ROCKVILLE, Md., Oct. 20, 2022 (GLOBE NEWSWIRE) -- Capital Bancorp, Inc. (the "Company") (NASDAQ: CBNK), the holding company for Capital Bank, N.A. (the "Bank"), today reported net income of $11.1 million, or $0.77 per diluted share, for the third quarter of 2022 in-line with the net income of $11.2 million, or $0.79 per diluted share, for the third quarter of 2021. Net portfolio loans increased $40.3 million, or 10.0 percent annualized, during the third quarter.

"Balance sheet realignment and continued expense management helped drive another quarter of strong results including record net interest income of $36.7 million," said Ed Barry, CEO of the Company and the Bank. "We redeployed excess liquidity to grow our securities portfolio and fund prudent loan growth while managing deposit balances and costs. Our diversified business continues to perform, but we are mindful that economic headwinds will affect our customers. Commercial loan quality remains stable, but we are seeing stress on consumer credit and have increased card-related reserves accordingly. We remain committed to managing the business to maximize shareholder value over the long-term."

Steven Schwartz, Chairman of the Board of the Company said, "The tailwinds of PPP loan fees, excess liquidity and extraordinary low-cost deposits that were present last year are all gone this year. Banks like ours are now facing the headwinds of rising costs of deposits, potential credit deterioration due to the probable recession and continued strong competition for the current moderate loan demand. Considering these factors, I am very pleased with the Company's performance for the quarter and year-to-date. We will continue to strive to provide value and first-class service to our customers, a workplace that facilitates the success and job satisfaction of our employees, and superior overall rates of return to our shareholders."

Third Quarter 2022 Highlights

Capital Bancorp, Inc.

• Strong Earnings - Continued strong performance by the Commercial Bank and OpenSky^® contributed to the third quarter's results. Quarterly net income remained consistent at $11.1 million compared to $11.2 million in the third quarter of 2021. While the Company reported record net interest income of $36.7 million, it also experienced a $5.5 million decrease in noninterest income, with $3.4 million of the decrease attributable to lower mortgage revenue and $2.0 million to lower credit card revenue. Offsetting this net decrease in non-interest income was a reduction in noninterest expense of $533 thousand. For the three months ended September 30, 2022 we earned $0.77 per diluted share compared to $0.79 for the three months ended September 30, 2021.
• Continued Outstanding Performance Ratios - Return on average assets ("ROAA") and return on average equity ("ROAE") were 2.15% and 20.32%, respectively, for the three months ended September 30, 2022, compared to 2.13% and 23.87%, respectively, for the three months ended September 30, 2021.
• Expanded Net Interest Margin - Net interest margin was 7.24%, or 4.16% excluding PPP and credit card loans, for the three months ended September 30, 2022, compared to 6.28%, or 3.52% excluding PPP and credit card loans, for the same three month period last year. The margin expansion was primarily driven by increases in the yield on portfolio loans, including credit card loans to customers whose accounts have been open for more than a year as origination costs on these accounts are amortized in the first year and thereafter no longer offset annual renewal fees. Rate increases in our adjustable rate portfolios also contributed to the margin expansion.
• Robust Capital Positions - As of September 30, 2022, the Company reported a common equity tier 1 capital ratio of 15.36% and an allowance for loan losses to total loans ratio of 1.58%. Tangible book value per common share grew 11.2 percent to $15.24 at September 30, 2022 when compared to the same quarter in 2021.

