Capital Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are against December 31, 2022. Capital Bancorp is a bank holding company operating commercial banking, mortgage lending and OpenSky credit-card businesses, principally in the Washington, D.C. and Baltimore markets. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $36.8 | $36.7 | $106.6 | $105.4 |
| Net interest margin | 6.71% | 7.24% | 6.66% | 7.01% |
| Net income | $9.8 | $11.1 | $26.8 | $32.8 |
| Diluted EPS | $0.70 | $0.77 | $1.90 | $2.29 |
| Provision for credit losses | $2.3 | $1.3 | $6.8 | $4.2 |
| Noninterest income | $6.3 | $7.1 | $19.0 | $23.8 |
| Noninterest expense | $28.0 | $28.1 | $83.9 | $82.4 |
- Balance sheet: Total assets were $2.27 billion, up 7.0% from year-end 2022. Net portfolio loans were $1.83 billion, up 7.7%; deposits were $1.97 billion, up 11.9%. Stockholders’ equity was $242.9 million, and equity was 10.7% of assets.
- Funding costs and margin: Q3 net interest income was nearly flat year over year despite loan growth and higher asset yields, as funding costs rose sharply. Average cost of interest-bearing liabilities increased to 3.37% from 0.66%; average loan yield increased to 9.72% from 8.94%. Excluding credit-card and remaining SBA-PPP loans, adjusted net interest margin was 4.05% in Q3 and 3.98% year to date, versus 4.16% and 3.94%, respectively, in 2022. These adjusted figures are non-GAAP measures.
- Credit quality: Allowance for credit losses was $28.3 million, or 1.52% of portfolio loans. Q3 net charge-offs were $1.8 million (0.38% annualized); year-to-date net charge-offs were $6.0 million (0.45%), versus $3.3 million (0.29%) in the prior-year period. Nonaccrual loans rose to $15.2 million from $9.4 million at year-end 2022; past-due loans totaled $38.2 million. A single $8.2 million multifamily residential loan was downgraded in Q1.
- Cash flow: For the nine months, operating cash flow was $41.2 million, investing cash flow was negative $91.7 million and financing cash flow was positive $116.2 million. Cash and cash equivalents increased $65.7 million to $146.2 million.
- Borrowings and liquidity: Total borrowings declined to $34.1 million from $119.1 million at year-end, including FHLB advances of $22.0 million. Disclosed unused capacity included $347.7 million at the FHLB, $150.0 million under the Bank Term Funding Program, $16.8 million through the Federal Reserve borrower-in-custody program and $76.0 million in correspondent-bank lines; none of these facilities had outstanding balances at quarter-end. The company reported $56.1 million of unpledged securities available as additional collateral.
- Capital and securities: The Bank remained “well capitalized” under prompt corrective action rules; its September 30 total capital ratio was 14.51% and CET1 ratio was 13.25%. Available-for-sale securities had $23.3 million of gross unrealized losses and $17.8 million of after-tax accumulated other comprehensive loss. Management attributed losses to interest rates and market conditions, not credit deterioration, and stated it intended and was able to hold the securities until maturity or recovery.
Material changes and management commentary
- Q3 net income declined 11.8% year over year; nine-month net income declined 18.2%. Higher interest income was substantially offset by sharply higher deposit and borrowing expense, increased credit-loss provision, and lower noninterest income.
- Credit-card fees declined 20.6% in Q3 and 24.7% year to date. OpenSky accounts fell to 529,205 from 576,844 a year earlier; management cited lower interchange and other fee income. Credit-card charge-offs were a major component of losses.
- Mortgage banking revenue was lower year to date amid elevated rates and weaker mortgage activity. Q3 originations were $50.0 million versus $60.5 million a year earlier, while gain-on-sale margin increased to 2.57% from 2.05%.
- Year-to-date salaries and benefits rose 19.2%, partly reflecting commercial-bank headcount growth; lower data-processing and professional fees partly offset the increase. The company repurchased 385,919 shares for approximately $7.0 million through September 30 and paid $2.8 million in dividends.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $804,000 and reduced the reserve for unfunded commitments by $775,000, for a net $29,000 reduction to retained earnings.
- Management provided no numerical earnings or financial guidance in the supplied filing text. It noted continued sensitivity to rates, deposit pricing and customer behavior, and mortgage-market pressure. It reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Risks, contingencies and unusual items
- Funding risk includes deposit pricing and mix changes; approximately $857.7 million, or 43.6%, of deposits were uninsured at September 30, 2023. Title-company deposits represented 15% of deposits, and OpenSky-secured deposits represented 9%.
- Commercial real estate exposure, regional economic concentration, rising credit-card losses, interest-rate sensitivity, and potential deterioration in collateral or borrower credit are key risks identified in the filing. Non-owner-occupied commercial real estate totaled $350.6 million, or 18.7% of gross loans.
- The filing corrected prior owner-occupied commercial real estate classifications: year-end 2022 and March 2023 balances were revised to $300.8 million and $300.0 million, respectively, from previously disclosed $387.7 million and $377.4 million. The filing describes a classification correction; it does not report a restatement of earnings.
- Mortgage loans sold remain subject to investor repurchase claims for specified documentation, compliance or performance issues. The related reserve was $1.2 million; no loans were repurchased in the reported periods.
- Interest-rate simulations estimated a 2.4% increase in 12-month net interest income under a +100 basis-point parallel shock and a 5.1% decrease under a −300 basis-point shock. Results depend on assumptions and may differ from actual outcomes.
Investor verification priorities
- Track deposit retention, pricing, uninsured balances and the cost of funding against loan yields and net interest margin.
- Review credit-card account trends, charge-offs, delinquency migration and allowance adequacy, alongside the rising nonaccrual and past-due loan balances.
- Assess commercial real estate concentrations, borrower performance and the corrected owner-occupied classifications, including the $8.2 million downgraded loan.
- Confirm available borrowing capacity, collateral encumbrances and liquidity under stress; distinguish stated facility capacity from immediately available cash.
- Monitor securities’ unrealized losses and any changes in management’s ability or intent to hold them, plus mortgage repurchase exposure and the reserve.