Capital Bancorp, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Capital Bancorp is the holding company for Capital Bank, serving the Washington, D.C. and Baltimore metropolitan areas. Its four segments are Commercial Banking, Capital Bank Home Loans (mortgage), OpenSky (credit cards) and Corporate. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods unless noted. Figures below are in U.S. dollars; “million” amounts are rounded.
Financial performance and position
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Net interest income | $35.4 million, up 28.6% | $68.7 million, up 32.3% |
| Provision for loan losses | $2.0 million, up 160.6% | $3.0 million, up 132.6% |
| Noninterest income | $8.4 million, down 37.9% | $16.7 million, down 39.3% |
| Noninterest expense | $27.1 million, down 0.3% | $54.2 million, up 2.4% |
| Net income | $11.5 million, up 19.3%; diluted EPS $0.80 | $21.7 million, up 16.6%; diluted EPS $1.52 |
| Net interest margin | 7.06%, versus 5.47% | 6.93%, versus 5.32% |
Management attributed net interest income growth mainly to higher credit-card and other portfolio loan balances and yields, as well as lower deposit costs. The reported margin included a substantial contribution from credit-card and SBA-PPP loans: 320 basis points in Q2 and 309 basis points year to date. Excluding both, margin was 3.86% for Q2 and 3.84% year to date.
Mortgage banking revenue fell to $1.5 million in Q2 from $5.3 million, and to $3.3 million year to date from $13.0 million, reflecting lower originations and gain-on-sale margins. OpenSky fees also declined year over year. Salaries, professional fees and advertising rose, partly offset by lower data-processing expense following a contract renegotiation and lower mortgage-related processing costs. The effective tax rate was 21.2% for Q2 and 22.9% year to date.
At June 30, 2022, total assets were $2.15 billion, up from $2.06 billion at December 31, 2021. Portfolio loans held for investment, net, were $1.58 billion, versus $1.50 billion; deposits were $1.89 billion, versus $1.80 billion. Cash and cash equivalents were $250.9 million. Available-for-sale securities totaled $226.5 million, but their unrealized losses had reduced accumulated other comprehensive income by $13.3 million, compared with a $1.1 million loss at year-end. Stockholders’ equity was $207.3 million, up from $197.9 million.
First-half cash from operating activities was $29.5 million, investing activities used $52.7 million, and financing activities provided $90.7 million. Cash and cash equivalents increased $67.5 million to $250.9 million. The company paid $1.4 million in dividends during the half-year.
Total borrowings were $34.1 million, comprising $22.0 million of FHLB advances and $12.1 million of other borrowed funds. The Bank reported $304.2 million of available FHLB capacity, $27.8 million at the Federal Reserve discount window and $76.0 million of unused correspondent-bank lines. Management said liquidity was sufficient. Approximately $1.0 billion, or 55.2%, of deposits were uninsured. The Bank was classified as well-capitalized; its June 30 ratios included a 9.11% Tier 1 leverage ratio and a 14.34% total capital ratio.
Material changes, outlook and risks
- Growth and credit: Gross portfolio loans increased to $1.62 billion from $1.53 billion at year-end, while SBA-PPP loans declined to $16.2 million from $111.5 million. The allowance was $26.4 million, or 1.64% of portfolio loans excluding PPP loans, compared with 1.65% at year-end. Nonaccrual loans were $7.1 million, down from $11.3 million. Net charge-offs were $868,000 in Q2 and $1.7 million for the first half, primarily in credit cards; management attributed these to portfolio growth and certain charges above credit limits, not broad credit deterioration.
- Mortgage and card outlook: Management expected rising and fluctuating rates, low housing inventory and construction-material shortages to continue suppressing mortgage originations through the remainder of 2022. Purchase mortgages represented 78.4% of first-half originations, versus 35.7% a year earlier. OpenSky’s Q2 net new secured accounts declined by 14,000, compared with 65,000 net new accounts in Q2 2021; management cited the fading effect of stimulus-related account growth, attrition and competition.
- Rate exposure: The company described itself as asset-sensitive. Its static 12-month earnings-at-risk analysis estimated net interest income changes of -3.5% for a 100-basis-point rate decline, +3.3% for a 100-basis-point increase and +11.6% for a 300-basis-point increase. These are model estimates, not forecasts, and depend on assumptions about deposit behavior, prepayments and other factors.
- Other risks and contingencies: Management cited inflation, economic and pandemic uncertainty, the Ukraine war, interest-rate and securities-value volatility, regional concentration, commercial real estate exposure, credit quality, liquidity, cybersecurity, third-party technology dependence, consumer-card compliance and the LIBOR transition. Credit-extension commitments totaled $375.4 million, including $364.8 million of unfunded lines; actual funding needs may be lower because commitments may expire unused. The mortgage put-back reserve was $1.2 million; no loans were repurchased in Q2. The company reported no material legal proceedings and no material change to previously disclosed risk factors.
- Accounting and capital actions: The company was preparing for the expected January 1, 2023 adoption of the current expected credit loss standard (CECL); the eventual reserve effect was not quantified. On July 25, 2022, it announced authorization to repurchase up to $10.0 million of common stock through December 31, 2023. Management gave no specific earnings or financial guidance in the provided filing text.
Important facts for investors to verify
- Whether credit-card growth and charge-offs develop as management expects, and whether the allowance remains adequate as portfolio mix and economic conditions change.
- How deposit pricing, uninsured-deposit concentration and interest-rate movements affect funding costs, liquidity and realized net interest margins.
- Whether mortgage volumes and OpenSky account and fee trends stabilize or continue to weaken.
- The final CECL model assumptions and estimated transition adjustment; the filing does not provide a clear quantified impact.
- Whether the announced share-repurchase authorization is used, and how any repurchases affect capital and per-share results.
- The significant unrealized securities losses and sensitivity-model assumptions, including actual results versus modeled rate scenarios.