Capital Bancorp, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed April 1, 2019. The company is a bank holding company operating primarily through Capital Bank, N.A., with commercial banking, Church Street Mortgage and OpenSky secured credit cards. It completed its IPO in September 2018.
Financial results and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets at year-end | $1.105 billion | $1.026 billion |
| Loans held for investment, net of unearned income | $1.000 billion | $887.4 million |
| Deposits | $955.2 million | $904.9 million |
| Total stockholders’ equity | $114.6 million | $80.1 million |
| Net interest income | $57.9 million | $48.9 million |
| Net interest margin | 5.59% | 5.12% (5.37% adjusted for 2017 foregone card interest and fees) |
| Net income | $12.8 million | $7.1 million |
| Diluted earnings per share | $1.02 | $0.62 |
| Allowance for loan losses | $11.3 million; 1.13% of loans | $10.0 million; 1.13% of loans |
Interest income rose 22.0% to $69.1 million, while interest expense increased 44.9% to $11.2 million. Noninterest income was $16.1 million, up 6.4%; noninterest expense rose 14.4% to $54.1 million. The efficiency ratio was 73.13% versus 73.85% in 2017; adjusted for specified 2017 one-time items, it was 73.13% versus 67.79%.
Reported net income increased 79.6%, but the comparison reflects 2017 one-time costs and foregone OpenSky interest and fees from a card-processing conversion, as well as a $1.4 million deferred-tax revaluation charge. On the company’s adjusted basis, 2017 net income was $11.3 million; thus 2018 net income of $12.8 million was higher, but by less than the reported comparison suggests. The effective tax rate declined to 28.1% from 49.6%.
Cash flow: Operating activities provided $28.3 million, investing activities used $109.3 million, and financing activities provided $63.4 million. Cash and cash equivalents declined $17.6 million to $34.7 million. The company raised $19.8 million net in its IPO. These cash-flow totals reflect substantial loan growth and mortgage-loan originations and sales.
Debt and liquidity: At year-end, the balance sheet included $15.4 million of other borrowed funds, $2.0 million of FHLB advances, $2.0 million of federal funds purchased and $3.3 million under repurchase agreements. The company reported available borrowing capacity of $185.6 million from the FHLB, $13.1 million from the Federal Reserve discount window and correspondent-bank lines (reported as $26.0 million in MD&A and $28.0 million in the notes). Management stated liquidity resources were sufficient to fund loans and other cash needs.
The Bank was classified as well capitalized. Its year-end total risk-based capital ratio was 12.25%, common equity Tier 1 ratio 11.00% and leverage ratio 9.06%. Company stockholders’ equity rose 43%, principally from the IPO and retained earnings.
Material changes versus 2017
- Loans held for investment grew approximately 13%; deposits increased approximately 6%, and assets increased approximately 8%.
- Net interest income increased 18.4%, supported by loan growth and higher asset yields. Average loan yield rose to 7.16% from 6.44%; the average cost of interest-bearing liabilities rose to 1.55% from 1.10%.
- OpenSky card fees increased 50.7% to $6.0 million as active accounts grew to 169,981 from 149,226. Mortgage banking revenue declined 8.7% to $9.5 million; mortgage originations for sale fell to $337.1 million from $418.9 million.
- Nonperforming assets declined to $4.8 million, or 0.44% of assets, from $5.5 million, or 0.54%. Net charge-offs were $865,000 versus $1.2 million; the allowance-to-loans ratio remained 1.13%.
- The company’s IPO added approximately $19.8 million net proceeds. It also repaid a $2.0 million senior note during 2018.
Outlook, commentary and risks
The filing provides no quantified earnings or financial guidance. Management’s stated strategy emphasizes organic commercial lending and core-deposit growth, technology and digital platforms, expansion of purchase-oriented mortgage originations and selective acquisitions. The company reported that purchase mortgages represented 79% of Church Street Mortgage originations in 2018, compared with 52.5% in 2017.
- Credit and concentration: Approximately 85% of loans were real-estate-related, and 93% were made to borrowers in the Washington, D.C. and Baltimore metropolitan areas. The Bank’s construction-to-capital ratio was 143.4% and non-owner-occupied CRE (including construction)-to-capital ratio was 339.5%, exceeding cited supervisory concentration guideline thresholds.
- OpenSky: About 11% of card balances were at least 30 days delinquent. The filing estimates that roughly 19% of new secured cards may charge off in their first year; elsewhere it states approximately 20%. Most card balances are deposit-secured, but fraud, excess-limit balances and unsecured advances can create losses.
- Funding: The company uses brokered, listing-service and other rate-sensitive deposits. Its ten largest non-brokered depositors represented approximately 22% of deposits, and board members and related interests held $155.8 million in deposits.
- Interest-rate exposure: A static model estimated net interest income would rise 4.3% under a +100-basis-point shock and fall 4.2% under a -100-basis-point shock; estimated economic value of equity declined 3.5% under +100 basis points. These are model estimates, not forecasts.
- Litigation: The Bank and two other institutions faced a Maryland civil lawsuit. Management said an adverse judgment could be as much as $4.0 million; insurance coverage could be disputed if a fraud finding occurred. The company said it could not predict the outcome or estimate the impact.
- Other items: CECL was expected to become applicable in 2020, with the impact still under evaluation. The company estimated adoption of the lease standard would add a $4.9–$5.2 million lease liability/right-of-use asset and reduce retained earnings by about $50,000. Management reported effective disclosure controls; the filing did not include management’s ICFR assessment or auditor attestation because of the newly public company transition period.
Most important facts for investors to verify
- Reconcile reported 2018 earnings growth with the 2017 conversion-related foregone revenue, conversion expense and tax revaluation; compare both GAAP and adjusted results.
- Assess credit quality and reserve adequacy as loan growth continues, particularly in CRE, construction and the concentrated local markets.
- Review OpenSky delinquency, charge-off and fraud trends, and clarify the filing’s 19% versus 20% first-year charge-off estimates and inconsistent disclosures of unsecured credit balances.
- Confirm the amount and terms of rate-sensitive and wholesale funding, large depositor concentration, and available correspondent-bank borrowing capacity.
- Monitor the Maryland litigation, potential exposure and insurance coverage, as well as the effect of CECL adoption and lease accounting.