CBNK - CBNK Robust Loan Growth Drives Record Profits and Returns

ROCKVILLE, Md., Oct. 25, 2021 (GLOBE NEWSWIRE) -- Capital Bancorp, Inc. (the "Company") (NASDAQ: CBNK), the holding company for Capital Bank, N.A. (the "Bank"), today reported net income of $11.2 million, or $0.79 per diluted share, for the third quarter of 2021. By comparison, net income was $8.4 million, or $0.61 per diluted share, for the third quarter of 2020. Return on average assets ("ROAA") was 2.13% for the third quarter of 2021, compared to 1.89% for the same period in 2020. Return on average equity ("ROAE") was 23.87% for the third quarter of 2021, compared to 23.28% for the same period in 2020.

“Capital Bancorp’s diversified business model continued to outperform in the third quarter,” said Steven Schwartz, Chairman of the Board of the Company. “The Bank’s results highlight the success of ongoing strategic investments in technology and people that have positioned the Bank for continued profitable growth.”

"The third quarter’s record results were driven by strong growth in the Commercial Bank and OpenSky ^® which more than made up for the anticipated slowdown of our mortgage business," said Ed Barry, CEO of the Company. "Regional economic activity and strategic hires contributed to 15.8 percent annualized portfolio loan growth quarter over linked-quarter on a consolidated basis. OpenSky ^® remains an engine of growth as we engage with customers to provide additional value-added services. OpenSky ^® annualized quarterly loan growth of 44.3 percent marked a return to historical trends. Customer attrition, which resulted in a modest decline in open accounts for the quarter, remains well-below historical levels.”

Third Quarter 2021 Highlights

Capital Bancorp, Inc.

• Record Earnings - Continued strong performance by the Commercial Bank and OpenSky ^® contributed to the third quarter's record results. Quarterly net income increased to $11.2 million from $8.4 million in the third quarter of 2020. Earnings were $0.79 per diluted share for the three months ended September 30, 2021 compared to $0.61 per diluted share for the same period last year.
• Industry-Leading Performance Ratios - Return on average assets ("ROAA") and return on average equity ("ROAE") were 2.13% and 23.87%, respectively, for the three months ended September 30, 2021 compared to 1.89% and 23.28%, respectively, for the three months ended September 30, 2020.
• Expanded Net Interest Margin - The net interest margin was 6.27% for the three months ended September 30, 2021, which is an increase of 126 basis points compared to 5.01% for the same three month period last year and an increase quarter over quarter of 80 basis points, from 5.47%, for the three months ended June 30, 2021. The margin improvement quarter over quarter was driven by an increase in average loans outstanding, improving loan yields, and management's concentrated effort to lower funding costs.
• Robust Capital Positions - As of September 30, 2021, the Company reported a common equity tier 1 capital ratio of 14.34% and an allowance for loan losses to total loans ratio of 1.56%, or 1.71% excluding Small Business Administration Payroll Protection Program ("SBA-PPP") loans. During the preceding twelve months, tangible book value per common share grew 25.5 percent to $13.70 at September 30, 2021.

Commercial Bank

• Accelerating Portfolio Loan Growth - Portfolio loans, excluding credit cards, increased by $156.2 million to $1.3 billion at September 30, 2021 compared to September 30, 2020, and by $41.6 million, or 13.0 percent annualized, compared to June 30, 2021. The year over year growth was mainly due to a 34.7 percent increase in commercial real estate loans of $129.6 million, a 6.2 percent increase in commercial and industrial loans of $8.4 million, and a 10.4 percent increase in construction real estate loans of $23.6 million.
• Growth in Core Deposits and Reduced Cost of Funds - Noninterest bearing deposits increased 39.7 percent compared to September 30, 2020. The $236.9 million year over year increase was primarily due to an increase in commercial demand deposits reflecting management's ongoing strategic initiative to improve the deposit franchise. At September 30, 2021, noninterest bearing deposits represented 43.4% of total deposits compared to 43.2% at June 30, 2021 and 35.9% at September 30, 2020. Overall, the cost of interest bearing liabilities was reduced 65 basis points, from 1.18% for the quarter ended September 30, 2020 to 0.53% for the quarter ended September 30, 2021.
• Credit Metrics - Non-performing assets ("NPAs") increased to 0.77% of total assets at September 30, 2021 compared to 0.54% at June 30, 2021 primarily due to the addition of one well-collateralized multi-family construction loan totaling $5.0 million and three residential mortgages totaling $523 thousand. Management continues to focus on reducing non-performing assets as evidenced by the disposition of two OREO properties totaling $3.1 million after September 30, 2021. Primarily as a result of improving market conditions, the provision for loan losses declined $2.5 million compared to the third quarter of 2020. The current provision for the three months ended September 30, 2021 was $975 thousand.
• SBA-PPP Loans - SBA-PPP loans, net of $4.3 million in unearned fees, totaled $137.2 million at September 30, 2021 which was comprised of $10.8 million in 2020 originations and $126.4 million of 2021 originations. As of September 30, 2021, the Company has obtained forgiveness for $237.7 million of SBA-PPP loans.

