CBNK - Capital Bancorp Reports Record Quarter and Year to Date Earnings

• Record earnings of $8.4 million, or $0.61 per diluted share for the third quarter of 2020 and $16.1 million, or $1.17 per diluted share for the nine months ended September 30, 2020
• Third quarter earnings supported by all three business lines which provide resilience, diversification and risk mitigation in a range of economic conditions while returning 1.89% on assets, 23.28% on equity and providing pre-tax pre-provision net revenue o f $15.1 million
• Proactive credit management decreased loans in deferral status to 2.0% of loans outstanding as of September 30, 2020 which is a reduction of 79% from June 30, 2020
• Increased provisions of $3.5 million to respond to economic conditions, incr easing the ratio of the allowance for loan losses ("ALLL") to total loans to 1.49%, or 1.77% excluding Small Business Administration Payroll Protection Program ("SBA-PPP") loans
• OpenSky ^® Credit Card account growth of 32% drove a $44.9 million increase in n oninterest bearing secured credit card deposits, while cardholder behavior that showed signs of returning to pre-COVID patterns resulted in record credit card revenue of $5.8 million for the third quarter
• Record mortgage loan originations of $431.1 million and mortgage banking revenue of $14.4 million during the quarter

ROCKVILLE, Md., Oct. 26, 2020 (GLOBE NEWSWIRE) -- Capital Bancorp, Inc. (the "Company") (NASDAQ: CBNK), the holding company for Capital Bank, N.A. (the "Bank"), today reported net income of $8.4 million, or $0.61 per diluted share, for the third quarter of 2020. By comparison, net income was $4.5 million, or $0.32 per diluted share, for the third quarter of 2019. Return on average assets was 1.89% for the third quarter of 2020, compared to 1.42% for the same period in 2019. Similarly, return on average equity was 23.3% for the third quarter of 2020, compared to 14.0% for the same period in 2019. Included in net income, in the current quarter, was a provision for loan losses of $3.5 million, compared to $1.1 million for the same period in 2019, attributable to the uncertain economic environment related to COVID-19.

"Our diversified business model has demonstrated resiliency in a difficult economic environment and continues to perform well as shown by our record earnings in the third quarter," said Ed Barry, CEO of Capital Bancorp.  "We look to maintain momentum by focusing on expense control, increasing core deposits and expanding relationships with PPP borrowers in the quarters to come.  Our consumer strategy is scaling more quickly than expected as we saw another quarter of robust growth in OpenSky ^® accounts, secured deposits, and related revenues as customer behavior began to normalize. Asset quality remains strong, with loans in deferral status decreasing 79% percent over the quarter to 2 percent of loans outstanding.  Given the remaining uncertain economic outlook due to COVID-19, we recorded a provision of $3.5 million for the quarter bringing the total to $9.2 million for the year."