Commercial Bank

• Strong Portfolio Loan Growth - Portfolio loans, excluding credit cards, increased by $204.5 million, or 15.5 percent, to $1.5 billion at September 30, 2022 compared to September 30, 2021. This growth was mainly due to a 24.6 percent increase in commercial real estate loans of $123.5 million, of which $63.0 million was owner occupied. Also contributing to the growth was a 34.2 percent increase in commercial and industrial loans of $49.0 million and an 11.6 percent increase in residential real estate loans of $48.6 million when comparing the quarter ended September 30, 2022 to the quarter ended September 30, 2021.
• Improving Credit Metrics - Non-performing assets ("NPAs") decreased to 0.43% of total assets at September 30, 2022 compared to 0.77% at September 30, 2021 with the disposition of $3.2 million in other real estate owned and a reduction in nonaccrual loans of $5.0 million as management continues to focus on resolving non-performing assets. The provision for loan losses increased $285 thousand compared to the third quarter of 2021. The current provision for the three months ended September 30, 2022 was $1.3 million and was related to the growth in unsecured credit card balances and to increases in charge-offs associated with attrition in the number of active secured card accounts.

OpenSky^®

• Stable Revenues - OpenSky^® revenue declined by 2.4 percent to $22.6 million for the quarter ended September 30, 2022 from the same period in 2021 due to the decrease in active customer accounts which led to decreases in interchange, renewal and other fees. Normal customer attrition and aggressive marketing and product strategies by fintech and credit card companies offering unsecured subprime credit cards has resulted in the continued decline in the total number of OpenSky^® accounts.
• Stable OpenSky^® Loan Balances - OpenSky^® loan balances, net of reserves, increased by $1.7 million to $136.7 million compared to $135.0 million in the third quarter of 2021. Corresponding deposit balances decreased 17.0 percent or $41.1 million from $242.4 million at September 30, 2021 to $201.3 million at September 30, 2022.

2022 Highlights

Capital Bancorp

• Diversified Businesses Drive Net Income - Net income for the nine months ended September 30, 2022 increased 10.1 percent to $32.8 million, or $2.29 per diluted share, from $29.8 million, or $2.11 per diluted share for the nine months ended September 30, 2021. Continued strong operating results demonstrate the advantages of the Company's diversified business lines that are, in certain respects, non-correlated across economic cycles.
• Top Tier Performance Ratios - Strong earnings supported ROAA and ROAE of 2.13% and 20.93%, respectively, for the nine months ended September 30, 2022 compared to 1.97% and 22.88%, respectively, for the nine months ended September 30, 2021.
• Expanded Net Interest Margin - For the nine months ended September 30, 2022, net interest margin increased by 136 basis points to 7.01% compared to 5.65% for the nine months ended September 30, 2021. The margin improvement was primarily driven by increases in the yield on portfolio loans including credit card loans to customers whose accounts have been open for more than a year as origination costs on these accounts are amortized in the first year and thereafter no longer offset annual renewal fees. Rate increases in our adjustable rate portfolios also contributed to the margin expansion.
• Stable Efficiency Ratio - The efficiency ratio decreased to 63.75% for the nine months ended September 30, 2022 compared to 65.78% for the same nine month period in the prior year.
• Repositioned Balance Sheet - Total assets decreased $45.9 million, or 2.2 percent during the nine months ended September 30, 2022 due mainly to a $59.5 million decrease in our deposit base. The roll off of higher priced time deposits contributed to $25.3 million of the decrease while a decrease in interest bearing demand deposits not absorbed through realignment into noninterest bearing and money market account balances contributed to the rest of the decline. The year to date cash received for the payoff of SBA-PPP loans totaling $105.6 million was utilized to grow the portfolio loans receivable base by $124.0 million during the nine months ended September 30, 2022. By comparison, for the nine months ended September 30, 2021, deposit growth of $269.1 million funded a growth in portfolio loans of $135.4 million as well as $89.4 million in investment portfolio growth.
  

