Capital Bancorp(CBNK) - 2020 Q4 - Annual Report

PART I Business Overview Capital Bancorp operates Capital Bank, N.A., a commercial-focused community bank serving businesses and consumers in the Washington, D.C. and Baltimore metropolitan areas - Capital Bancorp, Inc. is a bank holding company operating through Capital Bank, N.A., focusing on commercial clients in the Washington, D.C. and Baltimore metropolitan areas. It also has national consumer business lines: Capital Bank Home Loans (residential mortgages) and OpenSky® (secured credit cards)[22][23][24] - Key Financials as of December 31, 2020 | Metric | Amount (Millions) | | :----------------- | :---------------- | | Total Assets | $1,900 | | Total Loans | $1,300 | | Total Deposits | $1,700 | | Stockholders' Equity | $159.3 | Commercial Banking Division This division, comprising 86.6% of assets, focuses on C&I, commercial real estate, and construction lending, while reducing non-core funding dependence - Commercial Banking division accounts for 86.6% of Capital Bank's total assets, specializing in C&I, commercial real estate, and construction lending[29] - Construction Loan Growth | Year End | Amount (Millions) | | :----------------- | :---------------- | | Dec 31, 2020 | $224.9 | | Dec 31, 2019 | $198.7 | | % Increase | 13.2% | - Net non-core funding dependence ratio decreased from 17.4% at December 31, 2018, to 13.0% at December 31, 2020, due to focus on core deposit funding[31] Capital Bank Home Loans Division CBHL originates residential mortgage loans nationally for secondary market sale, with originations significantly increasing in 2020 due to refinance volume - CBHL originates conventional and government-guaranteed residential mortgage loans nationally, mainly for secondary market sale[32] - Mortgage Origination and Revenue Metrics | Metric | 2020 (Thousands) | 2019 (Thousands) | % Change | | :----------------------------------- | :--------------- | :--------------- | :------- | | Origination of loans held for sale | $1,308,912 | $593,189 | 120.7% | | Mortgage banking revenue | $40,649 | $15,955 | 154.8% | | Purchase volume as % of originations | 31.90% | 51.89% | -20.0% | - Approximately 67.2% of CBHL loan originations occur within Capital Bank's operating markets (Maryland, Virginia, Washington, D.C.), with the remainder through a national consumer direct channel[35] OpenSky® Secured Credit Card Division OpenSky® offers secured credit cards nationally to under-banked populations, with eligibility based on income, and has begun offering unsecured lines - OpenSky® provides secured credit cards nationally to under-banked populations, with credit limits ($200-$3,000 per card) fully secured by customer deposits[36] - Credit card eligibility is based on identity and income verification, not credit checks. Unsecured lines are offered to qualified customers based on proprietary scoring models[36][37][39] - OpenSky® Credit Card Portfolio Delinquency and Unsecured Lines (Dec 31, 2020) | Metric | Amount (Millions) | | :-------------------------------------- | :---------------- | | Portfolio 30+ days delinquent | 13.5% | | Unused unsecured lines of credit | $92.5 | | Outstanding unsecured credit card advances | $5.7 | COVID-19 Pandemic Response The company activated its Business Continuity Program, enabled remote work, and provided client relief, including SBA-PPP loans and loan modifications - Company activated Business Continuity Program, enabling remote work and providing client relief programs in response to COVID-19[40] - COVID-19 Relief Program Participation (Dec 31, 2020) | Program | Amount (Millions) | | :------------------------------------ | :---------------- | | SBA-PPP loans originated | $238.7 | | Short-term loan modifications/deferrals | $30.5 | Our Business Strategy The business strategy focuses on organic growth, technology leverage, scaling consumer fee-based platforms, and opportunistic acquisitions to enhance customer experience - Deliver premium advice-based solutions to drive organic loan and core deposit growth with corresponding net interest margin[45] - Leverage technology to improve customer experience and loyalty and deliver operational efficiencies, including maximizing web/mobile banking and enhancing cross-selling[48] - Increase scale in consumer fee-based platforms through high-value products, utilizing customer acquisition systems, and expanding purchase-oriented mortgage loan sales[49] - Pursue strategic acquisitions opportunistically in the Washington, D.C., Baltimore, Maryland, and surrounding metropolitan areas, and evaluate specialty finance company opportunities[50] Summary Demographic and Other Market Data The company operates in the economically robust Washington, D.C. and Baltimore metropolitan areas, characterized by high income and diverse industries - Washington, D.C. and Baltimore MSAs are economically robust, with the D.C. MSA ranking third among the largest 