Capital Bancorp(CBNK) - 2018 Q4 - Annual Report

PART I Business Capital Bancorp, Inc. operates Capital Bank, N.A., serving the Washington D.C. and Baltimore areas with $1.1 billion in assets - Key Financial Metrics as of December 31, 2018 | Metric | Amount ($ millions) | | :--- | :--- | | Total Assets | $1,100 | | Total Loans Held for Investment | $1,000 | | Total Deposits | $955 | | Total Stockholders' Equity | $115 | - The company operates through three primary divisions: Commercial Banking, Church Street Mortgage (CSM), and OpenSky®[21] - The Commercial Banking division, representing approximately 94% of Capital Bank's total assets, focuses on commercial and industrial (C&I), commercial real estate, and construction lending in the Washington, D.C. and Baltimore metropolitan areas[24][25] - The Church Street Mortgage division originates conventional and government-guaranteed residential mortgage loans nationally, primarily for sale into the secondary market, with purchase volume increasing from 19% in 2016 to 79% in 2018[28][32] - The OpenSky® division provides secured credit cards nationwide to under-banked populations, with credit lines fully collateralized by customer deposits held in noninterest-bearing accounts[34] - The company's business strategy includes driving organic loan and deposit growth, leveraging technology for efficiency, increasing scale in consumer fee-based platforms, and opportunistically pursuing acquisitions[41][42][43][45] - Loan Portfolio Composition as of December 31, 2018 | Loan Type | Amount ($ thousands) | Percentage of Total Loans | | :--- | :--- | :--- | | Residential Real Estate | $407,844 | 41% | | Commercial Real Estate | $278,691 | 28% | | Construction | $157,586 | 16% | | Commercial | $122,264 | 12% | | Credit card | $34,673 | 3% | | Other consumer | $1,202 | — | | Total | $1,002,260 | 100.0% | Risk Factors The company faces significant business, regulatory, and ownership risks, including economic sensitivity, geographic concentration, and compliance - Business Risks: The company's commercial operations are heavily concentrated in the Washington, D.C. and Baltimore metropolitan areas, making it sensitive to local economic downturns, with approximately 93% of loans to borrowers in this region[202][203] - Credit Risks: The loan portfolio has significant exposure to commercial real estate ($270.1 million) and construction loans ($157.6 million), which carry greater credit risks, with 85% of the total loan portfolio secured by real estate as of December 31, 2018[212][215] - Operational Risks: The OpenSky® credit card division is exposed to delinquencies and credit losses, particularly from fraud, with approximately 19% of new secured cards experiencing a charge-off within the first year based on experience[251][252][255] - Regulatory Risks: The company operates in a highly regulated environment, and compliance with complex laws like the Dodd-Frank Act and Basel III capital standards imposes significant costs and can restrict business activities[283][285][290] - Concentration Risk: The Bank exceeds regulatory guidelines for commercial real estate (CRE) concentration, with construction loans at 143% of total capital and non-owner-occupied CRE at 340% of total capital, potentially leading to increased regulatory scrutiny and capital requirements[149][298] - Ownership Risks: As of December 31, 2018, directors and executive officers beneficially owned approximately 42% of the outstanding common stock, giving them significant influence over corporate matters[309] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[324] Properties The company's headquarters are located in Rockville, Maryland, operating a network of leased properties including commercial bank branches, mortgage offices, and an OpenSky® operations office - Summary of Office Locations | Type of Office | Location(s) | | :--- | :--- | | Corporate Headquarters | Rockville, MD | | Commercial Branches | Rockville, MD; Washington, D.C.; North Bethesda, MD; Columbia, MD; Reston, VA | | Mortgage Offices | Columbia, MD; Annapolis, MD; Phoenix, MD; Reston, VA | | OpenSky® Operations | Horsham, PA | Legal Proceedings The company is periodically involved in various litigation matters incidental to its business, with specific details referenced in Note 18 of the Financial Statements - The company is a party to various litigation matters in the ordinary course of business, with material legal proceedings described in Note 18 to the Consolidated Financial Statements[327] Mine Safety Disclosures This item is not applicable to the company - Not applicable[328] PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock began trading on Nasdaq in September 2018, raising $20.2 million in its IPO, with no future dividend plans - The company's common stock has been publicly traded on the Nasdaq Global Select Market under the symbol CBNK since September 2018[331] - The company completed its IPO in September/October 2018, selling a total of 1,834,310 shares and raising approximately $20.2 million in net proceeds[332] - The company has never declared or paid dividends on its common stock and plans to retain earnings for business use rather than paying dividends in the foreseeable future[333] - Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Number of Securities to be Issued Upon Exercise | Weighted-Average Exercise Price ($) | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,431,860 | $9.38 | 542,215 | Selected Financial Data This section provides a five-year summary of historical consolidated financial data (2014-2018), including key financial metrics and non-GAAP reconciliations - Selected Historical Financial Data (2014-2018) | Metric ($ thousands) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Income | $12,767 | $7,109 | $9,441 | $7,492 | $6,793 | | Total Assets | $1,105,058 | $1,026,009 | $905,600 | $743,429 | $618,749 | | Loans, net of unearned income | $1,000,268 | $887,420 | $763,430 | $639,350 | $506,339 | | Total Deposits | $955,241 | $904,899 | $790,924 | $629,817 | $501,974 | | Total Stockholders' Equity | $114,564 | $80,119 | $70,748 | $59,657 | $50,216 | - The company provides non-GAAP financial measures for 2017 to exclude the effects of a one-time $2.3 million expense for a credit card system conversion, a $2.4 million loss of revenue from waived interest and fees during the conversion, and the impact of the 2017 Tax Act on deferred tax assets[348] - GAAP to Non-GAAP Reconciliation for 2017 ($ thousands) | Metric | GAAP Value | Adjustments | Non-GAAP Value | | :--- | :--- | :--- | :--- | | Net Income | $7,109 | $4,184 | $11,293 | | Diluted EPS | $0.62 | $0.37 | $0.99 | | ROAA | 0.74% | 0.43% | 1.17% | | ROAE | 9.29% | 5.46% | 14.75% | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, net income increased 79.6% to $12.8 million, total assets reached $1.1 billion, and asset quality improved - Results of Operations Comparison (2018 vs. 2017) | Metric ($ thousands) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $57,888 | $48,911 | 18.4% | | Provision for Loan Losses | $2,140 | $2,655 | (19.4)% | | Noninterest Income | $16,124 | $15,149 | 6.4% | | Noninterest Expense | $54,123 | $47,306 | 14.4% | | Net Income | $12,767 | $7,109 | 79.6% | - The significant increase in 2018 net income was primarily due to non-recurring items in 2017, including expenses and waived fees from a system conversion and a one-time tax expense from the revaluation of deferred tax assets[369] - Total assets grew by $79.0 million to $1.1 billion at year-end 2018, funded by a $50.3 million increase in deposits and a $34.4 million increase in stockholders' equity, largely from the IPO[397] - Loan Portfolio Growth (Year-End) | Metric ($ thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Gross Loans | $1,002,260 | $889,011 | | Allowance for Loan Losses | $11,308 | $10,033 | | Total Net Loans | $988,960 | $877,387 | - Asset quality improved, with nonperforming assets decreasing from $5.5 million (0.54% of total assets) at year-end 2017 to $4.8 million (0.44% of total assets) at year-end 2018[422][424] - Stockholders' equity increased by $34.4 million (43%) in 2018, primarily due to $19.8 million in net proceeds from the IPO and $12.5 million in net income[474] - The Bank remained 'well capitalized' under regulatory standards, with a Total risk-based capital ratio of 12.25% as of December 31, 2018[480][483] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate volatility, managed by ALCO, projecting a 4.3% increase in net interest income from a 100 bps rate rise - The primary component of market risk for the company is interest rate volatility, managed by the Asset/Liability Management Committee (ALCO)[503][506] - Interest Rate Shock Simulation as of December 31, 2018 | Rate Shock Scenario | Impact on Net Interest Income (12-month horizon) (%) | Impact on Economic Value of Equity (EVE) (%) | | :--- | :--- | :--- | | +300 bps | +12.8% | (12.0)% | | +200 bps | +8.5% | (7.7)% | | +100 bps | +4.3% | (3.5)% | | -100 bps | (4.2)% | +2.9% | - The company's interest sensitivity gap analysis indicates an asset-sensitive position for maturities under one year, meaning rising interest rates would generally have a positive effect on net interest income[507] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2018 and 2017, with an unqualified opinion from Elliott Davis, PLLC - The report of the independent registered public accounting firm, Elliott Davis, PLLC, states that the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017[516] - Consolidated Balance Sheet Highlights (as of Dec 31) | Metric ($ thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Total Assets | $1,105,058 | $1,026,009 | | Loans Receivable, net | $988,960 | $877,387 | | Total Deposits | $955,240 | $904,899 | | Total Liabilities | $990,494 | $945,890 | | Total Stockholders' Equity | $114,564 | $80,119 | - Consolidated Income Statement Highlights (Year Ended Dec 31) | Metric ($ thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Net Interest Income | $57,888 | $48,911 | | Provision for Loan Losses | $2,140 | $2,655 | | Noninterest Income | $16,124 | $15,149 | | Noninterest Expense | $54,123 | $47,306 | | Net Income | $12,767 | $7,109 | - The Notes to Consolidated Financial Statements provide detailed information on accounting policies, loan portfolio characteristics, capital standards, fair value measurements, and related-party transactions[534] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[751] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2018 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[752] - The annual report does not include a management assessment of internal control over financial reporting due to the transition period for newly public companies[753] - There were no material changes in the company's internal control over financial reporting during the fourth quarter of 2018[754] Other Information The company reports no other information for this item - None[755] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[758] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[759] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related matters is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[760] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[761] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2019 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[762] PART IV Exhibits, Financial Statement Schedules This section provides an index of all exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents and certifications - This section lists all exhibits filed with the Form 10-K, including Articles of Incorporation, Bylaws, Stock and Incentive Compensation Plans, CEO/CFO certifications, and XBRL data[765][766]