Capital Bancorp Inc quarterly report, Q3 FY2020

Capital Bancorp, Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. Capital Bancorp is a bank holding company operating commercial banking, residential mortgage lending through Capital Bank Home Loans, and the nationwide OpenSky secured-card business, primarily serving the Washington, D.C.–Baltimore region. Amounts below are in millions unless noted.

Financial performance and position

MetricQ3 2020Q3 2019Nine months 2020Nine months 2019
Net interest income$22.0$18.2$58.4$49.5
Provision for loan losses$3.5$1.1$9.2$1.9
Noninterest income$21.1$7.2$41.6$17.2
Noninterest expense$28.1$18.2$68.7$48.8
Net income$8.4$4.5$16.1$11.8
Diluted EPS$0.61$0.32$1.17$0.85
Net interest margin5.01%5.83%4.96%5.70%
  • Q3 net income rose 88% year over year; nine-month net income rose 36%. Growth reflected stronger net interest income and especially mortgage banking and card income, partly offset by higher credit-loss provisions and operating costs.
  • Q3 mortgage banking revenue was $14.4 million and credit-card fees were $5.8 million. Nine-month amounts were $28.5 million and $10.7 million, respectively. Management attributed mortgage growth partly to refinancing activity; purchase loans were 34% of Q3 originations versus 44% a year earlier.
  • Net interest margin declined as lower market rates and low-yield PPP loans reduced asset yields. Q3 interest-earning asset yield fell to 5.73% from 7.17%; the cost of interest-bearing liabilities fell to 1.18% from 1.98%.
  • At September 30, total assets were $1.879 billion, up $450.5 million from year-end 2019. Net portfolio loans were $1.223 billion; separately reported SBA-PPP loans were $233.3 million net of fees. Deposits totaled $1.662 billion, including $596.2 million noninterest-bearing and $1.066 billion interest-bearing.
  • Cash and cash equivalents were $205.5 million, versus $114.8 million at December 31, 2019. Nine-month cash flow was negative $35.9 million from operations and negative $299.5 million from investing, offset by $426.1 million provided by financing, principally deposit growth.
  • Borrowings totaled $39.7 million: $22.2 million of FHLB advances and $17.5 million of other borrowed funds. Available capacity included $233.0 million from the FHLB, $15.6 million at the Federal Reserve discount window, and $76.0 million of correspondent-bank lines. Management said it had not needed to draw on these available sources.
  • Stockholders’ equity was $149.4 million. The Bank’s September 30 regulatory ratios included 11.48% CET1 and 12.74% total capital; it was classified as well-capitalized. The company reported nine-month annualized return on average assets of 1.35% and return on average equity of 15.35%.

Material changes and credit position

  • Allowance for loan losses increased to $22.0 million, or 1.77% of portfolio loans, from $13.3 million, or 1.14%, at year-end. Management recorded $9.2 million of provision during the first nine months, citing COVID-19-related economic uncertainty.
  • Nonperforming loans rose to $11.5 million, or 0.92% of portfolio loans, from $4.7 million, or 0.40%, at year-end. The increase was mainly construction loans; management said the identified loans were well secured and no impairment was then expected. Foreclosed real estate was $3.3 million; total nonperforming assets were $14.8 million.
  • COVID-related payment deferrals declined to $30.3 million across 49 loans at September 30 from $144.0 million across 204 loans at June 30. Loans removed from deferral had returned to original payment terms. The filing reports five TDR loans totaling $446,000 and no new TDRs in the first nine months.
  • PPP lending was $238.7 million gross, fully guaranteed by the SBA; the company assigned no loan-loss allowance, citing remote expected loss. It reported $5.4 million of net unearned fees and no remaining commitments to originate PPP loans.
  • Noninterest expense increased 54% in Q3, led by salaries and benefits and data processing, reflecting growth in mortgage originations, credit-card accounts, and loan and deposit volumes. The company repurchased 254,834 shares for $2.8 million in the first nine months.

Outlook, risks, and contingencies

  • The filing provides no specific earnings or financial guidance. Management said the duration and financial effects of COVID-19 could not be reliably estimated and could materially affect future results, cash flows, capital, liquidity, borrowers’ repayment capacity, and real-estate collateral values.
  • Key disclosed risks include further deterioration in regional economic conditions; rising delinquencies, defaults, provisions, and foreclosures; interest-rate and net-interest-margin sensitivity; reliance on third-party technology and service providers; cybersecurity; and mortgage loan repurchase claims.
  • The company warned that PPP-related legal, compliance, and reputational claims are possible, and that the SBA could limit or deny a guarantee if it finds deficiencies in loan origination, funding, or servicing.
  • Credit commitments and other off-balance-sheet exposures totaled $331.9 million, including $317.0 million of unfunded lines, $9.8 million of mortgage origination commitments, and $5.1 million of letters of credit; not all commitments are expected to be drawn. Management reported no material legal proceedings and no subsequent events requiring accrual or disclosure.

Important facts for investors to verify

  • Whether COVID-19-related deferrals returning to regular payments remain current and whether nonperforming construction and commercial loans require additional reserves or charge-offs.
  • How PPP forgiveness, fee recognition, and SBA guarantee compliance affect future income and credit exposure.
  • Whether elevated mortgage refinancing and OpenSky card growth can be sustained, and how their associated processing and technology costs evolve.
  • How deposit growth, available borrowing capacity, and liquidity hold up if customer balances or funding conditions change.
  • Whether margin pressure continues as market rates remain low, and how changes in rates affect earnings and capital under the company’s stated interest-rate sensitivities.