25 MSAs in income levels[51][52] - Key Demographic Data (2020) | Region | Total Population | Median Household Income | | :---------------------- | :--------------- | :---------------------- | | Washington D.C. MSA | 6,346,402 | $107,029 | | Baltimore, Maryland MSA | 2,812,251 | $84,221 | | United States | 330,342,293 | $66,010 | - Combined Washington, D.C. and Baltimore metropolitan areas have a GDP over $774.5 million, growing approximately 32% between 2010 and 2020. Key industries include government contracting and hospitality/tourism[53][57][61][62] Lending Activities The company maintains a diversified loan portfolio focused on variable-rate, shorter-term, higher-yielding products, with real estate loans comprising 80% of the total - The Company maintains a diversified loan portfolio with a focus on variable rate, shorter term and higher yielding products, including residential and commercial real estate, construction, and commercial business loans[64] - Portfolio Loan Composition (Dec 31, 2020) | Category | Amount (Thousands) | Percentage of Total Loans | | :----------------- | :----------------- | :------------------------ | | Residential | $437,860 | 33% | | Commercial | $392,550 | 30% | | Construction | $224,904 | 17% | | Subtotal real estate | $1,055,314 | 80% | | Commercial | $157,127 | 12% | | Credit card | $102,186 | 8% | | Other consumer | $1,649 | —% | | Total | $1,316,276 | 100.0% | Residential Real Estate Loans Offers one-to-four family mortgage loans and home equity lines of credit, with varying terms for owner-occupied and investor properties - Offers one-to-four family mortgage loans (owner-occupied and investor-owned) and home equity lines of credit, primarily in local markets[68] - Owner-occupied loans have fixed rates for 5-7 years, then annual adjustments over 30 years. Investor loans have 25-year amortization with a 5-year balloon, requiring a 1.15 minimum debt service coverage ratio[68] Commercial Real Estate Loans Provides commercial real estate loans for owner-occupied and investor properties, typically with 10-year terms and requiring personal guarantees - Offers commercial real estate loans for owner-occupied and investor properties. Owner-occupied CRE loans were $200.3 million (15.2% of total loan portfolio) as of December 31, 2020[69] - Loan terms are generally 10 years or less, amortized over 25 years or less, with initial fixed rates adjusting at 5 years. Personal guarantees are typically required[69] Construction Loans Extends construction loans for residential properties with 12-18 month terms, adhering to strict loan-to-collateral value ratios and milestone-based disbursements - Construction loans are primarily for single-family homes, condominiums, and townhouses, with terms of 12 to 18 months[70] - Loan-to-collateral value ratio cannot exceed 75% for investor-owned and 80% for owner-occupied properties. Disbursements are milestone-based and require inspections[70] Commercial Business Loans Offers general commercial loans, including lines of credit and term loans, collateralized by business assets and typically requiring personal guarantees - Provides general commercial loans (lines of credit, working capital, term loans, equipment financing) primarily in target markets[71] - Underwritten based on debt servicing ability, collateralized by general business assets, and typically requires personal guarantees. Loans generally have fixed rates and 5-7 year terms[71][72] Credit Cards OpenSky® provides secured credit cards nationally to under-banked populations, with options for unsecured lines based on proprietary scoring models - OpenSky® division provides secured credit cards nationally to under-banked populations, with lines of credit secured by noninterest-bearing demand accounts[73] - Offers unsecured lines to qualified customers based on a proprietary scoring model considering credit score and repayment history[73] Other Consumer Loans Selectively offers other consumer loans, including secured and unsecured installment loans, primarily as an accommodation to existing customers - Offers secured and unsecured installment and term loans, car loans, and boat loans on a case-by-case basis, primarily as an accommodation to existing customers[73] Credit Policies and Procedures Maintains asset quality through conservative credit culture, active management of concentrations, multi-tiered approval, and regular reviews of delinquencies and assets - Maintains asset quality through local market knowledge, customer relationships, consistent underwriting, and a conservative credit culture, avoiding highly speculative or subprime loans[74] - Actively manages credit concentrations with limits reviewed annually by the Loan Committee. Loan approval involves a multi-tiered delegated authority structure[76][77] - Conducts weekly loan meetings to review asset quality and delinquencies, and performs annual asset reviews for loans exceeding $250,000[80][82] Deposits Deposits are the primary funding source, offering diverse products and cash management services, solicited through relationship banking and supplemented by wholesale funding - Deposits are the primary funding source, offering diverse products (checking, savings, CDs, money market) and cash management services[84] - Solicits deposits through relationship-driven bankers and cross-selling, supplemented by wholesale funding (CDARS, brokered deposits). Credit card customers are a significant deposit source[84] Residential Mortgage Origination Originates residential mortgages for secondary market sale via CBHL, transitioning to a purchase-oriented volume and niche products with specialized lending groups - Originates residential mortgages for sale on the secondary market via CBHL, selling substantially all loans servicing-released[85][86] - Transitioning to a more purchase-oriented mortgage market and niche products, establishing specialized groups (Community Lending, Renovation) and hiring new originators[86] Investments Manages its securities portfolio for liquidity, safety, and yield, primarily comprising government agency, corporate, municipal, and mortgage-backed securities, with annual policy review - Investment goals: provide balance sheet liquidity, diversify assets, and modify interest rate risk profile[87] - Portfolio comprises U.S. government agency securities, high-quality corporate and municipal debt, and mortgage-backed securities[88] - Investment policy is annually reviewed by ALCO and ratified by the board; day-to-day activities supervised by the CFO[89] Competition Operates in a highly competitive financial services industry, competing on rates, fees, and service, leveraging its commercial banking suite and community relationships - Operates in a highly competitive financial services industry, competing with commercial banks, credit unions, mortgage companies, brokerage firms, and fintech companies[90] - Competitive factors include interest rates, fee pricing, locations, customer service, and reputation. Many competitors have greater financial resources and fewer regulatory restrictions[91] - Aims to compete through its broad commercial banking product suite, high-quality customer service, positive reputation, and long-standing community relationships[93] Employees and Human Capital Resources Employed 247 individuals as of 2020, fostering a values-driven culture with competitive rewards, employee development, and a focus on safety and wellness - Employee Count (Dec 31, 2020) | Metric | Count | | :-------------- | :---- | | Total Employees | 247 | | Full-time | 239 | - Company core values: Act as an Owner, Practice Balanced Risk Management, Challenge the Norm, Leverage the Team[95] - Committed to employee development through internal/external training and leadership programs. 85% of workforce works remotely due to COVID-19, with safety protocols in place[95][96] Available Information SEC filings, including 10-K, 10-Q, and 8-K reports, are accessible via the company's investor relations website and the SEC's website - SEC filings (10-K, 10-Q, 8-K) are available on the Company's website (www.capitalbankmd.com) under 'Investor Relations' and on the SEC's website (www.sec.gov)[97](index=97&type=chunk) Supervision and Regulation The company and its subsidiaries are extensively regulated by federal and state laws, with a framework prioritizing depositor protection and continuously impacted by legislative changes - Extensively regulated under federal and state law, covering activities, investments, consumer protection, and capital adequacy. Key regulators are the Federal Reserve, OCC, and FDIC[100] - The Dodd-Frank Act and Regulatory Relief Act have brought extensive changes, increasing regulatory burden and compliance costs, but also offering favorable provisions for community banks[101][112] - Bank regulation is intended to protect depositors and consumers, not shareholders, and regulators have broad discretion to impose restrictions[100] General Subject to extensive federal and state regulations, supervised by the Federal Reserve, OCC, and FDIC, with legislative changes continuously impacting compliance burdens - Extensive regulation under federal and state law covers permissible activities, investments, consumer protection, and capital adequacy[100] - Supervised by the Federal Reserve, OCC, and FDIC, which have broad discretion to impose restrictions. Regulation prioritizes depositors and consumers[100] - Legislative and regulatory initiatives, like the Dodd-Frank Act and Regulatory Relief Act, increase regulatory burden and compliance costs[101] Regulation of Capital Bancorp, Inc. As a registered Bank Holding Company, Capital Bancorp is supervised by the Federal Reserve, facing activity limitations and a mandate to support its subsidiary bank - Registered as a BHC, subject to Federal Reserve regulation and supervision, limiting