Capital Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Capital Bancorp is a bank holding company operating primarily through Capital Bank, with commercial banking, residential mortgage banking and OpenSky secured credit-card businesses. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $18.2 million | $14.5 million | $49.5 million | $43.0 million |
| Provision for loan losses | $1.1 million | $0.5 million | $1.9 million | $1.6 million |
| Noninterest income | $7.2 million | $4.2 million | $17.2 million | $12.7 million |
| Noninterest expense | $18.2 million | $13.9 million | $48.8 million | $41.0 million |
| Net income | $4.5 million | $3.1 million | $11.8 million | $9.3 million |
| Diluted EPS | $0.32 | $0.26 | $0.85 | $0.77 |
- Q3 net income rose 42% year over year; nine-month net income rose 27%. Higher net interest income and noninterest income drove growth, partly offset by higher credit provision and operating expense.
- Q3 net interest margin was 5.83%, up from 5.56%; excluding the credit-card portfolio, it was 4.37%, up from 4.26%. For nine months, margin was 5.70% versus 5.63%, and excluding credit cards 4.35% versus 4.27%.
- Mortgage banking revenue increased to $4.9 million in Q3 from $2.5 million, and to $11.0 million for nine months from $7.4 million. OpenSky card fees and issuance volumes also increased. Q3 purchase mortgages were 44% of originations, down from 79% in Q2 as refinances gained share amid lower rates.
- Expense growth reflected compensation, including mortgage commissions, data processing, professional fees, advertising and loan processing. Q3 noninterest expense included a $216,000 credit to FDIC assessment expense.
Financial position, funding and asset quality
- At September 30, 2019, assets were $1.311 billion, up $206.3 million from year-end 2018. Net loans were $1.128 billion; gross loans were $1.144 billion, up from $1.002 billion. Deposits were $1.112 billion, up from $955.2 million.
- Cash and cash equivalents were $55.1 million, compared with $34.7 million at year-end. Available-for-sale securities were $37.1 million, down from $46.9 million. Stockholders’ equity was $127.8 million, up from $114.6 million.
- Interest-bearing deposits increased $106.1 million and noninterest-bearing deposits increased $51.1 million. Management reported progress shifting funding toward core deposits; fiduciary accounts contributed $33.6 million to noninterest-bearing deposit growth.
- FHLB advances were $35.6 million, versus $2.0 million at year-end; other borrowed funds were $15.4 million. The company reported $162.5 million of available FHLB capacity, $12.1 million at the Federal Reserve discount window and $28.0 million in correspondent-bank lines.
- The allowance for loan losses was $12.8 million, or 1.12% of loans, versus $11.3 million, or 1.13%, at year-end. Nine-month net charge-offs were $369,000, down from $781,000 in the comparable 2018 period.
- Nonperforming loans rose to $6.5 million, or 0.57% of loans, from $4.7 million, or 0.47%, at year-end. Management attributed most of the increase to a $2.1 million construction loan to one borrower relationship, described as well secured with no impairment expected. Total nonperforming assets were $6.7 million, or 0.51% of assets.
- The Bank was classified as well capitalized. At quarter-end, its common equity Tier 1 ratio was 10.19%, total capital ratio 11.44%, and leverage ratio 8.60%.
Cash flow and material changes
- For the nine months, operating cash flow was negative $34.5 million, investing cash flow negative $130.7 million, and financing cash flow positive $185.6 million. Cash increased $20.4 million overall. Operating cash flow reflects mortgage-loan originations and sales; investing outflows principally reflected $140.5 million of net loan growth.
- Average interest-earning assets grew, led by loan growth, while average funding costs rose: Q3 average cost of interest-bearing liabilities increased to 1.98% from 1.63%. Management noted that deposit pricing had not yet fully reflected recent market-rate decreases.
- The company adopted the lease accounting standard in January 2019, recording approximately $5.2 million in right-of-use assets and $5.4 million in lease liabilities; management said the adoption did not materially affect income.
- The company repurchased 21,130 shares in August for $263,000 under a $5.0 million authorization expiring December 31, 2020.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management described ongoing focus on loan and core-deposit growth, with liquidity resources considered sufficient for lending and other cash needs.
- Key exposures include interest-rate changes, deposit retention and pricing, credit quality and loan-loss reserve adequacy, and concentration in the Washington, D.C. and Baltimore metropolitan areas. Commercial real estate, construction and commercial business lending may carry elevated repayment risk.
- The company reported an asset-sensitive position within one year. Its static model estimated a 12-month net-interest-income change of +8.2% under a +100-basis-point shock and -5.8% under a -100-basis-point shock. These are modeled estimates dependent on assumptions, not forecasts.
- Management expects the future credit-loss standard to affect reserves, but the impact was not quantified; the filing stated it would become effective for the company after December 15, 2022. The filing reported no material change in risk factors and no material pending legal proceedings. A previously disclosed settlement was released and concluded; $200,000 not covered by insurance was paid in April 2019.
Important facts for investors to verify
- Whether the rise in nonperforming loans, particularly the construction relationship, resolves without loss and whether reserve levels remain adequate as the portfolio grows.
- Whether deposit growth remains stable and funding costs moderate, given higher deposit pricing and increased FHLB borrowing.
- How mortgage refinance activity, margins and loan-sale volumes affect mortgage revenue and associated compensation and processing costs.
- Actual liquidity and capital capacity relative to $257.9 million of credit-extension commitments, while recognizing that commitments may not be fully drawn.
- Future implementation estimates for the credit-loss standard and the effect of market-rate changes on realized results versus the filing’s sensitivity models.