Capital Bancorp, Inc. Reports First Quarter 2024 Results

• Net Income of $6.6 million, or $0.47 per share. Net Income, as adjusted(1) of $7.1 million, or $0.51 per share
• ROAA of 1.15% and ROAE of 10.19% for 1Q 2024
• Adjusted Metrics(1) excluding Merger-Related Expenses:
  • ROAA of 1.24% and ROAE of 11.03% for 1Q 2024
• Loan Growth of $61.2 million, or 12.9% annualized for 1Q 2024
• Deposit Growth of $109.7 million; Noninterest bearing deposits increased $48.4 million, or 7.8% from 4Q 2023
• Cash dividend of $0.08 per share declared

ROCKVILLE, Md., April 22, 2024 (GLOBE NEWSWIRE) -- Capital Bancorp, Inc. (the "Company") (NASDAQ: CBNK), the holding company for Capital Bank, N.A. (the "Bank"), today reported net income of $6.6 million, or $0.47 per diluted share, for the first quarter 2024, compared to net income of $9.0 million, or $0.65 per diluted share, for the fourth quarter 2023, and $9.7 million, or $0.68 per diluted share, for the first quarter 2023. Net income, as adjusted(1) to exclude the impact of merger-related expenses was $7.1 million, or $0.51 per diluted share for the first quarter 2024.

The Company also declared a cash dividend on its common stock of $0.08 per share. The dividend is payable on May 22, 2024 to shareholders of record on May 6, 2024.

“We had another strong quarter of performance with robust strong loan and deposit growth, increasing credit card accounts and continued credit stability,” said Ed Barry, Chief Executive Officer of the Company and the Bank. “The announced acquisition of Integrated Financial Holdings, Inc. ("IFHI") diversifies our business while prudently deploying capital. IFHI's expertise in niche C&I lending complements our strategy and extends our capabilities. At the same time, CBNK continues to make the investments in people and technology that will enable us to elevate our franchise while maintaining a strong growth and profitability profile.”

"Notwithstanding the significant headwinds currently facing many community and regional banks, we continue to be well positioned for continued value creation,” said Steven J Schwartz, Chairman of the Company. “Our net cardholder growth for the quarter plus strong loan and deposit growth and a resilient core net interest margin are all positive signs for the future. Moreover, we anticipate that the acquisition of Integrated Financial Holdings, Inc., if approved by the regulators, will set us on a path of additional strategic acquisitions that, together with organic growth, will assure we can continue to deliver top tier performance. The Board reiterates its thanks and appreciation to our extremely hard working and dedicated employees.”

(1) Reconciliations of the non–U.S. generally accepted accounting principles ("GAAP") measures are set forth in the Appendix at the end of this press release.

Pending Acquisition of Integrated Financial Holdings, Inc.

On March 28, 2024, the Company and Integrated Financial Holdings, Inc. (“IFHI”) issued a joint press release announcing the execution of an Agreement and Plan of Merger and Reorganization, dated as of March 27, 2024, by and between the Company and IFHI, pursuant to which, upon the terms and subject to the conditions set forth therein, the Company and IFHI will merge, with the Company continuing as the surviving entity.

The Company incurred pre-tax merger-related expenses related to the IFHI transaction of $0.7 million for the first quarter 2024. The merger is expected to close in the fourth quarter 2024 subject to regulatory approval.

The following table provides a reconciliation of the Company's net income under GAAP to non-GAAP results excluding merger-related expenses.

Note: The tax benefit associated with merger-related expenses has been adjusted to reflect the estimated nondeductible portion of the expenses.

First Quarter 2024 Highlights

Capital Bancorp, Inc.

Earnings Summary - Net income of $6.6 million, or $0.47 per diluted share, decreased $2.5 million compared to $9.0 million, or $0.65 per diluted share, for the fourth quarter 2023. Net income, as adjusted(1), was $7.1 million, or $0.51 per diluted share for the first quarter 2024.

