Capital Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 16, 2020. This is an annual report, not a quarterly filing. The company is a Maryland bank holding company operating primarily through Capital Bank, N.A., serving the Washington, D.C. and Baltimore markets. Its businesses are commercial banking, residential mortgage lending, and OpenSky secured credit cards.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $83.4 million | $69.1 million |
| Net interest income | $67.5 million | $57.9 million |
| Noninterest income | $24.5 million | $16.1 million |
| Net income | $16.9 million | $12.8 million |
| Diluted earnings per share | $1.21 | $1.02 |
| Net interest margin | 5.60% | 5.59% |
| Efficiency ratio | 72.29% | 73.13% |
| Total assets, year-end | $1.43 billion | $1.11 billion |
| Loans held for investment, gross | $1.17 billion | $1.00 billion |
| Deposits, year-end | $1.23 billion | $955.2 million |
| Stockholders’ equity, year-end | $133.3 million | $114.6 million |
- Growth and earnings: Net income rose 32.3%. Management attributed the increase chiefly to loan growth: average loans increased $142.6 million, and loan interest income increased $10.4 million. Net interest income grew 16.6%; noninterest income increased 52.1%, primarily from mortgage banking and card fees.
- Costs and credit: Noninterest expense rose 22.9% to $66.5 million, including higher salaries and mortgage commissions, public-company professional fees, marketing, and data processing costs. Provision for loan losses increased to $2.8 million. Net charge-offs were $798,000, or 0.08% of average loans; allowance coverage was 1.14% of loans.
- Cash flow: Operating cash flow was negative $26.3 million, investing cash flow negative $188.8 million, and financing cash flow positive $295.3 million. Cash and cash equivalents increased $80.1 million to $114.8 million. The filing shows substantial mortgage originations and loan growth affecting operating and investing cash flows.
- Liquidity and funding: Deposits increased 28.3%. The company reported $140.5 million of available FHLB borrowing capacity, $12.5 million at the Federal Reserve discount window, and $28.0 million of correspondent-bank lines; none was drawn from the latter two facilities at year-end. Borrowed funds were $47.6 million, including $32.2 million of FHLB advances and $15.4 million of subordinated funding.
- Capital and debt: The Bank was classified as well capitalized; its year-end Tier 1 leverage, CET1, and total risk-based capital ratios were 8.65%, 10.73%, and 11.98%, respectively. The company’s $13.5 million subordinated notes mature in 2025 and carry a 6.95% rate for the first five years; $2.1 million of junior subordinated debentures mature in 2036 and bear a floating rate.
- Fourth-quarter comparison: Q4 2019 net income was $5.1 million and diluted EPS was $0.36, versus $3.5 million and $0.25 in Q4 2018.
Material changes versus 2018
- Assets grew 29.3%, gross loans held for investment 17.1%, and deposits 28.3%. Year-end loans held for sale increased to $71.0 million from $18.5 million, reflecting higher mortgage activity.
- Mortgage banking revenue rose 68.4% to $16.0 million. Originations of loans held for sale increased 76.0% to $593.2 million, supported by refinancing activity. Purchase originations were 51.9% of volume, down from 79.4% in 2018, and management described a transition toward purchase-oriented and niche products.
- OpenSky active accounts increased to 223,379 from 169,981; credit-card balances grew to $46.4 million from $34.7 million. Credit-card fees increased 25.7% to $7.6 million.
- The company recorded $2.4 million of foreclosed real estate, up from $142,000, primarily following foreclosure of a construction loan with an outstanding balance of $2.1 million. Nonperforming assets increased to $7.1 million from $4.8 million, although nonperforming loans remained about $4.7 million.
- The company adopted the new lease accounting standard in 2019, recognizing a $3.9 million net right-of-use asset and $4.3 million lease liability at year-end. The filing says the adoption did not significantly affect the income statement.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. Management said it expected to deploy excess liquidity in early 2020 to fund loan growth and support the investment portfolio, and continued to emphasize core deposit growth and reducing wholesale funding reliance.
- Key risks include concentration in the Washington, D.C. and Baltimore economies; commercial real estate and construction exposure; interest-rate and liquidity risk; reliance on mortgage secondary-market sales; and OpenSky credit, fraud, and regulatory risks. The Bank exceeded supervisory CRE concentration guideline thresholds: construction loans were 147.7% of risk-based capital, and non-owner-occupied CRE including construction was 341.6% of capital.
- OpenSky balances were largely deposit-secured, but 11.9% of the portfolio was at least 30 days delinquent. Management cited historical first-year charge-offs on about 20% of new secured accounts; the filing also reports $3.1 million of outstanding unsecured advances.
- The 2019 provision for credit losses rose with loan growth and classified loans. Management cautioned that allowance estimates are judgmental and may require increases; adoption of CECL was expected for fiscal years beginning after December 15, 2022.
- The company reported $268.5 million of credit-extension commitments, including $260.6 million of unfunded lines, plus $2.6 million of mortgage origination commitments. These are not necessarily expected to be drawn in full.
- A lawsuit disclosed earlier in 2019 was settled; insurance covered payments except for $200,000, accrued in March and paid in April. Management said other ordinary-course litigation was not expected to be material.
- The company had not paid common dividends and said it did not plan to do so in the foreseeable future. A $5.0 million repurchase program remained active through December 31, 2020; year-end disclosures report 28,480 shares repurchased during 2019 for approximately $371,000.
Important facts for investors to verify
- Whether loan and deposit growth can be sustained without weakening underwriting, asset quality, or net interest margin.
- Trends in CRE/construction concentrations, classified loans, foreclosed property, allowance adequacy, and OpenSky delinquencies, fraud losses, and unsecured exposure.
- The durability of mortgage revenue given refinancing sensitivity and the shift in originations toward purchase volume.
- Deposit concentration and funding costs, including brokered/listing-service deposits, large depositor relationships, and the maturity profile of certificates of deposit.
- Interest-rate sensitivity and the company’s transition from LIBOR-based instruments, including the floating-rate junior subordinated debentures.
- Management’s stated liquidity and capital position against actual subsequent-period results, and the potential impact of CECL adoption.