activities and requiring approval for acquisitions/mergers[102] - BHCs must serve as a source of financial strength to subsidiary depository institutions. Capital loans to subsidiaries are subordinate to deposits in insolvency[106][107] - Has not elected to become a 'financial holding company' under GLBA, which would permit a broader range of non-banking activities[105] Regulation of Capital Bank Capital Bank, N.A. is regulated by the OCC and FDIC, granting regulators extensive powers to examine operations and impose remedies for unsatisfactory practices - Capital Bank is subject to supervision, examination, and reporting requirements of the National Bank Act and OCC regulations, as well as FDIC regulations[109][111] - Regulators can: enjoin unsafe practices, require corrective action, issue administrative orders, direct capital increases, restrict growth, assess civil monetary penalties, and remove officers/directors[111] Regulatory Relief Act The Regulatory Relief Act of 2018 provided favorable regulatory changes for smaller institutions, including increased asset thresholds and extended examination cycles - The Regulatory Relief Act (2018) introduced favorable regulatory changes for depository institutions and BHCs with less than $10 billion in assets[112] Provisions That Are Favorable to Community Banks The Regulatory Relief Act introduced beneficial provisions for community banks, raising asset thresholds for policy statements, risk committees, and examination cycles - Increased asset threshold for 'Small Bank Holding Company Policy Statement' from $1 billion to $3 billion[114] - Raised asset threshold for requiring a risk committee from $10 billion to $50 billion[115] - Increased asset threshold for an 18-month on-site examination cycle from $1 billion to $3 billion[116] Short Form Call Reports The Regulatory Relief Act mandates agencies to allow institutions under $5 billion in assets to submit short-form call reports for specific quarters - Requires federal banking agencies to allow insured depository institutions with less than $5 billion in assets to submit short-form call reports for Q1 and Q3[118] Transactions with Affiliates and Insiders Federal laws limit transactions with affiliates to arms-length terms and specific capital caps, while also restricting transactions with insiders to market terms and requiring board approval - Federal laws (Sections 23A and 23B of FRA) limit transactions with affiliates to arms-length terms, capped at 10% of capital and surplus for one affiliate, and 20% for all[119] - Extensions of credit to affiliates must be secured, and banks are prohibited from purchasing 'low quality' assets from affiliates[119] - Transactions with executive officers, directors, and 10%+ shareholders are restricted, requiring market terms and, for loans above certain thresholds, prior board approval[120] Incentive Compensation Federal agencies and the Dodd-Frank Act regulate incentive compensation to prevent excessive risk-taking, requiring balanced policies and strong governance, with Federal Reserve oversight - Federal banking agencies' guidance aims to ensure incentive compensation policies do not encourage excessive risk-taking, requiring balance between risk/rewards, internal controls, and strong governance[122] - Dodd-Frank Act prohibits incentive-based compensation that encourages inappropriate risk-taking or is excessive for covered financial institutions[124] - Federal Reserve reviews incentive compensation, and deficiencies can result in adverse supervisory ratings and enforcement actions[125] Deposit Insurance Deposits are FDIC-insured through the DIF, requiring mandatory assessments based on assets and equity, with the FDIC able to increase rates or terminate insurance for unsafe practices - Deposits are insured by the FDIC through the DIF, requiring mandatory quarterly assessments based on average total consolidated assets less average tangible equity[127][128] - FDIC uses a 'financial ratios method' for assessments, favoring lower-risk institutions. Dodd-Frank Act raised the federal deposit insurance limit to $250,000[129][130] - FDIC has authority to increase assessments or terminate deposit insurance for unsafe practices, which could adversely affect operating expenses[132] Dividends The company's dividend payments are restricted by federal and state laws, depending on Capital Bank's earnings, capital, and regulatory status, with regulators able to prohibit payments - Ability to pay dividends depends on Capital Bank's dividends, which are restricted by federal and state laws based on earnings, capital, and regulatory status[133] - Regulators can prohibit dividend payments if deemed unsafe/unsound or if it leads to undercapitalization. Failure to meet capital conservation buffer also limits dividends[133] - National banks' dividends are limited to retained net profits for the preceding two calendar years plus