Capital Bancorp, Inc. — Q2 2023 Form 10-Q
Business and period: Capital Bancorp is a bank holding company operating primarily through Capital Bank, with commercial banking, mortgage lending, and OpenSky credit-card businesses. This unaudited report covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are U.S. dollars.
Key financial results
| Metric | Three months ended June 30, 2023 | Comparable 2022 period | Six months ended June 30, 2023 | Comparable 2022 period |
|---|---|---|---|---|
| Net interest income | $35.3 million | $35.4 million | $69.8 million | $68.7 million |
| Provision for credit losses | $2.9 million | $2.0 million | $4.5 million | $3.0 million |
| Noninterest income | $6.7 million | $8.4 million | $12.7 million | $16.7 million |
| Noninterest expense | $29.6 million | $27.1 million | $55.8 million | $54.2 million |
| Net income, per financial statements | $7.3 million | $11.5 million | $17.1 million | $21.7 million |
| Diluted earnings per share | $0.52 | $0.80 | $1.20 | $1.52 |
| Net interest margin | 6.63% | 7.06% | 6.64% | 6.93% |
Quarterly net income fell 36.4% year over year; six-month net income fell about 21.5%. Higher funding costs, larger credit-loss provisions, lower credit-card fees, and increased compensation weighed on results. Loan growth and higher loan yields supported interest income, but did not fully offset funding-cost increases and weaker fee income.
Financial position, cash flow, and liquidity
- Balance sheet: Total assets were $2.23 billion, up 4.9% from year-end 2022. Portfolio loans, net of allowance, were $1.81 billion, up 6.3%; total deposits were $1.93 billion, up 10.0%. Stockholders’ equity was $237.4 million, and equity was 10.7% of total assets.
- Funding and liquidity: Cash and cash equivalents were $119.3 million. Borrowings declined to $34.1 million from $119.1 million, including $22.0 million of FHLB advances. The company reported $359.6 million of remaining FHLB capacity, $21.8 million of Federal Reserve discount-window capacity, $150.0 million available under the Bank Term Funding Program, and $76.0 million in correspondent-bank lines; none of the latter three facilities had balances outstanding.
- Deposits: Uninsured deposits were approximately $860.4 million, or 44.5% of deposits. Brokered time deposits were $128.7 million, or 6.7% of deposits. Average interest-bearing deposit cost was 2.98% for the first half, versus 0.77% for full-year 2022.
- Cash flows, first half: Operating activities provided $18.8 million; investing activities used $65.4 million; financing activities provided $85.6 million. Cash and cash equivalents increased $38.9 million.
- Credit and capital: The allowance for credit losses was $27.5 million, or 1.50% of portfolio loans. Nonaccrual loans were $15.7 million, or 0.85% of portfolio loans, versus 0.56% at year-end. The Bank remained classified as well capitalized; its total risk-based capital ratio was 14.08% and Tier 1 leverage ratio was 9.77%.
Material changes and management commentary
- Deposit interest expense rose sharply as rates increased: quarterly interest expense was $9.7 million versus $1.2 million a year earlier. The quarterly net interest margin declined 43 basis points year over year; management attributed the pressure chiefly to deposit-cost increases outpacing loan-yield gains.
- Credit-card fees fell 24.2% in Q2 and 26.5% for the first half. OpenSky accounts declined to 540,058 from 616,435 a year earlier, and the portfolio shifted toward partially secured and unsecured exposure. First-half net charge-offs were $4.2 million, compared with $1.7 million in 2022.
- Mortgage banking revenue declined 25.0% for the first half. Management cited elevated interest rates and lower origination activity; Q2 mortgage originations were $61.5 million versus $84.4 million a year earlier.
- First-half salaries and benefits increased 21.2%, partly reflecting commercial-bank headcount growth. Lower data-processing expense partially offset the increase.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $804,000 and reduced the reserve for unfunded commitments by $775,000, for a net $29,000 reduction to retained earnings. The filing reports no significant qualitative-scorecard changes after implementation.
- Management corrected prior disclosures of owner-occupied commercial real estate balances: December 31, 2022 was revised from $387.7 million to $300.8 million, and March 31, 2023 from $377.4 million to $300.0 million. The filing says certain loans had been misclassified as owner-occupied.
Outlook, risks, and contingencies
The filing provides no specific earnings or balance-sheet guidance. Management identifies interest rates, deposit retention and funding costs, regional economic conditions, commercial real estate exposure, credit-card losses and compliance, mortgage-market weakness, liquidity, and operational, cyber, and regulatory risks as factors that could affect results. The company describes itself as asset-sensitive for periods under one year; its static earnings-at-risk analysis estimates net interest income would rise 8.5% under a 300-basis-point rate increase and fall 5.4% under a 300-basis-point decrease, subject to modeling assumptions and behavioral uncertainty. Mortgage repurchase reserves were $1.2 million; no loans were repurchased in the periods presented. The company reported no material legal proceedings, no material risk-factor changes, and effective disclosure controls.
Important facts for investors to verify
- The six-month income statement reports net income of $17.053 million, while the MD&A table reports $17.034 million; the MD&A pre-tax income figure also differs from the financial statements. Confirm the correct reported figures and the reason for the discrepancies.
- Assess deposit stability and pricing, particularly given uninsured deposits of 44.5%, rising deposit costs, and the disclosed concentration in title-company and OpenSky-related deposits.
- Track nonaccrual loans, charge-offs, credit-card account trends, and the adequacy of the allowance as loan balances grow and credit-card mix changes.
- Review commercial real estate concentration and the effect of the owner-occupied classification correction on prior-period comparisons.
- Evaluate the assumptions behind interest-rate sensitivity and the availability and collateral requirements of contingent liquidity facilities.
- Consider continued repurchases: the company bought back 285,344 shares for $5.0 million in the first half, while also managing growth, liquidity, and capital.