Capital Bancorp Inc quarterly report, Q1 FY2023

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Capital Bancorp, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023. Capital Bancorp is a bank holding company operating Capital Bank, Capital Bank Home Loans and the OpenSky credit-card platform, with commercial banking concentrated in the Washington, D.C. and Baltimore metropolitan areas. Amounts below are in U.S. dollars; financial statement amounts are generally in thousands unless otherwise noted.

Financial performance

  • Net income: $9.7 million, down 4.7% from $10.2 million in Q1 2022. Diluted EPS was $0.68 versus $0.71.
  • Net interest income: $34.5 million, up 3.5%. Net interest margin declined 14 basis points to 6.65%; excluding credit-card and SBA-PPP loans, it was 3.81%, compared with 3.82%.
  • Interest income and funding costs: Interest income rose 26.2% to $43.4 million, while interest expense increased to $8.9 million from $1.1 million. Average cost of interest-bearing liabilities increased to 2.93% from 0.42%, exceeding the increase in asset yields.
  • Noninterest income: $6.0 million, down 27.3%, mainly from lower credit-card fees and mortgage banking revenue.
  • Expenses and taxes: Noninterest expense fell 3.3% to $26.2 million; lower data-processing and advertising costs were partly offset by a 21.8% increase in salaries and benefits. Income tax expense was $2.9 million, and the effective tax rate declined to 23.0% from 24.7%.
  • Cash flows: Operating activities provided $10.4 million, investing activities used $58.7 million, and financing activities provided $108.3 million. Cash and cash equivalents rose $60.0 million during the quarter to $140.4 million.

Financial position, liquidity and capital

  • Assets and lending: Total assets were $2.245 billion at March 31, 2023, up $121.6 million from December 31, 2022. Portfolio loans receivable, net, were $1.760 billion, up $57.7 million from year-end; gross portfolio loans increased 17.0% year over year.
  • Deposits and borrowings: Deposits totaled $1.944 billion, up $186.3 million from year-end. Borrowings declined to $44.1 million from $119.1 million, including $32.0 million of FHLB advances and $12.1 million of other borrowings.
  • Liquidity: In addition to $140.4 million in cash and cash equivalents, the company reported $331.3 million of available FHLB capacity, $21.9 million under the Federal Reserve discount-window program, $150.0 million under the Bank Term Funding Program, and $76.0 million of correspondent-bank lines. No balances were outstanding under the Federal Reserve facilities or correspondent lines at quarter-end.
  • Deposit concentration: Approximately $844.4 million, or 43.43% of deposits, was uninsured at March 31. OpenSky-secured deposits and title-company deposits represented 10% and 14% of total deposits, respectively.
  • Credit quality: The allowance for credit losses was $26.2 million, about 1.46% of portfolio loans excluding SBA-PPP loans. Nonaccrual loans were $16.3 million, or 0.91% of portfolio loans, versus $9.4 million, or 0.56%, at year-end. Net charge-offs were $2.6 million; the annualized rate was 0.61%, compared with 0.24% in Q1 2022.
  • Capital: Stockholders’ equity was $234.5 million, and equity was 10.4% of assets. The Bank was reported as “well capitalized” and in compliance with applicable regulatory capital requirements; its CET1 and total capital ratios were 12.80% and 14.06%.

Material changes and notable items

  • Loan growth and higher yields lifted interest income, but deposit and borrowing costs rose sharply, reducing net interest margin and limiting net interest income growth.
  • OpenSky active accounts declined year over year, and credit-card fees fell $1.7 million. Mortgage originations declined 63.5% to $40.3 million as higher rates weighed on home sales and refinancing.
  • Net charge-offs increased, primarily from credit cards, including partially secured and unsecured accounts, and a $943,000 commercial real estate charge-off.
  • The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $804,000, reduced the reserve for unfunded commitments by $775,000, and reduced retained earnings by a net $29,000. The filing states no qualitative-scorecard adjustments were made after implementation.
  • Available-for-sale securities had $18.7 million of gross unrealized losses at quarter-end, with a $13.959 million after-tax accumulated other comprehensive loss. Management attributed the losses to interest rates and market conditions rather than credit deterioration and stated it intended and was able to hold the securities until recovery or maturity. Securities pledged totaled $150.0 million.
  • The company repurchased 146,937 shares during the quarter for $2.7 million, at a weighted average price of $18.48. On April 13, 2023, it announced an additional authorization of up to $5.0 million or 175,000 shares, incremental to its existing program.

Outlook, risks and contingencies

The filing provides no specific earnings or financial guidance. Management identifies interest-rate volatility, deposit retention and funding costs, banking-industry confidence, regional economic conditions, commercial real estate exposure, credit quality, and mortgage and OpenSky performance as material risks. The company specifically cautions that recent bank failures and rapid movement of deposits could adversely affect liquidity, funding costs, lending capacity, margins, capital and results.

Unfunded lines of credit and other credit commitments totaled $372.2 million, including $363.2 million of unused lines and $5.1 million of letters of credit; actual funding needs may be lower because commitments may expire unused. The company reported no material legal proceedings and no subsequent events requiring accrual or disclosure. Management reported effective disclosure controls and procedures.

Key facts for investors to verify

  • Whether deposit balances and composition remain stable, particularly uninsured and concentrated deposits, and whether funding costs continue to rise.
  • Whether the rise in nonaccrual loans, charge-offs and credit-card losses continues, and whether the allowance remains adequate under CECL.
  • How loan growth, interest-rate changes and deposit pricing affect net interest margin and earnings.
  • Whether OpenSky account trends and mortgage origination volumes recover or continue to pressure fee income.
  • How pledged securities, available borrowing facilities and unrealized securities losses affect liquidity and flexibility under stress.
  • The remaining stock-repurchase authorization and subsequent execution following the April 13, 2023 announcement.