Capital Bank Home Loans

• Softening Mortgage Performance - The third quarter of 2021 saw mortgage origination volumes begin to slow after a record-breaking 2020. Origination volumes declined 49.6 percent, to $217 million, in the third quarter of 2021, when compared to $431 million in the third quarter of 2020. The steepening yield curve in the third quarter of 2021 has slowed originations from the year earlier period when low interest rates fueled refinance volumes. In the most recent quarter, mortgage origination volumes declined $48.7 million or 18.3 percent from the three months ended June 30, 2021 due to the rate-related slow-down in the mortgage industry which has disproportionately impacted refinance activity.
• Purchase Volume - Purchase volumes increased to 51.0 percent of total originations for the third quarter of 2021, up from 33.8 percent during the third quarter of 2020.

OpenSky ^®

• Strong Revenue Growth - OpenSky ^® revenue grew by 80.6 percent to $23.2 million for the quarter ended September 30, 2021 from the same period in 2020 and by 23.2 percent from the linked-quarter despite the linked-quarter decline in open accounts. As account growth, line usage and customer behaviors continue to revert to traditional seasonal patterns, management anticipates modest seasonal declines in open accounts as account opening and attrition normalize.
• Continued Growth in OpenSky ^® Loans and Deposits - OpenSky ^® loan balances, net, increased by $51.9 million to $135.0 million compared to $83.1 million in the third quarter of 2020 and from $121.4 million, or 11.2 percent, on a linked quarter basis. Corresponding deposit balances increased 37.2 percent or $65.7 million from $176.7 million at September 30, 2020 to $242.4 million at September 30, 2021. Strong growth in loans, deposits, and related-revenue appears to indicate that consumer behaviors may be returning to historical trends.

Year to Date 2021 Highlights

Capital Bancorp

• Diversified Businesses Drive Net Income - Net income for the nine months ended September 30, 2021 increased 84.7 percent to $29.8 million, or $2.11 per diluted share, from $16.1 million, or $1.17 per diluted share for the nine months ended September 30, 2020. Continued strong operating results demonstrate the advantages of the Company's diversified business lines that are, in certain respects, non-correlated across economic cycles.
• Elevated Performance Ratios - Improved earnings supported ROAA and ROAE of 1.97% and 22.88%, respectively, for the nine months ended September 30, 2021 compared to 1.35% and 15.35%, respectively, for the nine months ended September 30, 2020.
• Expanded Net Interest Margin - For the nine months ended September 30, 2021, net interest margin ("NIM") increased by 69 basis points to 5.65% compared to 4.96% for the nine months ended September 30, 2020. The margin improvement was largely driven by the increase in OpenSky ^® income.
• Efficiency Ratio Continues to Improve - Increased revenue and active expense management improved the efficiency ratio to 65.78% for the nine months ended September 30, 2021 compared to 66.14% for the same nine month period in the prior year.
• Balance Sheet Growth - Total assets increased $293.0 million, or 20.9 percent on an annualized basis, during the nine months ended September 30, 2021. The growth of earning assets on the balance sheet consisted of increases in cash equivalents of $177.1 million, portfolio loans of $128.3 million which includes OpenSky ^® loan growth of $32.8 million, investments available for sale of $89.4 million, and Bank Owned Life Insurance ("BOLI") of $35.3 million. Asset growth was offset by a decrease of $7.1 million in loans held for sale as well as a $63.8 million reduction in SBA-PPP loans. The asset growth was primarily funded by a $269.1 million increase in deposits.
  

Commercial Bank

• Strong Portfolio Loan Growth - Portfolio loans, excluding credit card loans, increased by $102.6 million, or 11.3 percent on an annualized basis, to $1.3 billion for the nine months ended September 30, 2021 compared to $1.2 billion at December 31, 2020. The growth was primarily due to a 28.0 percent increase in commercial real estate loans.
• Improved Deposit Franchise and Lower Cost of Funding - Noninterest bearing deposits increased by $224.6 million, or 36.9 percent, during the nine months ended September 30, 2021 and represent 43.4% of total deposits. The cost of interest bearing liabilities declined to 0.66% from 1.41% for the same period in the prior year, as higher priced time deposits continue to run-off or re-price.
• COVID-19 Related Deferrals - At September 30, 2021, outstanding loans deferred due to COVID-19 amounted to $7.3 million, a decrease of 75.9 percent from $30.3 million at September 30, 2020.
  

