Capital Bancorp(CBNK) - 2024 Q1 - Quarterly Report

PART I - CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Capital Bancorp, Inc. as of March 31, 2024, including balance sheets, statements of income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes on accounting policies and financial accounts Consolidated Balance Sheets As of March 31, 2024, total assets increased to $2.32 billion from $2.23 billion at year-end 2023, driven primarily by a $60.5 million increase in net portfolio loans, with total liabilities growing to $2.06 billion, funded by a $109.7 million increase in deposits, and total stockholders' equity rising slightly to $259.5 million Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $2,324,238 | $2,226,176 | | Total Portfolio Loans, Net | $1,935,175 | $1,874,678 | | Total Liabilities | $2,064,773 | $1,971,316 | | Total Deposits | $2,005,695 | $1,895,996 | | Total Stockholders' Equity | $259,465 | $254,860 | Consolidated Statements of Income For the three months ended March 31, 2024, net income was $6.6 million, a decrease from $9.7 million in the prior year period, with diluted earnings per share falling to $0.47 from $0.68, primarily due to a higher provision for credit losses and increased noninterest expenses, including merger-related costs Q1 2024 vs Q1 2023 Income Statement (in thousands, except per share data) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Interest Income | $35,008 | $34,487 | | Provision for Credit Losses | $2,727 | $1,660 | | Noninterest Income | $5,972 | $6,026 | | Noninterest Expenses | $29,487 | $26,222 | | Net Income | $6,562 | $9,735 | | Diluted Earnings Per Share | $0.47 | $0.68 | Notes to Unaudited Consolidated Financial Statements The notes provide detailed disclosures on the Company's operations, accounting policies, and financial statement line items, covering the pending acquisition of Integrated Financial Holdings, Inc., the composition of investment securities and loan portfolios, the methodology for the allowance for credit losses (ACL), and segment reporting details - The Company operates through four business segments: commercial banking, mortgage lending (Capital Bank Home Loans), credit cards (OpenSky™), and corporate activities[178] - On March 27, 2024, the Company entered into a merger agreement to acquire Integrated Financial Holdings, Inc. ("IFHI"). The merger is expected to close in Q4 2024, and the Company incurred $0.7 million in related expenses during Q1 2024[74][75] - As of March 31, 2024, the investment securities portfolio, valued at $202.3 million, was entirely classified as available for sale. Management concluded there were no credit-related declines in fair value requiring an allowance[79][83] - The Allowance for Credit Losses (ACL) increased to $29.4 million at March 31, 2024, from $28.6 million at year-end 2023, with a provision expense of $2.7 million for the quarter[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial performance for Q1 2024, highlighting a 32.6% decrease in net income to $6.6 million year-over-year, driven by higher credit provisions and noninterest expenses, while covering analysis of net interest income, asset quality, balance sheet growth, the pending acquisition of IFHI, capital adequacy, and liquidity position Results of Operations Net income for Q1 2024 was $6.6 million, down from $9.7 million in Q1 2023, with net interest income seeing a modest increase of 1.5% to $35.0 million, offset by a 64.3% increase in the provision for credit losses to $2.7 million and a 12.5% rise in noninterest expenses to $29.5 million, which included $0.7 million in merger-related costs Key Performance Metrics Q1 2024 vs Q1 2023 (in thousands) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Income | $6,562 | $9,735 | | Net Interest Income | $35,008 | $34,487 | | Provision for Credit Losses | $2,727 | $1,660 | | Noninterest Expense | $29,487 | $26,222 | - Net income, as adjusted (non-GAAP) to exclude merger-related expenses, was $7.1 million for Q1 2024[266] - The net interest margin decreased by 41 basis points to 6.24% year-over-year, primarily due to a $1.4 million decrease in interest income from credit cards and higher funding costs[276] Financial Condition As of March 31, 2024, total assets grew to $2.32 billion, a 4.4% increase from year-end 2023, primarily driven by a 3.2% growth in the net loan portfolio to $2.0 billion, with deposits increasing by 5.8% to $2.01 billion, funding the asset growth, and asset quality remaining stable, with the allowance for credit losses at 1.49% of total loans, and stockholders' equity increasing by 1.8% to $259.5 million Balance Sheet Summary (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $2,324,238 | $2,226,176 | | Portfolio Loans Receivable, Net | $1,964,525 | $1,903,288 | | Total Deposits | $2,005,695 | $1,895,996 | | Total Stockholders' Equity | $259,465 | $254,860 | - Nonperforming loans as a percentage of total portfolio loans decreased to 0.73% at March 31, 2024, compared to 0.91% at March 31, 2023[48] Liquidity and Capital Resources The Company maintains a strong liquidity position with diverse funding sources, including a core deposit base and significant available borrowing capacity of $447.7 million from the FHLB and $76.0 million from correspondent banks, while capital levels remain robust, with the Bank classified as "well capitalized" under regulatory standards, and its Total capital ratio at 14.36% as of March 31, 2024, well above the 10.00% minimum - As of March 31, 2024, the Company had significant available liquidity, including $447.7 million in borrowing capacity from the FHLB, $17.9 million from the Federal Reserve, and $76.0 million from correspondent banks[34] Bank Regulatory Capital Ratios (March 31, 2024) | Ratio | Actual | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Tier 1 leverage ratio | 10.29% | 5.00% | | Common equity tier 1 capital ratio | 13.10% | 6.50% | | Tier 1 capital ratio | 13.10% | 8.00% | | Total capital ratio | 14.36% | 10.00% | - Stockholders' equity increased by $4.6 million during the quarter, primarily due to net income of $6.6 million, partially offset by $1.4 million in share repurchases[33] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk is interest rate volatility, managed by the Asset/Liability Management Committee (ALCO) through Earnings at Risk (EAR) and Economic Value of Equity (EVE) simulations, with the Company being asset-sensitive for periods less than one year as of March 31, 2024, indicating that net interest income would generally benefit from rising interest rates, and a +200 basis point parallel interest rate shock projected to increase net interest income by 3.2% over a 12-month horizon - The Company's primary market risk is interest rate volatility, which it manages by structuring its balance sheet in the ordinary course of business without using complex derivatives like leveraged derivatives or financial futures[98][100] Impact on Net Interest Income from Parallel Interest Rate Shock (March 31, 2024) | Rate Shock (bps) | % Change in NII | | :--- | :--- | | +400 | 6.3% | | +300 | 4.7% | | +200 | 3.2% | | +100 | 1.6% | | -100 | (1.7)% | | -200 | (2.9)% | - For periods less than one year, the Company has an asset-sensitive position, meaning rate-sensitive assets exceed rate-sensitive liabilities. This suggests rising interest rates would generally have a positive effect on net interest income[101] Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2024, with enhancements made during the first quarter of 2024 to internal controls over the allowance for credit losses, specifically around model validation and output review - The Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report[185] - During Q1 2024, the Company enhanced internal controls over the allowance for credit losses, including process controls for model validation and allowance output review[186] PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently a party to any material legal proceedings outside of the ordinary course of business - The Company is not presently a party to any material legal proceedings[219] Item 1A. Risk Factors There are no material changes to the risk factors disclosed in the Company's 2023 Form 10-K, except for new risks related to the proposed merger with Integrated Financial Holdings, Inc. (IFHI), including the potential for substantial merger and integration costs, the negative impact on the Company if the merger fails to complete, and challenges related to integrating IFHI's operations - New risk factors have been introduced related to the proposed merger with IFHI[220] - Risks include incurring substantial costs for the merger, potential negative market reaction if the merger fails, and difficulties in integrating the two companies' businesses and realizing anticipated benefits[221][222][223] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not conduct any unregistered sales of its stock during the period, but repurchased 67,869 shares under its stock repurchase program during the three months ended March 31, 2024, with repurchases temporarily suspended during the first quarter in connection with the pending acquisition of IFHI Share Repurchases in Q1 2024 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Feb 2024 | 46,820 | $20.77 | | Mar 2024 | 21,049 | $20.28 | - The Company temporarily suspended its stock repurchase program during Q1 2024 due to the pending acquisition of IFHI[254]