8-K: Capital Bancorp Reports Strong Q4 2024 Results, Fueled by IFH Acquisition and Organic Growth

Capital Bancorp announces positive fourth quarter and full year 2024 results, highlighting the successful acquisition of IFH and robust loan and deposit growth.

Summary

• Capital Bancorp, Inc. reported a net income of $7.5 million, or $0.45 per share, for the fourth quarter of 2024.
• Adjusted net income, excluding merger-related expenses and other items, was $15.5 million, or $0.92 per share.
• The company successfully completed its merger with Integrated Financial Holdings, Inc. (IFH) on October 1, 2024.
• Gross loan growth in the quarter was $522.6 million, including $373.5 million from the IFH acquisition and $149.1 million from organic growth.
• Total deposit growth in the quarter was $575.7 million, including $459.0 million from the IFH acquisition and $116.7 million from organic growth.
• The Board of Directors declared a cash dividend of $0.10 per share.
• Net Interest Income increased $6.0 million, or 15.6% (not annualized), from 3Q 2024.
• Net Interest Margin (NIM) decreased to 5.87% as compared to 6.41% (3Q 2024).
• Core Fee Revenue of $14.5 million, or 24.7% of total core revenue, increased $7.9 million from 3Q 2024, excluding a non-recurring equity and debt investment write-down of $2.6 million (non-GAAP)(1), primarily due to the acquisition of IFHGross Loan Growth in the quarter of $522.6 million includes $373.5 million from the acquisition of IFH, and $149.1 million from organic growth, or 28.2% annualized for 4Q 2024.
• Commercial and industrial loans of $554.6 million, or 21.0% of total gross loans at December 31, 2024 increased $282.7 million from September 30, 2024.
• Total Deposit Growth in the quarter of $575.7 million includes $459.0 million from the acquisition of IFH, and $116.7 million from organic growth, or 21.2% annualized for 4Q 2024.
• Noninterest bearing deposits increased $92.8 million, or 51.4% annualized from 3Q 2024.
• The ratio of allowance for credit losses to total loans equaled 1.85% at December 31, 2024 including 1.44% for the legacy Capital Bank portfolio, down 7 basis points from 3Q.
• The additional ACL coverage results from the initial $15.5 million impact from the acquisition of the IFH portfolio.

Sentiment

Score: 7

Explanation: The document presents a mixed picture. While the acquisition of IFH and organic growth are positive, the decrease in net income and tangible book value, along with increased nonperforming assets, temper the overall sentiment. The outlook is cautiously optimistic.

Positives

• The successful acquisition of IFH has significantly boosted the company's assets, loans, and deposits.
• Organic loan and deposit growth indicates strong underlying business performance.
• The increase in commercial and industrial loans suggests a positive shift in the loan portfolio mix.
• The company maintains regulatory capital ratios that exceed all capital adequacy requirements.
• The company declared a cash dividend of $0.10 per share, demonstrating confidence in its financial position.
• Estimated total cost synergies resulting from the acquisition totaled $1.5 million in the fourth quarter 2024, generally consistent with modeled expectations.
• Windsor's total servicing portfolio was $2.5 billion at December 31, 2024.

Negatives

• Reported net income decreased compared to both the previous quarter and the same quarter of the prior year.
• Tangible book value per share decreased due to the IFH acquisition and related purchase accounting impacts.
• Net interest margin decreased, reflecting pressure on yields.
• Nonperforming assets increased to 0.94% of total assets.
• Special mention and substandard loans increased compared to the previous quarter.
• The fourth quarter earnings were also impacted by pre-tax provision credit losses on acquired loans of $4.2 million ('Initial IFH ACL Provision') along with a non-recurring $2.6 million write-down of a legacy IFH equity and debt investment in a start-up.

Risks

• The company faces risks related to the integration of IFH and the realization of expected synergies.
• Changes in economic conditions and interest rates could impact future performance.
• The company is exposed to cybersecurity threats and regulatory risks.
• The company's future performance could be affected by various factors, including changes in financial services policies, laws, and regulations.
• The company's future performance could be affected by climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs.

Future Outlook

Management expects outstanding organic growth to continue to be a major contributing factor in overall earnings growth in 2025 and beyond, and is focused on merger integration and executing on the opportunities from complementary lines of business.

Management Comments

• We are pleased to have successfully closed our acquisition of Integrated Financial Holdings, and we are now focused on merger integration and executing on the opportunities from our complementary lines of business, said Ed Barry, CEO of the Company and the Bank.
• We continue to benefit from our diversified business model which is driving growth across our platforms.
• The really strong performance of the commercial bank during the quarter was highlighted by record loan growth, solid deposit growth, and stable core net interest margin, said Steven J. Schwartz, Chairman of the Company.
• I am particularly pleased by the growth of our commercial and industrial loans.
• This outstanding organic growth is expected to continue to be a major contributing factor in our overall earnings growth in 2025 and beyond.
• The acquisition of IFH, while creating a lot of noise in the financial results of the 4th quarter, provides us with a new line of business loan servicing, processing, and packaging and a significant expansion of our government-guaranteed lending platform.

Industry Context

The acquisition of IFH reflects a trend of consolidation in the banking industry, as institutions seek to expand their market presence and diversify their revenue streams. Capital Bancorp's focus on commercial and industrial lending, as well as government-guaranteed lending, aligns with broader industry trends toward specialized lending and fee-based services.

Comparison to Industry Standards

• Capital Bancorp's return on average assets (ROAA) of 0.96% is below the average ROAA for well-performing banks, which typically exceeds 1%.
• However, the adjusted ROAA of 1.97% is significantly higher, indicating that the company's core profitability is strong once merger-related expenses are excluded.
• The efficiency ratio of 66.7% is relatively high compared to the best-performing banks, which often have efficiency ratios below 50%.
• The adjusted efficiency ratio of 59.3% is more competitive but still suggests room for improvement in operational efficiency.
• Compared to regional peers like ACNB, BCBP, and FRST, Capital Bancorp's loan growth and deposit growth rates are competitive, particularly given the contribution from the IFH acquisition.
• The company's focus on government-guaranteed lending through Windsor Advantage positions it well to capitalize on the growing demand for SBA and USDA loans, similar to other specialized lenders in the industry.

Stakeholder Impact

• Shareholders will see a dividend of $0.10 per share.
• Employees will be affected by the integration of IFH and potential cost synergies.
• Customers will benefit from the expanded range of products and services offered by the combined company.
• Suppliers and creditors will be impacted by the company's financial performance and strategic direction.

Next Steps

• Core system conversion scheduled for late February 2022.
• Ongoing focus on transaction revenue synergies and the potential for higher USDA and renewables volume leveraging our larger balance sheet.
• Ongoing vendor consolidation.
• Execute on Windsor Advantage / Capital Bank lender service provider relationship to efficiently grow SBA and small-ticket C&I loans.
• Utilize combined bank products to deepen client relationships and drive growth.

Key Dates