Commercial Bank

• Strong Portfolio Loan Growth - During the first nine months of 2022, portfolio loans, excluding credit card loans, increased by $131.1 million, or 12.6 percent on an annualized basis, to $1.5 billion at September 30, 2022 compared to the first nine months of 2021 when portfolio loans, excluding credit card loans, increased by $102.6 million to $1.3 billion at September 30, 2021. The 2022 growth was primarily due to a $69.7 million increase in commercial real estate loans, of which $51.5 million was owner occupied, a $65.2 million increase in residential real estate, and a $16.3 million increase in commercial and industrial. These increases were offset by a $20.1 million decline in construction real estate.
• Improved Deposit Franchise - While total deposits at September 30, 2022 decreased during the first nine months, the composition of the deposit portfolio has continued to move away from higher costing time deposits. Noninterest bearing deposits continue to increase as a percent of total deposits and represented 46.4 percent of total deposits at September 30, 2022. The cost of interest bearing liabilities declined to 0.51% from 0.66% for the same period in the prior year, due mainly to the mix of deposits in the portfolio.

OpenSky^®

• Interest Rate Increases Offset Gross Balance Declines - Gross credit card balances decreased by $4.5 million, or 3.2 percent, for the first nine months of 2022 compared to an increase of $32.8 million for the first nine months of 2021 when government stimulus funds contributed to balance growth in the credit card portfolio. For the first nine months of 2022, the increase in average credit card balances as well as an increase in interest rates accounted for the $13.9 million growth in interest income when compared to the same period in 2021. The decrease in overall credit card accounts led to the reduction in credit card fees, which declined by 16.7 percent to $17.7 million compared to $21.2 million for the same nine month period last year.

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⁽¹⁾ Annualized for the quarterly periods
⁽²⁾ Refer to Appendix for reconciliation of non-GAAP measures.
⁽³⁾ Loans are reflected net of deferred fees and costs.

Operating Results - Comparison of Three Months Ended September 30, 2022 and 2021

For the three months ended September 30, 2022, net interest income increased $4.6 million, or 14.4 percent, to $36.7 million from the same period in 2021, primarily due to an increase in interest earned on portfolio loans. The net interest margin increased 96 basis points to 7.24% for the three months ended September 30, 2022 from 6.28% for the same period in 2021 due in large part to the growth in portfolio loan balances and an increase in the loan yields on those loans. Net interest margin, excluding credit card and SBA-PPP loans, was 4.16% for the third quarter of 2022 compared to 3.52% for the same period in 2021. For the three months ended September 30, 2022, average interest earning assets decreased $15.2 million, or 0.8 percent, to $2.0 billion as compared to the same period in 2021, and the average yield on interest earning assets increased 100 basis points. Compared to the same period in the prior year, average interest bearing liabilities decreased $85.5 million, or 7.8 percent, while the average cost of interest-bearing liabilities increased 13 basis points to 0.66% from 0.53%.

The provision for loan losses of $1.3 million for the three months ended September 30, 2022 was related to the credit card portfolio and the cycling of credit card accounts. Net charge-offs for the third quarter of 2022 were $1.6 million, or 0.39% on an annualized basis of average portfolio loans, compared to $301 thousand, or 0.08% on an annualized basis of average loans for the third quarter of 2021. All of the $1.6 million in net charge-offs during the quarter were related to the credit card portfolio with $1.5 million related to secured cards and $95 thousand related to unsecured cards.

For the quarter ended September 30, 2022, noninterest income was $7.1 million, a decrease of $5.5 million, or 43.6 percent, from $12.6 million in the prior year quarter. The decrease was primarily the result of a reduction in mortgage banking revenue of $3.5 million due to the decline in home loan sales and home loan refinances brought on by the rising interest rate environment as well as a decline in credit card fees of $2.0 million associated with the decline in active customer accounts and interchange income.

Credit card loan balances, net of reserves increased by $1.7 million to $136.7 million as of September 30, 2022 from $135.0 million at September 30, 2021. The related deposit account balances decreased 17.0 percent to $201.3 million at September 30, 2022 when compared to $242.4 million at September 30, 2021 reflecting the reduction in active customer accounts as well as the migration of customers from the secured card program to the unsecured card program. For the three months ended September 30, 2022, OpenSky^® credit card accounts decreased by 40 thousand net compared to a 7 thousand net decrease in accounts for the same period in 2021. Elevated new account originations related to COVID-19 stimulus payments were realized in 2021 did not recur in 2022.

