Capital Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. Capital Bancorp is the holding company for Capital Bank, with commercial banking, mortgage lending, OpenSky credit cards and corporate operations. Its banking business is concentrated in the Washington, D.C. and Baltimore metropolitan areas; mortgage and OpenSky products serve customers nationally.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $33.5 million | $25.2 million | $89.5 million | $68.9 million |
| Net interest income | $32.1 million | $22.0 million | $84.0 million | $58.4 million |
| Provision for loan losses | $1.0 million | $3.5 million | $2.3 million | $9.2 million |
| Noninterest income | $12.6 million | $17.5 million | $40.0 million | $34.1 million |
| Noninterest expense | $28.6 million | $24.5 million | $81.6 million | $61.2 million |
| Net income | $11.2 million | $8.4 million | $29.8 million | $16.1 million |
| Diluted EPS | $0.79 | $0.61 | $2.11 | $1.17 |
- Q3 net income rose 32.5%; nine-month net income rose 84.7%. Higher interest income and credit-card fees, lower funding costs and reduced credit-loss provisions were key contributors.
- Net interest margin was 6.27% for Q3, up from 5.01%; for the nine months it was 5.65%, up from 4.96%. Excluding credit-card and PPP loans, reported margin was lower year over year: 3.52% versus 3.84% for Q3 and 3.57% versus 3.92% year to date.
- Credit-card fees increased 30.9% in Q3 and 98.3% year to date, supported by OpenSky account growth to 700,000 from 529,000. Mortgage banking revenue fell 58.2% in Q3 and 16.7% year to date as mortgage originations slowed.
- Operating costs increased, particularly data processing, salaries and professional fees. Management attributed data-processing growth largely to OpenSky volume; professional-fee growth included preparation for a possible expansion of credit-card offerings.
Financial position, cash flow and capital
- At September 30, 2021, assets were $2.17 billion, up from $1.88 billion at year-end 2020. Net portfolio loans were $1.42 billion; PPP loans, reported separately, were $137.2 million net of fees.
- Deposits were $1.92 billion, up $269.1 million since year-end. Noninterest-bearing deposits increased to $833.2 million. Cash and cash equivalents rose to $324.0 million from $146.9 million.
- Total borrowings were $34.1 million: $22.0 million of FHLB advances and $12.1 million of other borrowed funds. The filing reports $177.5 million of available FHLB capacity, $16.3 million at the Federal Reserve discount window and $76.0 million of correspondent-bank lines; these facilities were unused at quarter-end.
- Nine-month cash flows were $102.5 million provided by operating activities, $192.3 million used in investing and $266.9 million provided by financing. Investing included a $35.0 million purchase of bank-owned life insurance; financing included deposit growth. Cash flows from mortgage-loan originations and sales are also significant.
- Stockholders’ equity was $189.1 million. The Company’s CET1 ratio was 14.34%; the Bank’s CET1 ratio was 12.60%. The Bank met applicable regulatory capital requirements and was classified as well-capitalized.
- Allowance for loan losses was $24.8 million, or 1.71% of portfolio loans, versus $23.4 million, or 1.78%, at year-end. Nine-month net charge-offs were $0.94 million, or 0.09% of average portfolio loans.
Material changes, outlook and risks
- Nonperforming assets rose to $17.2 million, or 0.79% of assets, from $12.6 million, or 0.67%, at year-end. Nonperforming portfolio loans were $13.9 million, up from $9.2 million; management cited a new, well-collateralized $5.0 million multifamily construction loan as the main driver. Two foreclosed properties totaling $3.1 million were disposed of after quarter-end.
- COVID-related commercial and consumer loan deferrals declined to $7.3 million across nine loans from $30.5 million across 43 loans at year-end 2020. Management said the economy and credit metrics had improved, but the pandemic’s future effects remained uncertain.
- Mortgage originations fell 49.6% year over year in Q3 to $217 million. Management said historically low housing inventory, building-material shortages and fluctuating rates were likely to continue suppressing mortgage originations for the remainder of 2021. The filing provides no formal earnings or financial-target guidance.
- Key risks include regional economic and real-estate exposure, credit deterioration, interest-rate and funding sensitivity, COVID-19 effects, mortgage-loan repurchase claims, and technology, cybersecurity and consumer-compliance risks. The Company reported an asset-sensitive position; its model estimated a 3.9% increase in 12-month net interest income under a parallel +100 bp shock and a 2.6% decrease under -100 bp, subject to model assumptions.
- Unusual or notable items include the $35.0 million BOLI purchase, significant available-for-sale securities purchases and sales, and the continuing runoff of PPP loans. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan growth, nonperforming assets and allowance adequacy remain consistent with management’s improving-credit assessment, particularly for construction and commercial real estate.
- How much earnings growth depends on OpenSky fees and PPP-related income, and whether OpenSky growth can absorb rising processing and operating costs.
- Whether mortgage volumes and gain-on-sale margins hold up as refinancing activity slows and the rate environment changes.
- Whether deposit growth, liquidity and capital remain strong as excess cash is deployed and customer funding conditions evolve.
- The timing and financial impact of adopting the CECL credit-loss standard, which the Company expected to adopt for fiscal years beginning after December 15, 2022.