Capital Bancorp, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The Maryland bank holding company reports results for the quarter and six months ended June 30, 2019. Its businesses are commercial banking in the Washington, D.C.–Baltimore region, Capital Bank Home Loans, and the nationwide OpenSky secured credit card platform.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $16.5 million | $14.1 million | $31.3 million | $28.5 million |
| Provision for loan losses | $677,000 | $630,000 | $798,000 | $1.1 million |
| Noninterest income | $5.9 million | $4.3 million | $10.0 million | $8.4 million |
| Noninterest expense | $16.2 million | $13.5 million | $30.5 million | $27.1 million |
| Net income | $4.0 million | $3.1 million | $7.3 million | $6.1 million |
| Diluted EPS | $0.29 | $0.26 | $0.53 | $0.51 |
Q2 net income rose 27.9%; six-month net income rose 19.7%. Management attributed growth mainly to higher net interest and noninterest income; for the first half, lower loan-loss provision also contributed. Q2 net interest margin was 5.79%, up from 5.53%; excluding credit cards it was 4.37%, up from 4.29%. For the first half, reported margin was 5.63% versus 5.66%, while margin excluding credit cards increased to 4.34% from 4.27%.
Balance sheet and liquidity. At June 30, 2019, assets were $1.234 billion, up $129.1 million from year-end 2018. Net loans were $1.044 billion, up from $989.0 million; deposits were $1.037 billion, up from $955.2 million; cash and cash equivalents were $79.5 million, up from $34.7 million. Stockholders’ equity was $123.1 million, versus $114.6 million. FHLB advances were $38.9 million, compared with $2.0 million at year-end; other borrowed funds were $15.4 million. Management reported $157.5 million of available FHLB capacity, $8.3 million of Federal Reserve borrowing capacity, and $28.0 million in correspondent-bank lines, and stated liquidity was sufficient.
First-half operating cash flow was negative $19.7 million, compared with positive $15.1 million in the prior-year period, principally reflecting mortgage loan originations and sales. Investing used $49.0 million; financing provided $113.5 million, including deposit growth and net FHLB borrowing. Cash increased $44.8 million. The Bank was classified as well capitalized; its June 30 total capital ratio was 11.90% and Tier 1 leverage ratio was 8.91%.
Material changes and management commentary
- Average loan balances grew about 13% year over year in both Q2 and the first half. Loan growth drove higher interest income, while higher deposit costs contributed to a wider cost of interest-bearing liabilities.
- Mortgage banking revenue increased 48.7% in Q2 and 23.6% for the first half. OpenSky card fees increased 26.1% in Q2; card issuances reached 37,000 for the quarter.
- Noninterest expense rose 19.8% in Q2 and 12.6% for the first half, led by salaries and benefits, including mortgage commissions, as well as advertising and other costs.
- Nonperforming loans increased to $6.8 million, or 0.65% of loans, from $4.7 million, or 0.47%, at year-end. Management linked most of the increase to one well-secured construction borrower relationship and stated no impairment was expected. The allowance was $11.9 million, or 1.13% of loans, unchanged as a percentage from year-end.
- The company shifted funding toward core deposits: noninterest-bearing deposits grew, while certificates of deposit fell $58.4 million, including a $32 million decline in brokered deposits. FHLB advances increased to support funding needs.
Outlook, risks and unusual items
The filing provides no numerical earnings or growth guidance. Management discusses ongoing loan and deposit growth strategies, including commercial lending, mortgage purchase transactions, and OpenSky expansion, but results remain subject to market conditions. The company identifies regional economic concentration, credit quality and reserve adequacy, interest-rate and liquidity risk, mortgage banking and credit-card compliance risks, cyber and operational risks, and regulatory and capital requirements among its risks.
Management disclosed that LIBOR may be phased out after 2021; replacement rates, transition costs, valuation effects, and potential litigation are uncertain. A bank lawsuit was settled in April 2019; insurance funded the settlement except for $200,000, which had been accrued at March 31 and paid in April. The company adopted the new lease standard in Q1, recognizing lease right-of-use assets and liabilities; it reported no significant income-statement impact. A $5.0 million share repurchase program was announced in April; no shares were repurchased during Q2.
Important facts for investors to verify
- Whether loan growth and higher lending yields can continue to offset rising deposit and funding costs.
- Credit trends behind the increase in nonperforming construction loans, and whether the allowance remains adequate as the portfolio grows.
- The sustainability and profitability of mortgage banking and OpenSky growth, including related expense increases and credit-card charge-offs.
- Funding mix, deposit pricing, FHLB borrowing, and access to contingent liquidity under changing market conditions.
- Potential effects of LIBOR transition and the future adoption of expected-credit-loss accounting; management was still evaluating the latter’s impact.