Business context and reporting period
Capital Bancorp, Inc. is a Maryland bank holding company operating in the Washington, D.C. and Baltimore markets. Its businesses include commercial banking, residential mortgage banking (Capital Bank Home Loans), and nationwide secured credit cards (OpenSky). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $18.6 million | $16.5 million | $36.3 million | $31.3 million |
| Provision for loan losses | $3.3 million | $0.7 million | $5.7 million | $0.8 million |
| Noninterest income | $13.9 million | $5.9 million | $20.5 million | $10.0 million |
| Noninterest expense | $22.7 million | $16.2 million | $40.5 million | $30.5 million |
| Net income | $4.8 million | $4.0 million | $7.7 million | $7.3 million |
| Diluted EPS | $0.34 | $0.29 | $0.55 | $0.53 |
- Q2 net interest margin was 4.72%, down from 5.79%; net interest spread was 4.19%, versus 5.15%. The filing attributes margin pressure primarily to lower interest rates, partly offset by asset growth. For the six-month period, the average-balance table reports NIM of 4.92% versus 5.63%; MD&A also cites 4.38% in its discussion, apparently referring to spread. Verify the inconsistent presentation.
- Mortgage banking revenue rose to $10.1 million in Q2 from $3.7 million, reflecting refinancing activity and increased loan sales. Credit card fees increased to $2.9 million from $2.0 million. Higher mortgage commissions, staffing, and data-processing costs contributed to expense growth.
- At June 30, total assets were $1.82 billion, up from $1.43 billion at year-end 2019. Portfolio loans, net of allowance, were $1.19 billion; SBA Paycheck Protection Program (PPP) loans, net of fees, were $229.6 million. Deposits totaled $1.61 billion, compared with $1.23 billion at year-end, including $564.0 million of noninterest-bearing deposits.
- Cash and cash equivalents were $199.7 million, versus $114.8 million at year-end. Six-month operating cash flow was negative $27.0 million and investing cash flow negative $265.5 million, largely reflecting PPP and portfolio loan funding and mortgage activity; financing cash flow was positive $377.4 million, primarily from deposit growth.
- Total liabilities were $1.68 billion and stockholders’ equity $142.1 million at June 30. FHLB advances were $25.6 million and other borrowed funds $17.4 million. The Bank was reported as well-capitalized; its CET1 ratio was 11.10%.
Material changes and credit quality
- The allowance for loan losses increased to $18.7 million, or 1.54% of portfolio loans, from $13.3 million, or 1.14%, at year-end. Management recorded $5.7 million of provision in the first half in response to COVID-19 uncertainty; six-month net charge-offs were $330,000.
- Nonperforming loans were $5.9 million, or 0.48% of portfolio loans, versus $4.7 million, or 0.40%, at year-end. Nonperforming assets totaled $9.2 million. Management attributed a notable construction-loan increase to one relationship it believes is well secured.
- More than 1,220 PPP loans totaling approximately $236.3 million had been processed by June 30. The loans carry a 100% SBA guarantee; the company assigned no allowance based on its assessment that expected losses were remote.
- Short-term principal and/or interest deferrals covered approximately $144.4 million of commercial and consumer portfolio loans at June 30, excluding OpenSky. The filing says interest continued to accrue during relief periods.
Outlook, risks and contingencies
The filing provides no numerical earnings guidance. Management said the duration and severity of COVID-19 effects could not be reliably estimated and could materially affect customers, collateral values, credit quality, earnings, liquidity, and capital. Most branches remained temporarily closed, while a significant portion of the workforce worked remotely. Management said available liquidity was sufficient and that it had not needed to draw on available backup sources.
- Available borrowing capacity included $253.8 million from the FHLB, $15.5 million from the Federal Reserve discount window, and $76.0 million in correspondent-bank lines; these correspondent lines were unused. PPP loans could also be pledged to the Federal Reserve facility.
- Key risks include worsening borrower performance, real-estate collateral declines, further credit-loss provisions, interest-rate and net-interest-income volatility, deposit or funding changes, operational and cybersecurity disruptions, and PPP compliance, litigation, or SBA-guarantee risks.
- Credit extension commitments totaled $306.6 million, including $290.9 million in unused lines, $10.4 million in mortgage origination commitments, and $5.3 million in letters of credit; actual funding needs may be lower because commitments may expire unused.
- Management reported no material legal proceedings and no subsequent events requiring accrual or disclosure. The Bank exceeded applicable regulatory capital requirements. The company repurchased 113,634 shares in the first half for approximately $1.3 million.
Important facts for investors to verify
- How COVID-19 deferrals perform when relief periods end, and whether delinquencies, criticized loans, nonperforming assets, and loss provisions increase.
- PPP loan forgiveness, fee recognition, SBA guarantee compliance, and any resulting legal or reputational exposure.
- Whether mortgage banking’s unusually strong revenue and refinancing volumes are sustainable, alongside associated commissions and operating costs.
- The six-month net interest margin and spread figures: MD&A presents inconsistent figures, so confirm the intended comparable metric.
- Liquidity, deposit concentration and mix, capital ratios, and contingent funding capacity as pandemic conditions evolve.