Capital Bancorp(CBNK) - 2023 Q1 - Quarterly Report

PART I - CONSOLIDATED FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Capital Bancorp, Inc. for the quarter ended March 31, 2023, including key financial figures and the adoption of the CECL accounting standard Consolidated Balance Sheet Highlights (as of March 31, 2023 vs. Dec 31, 2022) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $2,245,286 | $2,123,655 | | Total Portfolio Loans, net | $1,759,893 | $1,702,207 | | Total Liabilities | $2,010,769 | $1,899,640 | | Total Deposits | $1,944,374 | $1,758,072 | | Total Stockholders' Equity | $234,517 | $224,015 | Consolidated Income Statement Highlights (Q1 2023 vs. Q1 2022) | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $34,487 | $33,331 | | Provision for Credit Losses | $1,660 | $952 | | Noninterest Income | $6,026 | $8,288 | | Noninterest Expense | $26,203 | $27,102 | | Net Income | $9,735 | $10,211 | | Diluted EPS | $0.68 | $0.71 | - Net cash provided by operating activities was $10.4 million, while investing activities used $58.7 million, primarily for net increases in portfolio loans. Financing activities provided $108.3 million, driven by a significant increase in deposits[17][18] Notes to Unaudited Consolidated Financial Statements The notes detail accounting policies, including the CECL standard adoption, its impact on ACL and retained earnings, and breakdowns of business segments, loan portfolio, investment securities, and fair value measurements - The company operates through Capital Bank, N.A., focusing on commercial, real estate, and credit card loans. It also originates residential mortgages via Capital Bank Home Loans (CBHL) and issues nationwide credit cards through its OpenSky platform[19] - The company adopted the CECL standard (ASU 2016-13) on January 1, 2023. The adoption resulted in an $804 thousand increase in the ACL and a $775 thousand reduction to the reserve for unfunded commitments, leading to a net decrease of $29 thousand in retained earnings[34][42] Portfolio Loan Composition (March 31, 2023) | Loan Category | Amount (in thousands) | Percent of Total | | :--- | :--- | :--- | | Commercial Real Estate | $660,218 | 37% | | Residential Real Estate | $545,899 | 31% | | Construction | $251,494 | 14% | | Commercial and Industrial | $221,258 | 12% | | Credit Card | $112,860 | 6% | | Total Gross Loans | $1,793,307 | 100% | - The Allowance for Credit Losses (ACL) was $26.2 million at March 31, 2023. The provision for credit losses for Q1 2023 was $1.7 million, with net charge-offs of $2.6 million, primarily from the credit card portfolio ($1.7 million) and commercial real estate ($0.9 million)[121][90][95] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial performance, highlighting a net income decrease due to lower noninterest income and higher interest expenses, while covering financial condition, loan and deposit growth, and capital positions Results of Operations Q1 2023 net income decreased 4.7% to $9.7 million, with net interest income growing 3.5% despite margin compression, while noninterest income fell due to reduced credit card and mortgage banking revenue, and noninterest expense decreased 3.3% Q1 2023 vs. Q1 2022 Performance Summary | Metric | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Net Income | $9.7M | $10.2M | (4.7)% | | Diluted EPS | $0.68 | $0.71 | (4.2)% | | Net Interest Income | $34.5M | $33.3M | 3.5% | | Noninterest Income | $6.0M | $8.3M | (27.3)% | | Noninterest Expense | $26.2M | $27.1M | (3.3)% | - The net interest margin decreased 14 basis points YoY to 6.65%, as the average cost of interest-bearing liabilities rose 251 basis points, outpacing the 136 basis point increase in the average yield on interest-earning assets[290] - Noninterest income fell primarily due to a $1.7 million decrease in credit card fees from fewer active OpenSky® accounts and a $634 thousand decrease in mortgage banking revenue as originations dropped 63.5% in a rising rate environment[98][99][170] - The provision for credit losses increased to $1.7 million from $952 thousand YoY, driven by portfolio loan growth and higher credit card charge-offs[94] Financial Condition As of March 31, 2023, total assets reached $2.25 billion, a 5.8% increase year-over-year, fueled by a 17.0% growth in net portfolio loans to $1.8 billion. Total deposits grew 4.4% to $1.94 billion. The company's uninsured deposits were estimated at 43.4% of total deposits. The company reduced total borrowings during the quarter and maintained a strong liquidity position with significant available capacity from the FHLB and the Federal Reserve's Bank Term Funding Program (BTFP). The Bank remains well-capitalized, with a Tier 1 leverage ratio of 9.78% Financial Condition Highlights (as of March 31, 2023) | Metric | March 31, 2023 | March 