8 million |
| Total assets | $2.055 billion | $1.877 billion |
| Portfolio loans held for investment, net | $1.499 billion | $1.292 billion |
| Deposits / borrowings | $1.797 billion / $34.1 million | $1.652 billion / $36.0 million |
| Cash and cash equivalents | $183.4 million | $146.9 million |
- Net income increased 54.8%. Management attributed the improvement chiefly to loan and credit-card growth, higher loan yields, lower deposit funding costs and a smaller loan-loss provision.
- Credit-card fees rose 64.4% to $27.9 million, while mortgage banking revenue fell 35.4% to $20.8 million. Total noninterest income was nearly flat. Data-processing expense increased 45.8% to $39.2 million, largely with OpenSky account growth.
- Operating cash flow was $132.1 million; investing cash flow was negative $238.2 million and financing cash flow was positive $142.6 million. Cash increased $36.5 million. Investing included $35.0 million to purchase bank-owned life insurance (BOLI).
- Allowance for loan losses was $25.2 million, or 1.65% of period-end portfolio loans excluding SBA-PPP loans. Net charge-offs were $1.6 million, or 0.12% of average portfolio loans. Nonaccrual loans were $11.3 million, compared with $9.0 million a year earlier.
- The Bank was classified as well capitalized; its year-end total capital ratio was 13.79% and Tier 1 leverage ratio was 8.36%. The company reported $22.0 million of FHLB advances and $12.1 million of other borrowings. Available liquidity included $183.3 million of FHLB capacity, $15.9 million at the Federal Reserve and $76.0 million in correspondent-bank lines.
Material changes versus FY 2020
- Commercial real estate loans grew $163.8 million, including $102.2 million in owner-occupied loans; net credit-card loans grew $38.9 million. Total assets increased 9.5% and net portfolio loans increased 15.8%.
- Noninterest-bearing deposits rose 29.4%; the company reported no wholesale time deposits at year-end, versus $107.7 million in 2020. Estimated uninsured deposits were $972.4 million.
- Average portfolio loans increased $155.9 million. The average portfolio loan yield rose 90 basis points, while the cost of interest-bearing deposits declined 63 basis points, supporting net interest margin expansion.
- Mortgage activity weakened after the 2020 refinance surge: gain-on-sale margin declined to 2.79% from 3.02%. OpenSky active accounts increased by 92,000.
- COVID-related deferred loans declined from $30.5 million at year-end 2020 to $4.0 million at year-end 2021. SBA-PPP loans receivable were $111.5 million at year-end, down from $201.0 million net on the balance sheet a year earlier.
Outlook, risks and other notable items
- No quantified earnings or revenue guidance is provided. Management expected low housing inventory, building-material shortages and fluctuating interest rates to continue suppressing mortgage originations into 2022. The company’s stated strategy emphasizes commercial and core-deposit growth, technology-enabled consumer platforms and selective acquisitions.
- Key risks include economic and interest-rate uncertainty, inflation and labor or supply-chain pressures, and geographic concentration: approximately 91.0% of loans held for investment were to borrowers in the Washington, D.C. and Baltimore metropolitan areas.
- Commercial real estate concentration warrants attention. The Bank’s construction-to-total-capital ratio was 136.9%, above the 100% regulatory guideline indicator cited in the filing. Management said it monitors concentrations and stress-tests construction loans.
- OpenSky serves credit-rebuilding and under-banked customers; 13.5% of its secured-card portfolio was 30 or more days delinquent at year-end. Management disclosed historical first-year charge-offs of approximately 19% for secured cards and identified fraud and credit losses as risks.
- Large depositor concentration is material: the ten largest non-brokered depositors represented $362.9 million, or approximately 20.2% of deposits. Rate shocks also matter; the company’s static model estimated net interest income would rise 7.2% under a +200-basis-point parallel shock and fall 4.7% under a -200-basis-point shock over 12 months, subject to modeling assumptions.
- The company began quarterly cash dividends in Q3 2021 and paid $1.4 million during the year. A share repurchase program was pending regulatory approval. The company reported ordinary-course litigation that management did not expect to be material.
- The financial statements received an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation. The company was an emerging growth company and noted planned CECL implementation for fiscal years beginning after December 15, 2022, with financial impact not yet quantified.
Important facts for investors to verify
- Whether loan growth and credit quality remain sound, particularly in commercial real estate, construction and OpenSky; monitor delinquencies, charge-offs, nonaccruals and allowance adequacy.
- Whether low-cost deposit growth persists and whether large or uninsured deposit balances create funding-cost or liquidity pressure.
- How rising rates, deposit repricing and securities valuation changes affect net interest income, margin, capital and accumulated other comprehensive income.
- Whether mortgage originations and OpenSky account economics meet management’s expectations, including the cost burden from data processing, advertising and staffing.
- The eventual CECL reserve impact, and any changes to capital, dividends or repurchase plans subject to regulatory and board approval.