Capital Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Results are unaudited. The company is a bank holding company operating commercial banking, residential mortgage lending and the OpenSky secured-credit-card business, primarily serving the Washington, D.C. and Baltimore region for banking operations.
Financial performance and condition
- Profit: Net income was $2.934 million, down 11.6% from $3.319 million in Q1 2019. Diluted EPS was $0.21 versus $0.24. Pretax income declined 8.5% to $4.014 million.
- Revenue and margin: Net interest income rose 20.0% to $17.687 million, supported by higher average loans and other earning assets. Net interest margin declined 30 basis points to 5.16% (3.96% excluding credit cards); net interest spread fell to 4.61% from 4.83%. Noninterest income increased 60.8% to $6.579 million, driven by mortgage banking revenue (+69.1%, to $4.017 million) and credit-card fees (+34.6%, to $2.008 million).
- Expenses and credit provision: Noninterest expense rose 24.5% to $17.843 million, including higher compensation and data-processing costs. Loan-loss provision increased to $2.409 million from $121,000; management attributed $2.2 million of the Q1 2020 provision to COVID-19-related economic deterioration. Net charge-offs were $196,000.
- Assets and loans: Total assets increased to $1.508 billion from $1.428 billion. Net loans were $1.172 billion; gross loans grew to $1.190 billion from $1.174 billion. The allowance for loan losses rose to $15.514 million, or 1.31% of loans, from $13.301 million, or 1.14%.
- Asset quality: Nonperforming loans increased to $5.787 million (0.49% of loans) from $4.720 million (0.40%). Nonperforming assets rose to $9.188 million (0.61% of assets) from $7.104 million (0.50%), including foreclosed real estate of $3.401 million. The filing attributes much of the increase in nonperforming construction loans to one relationship that management believes is well secured.
- Cash flow: Operating activities provided $3.065 million, investing activities used $15.995 million, and financing activities provided $72.976 million. Cash and cash equivalents increased $60.046 million to $174.870 million, primarily alongside deposit growth.
- Funding, debt and liquidity: Deposits totaled $1.303 billion, up from $1.225 billion; noninterest-bearing deposits rose to $363.423 million. FHLB advances were $28.889 million and other borrowed funds were $15.430 million. The company reported $161.8 million of available FHLB capacity, $13.5 million of Federal Reserve borrowing capacity and $28 million of correspondent-bank lines; no Federal Reserve advances were outstanding. Management considered liquidity sufficient at quarter-end.
- Capital: Stockholders’ equity was $136.080 million, up from $133.331 million. The Bank’s CET1 ratio was 10.93%, and it was classified as well capitalized. The company repurchased 112,134 shares during the quarter for approximately $1.3 million.
Material changes and management commentary
- Growth in net interest income and noninterest revenue did not offset increased credit-loss provision and operating expenses, resulting in lower net income. Mortgage loan sale proceeds were $177.5 million, compared with $71.7 million in Q1 2019; OpenSky issued 43,000 cards versus 35,000.
- The company said approximately 94% of its workforce was working remotely while maintaining service. At March 31, it had granted short-term deferrals on nine commercial and consumer loans totaling $10.2 million. By April 30, it had processed more than 1,110 PPP applications totaling approximately $246 million and granted deferrals on loans totaling $107.3 million.
- Management said COVID-19’s duration and financial effects could not be reasonably estimated and could materially affect customers’ repayment ability, collateral values, credit reserves, earnings, cash flows, liquidity and capital. It identified hospitality, food service and retail as sectors to monitor. As of March 31, hospitality and food-service loans totaled $59.0 million and retail loans totaled $35.1 million.
- No earnings guidance or quantified financial outlook is provided. Management said future credit challenges and use of available liquidity could increase depending on the pandemic’s duration and severity. The filing also warns that very low interest rates may compress margins.
- Subsequent-event information: by April 30, OpenSky’s relief program had been used by 2,139 customers, representing $716,000 in balances. The filing cautions that PPP participation carries compliance, litigation, reputational and SBA-guarantee risks. Management stated that litigation in the ordinary course was not expected to materially affect the company; no material legal proceedings were reported.
Most important facts for investors to verify
- Whether COVID-19-related borrower stress translates into rising delinquencies, nonperforming assets, charge-offs or additional loan-loss provisions, especially in affected sectors and among borrowers receiving deferrals.
- Whether the allowance for loan losses remains adequate as economic conditions and collateral values change; the filing says the effects cannot yet be quantified.
- Whether deposit growth, available borrowing facilities and reported liquidity remain sufficient as PPP lending and customer funding needs evolve.
- Whether lower interest rates and changes in asset and deposit pricing further pressure net interest margin and earnings.
- Whether PPP processing, forgiveness, servicing and compliance create costs, litigation exposure, or risk to SBA guarantees.