Capital Bank Home Loans

• Gain on Sale - The year-to-date gain on sale of mortgage loans grew modestly to $25.9 million at September 30, 2021 from $25.5 million at September 30, 2020, even as year to date origination volumes declined 8.2 percent, to $845 million at September 30, 2021 from $920 million at September 30, 2020. Gain on sale margins remained strong at 2.85% for the nine months ended September 30, 2021. The steepening yield curve in 2021 has slowed originations from the year earlier period when low interest rates fueled refinance volumes. Historically-low housing inventory, shortages in new home building materials, and fluctuating interest rates are likely to continue suppressing origination volumes throughout the remainder of 2021.
  

OpenSky ^®

• Growth Elevates Performance - The 132 thousand increase in the number of accounts in the nine months ended September 30, 2021 resulted in a $49.9 million increase in noninterest bearing secured credit card deposits that totaled $242.4 million as of September 30, 2021. Credit card balances increased by $32.8 million, or 32.1 percent, for the nine months ended September 30, 2021 and totaled $135.0 million. Account growth led to higher credit card fees, which increased by 98.3 percent to $21.2 million compared to $10.7 million for the same nine month period last year, largely driven by the larger number of accounts in the portfolio.

COMPARATIVE FINANCIAL HIGHLIGHTS - Unaudited

Operating Results - Comparison of Three Months Ended September 30, 2021 and 2020

For the three months ended September 30, 2021, net interest income increased $10.0 million, or 45.5 percent, to $32.1 million from the same period in 2020, primarily due to an increase in interest earning assets and a decrease in rates on interest bearing liabilities. The net interest margin increased 126 basis point to 6.27% for the three months ended September 30, 2021 from the same period in 2020. Net interest margin, excluding credit card and SBA-PPP loans, was 3.52% for the third quarter of 2021 compared to 3.84% for the same period in 2020. For the three months ended September 30, 2021, average interest earning assets increased $277.7 million, or 15.9 percent, to $2.0 billion as compared to the same period in 2020, and the average yield on interest earning assets increased 82 basis points. Compared to the same period in the prior year, average interest-bearing liabilities increased $25.5 million, or 2.4 percent, while the average cost of interest bearing liabilities decreased 65 basis points to 0.53% from 1.18%.

The provision for loan losses of $975 thousand for the three months ended September 30, 2021 was related to growth in the credit card portfolio. On an annualized basis, net charge-offs for the third quarter of 2021 were $301 thousand, or 0.09% of average loans, compared to $163 thousand, or 0.06% of average loans on an annualized basis, for the third quarter of 2020. The $301 thousand in net charge-offs during the quarter was mainly comprised of $302 thousand in credit card charge-offs.

For the quarter ended September 30, 2021, noninterest income was $12.6 million, a decrease of $4.9 million, or 27.92 percent, from $17.5 million in the prior year quarter. The decrease was primarily the result of reduced mortgage banking revenue.

Net credit card loan balances increased by $51.9 million to $135.0 million as of September 30, 2021 from $83.1 million at September 30, 2020. The related deposit account balances increased 37.2 percent to $242.4 million at September 30, 2021 when compared to $176.7 million at September 30, 2020. For the three months ended September 30, 2021, OpenSky's ^® secured credit card accounts decreased 7 thousand compared to 148 thousand net new accounts for the same period in 2020.

The efficiency ratio for the three months ended September 30, 2021 improved to 64.10% compared to 65.17% for the three months ended September 30, 2020 on higher levels of revenue and improved operating leverage.

Noninterest expense was $28.6 million for the three months ended September 30, 2021, as compared to $24.5 million for the three months ended September 30, 2020, an increase of $4.2 million, or 17.1 percent. The increase was primarily driven by a $2.3 million, or 28.9 percent, increase in data processing expenses, an increase in professional services of $1.2 million, or 95.4 percent, and an increase in salaries and employee benefits of $1.02 million, or 11.4 percent. The increase of $2.3 million in data processing expenses was mainly attributable to the higher volume of active credit cards during the third quarter of 2021, while the increases in professional services was primarily related to the preparatory activities for a possible expansion of credit card offerings.

Operating Results - Comparison of Nine Months Ended September 30, 2021 and 2020

For the nine months ended September 30, 2021, net interest income increased $25.7 million, or 44.0 percent, to $84.0 million from the same period in 2020, primarily due to an increase in interest earning assets and a decrease in rates on interest bearing liabilities. The net interest margin increased 69 basis points to 5.65% for the nine months ended September 30, 2021 from the same period in 2020. Net interest margin, excluding credit card and SBA-PPP loans, was 3.57% for the nine months ended September 30, 2021 compared to 3.92% for the same period in 2020. For the nine months ended September 30, 2021, average interest earning assets increased $416.5 million, or 26.5 percent, to $2.0 billion as compared to the same period in 2020, and the average yield on interest earning assets increased 16 basis points. Compared to the same period in the prior year, average interest-bearing liabilities increased $93.2 million, or 9.3 percent, while the average cost of interest-bearing liabilities decreased 75 basis points to 0.66% from 1.41%.