current year's retained net profits[133] Capital Adequacy Guidelines BHCs and banks are subject to Basel III capital requirements, including CET1, Tier 1, Total Capital, and leverage ratios, with modifications from the Regulatory Relief Act - Subject to Basel III capital requirements, including minimum ratios for CET1, Tier 1, Total Capital, and a leverage ratio, plus a capital conservation buffer[135][137] - Minimum capital ratios (fully phased-in on Jan 1, 2019): CET1 to risk-weighted assets (7%), Tier 1 to risk-weighted assets (8.5%), Total capital to risk-weighted assets (10.5%), and leverage ratio (4%)[137] - Basel III revised risk-weighted asset calculations, assigning a 150% risk weighting to HVCRE loans. The Regulatory Relief Act and subsequent rules have simplified HVCRE treatment and allowed for a delay in CECL impact on regulatory capital[140][147] Commercial Real Estate Concentration Guidelines Regulators provide CRE concentration guidance, with the Bank's ratios for construction and non-owner-occupied CRE nearing thresholds, and HVCRE loans subject to higher risk weighting - Regulators identify CRE concentration risk based on ratios like construction loans to capital (100% threshold) and non-owner-occupied CRE to capital (300% threshold)[150] - Bank's CRE Concentration Ratios (Dec 31, 2020) | Metric | Ratio | | :------------------------------------------------------------------ | :------ | | Construction to total risk based capital | 149.4% | | Total non-owner-occupied CRE (including construction) to total capital | 298.6% | - HVCRE loans are assigned a 150% risk weighting, but the Regulatory Relief Act aims to simplify this treatment and create a new HVADC category with a lower 130% risk weight[152][153] Prompt Corrective Action Regulators implement 'prompt corrective action' for capital-deficient institutions, categorizing them by capital ratios, with Capital Bank classified as 'well capitalized' as of 2020 - Regulators take 'prompt corrective action' for capital-deficient institutions, categorizing them based on capital ratios[154] - Capital Categories for Prompt Corrective Action | Category | Total Risk-Based Capital Ratio | Tier 1 Risk-Based Capital Ratio | Common Equity Tier 1 (CET1) Capital Ratio | Leverage Ratio | | :----------------------- | :----------------------------- | :------------------------------ | :---------------------------------------- | :------------- | | Well Capitalized | 10% or greater | 8% or greater | 6.5% or greater | 5% or greater | | Adequately Capitalized | 8% or greater | 6% or greater | 4.5% or greater | 4% or greater | - As of December 31, 2020, Capital Bank was 'well capitalized.' Undercapitalized institutions face capital restoration plans, holding company guarantees, and activity restrictions[157][159] Safety and Soundness Standards Federal banking agencies establish safety and soundness standards covering operational, managerial, and asset quality aspects to address concerns before capital impairment - Guidelines address safety and soundness concerns, covering internal controls, information systems, loan documentation, credit underwriting, asset growth, earnings, and compensation[162] - Asset quality guidelines require: periodic asset quality reviews, estimation of inherent losses and reserve establishment, comparison of problem assets to capital, corrective action for problem assets, consideration of asset concentrations, and periodic asset quality reports[164] Community Reinvestment Act The CRA requires financial institutions to meet community credit needs, with compliance influencing regulatory approvals, and Capital Bank currently holds a 'satisfactory' rating - CRA requires financial institutions to meet community credit needs, including low- and moderate-income areas. Compliance affects regulatory approvals[165] - Capital Bank received a 'satisfactory' CRA rating. Federal banking regulators are proposing changes to modernize CRA regulations[165][166] Anti-Terrorism, Money Laundering Legislation and OFAC The Bank complies with anti-money laundering and anti-terrorism financing laws, including the Bank Secrecy Act, USA Patriot Act, and OFAC sanctions, through robust programs - Subject to Bank Secrecy Act and USA Patriot Act, requiring anti-money laundering programs, 'know your customer' protocols, and suspicious activity reporting[167] - OFAC sanctions require blocking accounts/transactions with sanctioned persons/countries and reporting blocked/rejected transactions[170] - The Bank has established appropriate anti-money laundering and customer identification programs and implemented policies to comply with these requirements[169][171] Data Privacy and Cybersecurity GLBA and federal regulations mandate policies for data privacy and comprehensive cybersecurity programs, including multi-layered controls and third-party monitoring - GLBA and federal regulations require policies for nonpublic personal