Capital Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated results. Capital Bancorp is a bank holding company operating primarily through Capital Bank, with commercial banking, mortgage lending, and OpenSky credit-card businesses. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $2.324 billion | $2.226 billion at Dec. 31, 2023 |
| Net interest income | $35.0 million | $34.5 million in Q1 2023 |
| Net interest margin | 6.24% | 6.65% in Q1 2023; excluding credit-card loans, 3.85% vs. 3.81% |
| Net income / diluted EPS | $6.6 million / $0.47 | $9.7 million / $0.68 in Q1 2023 |
| Loans held for investment, net | $1.935 billion | $1.875 billion at Dec. 31, 2023 |
| Deposits | $2.006 billion | $1.896 billion at Dec. 31, 2023 |
| Cash and cash equivalents | $85.2 million | $54.0 million at Dec. 31, 2023 |
| Total borrowings | $34.1 million | $49.1 million at Dec. 31, 2023 |
| Stockholders’ equity | $259.5 million; 11.16% of assets | $254.9 million; 11.45% of assets at Dec. 31, 2023 |
Net interest income rose 1.5% year over year as average portfolio loans grew, but higher deposit costs partly offset asset growth. Average interest-bearing liability cost increased to 3.90% from 2.93%. Noninterest income was $6.0 million, nearly flat year over year; mortgage banking revenue increased, while credit-card fees declined.
Provision for credit losses was $2.7 million, compared with $1.7 million in Q1 2023. Net charge-offs were $2.0 million, or 0.41% annualized of average portfolio loans, versus $2.6 million and 0.61%. The allowance for credit losses was $29.4 million, or 1.49% of portfolio loans. Nonaccrual loans were $14.4 million, 0.74% of loans, versus $16.0 million and 0.84% at year-end.
Noninterest expense increased 12.5% to $29.5 million. Cash flows were $(3.4) million from operating activities, compared with $10.4 million provided in Q1 2023; the filing reports a $10.6 million increase in accounts receivable among operating cash-flow changes. Investing activities used $57.6 million, principally reflecting $63.2 million of net loan growth. Financing activities provided $92.3 million, mainly from deposit growth.
Material changes and notable items
- Net income declined 32.6% year over year. Management cited increased funding costs, higher credit-loss provision, and expense growth. Adjusted net income, excluding merger-related expenses, was $7.1 million, or $0.51 diluted EPS; these are non-GAAP measures.
- Net interest margin fell 41 basis points, primarily because credit-card interest income declined $1.4 million. Excluding credit-card loans, the margin increased four basis points.
- Advertising expense rose $1.5 million and merger-related expense was $0.7 million; occupancy, other operating, salary, and data-processing expenses also increased. The efficiency ratio was 71.95%, or 70.22% excluding merger costs, versus 64.72% in Q1 2023.
- Commercial real estate loans were $736.3 million, including $377.2 million of non-owner-occupied commercial real estate. A single $11.6 million owner-occupied commercial real estate relationship contributed to higher 60–89-day delinquencies; the borrower resumed payments, according to the filing.
- Available-for-sale securities had $18.0 million of gross unrealized losses at quarter-end. Management reported no credit-related declines and no intent or expected need to sell the securities before recovery of amortized cost. Accumulated other comprehensive loss increased to $13.6 million from $13.1 million at year-end.
Liquidity, capital, outlook, and risks
- Deposits grew 5.8% from year-end; 42.7% were uninsured. Brokered time deposits were $160.6 million, or 8.0% of deposits. Management identified OpenSky card customers and title companies as significant deposit concentrations.
- Available contingent funding included $447.7 million of FHLB capacity, $17.9 million through the Federal Reserve borrower-in-custody program, and $76.0 million of correspondent-bank lines. The company reported $202.3 million of unpledged securities. It had no outstanding BTFP borrowings and no securities pledged to that program at quarter-end.
- The Bank was classified as well capitalized and reported a 13.10% common equity Tier 1 ratio and 10.29% Tier 1 leverage ratio. The Company’s common equity to total assets was 11.16%.
- On March 27, 2024, Capital Bancorp agreed to acquire Integrated Financial Holdings, Inc. (IFHI), whose assets were approximately $548 million at Dec. 31, 2023. IFHI shareholders are to receive 1.115 Capital Bancorp shares and, subject to adjustments, $5.36 cash per share. Closing is expected in Q4 2024, subject to shareholder and regulatory approvals and other conditions. No specific financial guidance is provided in the filing.
- Merger risks include failure or delay in closing, integration challenges, deposit or employee attrition, higher-than-expected costs, and foregone opportunities while the transaction is pending. A $3.0 million termination fee may apply in certain circumstances. The filing also highlights interest-rate, liquidity, credit, commercial real estate, consumer-credit, cybersecurity, operational, regulatory, and regional economic risks.
- Management stated disclosure controls were effective and reported no material legal proceedings. Additional controls were introduced or enhanced during the quarter for allowance-for-credit-loss model validation and review.
Important facts for investors to verify
- Whether the IFHI transaction receives approvals, closes on the expected timeline, and achieves anticipated benefits without materially higher costs.
- Deposit stability and pricing, particularly uninsured deposits, brokered time deposits, and the disclosed title-company and OpenSky-related concentrations.
- Credit trends, including commercial real estate delinquencies, the $11.6 million borrower relationship, and loss performance in secured, partially secured, and unsecured card balances.
- Whether loan growth and operating cash flow remain sustainable while funding costs and credit provisions affect earnings and margins.
- The effect of interest-rate changes and unrealized securities losses on earnings, liquidity, and capital; management’s sensitivity analysis estimates net interest income rises 3.2% under a +200-basis-point parallel shock and falls 2.9% under a −200-basis-point shock over 12 months.