Capital Bancorp Inc quarterly report, Q1 FY2021

Открыть документ

Capital Bancorp, Inc. — Q1 2021 Form 10-Q

Business context and period: The company is the bank holding company for Capital Bank, N.A. Its businesses include commercial banking in the Washington, D.C.–Baltimore region, residential mortgage lending through Capital Bank Home Loans, and nationwide secured credit cards through OpenSky. This unaudited report covers the three months ended March 31, 2021; results are compared with Q1 2020 unless noted. Balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars.

Financial performance and position

  • Profit: Net income was $9.0 million, up 206% from $2.9 million; diluted EPS was $0.65 versus $0.21. Pretax income was $12.1 million and income tax expense was $3.1 million. Effective tax rate was 25.9%.
  • Interest income and margin: Interest income rose 22.5% to $26.6 million. Net interest income increased 38.2% to $24.4 million, while net interest margin was essentially flat at 5.15% versus 5.16%. Excluding SBA-PPP and credit card loans, management reported a 3.70% margin, down from 3.96%.
  • Noninterest income and expense: Noninterest income rose 152% to $14.0 million, led by credit card fees of $5.9 million and mortgage banking revenue of $7.7 million. Noninterest expense increased 53% to $25.8 million; data processing expense rose 126% to $9.3 million, primarily reflecting OpenSky and account growth.
  • Credit costs and asset quality: Loan-loss provision fell to $0.5 million from $2.4 million, which management attributed mainly to improving economic conditions. Allowance for loan losses was $23.6 million, or 1.79% of portfolio loans. Net charge-offs were $0.4 million. Nonperforming assets were $12.1 million, including $8.8 million of nonperforming portfolio loans and $3.3 million of foreclosed real estate.
  • Cash flow and liquidity: Cash and cash equivalents were $318.0 million, up from $146.9 million at year-end. Q1 operating cash flow was $54.6 million; investing cash flow was negative $92.6 million and financing cash flow was positive $209.1 million. The company reported $190.7 million of available FHLB capacity, $15.6 million at the Federal Reserve discount window, and $76.0 million of unused correspondent-bank lines; it said these facilities had not been drawn.
  • Balance sheet and funding: Total assets were $2.092 billion, up $215.3 million from year-end. Deposits were $1.863 billion, including $771.9 million of noninterest-bearing deposits. Portfolio loans, net, were $1.289 billion; SBA-PPP loans, net of fees, were $265.7 million. Total borrowings were $34.1 million, comprising $22.0 million of FHLB advances and $12.1 million of other borrowings. Stockholders’ equity was $167.0 million.
  • Capital: The Bank was reported as well-capitalized and compliant with applicable regulatory requirements. Its CET1 ratio was 12.29%; the company-level CET1 ratio was 13.81%.

Material changes versus comparable periods

  • Compared with Q1 2020, net interest income benefited from increased average earning assets and lower funding costs. Average earning-asset yield fell to 5.62% from 6.34%, while the average rate on interest-bearing liabilities fell to 0.81% from 1.73%.
  • Higher mortgage originations and OpenSky card issuance drove much of the increase in noninterest income. Mortgage loan sale proceeds were $412.1 million versus $182.1 million; OpenSky issuances were 125,000 versus 43,000.
  • Compared with December 31, 2020, PPP loans increased to $272.1 million gross from $204.9 million, while net portfolio loans edged down to $1.289 billion from $1.292 billion. Deposits increased by $210.9 million.
  • COVID-related commercial and consumer loans still on deferral declined to approximately $25.5 million from $30.5 million at year-end and $144.0 million at June 30, 2020. The filing’s table reports $25.4 million at March 31.
  • Available-for-sale securities increased to $128.0 million from $99.8 million. A $2.3 million pretax unrealized securities loss reduced other comprehensive income; comprehensive income was $7.3 million.

Outlook, risks, contingencies, and unusual items

  • The filing provides no specific earnings or financial guidance. Management said the U.S. economic and public-health outlook improved during Q1, but the pandemic’s continuing effects remain uncertain and could worsen with renewed outbreaks or economic deterioration.
  • Key exposures include regional economic and real-estate conditions, commercial real estate and business lending, interest-rate and funding risk, credit deterioration, OpenSky compliance and fraud risk, technology and third-party service disruptions, mortgage-loan repurchase claims, and regulatory or legal matters.
  • Management reported an asset-sensitive position: its 12-month earnings-at-risk model estimated net interest income changes of +3.0% under a +100-basis-point shock and +8.6% under +200 basis points; corresponding economic-value-of-equity estimates were +10.3% and +18.5%. These are model estimates, not forecasts, and depend on assumptions.
  • PPP loans were 100% SBA-guaranteed and had no loan-loss allowance; management assessed the likelihood of loss as remote. PPP funding was extended through May 31, 2021, and the company described access to a Federal Reserve PPP liquidity facility through June 30, 2021.
  • Unfunded credit lines, mortgage-origination commitments, and letters of credit totaled $390.2 million. The company maintained reserves for off-balance-sheet credit risk and potential mortgage-loan put-backs. It reported no material legal proceedings and no new TDRs in Q1.
  • A new $7.5 million share-repurchase authorization was announced in February 2021; no shares were repurchased under it during Q1.

Important facts for investors to verify

  • The cover text states common shares outstanding “as of May 6, 2020,” although this is a Q1 2021 filing signed May 10, 2021. Confirm the intended measurement date and share count.
  • The filing gives conflicting year-end nonperforming-loan ratios: the narrative cites 0.70%, while the table lists 0.61%. The March 31, 2021 ratio is reported as 0.67%.
  • Reconcile the approximately $25.5 million of deferred loans in the narrative with the $25.4 million shown in the loan-modification table.
  • Track credit quality, reserve adequacy, charge-offs, and the performance of remaining COVID-related deferrals, particularly in exposed commercial sectors.
  • Assess whether strong mortgage and OpenSky fee income can be sustained against higher operating and data-processing costs, and monitor the effect of interest rates and PPP forgiveness on earnings and liquidity.