information disclosure and comprehensive information security programs[172] - Cybersecurity guidance mandates multiple layers of security controls, robust business continuity programs, and monitoring of third-party service providers[173] The Consumer Financial Protection Bureau The CFPB, established by Dodd-Frank, regulates consumer finance and enforces federal laws, with federal banking agencies retaining oversight for smaller institutions - CFPB, established by Dodd-Frank Act, has broad authority to regulate consumer finance, enforce federal consumer financial laws, and act against unfair/deceptive practices[174] - Federal banking agencies retain examination and enforcement powers over institutions under $10 billion in assets regarding CFPB's jurisdiction[176] Mortgage Loan Origination Dodd-Frank and CFPB rules set mortgage origination standards, including ability-to-repay and qualified mortgage criteria, with the Regulatory Relief Act providing exemptions for smaller institutions - Dodd-Frank Act and CFPB's ATR/QM Rule establish minimum standards for residential mortgage origination, requiring 'reasonable ability' to repay and defining 'qualified mortgages'[177] - Qualified mortgages must meet criteria like debt-to-income ratio (≤43%), limited upfront fees, term (≤30 years), and no interest-only/negative amortization payments[177] - Regulatory Relief Act exempts certain smaller institutions from 'ability to repay' requirements for portfolio-retained loans, escrow accounts, and some HMDA disclosures[178][179][180] The Volcker Rule The Volcker Rule prohibits proprietary trading and private fund investments by banking entities, with recent revisions simplifying compliance for less active trading banks - Volcker Rule prohibits banking entities from short-term proprietary trading and sponsoring/investing in private equity/hedge funds[185] - Revisions in 2019 and 2020 simplified compliance for banks without significant trading activities and expanded permissible banking activities[185] Other Provisions of the Dodd-Frank Act Dodd-Frank requires BHCs and banks to be well-capitalized for interstate acquisitions, eliminated branching restrictions, and repealed Regulation Q, with ongoing implementation - Requires BHCs and banks to be well-capitalized and well-managed for interstate acquisitions[186] - Eliminates restrictions on interstate banking, allowing de novo branches in any state[186] - Repealed Regulation Q, permitting interest payments on demand deposits[186] Federal Home Loan Bank Membership As an FHLB member, the Bank maintains a minimum stock investment, and the FHLB holds a super lien on loaned funds, prioritizing repayment in case of failure - As an FHLB member, the Bank must maintain a minimum investment in Class B stock, subject to potential increases by the FHLB Board[188] - FHLB holds a 'super lien' on funds loaned to member institutions, prioritizing repayment over other creditors in case of failure[189] Other Laws and Regulations The company's operations are subject to various banking and commercial laws, including those governing lending, deposits, environmental, privacy, and data security practices - Lending practices are subject to: Truth-In-Lending Act, HMDA, Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Real Estate Settlement Procedures Act, and National Flood Insurance Program rules[190] - Deposit operations are subject to: Right to Financial Privacy Act, Truth-In-Savings Act, and Electronic Funds Transfer Act[190] - Also subject to environmental, privacy, and data security laws, facing increased regulatory and political scrutiny[192][193] Enforcement Powers Federal regulatory agencies wield substantial enforcement powers, including civil fines and corrective orders, for banking violations, with increased oversight from Dodd-Frank - Federal regulatory agencies have substantial enforcement powers, including civil penalties up to $1,924,589 per day for violations[194] - Regulators can issue orders requiring corrective actions (restitution, growth restrictions, asset disposal) and terminate deposit insurance[195] - Dodd-Frank Act increased regulatory oversight, supervision, and examination of banks and BHCs[195] Risk Factors The company faces significant business, regulatory, and ownership risks, including COVID-19 impacts, geographic concentration, stringent capital requirements, and stock price volatility - COVID-19 pandemic poses significant business risks, including disruptions, increased credit risk, interest rate volatility, and challenges in loan repayment[198][199][201][208][209] - Concentration in Washington, D.C. and Baltimore metropolitan areas makes the Company sensitive to local economic downturns and changes in government spending[217][218][221] - Regulatory risks include a highly regulated environment, stringent capital requirements (Basel III), and potential adverse effects from examinations or monetary