The efficiency ratio for the three months ended September 30, 2022 increased slightly to 64.16% compared to 64.10% for the three months ended September 30, 2021.

Noninterest expense was $28.1 million for the three months ended September 30, 2022, as compared to $28.6 million for the three months ended September 30, 2021, a decrease of $533 thousand, or 1.9 percent. The decrease was primarily driven by decreases in data processing expenses of $3.0 million due to successful contract negotiations in the first quarter of 2022 for OpenSky^® and were offset by increases in salaries and employee benefits of $785 thousand, or 7.9 percent; advertising expenses of $605 thousand, or 58.9 percent; and professional fees of $1.3 million, or 50.6 percent.

Operating Results - Comparison of Nine Months Ended September 30, 2022 and 2021

For the nine months ended September 30, 2022, net interest income increased $21.4 million, or 25.5 percent, to $105.4 million from the same period in 2021, primarily due to the $208.4 million increase in average balances in portfolio loans combined with the 79 basis point increase in yield for portfolio loans. The net interest margin increased 136 basis points to 7.01% for the nine months ended September 30, 2022 from the same period in 2021. Net interest margin, excluding credit card and SBA-PPP loans, was 3.94% for the nine months ended September 30, 2022 compared to 3.57% for the same period in 2021. For the nine months ended September 30, 2022, average interest earning assets increased $22.1 million, or 1.1 percent, to $2.0 billion as compared to the same period in 2021, and the average yield on interest earning assets increased 125 basis points. Compared to the same period in the prior year, average interest-bearing liabilities decreased $65.5 million, or 6.0 percent, while the average cost of interest bearing liabilities decreased 15 basis points to 0.51% from 0.66%.

For the nine months ended September 30, 2022, the provision for loan losses was $4.2 million, an increase of $2.0 million from the prior year and was related primarily to the credit card portfolio. Net charge-offs for the nine months ended September 30, 2022 were $3.3 million, or 0.29% annualized of average portfolio loans, compared to $941 thousand, or 0.09% annualized of average portfolio loans, for the same period in 2021. The $3.3 million in net charge-offs during the nine months ended September 30, 2022 was comprised of credit card portfolio net charge-offs with $3.2 million related to secured cards while $116 thousand was related to unsecured cards . Noted deterioration in macro economic conditions caused management to tighten credit policies surrounding the credit card portfolio, and we are beginning to see delinquencies flatten.

For the nine months ended September 30, 2022, noninterest income was $23.8 million, a decrease of $16.2 million, or 40.5 percent, from the same period in 2021. The decrease was primarily driven by the reduction in mortgage banking revenues of $13.2 million due to the decline in home loan sales and home loan refinances brought on by the rising interest rate environment. The rising interest rate environment is expected to continue depressing the contribution made by Capital Bank Home Loans into 2023.

For the nine months ended September 30, 2022, the Bank had a net decrease of 84 thousand OpenSky^® net active credit card accounts, decreasing the total number of open accounts to 577 thousand. This compares to 132 thousand net new originations for the same period last year, which increased total open accounts to 700 thousand at September 30, 2021.

The efficiency ratio for the nine months ended September 30, 2022 decreased to 63.75% compared to 65.78% for the nine months ended September 30, 2021 due to increases in interest income.

Noninterest expense was $82.4 million for the nine months ended September 30, 2022, as compared to $81.6 million for the nine months ended September 30, 2021, an increase of $808 thousand, or 1.0 percent. The increase was primarily driven by a $3.8 million, or 14.1 percent, increase in salaries and benefits, an increase in professional fees of 54.9 percent, or $3.0 million, and a $2.3 million, or 74.3 percent, increase in advertising expense. The increase was partially offset by a $6.9 million, or 23.2 percent, decrease in data processing and a $1.3 million, or 49.4 percent, decrease in loan processing. The decrease of $6.9 million in data processing expenses was primarily due to a contract renegotiation entered into in the first quarter of 2022 in the OpenSky^® Division.

