Capital Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Capital Bancorp is a bank holding company operating commercial banking, residential mortgage lending, and the OpenSky credit-card business, principally in the Washington, D.C. and Baltimore markets. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $36.7 million | $32.1 million | $105.4 million | $84.0 million |
| Provision for loan losses | $1.3 million | $1.0 million | $4.2 million | $2.3 million |
| Noninterest income | $7.1 million | $12.6 million | $23.8 million | $40.0 million |
| Noninterest expense | $28.1 million | $28.6 million | $82.4 million | $81.6 million |
| Net income | $11.1 million | $11.2 million | $32.8 million | $29.8 million |
| Diluted EPS | $0.77 | $0.79 | $2.29 | $2.11 |
| Net interest margin | 7.24% | 6.28% | 7.01% | 5.65% |
Q3 pretax income was $14.4 million and income tax expense was $3.3 million; the effective tax rate was 23.1%. For the nine-month period, pretax income was $42.6 million, tax expense was $9.8 million, and the effective tax rate was 23.0%. Management reported net interest margin excluding credit-card and PPP loans of 4.16% for Q3 and 3.94% for the nine-month period.
At September 30, total assets were $2.009 billion, deposits $1.738 billion, portfolio loans held for investment net of allowance $1.622 billion, and total stockholders’ equity $214.0 million. Total assets were down 2.2% from year-end 2021; portfolio loans held for investment net increased 8.2%, while deposits declined 3.3%. Available-for-sale securities were $269.6 million. Accumulated other comprehensive loss was $17.6 million, principally reflecting unrealized securities losses.
Cash and cash equivalents were $37.1 million, versus $183.4 million at December 31, 2021. For the nine months, operating activities provided $45.4 million, investing activities used $130.5 million, and financing activities used $61.2 million; cash decreased $146.3 million. Total borrowings were $34.1 million: $22.0 million of FHLB advances and $12.1 million of other borrowed funds. The Bank reported $295.2 million of available FHLB capacity, $26.7 million of Federal Reserve borrowing capacity, and $76.0 million of unused correspondent-bank lines.
The Bank was classified as well-capitalized. Its September 30 ratios included a 9.60% Tier 1 leverage ratio, 13.39% common equity Tier 1 ratio, and 14.65% total capital ratio. The allowance for loan losses was $26.1 million, or 1.58% of portfolio loans, compared with $25.2 million and 1.65% at year-end 2021. Nonaccrual loans were $8.4 million, or 0.51% of portfolio loans. Uninsured deposits were approximately $960.2 million, or 55.3% of deposits.
Material changes versus comparable periods
- Q3 net interest income rose 14.4% year over year, but net income slipped 0.7% as noninterest income fell 43.6%. For the nine months, net income increased 10.1%, supported by 25.5% growth in net interest income.
- Mortgage banking revenue fell 78.3% in Q3 and 75.3% year to date. Q3 mortgage originations declined 72.1% to $60.5 million from $217.2 million a year earlier; gain-on-sale margin fell to 2.05% from 2.67%.
- Credit-card fees fell 26.9% in Q3 and 16.7% year to date, amid fewer active accounts. Q3 OpenSky account balances declined by 40,000 net accounts.
- Portfolio lending expanded while PPP loans ran off: PPP loans were $2.7 million at quarter-end versus $108.3 million at year-end 2021. The loan-loss provision rose, primarily due to credit-card portfolio growth and losses.
- Q3 noninterest expense declined 1.9%, chiefly due to lower data-processing costs after contract renegotiations; nine-month expense increased 1.0% as higher compensation, professional fees, and advertising partly offset those savings.
Outlook, risks, and unusual items
The filing gives no formal earnings or financial guidance. Management said higher interest rates, low housing inventory, and building-material shortages were likely to continue suppressing mortgage originations into 2023. It cited inflation, economic deterioration, changing interest rates, regional-market concentration, commercial real-estate exposure, credit quality, liquidity, and the performance and regulatory risks of OpenSky and mortgage banking among factors that could affect results.
Credit-card net charge-offs were $1.6 million in Q3, all from that portfolio, and $3.3 million for the nine months. Management said it tightened credit policies in response to macroeconomic deterioration and was beginning to see delinquencies flatten. The filing also notes that the expected impact of adopting CECL in Q1 2023 was still being refined; the amount is not clearly quantified.
Available-for-sale securities had $23.5 million of gross unrealized losses at quarter-end; management attributed them to interest rates and market conditions rather than credit deterioration and said it had the intent and ability to hold the securities until maturity or recovery. The company authorized a new $10 million share-repurchase program through December 31, 2023; no repurchases had occurred by quarter-end. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether rising rates and deposit competition affect funding costs, deposit retention, and liquidity, particularly given the 55.3% uninsured-deposit share and lower cash balance.
- Whether credit-card delinquencies, charge-offs, and reserve needs stabilize after policy tightening; review the allowance and upcoming CECL adoption impact.
- How quickly mortgage volumes and OpenSky account activity respond to market conditions, and whether lower noninterest income offsets continued net-interest-income growth.
- Whether securities-related unrealized losses, loan growth, and any future capital deployment affect equity and regulatory capital.
- Whether stated liquidity capacity, including FHLB and other borrowing lines, remains available and sufficient under adverse conditions.