For the nine months ended September 30, 2021, the provision for loan losses was $2.3 million, a decrease of $6.9 million from the prior year to date period. Net charge-offs for the nine months ended September 30, 2021 were $941 thousand, or 0.09% of average portfolio loans on an annualized basis, compared to $494 thousand, or 0.05% of average portfolio loans on an annualized basis, for the same period in 2020. The $941 thousand in net charge-offs during the nine months ended September 30, 2021 was comprised of commercial loan net charge-offs of $33 thousand, construction loan net charge-offs of $161 thousand, and net charge-offs of $747 thousand in the credit card portfolio.

For the nine months ended September 30, 2021, noninterest income was $40.0 million, an increase of $5.9 million, or 17.3 percent, from the same period in 2020. The increase was primarily driven by significant growth in credit card fees, which increased by $10.5 million, which was partially offset by a decrease in mortgage banking revenues of $3.5 million.

For the nine months ended September 30, 2021, the Bank originated 272 thousand new OpenSky ^® secured credit card accounts, increasing the total number of open accounts to 700 thousand. This compares to 363 thousand new originations for the same period last year, which increased total open accounts to 529 thousand.

The efficiency ratio for the nine months ended September 30, 2021 decreased to 65.78% compared to 66.14% for the nine months ended September 30, 2020, primarily resulting from increased revenue in addition to management's efforts to control expenses.

Noninterest expense was $81.6 million for the nine months ended September 30, 2021, as compared to $61.2 million for the nine months ended September 30, 2020, an increase of $20.4 million, or 33.4 percent. The increase was primarily driven by a $2.4 million, or 9.8 percent, increase in salaries and benefits, an increase in professional fees of 86.5 percent, or $2.6 million, a $11.9 million, or 67.5 percent, increase in data processing, and a $2.2 million, or 28.8 percent, increase in other operating expenses period over period. The increase of $11.9 million in data processing expenses was primarily due to the higher volume of open credit cards during the nine month period ended September 30, 2021. Additionally, operating expenses increased $2.2 million, primarily due to increases in outside service providers.

During the nine months ended September 30, 2021, results of operations were impacted by the COVID-19 pandemic and the resulting issuance of SBA-PPP loans. At September 30, 2021, SBA-PPP loans had remaining deferred origination fees of $5.2 million, and deferred costs of $0.9 million.

Financial Condition

Total assets at September 30, 2021 were $2.2 billion, an increase of 15.5 percent from September 30, 2020. Portfolio loans, which exclude mortgage loans held for sale and SBA-PPP loans, totaled $1.4 billion as of September 30, 2021, an increase of 16.1 percent as compared to $1.2 billion at September 30, 2020.

Total deposits at September 30, 2021 were $1.9 billion, an increase of $259 million, or 15.6 percent, as compared to $1.7 billion at September 30, 2020. Noninterest bearing deposits increased by $236.9 million, or 39.7 percent, to $833.2 million at September 30, 2021 compared to the level at September 30, 2020 and comprise 91.5 percent of the total deposit growth between third quarter 2020 and third quarter 2021. Deposit balances grew year over year in certain fiduciary accounts of title and property management companies, as well as noninterest bearing SBA-PPP loan customers and OpenSky ^® deposits.

The Company recorded a provision for loan losses of $2.3 million during the nine months ended September 30, 2021, which increased the allowance for loan losses to $24.8 million, or 1.56% of total loans (1.71%, excluding SBA-PPP loans, on a non-GAAP basis) at September 30, 2021. Nonperforming assets were $16.8 million, or 0.77% of total assets, as of September 30, 2021, up from $14.8 million, or 0.79% of total assets, at September 30, 2020. Of the $16.8 million in total nonperforming assets as of September 30, 2021, nonperforming loans represented $13.6 million and foreclosed real estate totaled $3.2 million. Management continues to focus on reducing the nonperforming assets as evidenced by further dispositions after September 30, 2021 totaling $3.1 million. Included in nonperforming loans at September 30, 2021 were troubled debt restructurings of $546 thousand.

Stockholders’ equity increased to $189.1 million as of September 30, 2021, compared to $149.4 million at September 30, 2020. This increase was primarily attributable to earnings during the period. As of September 30, 2021, the Bank's capital ratios continued to exceed the regulatory requirements for a “well-capitalized” institution.

Consolidated Statements of Income (Unaudited)

Consolidated Balance Sheets

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.

HISTORICAL FINANCIAL HIGHLIGHTS - Unaudited

Appendix

Reconciliation of Non-GAAP Measures