Financial Condition

Total assets at September 30, 2022 were $2.0 billion, down slightly from the balance at December 31, 2021. Net portfolio loans, which exclude mortgage loans held for sale and SBA-PPP loans, totaled $1.6 billion as of September 30, 2022, an increase of 8.1 percent as compared to $1.5 billion at December 31, 2021.

While total deposits were $1.7 billion for the period ended September 30, 2022, a slight decline from the balance at December 31, 2021, the composition of the deposit portfolio shifted, with a decrease in higher costing time deposits of $25.3 million, or 14.2 percent, when comparing September 30, 2022 to December 31, 2021, to lower costing money market accounts and noninterest bearing accounts.

The Company recorded a provision for loan losses of $4.2 million during the nine months ended September 30, 2022, which increased the allowance for loan losses to $26.1 million, or 1.58% of total loans at September 30, 2022. Nonperforming assets were $8.6 million, or 0.43% of total assets, as of September 30, 2022, down from $11.5 million, or 0.56% of total assets, at December 31, 2021, and was comprised solely of nonperforming loans. Included in nonperforming loans at September 30, 2022 were troubled debt restructurings of $361 thousand.

Stockholders’ equity increased to $214.0 million as of September 30, 2022, compared to $197.9 million at December 31, 2021. This increase was primarily attributable to earnings during the period of $32.8 million which were offset by unrealized losses recorded net of tax on available for sale securities in the rising interest rate environment creating a $16.5 million reduction in accumulated other comprehensive income during the period. As of September 30, 2022, the Bank's capital ratios continued to exceed the regulatory requirements for a “well-capitalized” institution.

The following table shows the average outstanding balance of each principal category of our assets, liabilities and stockholders’ equity, together with the average yields on our assets and the average costs of our liabilities for the periods indicated. Such yields and costs are calculated by dividing the annualized income or expense by the average daily balances of the corresponding assets or liabilities for the same period.

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⁽¹⁾   Annualized.
⁽²⁾   Includes nonaccrual loans.
⁽³⁾   For the three months ended September 30, 2022 and September 30, 2021, collectively, SBA-PPP loans and credit card loans accounted for 308 and 276 basis points of the reported net interest margin, respectively.

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⁽¹⁾   Includes nonaccrual loans.
⁽²⁾   For the nine months ended September 30, 2022 and September 30, 2021, collectively, SBA-PPP loans and credit card loans accounted for 307 and 208 basis points of the reported net interest margin, respectively.

The Company’s reportable segments represent business units with discrete financial information whose results are regularly reviewed by management. The four segments include Commercial Banking, Capital Bank Home Loans (the Company’s mortgage loan division), OpenSky® (the Company’s credit card division) and the Corporate Office. The following schedule presents financial information for each reportable segment for the three and nine months ended September 30, 2022 and September 30, 2021.

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⁽¹⁾   Noninterest expense includes $6.6 million and $9.4 million in data processing expense in OpenSky’s^® segment for the three months ended September 30, 2022 and 2021, respectively.
⁽²⁾   The Corporate segment invests idle cash in revenue producing assets including interest bearing cash accounts, loan participations and other appropriate investments for the Company.

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⁽¹⁾   Noninterest expense includes $20.9 million and $27.3 million in data processing expense in OpenSky’s^® segment for the nine months ended September 30, 2022 and 2021, respectively.
⁽²⁾   The Corporate segment invests idle cash in revenue producing assets including interest bearing cash accounts, loan participations and other appropriate investments for the Company.

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⁽¹⁾   Refer to Appendix for reconciliation of non-GAAP measures.
⁽²⁾   Annualized.
⁽³⁾   Gain on sale percentage is calculated as gain on sale of loans divided by mortgage loans sold.

Appendix

Reconciliation of Non-GAAP Measures