Capital Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. Capital Bancorp is a bank holding company whose businesses include commercial banking in the Washington, D.C.–Baltimore region, residential mortgage lending through Capital Bank Home Loans, and nationwide secured and other credit cards through OpenSky. This unaudited filing covers the three months ended March 31, 2022; balance-sheet comparisons are principally with December 31, 2021, and results comparisons with Q1 2021.
Key financial results
| Metric | Q1 2022 / March 31, 2022 | Comparable period / change |
|---|---|---|
| Total assets | $2.122 billion | Up $67.2 million, or 3.3%, from December 31, 2021; up 1.5% from March 31, 2021 |
| Net interest income | $33.3 million | Up 36.4% from $24.4 million in Q1 2021 |
| Net interest margin | 6.79% | 5.15% in Q1 2021; excluding credit-card and SBA-PPP loans, 3.82% versus 3.63% |
| Net income | $10.2 million | Up 13.7% from $9.0 million |
| Diluted earnings per share | $0.71 | $0.65 in Q1 2021 |
| Noninterest income | $8.3 million | Down 40.6% from $14.0 million, primarily due to lower mortgage banking revenue |
| Noninterest expense | $27.1 million | Up 5.2% from $25.8 million |
| Provision for loan losses | $952,000 | Up from $503,000 |
| Cash and cash equivalents | $313.8 million | Up $130.4 million from year-end 2021 |
| Deposits | $1.863 billion | Up $65.6 million from year-end 2021; essentially unchanged year over year |
| Borrowings | $34.1 million | Unchanged from year-end 2021 |
| Stockholders’ equity | $201.5 million | Up $3.6 million from year-end; includes $6.7 million after-tax securities-related other comprehensive loss |
Income, margins, and cash flow
- Interest income rose 29.1% to $34.4 million; interest expense fell 51.2% to $1.1 million. Management attributed the increase in net interest income mainly to credit-card portfolio growth and higher earnings, alongside lower deposit costs.
- The reported 6.79% net interest margin was substantially supported by SBA-PPP fee recognition and credit-card loans: those categories together contributed 297 basis points, versus 152 basis points a year earlier.
- Mortgage banking revenue declined 76.9% to $1.8 million. Mortgage originations fell 68.8% to $110.4 million from $353.8 million; gain-on-sale margin was 2.77%, compared with 3.00%.
- Net income was $10.2 million, while comprehensive income was $3.5 million, reflecting a $6.7 million after-tax unrealized loss on available-for-sale securities.
- Operating cash flow was $9.2 million, investing cash flow was positive $56.1 million, and financing cash flow was positive $65.1 million. Cash increased by $130.4 million. Investing cash flow included $57.2 million of SBA-PPP loan repayments; operating cash flow reflected mortgage loan sales and originations.
Financial position, asset quality, and funding
- Net portfolio loans held for investment were $1.501 billion, up $2.2 million from year-end. Gross portfolio loans were $1.533 billion; growth in residential and commercial real estate lending was partly offset by a decline in credit-card balances. SBA-PPP loans, reported separately, fell to $51.1 million net from $108.3 million.
- The allowance for loan losses was $25.3 million, or 1.65% of portfolio loans, unchanged as a percentage from year-end. Q1 net charge-offs were $881,000, all from credit cards; management said these related to portfolio growth and account cycling, rather than general credit deterioration.
- Nonaccrual loans were $5.6 million, or 0.39% of portfolio loans, versus $11.3 million and 0.75% at year-end. Five troubled debt restructurings totaled $525,000. The filing reports no material deterioration in overall credit quality, but loan performance remains subject to regional and broader economic conditions.
- Deposits included $825.2 million of noninterest-bearing balances and $1.038 billion of interest-bearing balances. Approximately $989.9 million, or 52.7% of deposits, was uninsured. The company reported no wholesale time deposits.
- Available liquidity included $313.8 million of cash, $326.2 million of unused FHLB borrowing capacity, $21.1 million of Federal Reserve borrowing capacity, and $76.0 million of unused correspondent-bank credit lines. Management stated that liquidity was sufficient to fund loans and other cash needs.
- The Bank was classified as well-capitalized and met applicable regulatory requirements. At March 31, its Tier 1 leverage ratio was 8.74%, common equity Tier 1 ratio 13.10%, and total capital ratio 14.36%. The company’s equity-to-assets ratio was 9.5%.
Changes, outlook, risks, and unusual items
- Business mix and earnings: Credit-card portfolio interest income increased materially, while mortgage activity contracted as rising rates slowed refinancing and originations. OpenSky reported a net decrease of 30,000 secured accounts in Q1 2022, compared with 74,000 net new accounts in Q1 2021; credit-card fees remained about $5.9 million.
- Costs: Salaries and benefits rose 20.3%, professional fees 42.9%, and advertising 96.8%. Lower data-processing and loan-processing costs partly offset those increases. Management cited hiring and compliance infrastructure investment, OpenSky marketing, renegotiated technology contracts, and lower mortgage volumes.
- Outlook: The filing gives no numerical earnings or revenue guidance. Management said historically low housing inventory, construction-material shortages, and fluctuating interest rates were likely to continue suppressing mortgage originations into 2022. It also noted uncertainty around COVID-19’s continuing effects and the economic environment.
- Market and credit risks: The company identifies interest-rate and securities valuation exposure, regional concentration in the Washington, D.C. and Baltimore markets, commercial real estate and business lending risks, credit-card losses, liquidity, cybersecurity and technology dependence, regulatory/compliance matters, and COVID-19 and geopolitical uncertainty, including the war in Ukraine. Its interest-rate model estimated that a parallel +200-basis-point shock would increase 12-month net interest income by 8.8%; this is a modeled sensitivity, not guidance, and actual outcomes may differ.
- Securities and accounting: Available-for-sale securities fell to $172.7 million fair value from $184.5 million at year-end, with unrealized losses increasing as market interest rates changed. Management attributed the losses to interest rates and market conditions rather than credit deterioration and stated it had the intent and ability to hold the securities until maturity or recovery. The company was preparing for the expected 2023 adoption of the current expected credit loss standard; it anticipated an effect on reserves, but the amount was not yet clear.
- Other disclosures: Management reported effective disclosure controls and no material legal proceedings. It enhanced certain IT general controls during the quarter. A share repurchase program was pending regulatory approval; no shares were repurchased in Q1.
Investor verification priorities
- Assess how much of the elevated reported net interest margin and year-over-year earnings growth is attributable to credit-card economics and SBA-PPP fee recognition, and how sustainable the underlying margin is.
- Track credit-card delinquencies, charge-offs, account trends, and allowance adequacy as the portfolio changes; verify the effect of broader consumer conditions.
- Monitor mortgage originations and gain-on-sale margins against management’s stated rate, inventory, and materials headwinds, and review the mortgage put-back reserve, which was $1.2 million.
- Evaluate the potential impact of further rate increases on deposit costs, loan yields, and the fair value of securities; verify modeled assumptions against actual results.
- Review uninsured deposit concentration, liquidity sources, and the status of the planned share repurchase program, as well as the eventual CECL adoption impact.