Third Quarter 2020 Highlights

• Diversified Businesses Drive Record Net Income - In the third quarter of 2020, net income increased 88.2 percent to a record $8.4 million from $4.5 million in the third quarter of 2019. Our continued strong operating results demonstrate the advantages of the Bank's uncorrelated diversified business lines that are complimentary across economic cycles.
• Net Interest Margin Improve ment - Net interest margin ("NIM") increased by 29 basis points to 5.01% from the last quarter but decreased 82 basis points from 5.83% for the three months ended September 30, 2019. The year over year decline in NIM was driven by an overall decline in the interest rate environment, lower earning SBA-PPP loans and excess liquidity. Excluding credit card and SBA-PPP loans, third quarter 2020 NIM was 3.84%, down 12 basis points from the prior quarter and 53 basis points from 4.37% in the same period last year.
• Growth in Core Deposits and Reduced Cost of Interest Bearing Liabilities - Noninterest bearing deposits increased by $32.2 million, or 5.7 percent, during the quarter ended September 30, 2020 and now represent 35.9% of total deposits. The growth in credit card-related deposits was partially offset by anticipated declines in SBA-PPP-related deposit balances. Overall, during the quarter, the cost of interest bearing liabilities was reduced from 1.38% at June 30, 2020 to 1.18% at September 30, 2020 as rates decreased in line with the market. The Bank continues to execute on its ongoing strategic initiative to improve the deposit portfolio mix by decreasing reliance on wholesale, internet and other non-core time deposits.
• Cost Management Initiatives Impr oving Operating Leverage - Focused investments in technology, combined with process improvements and workforce rationalizations, continue to increase the Bank's operating leverage. Higher mortgage originations and credit card volumes increased noninterest expenses by $9.9 million, or 54.3 percent from the same quarter last year. These higher levels of activity drove a $13.9 million, or 192.9 percent increase in related noninterest income.
• Balance Sheet Supported By Robust Capital Ratios, Elevated Reserves , and Excess Liquidity - As of September 30, 2020, the Company reported a common equity tier 1 capital ratio of 12.75% and ALLL to total loans of 1.49%, or 1.77% excluding SBA-PPP loans. The Bank is well-capitalized and has taken measures to navigate COVID-19 related disruptions by taking additional loan loss provisions and maintaining higher than normal levels of liquidity on the balance sheet.
• Proactive Management Leads to Early Recognition of Problem Assets - Non-performing assets increased to $14.8 million at September 30, 2020 compared to $9.2 million at June 30, 2020. The increase was largely attributable to two past-due construction loans related to a single relationship and totaling $4.7 million. Both loans are well secured and we do not anticipate any losses with these credits. Non-performing assets as a percentage of total assets increased to 0.79%, 0.90% excluding SBA-PPP loans, at September 30, 2020 compared to 0.50% at June 30, 2020.
• Continued Portfolio Loan Growth - For the quarter ended September 30, 2020, portfolio loans increased by $33.1 million, or 2.7 percent, to $1.24 billion compared to $1.21 billion at June 30, 2020. Commercial real estate loans increased by $8.9 million, or 2.4 percent, construction real estate loans increased by $14.7 million, or 6.9 percent and secured credit cards balances increased by $30.2 million, or 55.2 percent, while residential real estate decreased by $14.7 million, or 3.4 percent, and commercial and industrial loans decreased by $7.8 million, or 5.5 percent.
• COVID-19 Related Deferrals - Outstanding loans deferred due to COVID-19 decreased by 79% from June 30, 2020 to September 30, 2020 as shown in the table below.

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(1) Excludes modifications and deferrals made for OpenSky secured card customers.

• Record Mortgage Originations and Revenues - In the third quarter of 2020, the Capital Bank Home Loans originated a record $431.1 million of mortgage loans for sale, compared to $197.8 million in the third quarter of 2019. Capital Bank Home Loans achieved record revenue of $14.4 million for the third quarter of 2020 compared to $4.9 million for the same period in 2019. Efforts to optimize product pricing and mix elevated the average gain on sale to 3.13%.
  
• Continued Strong Growth in OpenSky ^® Credit Card Acc ounts - During the quarter, OpenSky ^® originated 148 thousand new credit cards, increasing the number of open credit card accounts to 529 thousand at September 30, 2020. Quarterly growth resulted in a $44.9 million increase in noninterest bearing secured credit card deposits which totaled $176.7 million at quarter end. Card balances, which typically lag new card production, increased in the third quarter of 2020 to $85.0 million from $54.7 million. Credit card fees were a record $5.8 million as consumer behavior shows signs of returning to pre-COVID patterns, resulting in a 98.2% increase in credit card revenue.

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

Operating Results - Three Months Ended September 30, 2020 compared to Three Months Ended September 30, 2019

For the three months ended September 30, 2020, net interest income increased $3.9 million, or 21.2 percent, to $22.0 million from the same period in 2019, primarily due to a $512.3 million, or 41.4 percent, increase in average interest-earning assets. The net interest margin decreased 82 basis points to 5.01% for the three months ended September 30, 2020 from the same period in 2019 due to lower yields on loans which was partially offset by a decrease in interest expense due to a reduction in interest rates. Net interest margin, excluding credit card and SBA PPP loans, was 3.84% for the third quarter of 2020 compared to 4.37% for the same period in 2019. For the three months ended September 30, 2020, average interest earning assets increased $512.3 million, or 41.4 percent, to $1.7 billion as compared to the same period in 2019, and the average yield on interest earning assets decreased 144 basis points. Period over period, average interest-bearing liabilities increased $228.7 million, or 27.3 percent, while the average cost decreased 80 basis points to 1.18% from 1.98%.

The provision for loan losses of $3.5 million for the three months ended September 30, 2020 reflects the prevailing uncertainty in the economy as a result of COVID-19. Net charge-offs for the third quarter of 2020 were $163 thousand, or 0.06% of average loans on an annualized basis, compared to $111 thousand, or 0.04% of average loans on an annualized basis, for the third quarter of 2019.