policies[273][279][281][283] - Ownership risks involve stock price volatility, potential dilution from future equity issuances, significant control by insiders, and the subordination of common stock to debt obligations[290][293][298][299] Risks Related to Our Business Business risks include COVID-19 impacts, SBA-PPP program exposure, geographic concentration, credit risk management, real estate dependence, cybersecurity, and market sensitivity in mortgage and credit card divisions - COVID-19 pandemic causes significant volatility, disrupting operations, increasing credit risk, and negatively affecting net interest income and lending activities[198][199][201][202][208][209] - Participation in SBA-PPP loan program exposes the Company to noncompliance and litigation risks, potentially impacting financial condition[206][207] - Geographic concentration in Washington, D.C. and Baltimore metropolitan areas makes the Company highly sensitive to local economic conditions and changes in government spending[217][218][221] - Other key business risks include: inability to measure/limit credit risk, insufficient allowance for loan losses, higher risks in commercial real estate/construction loans, dependence on real estate values, cybersecurity breaches, liquidity issues, and susceptibility of mortgage banking and OpenSky® credit card divisions to market changes and credit losses[224][225][230][233][238][246][249][256] Risks Related to the Regulation of Our Industry Regulatory risks include increased costs from compliance changes, stringent capital requirements, potential supervisory actions from examinations, and heightened scrutiny for CRE concentrations - Highly regulated environment means changes in laws/regulations or non-compliance can increase costs, impact business, and lead to enforcement actions[273][274] - More stringent capital requirements (Dodd-Frank Act, Basel III) could limit growth initiatives and affect financial condition[279][280] - Federal banking agency examinations can lead to remedial actions, including growth restrictions or civil penalties, if operations are deemed unsatisfactory[281][282] - High concentrations in commercial real estate lending may result in increased regulatory scrutiny and higher capital requirements, limiting capital leverage[285][286][288] Risks Related to Ownership of Our Common Stock Common stock ownership risks include price volatility, potential dilution, significant insider control, subordination to debt, dividend restrictions, and anti-takeover provisions - Common stock price may fluctuate significantly, making resale difficult, and could decline due to future issuances or sales[290][291][293][295] - Management and board of directors have significant control (beneficially owned ~40% of common stock as of Dec 31, 2020), potentially affecting shareholder votes[296][298] - Debt holders have priority over common stock in liquidation and interest payments. The Company's ability to pay dividends is restricted by regulatory requirements and dependence on the Bank's distributions[299][300][301][302] - Governing documents, Maryland law, and regulatory limitations on changes of control may have an anti-takeover effect. Common stock is not FDIC-insured[303][304][305][306] Unresolved Staff Comments No unresolved staff comments from the SEC regarding the company's filed reports - No unresolved staff comments from the SEC regarding the Company's filed reports[720] Properties The company's headquarters are in Rockville, Maryland, operating a branch-lite model with leased offices across the D.C. metropolitan area - Headquarters located at 2275 Research Boulevard, Suite 600, Rockville, Maryland 20850[309] - Operates commercial bank branches, mortgage offices, loan production offices, and a credit card operations office in Maryland, Virginia, and Washington, D.C[309] - Selected Property Locations and Lease Expirations | Location | Owned/Leased | Lease Expiration | | :---------------------------------------- | :----------- | :--------------- | | One Church Street Suite 100 Rockville, MD | Leased | 6/30/24 | | 1776 Eye Street Washington, D.C. | Leased | 4/30/22 | | 110 Gibraltar Road Suite 130 Horsham, PA | Leased | 5/31/23 | Legal Proceedings The company is involved in ordinary course litigation, which management believes will not materially impact its operations or financial condition - The Company is a party to various litigation matters incidental to the ordinary conduct of its business[312] - Management believes these legal proceedings will not have a material adverse impact on the Company's results of operations or financial condition[312] Mine Safety Disclosures This item is not applicable to the company PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq, with no cash dividends paid since inception, and equity compensation plans include options and RSUs, with share repurchases in 2020 - Common stock (CBNK) traded on Nasdaq Global Select