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
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine 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 margin | 5.01% | 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.