For the quarter ended September 30, 2020, noninterest income was $21.1 million, an increase of $13.9 million, or 192.9 percent from $7.2 million in the prior year quarter. The increase was primarily driven by significant growth in mortgage banking revenues of $9.5 million and credit card fees of $3.7 million resulting from the higher level of credit card accounts.

For the three months ended September 30, 2020, the Bank originated 148 thousand new OpenSky ^® secured credit card accounts, increasing the total number of open accounts to 529 thousand. This compares to 31 thousand new originations for the same period last year, which increased total open accounts to 222 thousand. Since September 30, 2019, credit card loan balances increased to $85.0 million from $44.1 million, while the related deposit account balances increased 127 percent to $176.7 million. The record growth in open accounts was primarily driven by enhanced marketing and economic conditions that led consumers to recognize the value and convenience of the Bank's secured credit card product.

The efficiency ratio for the three months ended September 30, 2020 decreased to 65.11% compared to 71.75% for the three months ended September 30, 2019, resulting from increased revenue in addition to management's efforts to control expenses.

Noninterest expense was $28.1 million for the three months ended September 30, 2020, as compared to $18.2 million for the three months ended September 30, 2019, an increase of $9.9 million, or 54.3 percent. The increase was primarily driven by a $3.4 million, or 36.5 percent, increase in salaries and benefits, a $3.7 million, or 88.0 percent increase in data processing, and an increase in operating expenses of $1.4 million, or 77.8 percent period over period. Included in salaries and benefits are commissions paid on mortgage originations, which increased from $1.9 million to $3.7 million, primarily due to an increase in the number of mortgage originations. In the three month period ended September 30, 2020, $431.1 million of mortgage loans were originated for sale compared to $197.8 million in the three months ended September 30, 2019. The Company's organic growth was supported by a 5.6 percent increase in employees to 244 at September 30, 2020, up from 231 at September 30, 2019. The increase was included the addition of 13 new employees in the revenue producing teams of the commercial banking and mortgage banking divisions. The increase of $3.7 million in data processing expenses is largely attributable to the higher volume of open credit cards, and increased mortgage loan processing volumes during the third quarter. Additionally, operating expenses increased $1.4 million due to increases in marketing and advertising, credit expenses, professional fees and FDIC insurance.

Operating Results - Nine Months Ended September 30, 20 20 compared to Nine Months Ended September 30, 2019

For the nine months ended September 30, 2020, net interest income increased $8.9 million, or 18.0 percent, to $58.4 million from the same period in 2019, primarily due to a $413 million, or 35.6 percent, increase in average interest-earning assets. As a result of the declining interest rate environment, which began in the third quarter of 2019, and the rapid increase in SBA PPP loans, net interest margin decreased 74 basis points to 4.96% for the nine months ended September 30, 2020 from the same period in 2019. Net interest margin, excluding credit cards and SBA PPP loans, was 3.92% for the nine months ended September 30, 2020 compared to 4.35% for the same period in 2019. For the nine months ended September 30, 2020, average interest earning assets increased $413 million, or 35.6 percent, to $1.6 billion as compared to the same period in 2019, and the average yield on interest earning assets decreased 118 basis points. Period over period, average interest-bearing liabilities increased $213.8 million, or 27.2 percent, while the average cost decreased 55 basis points to 1.41 percent from 1.96 percent.

For the nine months ended September 30, 2020, the provision for loan losses was $9.2 million, an increase of $7.3 million, or 392.7 percent, primarily due the impacts of COVID-19. Net charge-offs for the nine months ended September 30, 2020 were $494 thousand, or 0.07% of average loans, annualized, compared to $192 thousand, or 0.04% of average loans, annualized, for the same period in 2019.

For the nine months ended September 30, 2020, noninterest income was $41.6 million, an increase of $24.4 million, or 141.5 percent, from the same period in 2019. The increase was primarily driven by significant growth in mortgage banking revenues, which were up $17.5 million, and credit card fees, which increased by $5.2 million.

For the nine months ended September 30, 2020, the Bank originated 320 thousand new OpenSky ^® secured credit card accounts, increasing the total number of open accounts to 529 thousand. This compares to 72 thousand new originations for the same period last year, which increased total open accounts to 222 thousand. The record growth in open accounts was primarily driven by enhanced marketing and economic conditions that led consumers to recognize the value and convenience of the Bank's secured credit card product.

The efficiency ratio for the nine months ended September 30, 2020 decreased to 68.7% compared to 73.1% for the nine months ended September 30, 2019, primarily resulting from increased revenue in addition to management's efforts to control expenses.