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $2.25B | $2.12B | 5.8% | | Portfolio Loans, net | $1.79B | $1.53B | 17.0% | | Total Deposits | $1.94B | $1.86B | 4.4% | | Total Stockholders' Equity | $234.5M | $201.5M | 16.4% | - As of March 31, 2023, approximately $844.4 million, or 43.4% of the deposit portfolio, was uninsured[305] - The company maintains a strong liquidity position with available borrowing capacity of $331.3 million from the FHLB, $21.9 million from the Federal Reserve discount window, and $150.0 million from the Bank Term Funding Program (BTFP)[340][296] - The Bank was classified as "well capitalized" with a Tier 1 leverage ratio of 9.78% and a total capital ratio of 14.06% as of March 31, 2023[297][344] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate volatility, managed by its Asset/Liability Management Committee (ALCO). The balance sheet is asset-sensitive for maturities under one year, suggesting that net interest income would generally benefit from rising interest rates. An Earnings at Risk (EAR) simulation indicates a +100 basis point rate shock would increase net interest income by 2.6% over 12 months, while a -100 basis point shock would decrease it by 1.7% - The company is asset-sensitive in the short term, with a positive cumulative gap of $787.3 million for assets and liabilities repricing or maturing within one year. This indicates that rising interest rates would generally have a positive effect on net interest income[352][353] Impact on Net Interest Income from Parallel Interest Rate Shocks (as of March 31, 2023) | Rate Change Scenario | Estimated Change in NII (12-Month Horizon) | | :--- | :--- | | +300 bps | +9.7% | | +200 bps | +6.2% | | +100 bps | +2.6% | | -100 bps | (1.7)% | | -200 bps | (3.4)% | | -300 bps | (5.0)% | - An Economic Value of Equity (EVE) analysis shows that a -100 bps rate shock would decrease EVE by 1.8%, while a +100 bps shock would increase it by 0.4%, indicating modest long-term capital risk from rate changes[374][330] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023. During the quarter, the company enhanced its internal controls over financial reporting by creating an Allowance for Credit Loss (ACL) governance committee and moving the Loan Review function under the management of the Bank's Chief Risk Officer - Management concluded that disclosure controls and procedures were effective as of the end of the reporting period[405] - During Q1 2023, the company implemented changes to enhance internal controls related to the allowance for credit loss, including establishing a new governance committee and reorganizing the Loan Review function[300] PART II - OTHER INFORMATION Legal Proceedings The company reports that it is not currently a party to any material legal proceedings - The company is not presently a party to any material legal proceedings[377] Risk Factors The company highlights a significant new risk factor related to recent adverse developments in the banking industry, such as high-profile bank failures. These events have eroded customer confidence and created market volatility, which could materially and adversely affect the company's liquidity, funding costs, results of operations, and stock price - A new risk factor was identified concerning the impact of recent high-profile bank failures, which have eroded customer confidence and could negatively affect the company's liquidity, cost of funding, and overall financial results[359][378] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of its stock during Q1 2023. Under its stock repurchase program, the company bought back 146,937 shares for a total of $2.7 million. As of March 31, 2023, approximately $7.3 million remained authorized for future repurchases - There were no unregistered sales of the Company's stock during the first quarter of 2023[360] Common Stock Repurchases in Q1 2023 | Period | Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Feb 2023 | 42,794 | $20.86 | | Mar 2023 | 104,143 | $17.51 | | Total | 146,937 | $18.48 | Defaults upon Senior Securities The company reports that there were no defaults upon its senior securities during the period - None[382] Mine Safety Disclosures This item is not applicable to the company - Not applicable[363] Other Information The company reports no information for this item - None[364] Exhibits This section lists the exhibits filed with the Form 10-Q. Key exhibits include amendments to employment agreements for executives Steven Poynot and Scot R. Browning, certifications by the Principal Executive Officer and Principal Financial Officer, and the financial statements formatted in XBRL - The filing includes amendments to executive employment agreements, required CEO/CFO certifications (Rule 13a-14(a) and Section 1350), and interactive data files (XBRL)[332]