Market since September 2018. As of March 10, 2021, there were approximately 178 holders of record[316] - No cash dividends paid since inception; earnings are retained for business. Future dividends depend on regulatory restrictions and the Bank's ability to pay dividends to the Company[317][318] - Equity Compensation Plan Information (Dec 31, 2020) | Plan Category | Securities to be Issued | Weighted-Average Exercise Price | | :----------------------------------------------- | :---------------------- | :------------------------------ | | HCNB Bancorp, Inc. 2002 Stock Option Plan | 172,976 | $8.50 | | Capital Bancorp, Inc. 2017 Stock and Incentive Compensation Plan | 996,437 | $12.86 | | Total | 1,169,413 | $12.21 | - Issuer Repurchases of Equity Securities (Year Ended Dec 31, 2020) | Period | Total Shares Purchased | Average Price Per Share | Max Dollar Value Remaining | | :------------------------------------ | :--------------------- | :---------------------- | :------------------------- | | For the twelve months ended Dec 31, 2020 | 304,114 | $10.81 | $1,342,748 | Selected Financial Data Presents selected historical consolidated financial data, highlighting 2020 net income of $25.8 million, significant asset and deposit growth, and strong capital ratios - Statement of Income Data (in thousands) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Interest income | $97,251 | $82,180 | $69,127 | $56,666 | $49,243 | | Interest expense | $13,182 | $15,842 | $11,239 | $7,755 | $6,484 | | Net interest income | $84,069 | $67,512 | $57,888 | $48,911 | $42,759 | | Provision for loan losses | $11,242 | $2,791 | $2,140 | $2,655 | $4,291 | | Noninterest income | $61,061 | $25,692 | $16,124 | $15,149 | $20,473 | | Noninterest expense | $98,751 | $66,525 | $54,123 | $47,306 | $43,380 | | Income before income taxes | $35,137 | $23,888 | $17,749 | $14,099 | $15,561 | | Income tax expense | $9,314 | $5,819 | $4,982 | $6,990 | $6,120 | | Net income | $25,823 | $16,895 | $12,767 | $7,109 | $9,441 | - Balance Sheet Data (in thousands) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | | Total Assets | $1,876,593 | $1,428,495 | $1,105,058 | $1,026,009 | $905,600 | | Total Deposits | $1,652,128 | $1,225,421 | $955,240 | $904,899 | $790,924 | | Total Stockholders' Equity | $159,311 | $133,331 | $114,564 | $80,119 | $70,748 | | Loans, net of deferred fees & allowance | $1,292,068 | $1,156,934 | $1,002,260 | $887,420 | $763,430 | | SBA-PPP loans receivable, net | $201,018 | — | — | — | — | - Selected Performance Ratios | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------------- | :------ | :------ | :------ | :------ | :------ | | Return on average assets (ROAA) | 1.56% | 1.38% | 1.22% | 0.74% | 1.13% | | Return on average equity (ROAE) | 18.00% | 13.66% | 13.94% | 9.29% | 14.39% | | Net interest margin | 5.14% | 5.60% | 5.59% | 5.12% | 5.18% | | Efficiency ratio | 68.04% | 72.29% | 73.13% | 73.85% | 68.60% | | NPL / loans | 0.61% | 0.40% | 0.47% | 0.61% | 0.59% | | Allowance for loan losses to total loans | 1.78% | 1.14% | 1.13% | 1.13% | 1.13% | | Bank Tier 1 leverage ratio | 7.45% | 8.65% | 9.06% | 8.55% | 8.86% | GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures The company supplements GAAP reporting with non-GAAP measures like tangible common equity and tangible book value per share for performance analysis, acknowledging their limitations - Uses non-GAAP financial measures (Tangible common equity, Tangible book value per share) to supplement GAAP reporting for management and investor analysis[331][332][333] - Non-GAAP measures have limitations, are not necessarily comparable to GAAP, and should not be considered in isolation[332] - Tangible Common Equity and Tangible Book Value per Share (in thousands, except per share) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Total stockholders' equity | $159,311 | $133,331 | $114,564 | $80,119 | $70,748 | | Less: intangible assets | — | — | — | — | — | | Tangible common equity | $159,311| $133,331| $114,564| $80,119 | $70,748 | | Shares of common stock outstanding | 13,753,529 | 13,894,842 | 13,672,479 | 11,537,196 | 11,144,696 | | Tangible book value per share | $11.58 | $9.60 | $8.38 | $6.94 | $6.35 | Management's Discussion and Analysis of Financial Condition and Results of Operations Provides a detailed review of 2020 and 2019 financial condition and results, highlighting increased net income, asset and deposit growth, and risk management strategies - Net income increased by 53% to $25.8 million in 2020, primarily due to growth in net interest income and noninterest income[339] - Total assets grew 31.5% to $1.88 billion, and total deposits increased 34.8% to $1.7 billion in 2020[372][375] - The Bank maintained 'well capitalized' status, with capital ratios exceeding regulatory requirements[376][463] [Results of Operations for the Years Ended December 31, 2020 and 2019](index=60&type=section&id=Results%2