Capital Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless noted. Capital Bancorp is a Maryland bank holding company operating Capital Bank, Capital Bank Home Loans and the nationwide OpenSky secured credit-card platform. Unless stated otherwise, financial amounts below are in U.S. dollars; income and cash-flow figures are for the quarter.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Interest income | $18.318 million | Up 9.9% from $16.664 million in Q1 2018 |
| Net interest income | $14.744 million | Up 2.5% from $14.385 million |
| Net interest margin | 5.46%; 4.30% excluding credit cards | 5.79%; 4.25% excluding credit cards in Q1 2018 |
| Provision for loan losses | $121,000 | Down from $515,000 |
| Noninterest income | $4.092 million | Up 0.3% from $4.078 million |
| Noninterest expense | $14.330 million | Up 5.4% from $13.600 million |
| Net income | $3.319 million | Up 11.0% from $2.990 million |
| Basic / diluted EPS | $0.24 / $0.24 | $0.26 / $0.25 in Q1 2018 |
| Total assets | $1.124 billion | $1.105 billion at year-end 2018 |
| Loans receivable, net | $996.581 million | $988.960 million at year-end 2018 |
| Total deposits | $967.722 million | $955.240 million at year-end 2018 |
| Stockholders’ equity | $118.550 million | $114.564 million at year-end 2018 |
| Cash and cash equivalents | $38.351 million | $34.723 million at year-end 2018 |
| Cash from operating / investing / financing activities | $1.789 million / $(6.428) million / $8.267 million | Operating cash flow was $12.932 million in Q1 2018 |
Material changes and management commentary
- Net income increased mainly due to higher net interest income and lower loan-loss provision, partly offset by higher operating expenses.
- Average loans grew 12% year over year to $1.014 billion. Average interest-earning assets rose to $1.096 billion from $1.008 billion. Higher deposit costs contributed to a 33-basis-point decline in reported net interest margin; management attributed the decline primarily to lower credit-card late fees compared with Q1 2018, when delayed charge-offs affected results.
- Interest expense rose 56.8% to $3.574 million. The average rate paid on interest-bearing deposits increased to 1.83% from 1.14%; management cited higher market rates. The net interest margin excluding credit cards improved by five basis points.
- Noninterest expense increased by $730,000. Management cited higher compensation, professional fees and other operating costs, including a $200,000 litigation settlement accrual. Professional fees rose 65.5%; salaries and benefits rose 7.7%.
- Noninterest income was broadly flat. OpenSky issued a quarterly-high 35,000 cards, compared with 30,000 a year earlier; mortgage banking revenue declined 2.2% to $2.376 million.
- Deposits shifted toward noninterest-bearing balances: those balances rose to $262.235 million from $242.259 million, while interest-bearing deposits declined to $705.487 million from $712.981 million. Management described an ongoing effort to shift from wholesale funding toward core deposits.
Credit quality, funding and risk
- Gross loans were $1.010 billion, up from $1.002 billion at year-end. The allowance for loan losses was $11.347 million, or 1.13% of loans, essentially unchanged as a percentage. Q1 net charge-offs were $82,000, compared with $1.1 million in Q1 2018.
- Nonperforming loans increased to $6.982 million from $4.679 million; nonperforming assets rose to $7.131 million from $4.821 million. Management attributed the increase mainly to $2.1 million of nonperforming construction loans tied to one borrower relationship, which it said was well secured and not expected to result in impairment.
- Deposits were the principal funding source. At quarter-end, the Company had $15.401 million of other borrowed funds, $3.010 million of repurchase-agreement funding, and no outstanding FHLB advances, federal funds purchased or Federal Reserve borrowings.
- Management reported $38.4 million of cash and cash equivalents, $201.9 million of available FHLB borrowing capacity, $16.5 million of Federal Reserve borrowing capacity and $28.0 million of correspondent-bank credit lines; it considered liquidity sufficient for lending and other cash needs.
- The Bank was classified as well capitalized. Its March 31 ratios included a 9.05% Tier 1 leverage ratio, 10.98% common equity Tier 1 ratio and 12.23% total capital ratio. The Company’s corresponding ratios were 10.92%, 12.86% and 14.33%.
- Interest-rate simulations estimated a 4.0% decline in 12-month net interest income under a 100-basis-point rate decrease and increases of 4.4%, 8.8% and 13.3% under rate increases of 100, 200 and 300 basis points. The economic value of equity model estimated declines of 2.6%, 5.4% and 8.1% under those respective increases.
Outlook, contingencies and unusual items
- The filing provides no specific earnings, revenue or margin guidance. It describes risks from interest rates, regional economic conditions, loan growth and credit quality, deposit retention and liquidity, mortgage banking, OpenSky compliance and fraud, competition, technology and cyber risks, and regulatory or legal matters. Management cautions that actual results may differ materially from forward-looking statements.
- On April 9, 2019, the Bank agreed to settle a lawsuit for $3.7 million. The insurer funded all but $200,000, which was accrued at March 31. The settlement releases the claims and is not an admission of liability.
- The Company adopted the new lease standard on January 1, 2019, recognizing approximately $5.2 million of right-of-use assets and $5.4 million of lease liabilities. It reported no significant effect on income.
- On April 25, 2019, the Company announced a stock repurchase program of up to $5.0 million, expiring December 31, 2020.
- The Company said there were no material changes to the risk factors in its 2018 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile reported nonperforming-loan ratios: the MD&A table gives 0.69% at March 31 and 0.61% at December 31, while the accompanying text states 0.47% at December 31. The reported balances of $4.679 million of nonperforming loans and $1.002 billion of total loans imply a different year-end ratio.
- Review the construction-loan borrower relationship behind the quarter’s increase in nonperforming loans, including collateral valuation, repayment status and any subsequent developments.
- Confirm the settlement’s final cash cost and insurance coverage, and whether any additional legal exposure exists.
- Understand the drivers of the lower operating cash flow and confirm mortgage-loan sale figures: the cash-flow statement reports $74.068 million of proceeds from loans held for sale, while MD&A cites $71.7 million of sale proceeds for the quarter.
- Monitor funding costs, deposit mix and deposit retention, as interest expense rose substantially and deposit rates increased year over year.
- Assess the impact of credit-loss accounting guidance expected to become effective in 2020; the Company said it was evaluating the effect and did not expect early adoption.