Noninterest expense was $68.7 million for the nine months ended September 30, 2020, as compared to $48.8 million for the nine months ended September 30, 2019, an increase of $19.9 million, or 40.8 percent. The increase was primarily driven by an $8.2 million, or 34.1 percent, increase in salaries and benefits, a $6.4 million, or 57.4 percent increase in data processing, an increase in loan processing of $1.2 million and a $2.3 million, or 43.6 percent increase in other operating expenses period over period. Included in salaries and benefits are commissions paid on mortgage originations, which increased from $4.0 million to $7.5 million primarily due to an increase in the number of mortgage originations. In the nine months ended September 30, 2020, $920.2 million of mortgage loans were originated for sale compared to $208.5 million in the nine months ended September 30, 2019. The increase of $6.4 million in data processing expenses was due to the higher volume of open credit cards and increased mortgage loan processing volumes during the year. Additionally, operating expenses increased $2.3 million due to increases in marketing and advertising, credit expenses, professional fees and FDIC insurance.

During the nine months ended September 30, 2020, results of operations were impacted by the COVID-19 pandemic and include the deferral of $6.5 million of loan origination fees, net of costs, and the amortization of net fees of $1.1 million. There were no significant COVID-19 related noninterest expenses recorded during the nine months ended September 30, 2020.

Financial Condition

Total assets at September 30, 2020 were $1.88 billion, an increase of 43.3 percent as compared to $1.31 billion at September 30, 2019. Loans, excluding mortgage loans held for sale and PPP loans, totaled $1.24 billion as of September 30, 2020, an increase of 9.1 percent as compared to $1.14 billion at September 30, 2019.

Deposits at September 30, 2020 were $1.66 billion, an increase of 49.4 percent as compared to $1.11 billion at September 30, 2019. Noninterest bearing deposits increased by $303 million. These deposits include fiduciary accounts of title companies and property management accounts, as well as SBA PPP loans and the secured card deposits highlighted above. Interest bearing accounts increased by $246.9 million, mainly driven by a 46.7% increase in fiduciary accounts.

Due primarily to the deterioration in the macro-economic environment as a result of the impact of COVID-19, the Company recorded a provision for loan losses of $9.2 million during the nine months ended September 30, 2020, which increased our allowance for loan losses to $22.0 million, or 1.49% of total loans (1.77%, excluding SBA PPP loans, on a non-GAAP basis) at September 30, 2020. This level of reserve provides approximately 192 percent coverage of nonperforming loans at September 30, 2020, compared to a reserve of $12.8 million, or 1.12 percent, of total loans, and approximately 196% coverage of nonperforming loans at September 30, 2019. Nonperforming assets were $14.8 million, or 0.79% of total assets, as of September 30, 2020, up from $6.7 million, or 0.51% of total assets, at September 30, 2019. Of the $14.8 million in total nonperforming assets as of September 30, 2020, nonperforming loans represented $11.5 million and OREO totaled $3.3 million. The increase is primarily due to two construction loans totaling $4.7 million. Included in nonperforming loans at September 30, 2020 are troubled debt restructurings of $446 thousand.

Stockholders’ equity increased to $149.4 million as of September 30, 2020, compared to $127.8 million at September 30, 2019. This increase was primarily attributable to earnings and net proceeds from the exercise of stock options. Shares repurchased and retired in 2020 as part of the Company's stock repurchase program totaled 254,834 shares at a weighted average price of $10.84, for a total cost of $2.8 million including commissions. As of September 30, 2020, the Bank's capital ratios continue 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, 2020 and 2019, SBA-PPP loans and credit card loans collectively accounted for 117 and 146 basis points of the reported net interest margin, respectively.

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⁽¹⁾ Annualized.
⁽²⁾ Includes nonaccrual loans.
⁽³⁾ For the nine months ended September 30, 2020 and 2019, SBA-PPP loans and credit card loans collectively accounted for 104 and 135 basis points of the reported net interest margin, respectively.

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⁽¹⁾ Refer to Appendix for reconciliation of non-GAAP measures
⁽²⁾ Annualized.
⁽³⁾ Loans are reflected net of deferred fees and costs.
⁽⁴⁾ Gain on sale percentage is calculated as gain on sale of loans divided by the sum of gain on sale of loans and proceeds from loans held for sale, net of gains.

Appendix

Reconciliation of Non-GAAP Measures

Return on Average Assets, as Adjusted

Net Interest Margin, as Adjusted

Tangible Book Value per Share