Capital Bancorp, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Capital Bancorp is a bank holding company operating commercial banking in the Washington, D.C.–Baltimore region, residential mortgage lending through Capital Bank Home Loans, and a nationwide secured credit-card business through OpenSky. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons below are with the same 2020 periods unless otherwise noted.
Financial performance and position
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Net interest income | $27.5 million; +47.8% | $52.0 million; +43.1% |
| Net interest margin | 5.47%, versus 4.72% | 5.32%, versus 4.92% |
| Provision for loan losses | $0.8 million, versus $3.3 million | $1.3 million, versus $5.7 million |
| Noninterest income | $13.5 million; +21.3% | $27.4 million; +64.8% |
| Noninterest expense | $27.2 million; +36.7% | $53.0 million; +44.3% |
| Net income / diluted EPS | $9.6 million / $0.68 | $18.6 million / $1.32 |
- Q2 income before tax was $13.0 million, versus $6.5 million; six-month income before tax was $25.1 million, versus $10.5 million.
- At June 30, total assets were $2.15 billion, up $275.3 million from year-end 2020. Portfolio loans, net, were $1.37 billion; gross portfolio loans increased to $1.40 billion from $1.32 billion. SBA-PPP loans were $208.1 million gross, with $5.3 million of net unearned fees.
- Deposits totaled $1.92 billion, up $265.3 million from year-end. Noninterest-bearing deposits were $828.3 million and interest-bearing deposits were $1.09 billion. Cash and cash equivalents were $308.7 million.
- Debt included $22.0 million of FHLB advances and $12.1 million of other borrowings. The Bank reported $170.9 million of available FHLB capacity, $15.6 million of Federal Reserve borrowing capacity, and $76.0 million of unused correspondent-bank lines. Management said it had not needed to draw on these additional sources.
- Stockholders’ equity was $177.2 million. The Bank was reported well-capitalized; its CET1 ratio was 12.25% at June 30, compared with 11.34% at year-end 2020. The Company’s reported CET1 ratio was 13.94%, compared with 12.94%.
- Six-month operating cash flow was $76.1 million, investing cash outflow was $177.9 million, and financing cash inflow was $263.5 million. Investing included $35.0 million to purchase bank-owned life insurance and $66.5 million of proceeds from securities sales.
Material changes versus comparable periods
- Profitability rose substantially, supported by higher interest income, lower funding costs, growth in credit-card fees, and lower loan-loss provisions. The Q2 provision fell by $2.5 million year over year, which management attributed mainly to improving economic conditions.
- Credit-card fees increased 164.9% in Q2 and 177.5% for the first half, largely reflecting OpenSky account growth. Mortgage banking revenue fell 28.0% in Q2, partly offsetting the card-fee increase, but rose 26.4% for the first half.
- Expense growth was significant: data-processing costs rose 78.6% in Q2 and 98.6% for the first half. Management linked the increase to higher OpenSky account volumes, customer activity, loan and deposit balances, and mortgage processing.
- Reported margin improved, but excluding SBA-PPP and credit-card loans, net interest margin was 3.55% in Q2 and 3.59% for the first half, below the respective prior-year 3.96% levels. Management cited the declining-rate environment.
- Nonperforming assets declined to $11.6 million, or 0.54% of assets, from $12.6 million, or 0.67%, at year-end. Nonperforming portfolio loans were $8.4 million; the allowance for loan losses was $24.1 million, or 1.73% of portfolio loans.
- COVID-related commercial and consumer deferrals fell to $11.9 million across 16 loans at June 30, from $30.5 million across 43 loans at year-end 2020. PPP loans carry a 100% SBA guarantee; the company assigned them no loan-loss allowance.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said economic conditions had improved, but the continuing effects of COVID-19, including potential effects from variants, remained uncertain.
- Key stated risks include interest-rate changes, regional economic concentration, commercial real estate and business lending, OpenSky consumer-finance and fraud risks, mortgage-loan repurchase claims, technology and third-party processing, and regulatory or credit developments. Management described the balance sheet as asset-sensitive; actual results may differ from modeled estimates.
- Unfunded credit lines, commitments to originate mortgage loans, letters of credit, and a commitment to fund other investments totaled $380.4 million. The filing says these commitments may expire unused and are subject to credit review; it does not expect a loss from funding them.
- The company authorized a new $7.5 million share-repurchase program in February 2021 and reported no repurchases in the first half. The filing’s quarterly repurchase table displays a $5.0 million remaining authorization, which does not reconcile clearly with the stated new program amount.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, no material legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether rapid OpenSky fee growth can sustainably exceed the related increase in data-processing and other operating costs.
- How much earnings and reported margin depend on PPP and credit-card lending, and whether underlying margin improves as PPP balances run off and rates change.
- Credit performance in commercial real estate, construction, commercial and industrial, and credit-card portfolios; monitor deferrals, nonperformers, charge-offs, and reserve adequacy.
- The durability and composition of deposit growth, the concentration of OpenSky-related noninterest-bearing deposits, and the availability of stated contingent liquidity.
- Confirm the share-repurchase authorization amount and the interest-rate sensitivity figures: the filing’s EAR table prints +100, +200, and +300 basis-point scenario impacts as 281.0%, 817.0%, and 1,392.0%, respectively; these unusually large printed values warrant checking against the filed table or company clarification.