• Net interest income of $35.0 million increased $0.1 million compared to $34.9 million for the fourth quarter 2023. Interest income of $48.4 million increased $1.4 million compared to $47.0 million for the fourth quarter 2023 as interest income from portfolio loans increased $0.9 million and interest income from interest-bearing deposits held at other financial institutions increased $0.4 million. Interest expense of $13.4 million increased $1.3 million compared to $12.1 million for the fourth quarter 2023 as interest expense from time deposits increased $1.1 million and the average rate of time deposits increased 27 basis points to 4.99% as growth in average time deposits totaled $69.2 million for the first quarter 2024.
• The provision for credit losses was $2.7 million, a decrease of $0.1 million from the fourth quarter 2023. Net charge-offs totaled $2.0 million in the first quarter first including $1.7 million from credit card related loans and $0.3 million from commercial loans. Net charge-offs totaled $2.5 million in the fourth quarter 2023 including $1.9 million from credit card related loans and $0.6 million from commercial loans. A charge-off of $0.7 million was recorded in the fourth quarter 2023 on a single multi-unit residential real estate loan.
• Noninterest income of $6.0 million increased $0.1 million compared to $5.9 million for the fourth quarter 2023. Mortgage banking revenue increased $0.3 million primarily due to increased mortgage loans sold while credit card fees decreased $0.1 million and other income decreased $0.1 million.
• Noninterest expense of $29.5 million increased $2.6 million compared to $26.9 million for the fourth quarter 2023. Within this category, significant variances included the following:
  • Salaries and employee benefits of $12.9 million increased $1.3 million due to an increase in incentive based compensation expense of $1.0 million, annual merit-based increases of $0.3 million and a seasonal increase in payroll taxes of $0.3 million partially offset by an increase in deferred salary expense (a reduction in expense) of $0.3 million. In the fourth quarter 2023 the Company adjusted annual performance based incentive compensation.
  • Merger-related expenses of $0.7 million in the first quarter 2024 were related to professional fees including legal fees, third party consulting fees and other outside service provider expenses, with no comparable expense in the fourth quarter 2023.
  • Data processing expense of $6.8 million increased $0.6 million as the fourth quarter 2023 had lower expense primarily from processor rebates.
  • Advertising expense of $2.0 million increased $0.6 million related primarily to seasonal increases in OpenSkyTM card acquisition strategies.
  • Loan processing expense of $0.4 million increased $0.2 million in line with the growth in the loan portfolio.
  • Other operating expenses of $3.1 million decreased $0.9 million as operational losses were higher in the fourth quarter 2023.
• Income tax expense of $2.1 million, or 23.9% of pre-tax income for the first quarter 2024, decreased $0.1 million from $2.2 million, or 19.5% of pre-tax income for the fourth quarter 2023, reflective of a decrease in pre-tax income of $2.6 million. The lower effective tax rate for the fourth quarter 2023 was primarily driven by the tax benefit recognized on the exercise of non-qualified stock options. There was no comparable activity in the first quarter 2024.

Performance and Efficiency Ratios – Annualized return on average assets ("ROAA") and annualized return on average equity ("ROAE") were 1.15% and 10.19%, respectively, for the three months ended March 31, 2024, compared to 1.63% and 14.44%, respectively, for the three months ended December 31, 2023.

• Annualized ROAA and annualized ROAE, as adjusted(1) to exclude the impact of merger-related expenses, were 1.24% and 11.03%, respectively, for the three months ended March 31, 2024.
• The efficiency ratio was 71.95% for the three months ended March 31, 2024, compared to 65.91% for the three months ended December 31, 2023. The efficiency ratio, as adjusted(1) to exclude the impact of merger-related expenses, was 70.22% for the three months ended March 31, 2024.

Balance Sheet – Total assets of $2.3 billion at March 31, 2024 increased $98.1 million, or 4.4%, from December 31, 2023.

• Cash and cash equivalents of $85.2 million at March 31, 2024 increased $31.2 million, or 57.9%, from December 31, 2023, as total deposits increased $109.7 million, partially offset by an increase in total portfolio loans of $61.2 million and a decrease in other borrowed funds of $15.0 million.
• Total portfolio loans of $2.0 billion at March 31, 2024 increased $61.2 million, representing 12.9% annualized growth from December 31, 2023. Growth in the loan portfolio included $46.7 million within the commercial real estate loan category. Total average loans increased $64.1 million quarter over quarter.
• Total deposits of $2.0 billion at March 31, 2024 increased $109.7 million, or 5.8%, from December 31, 2023, while total average deposits increased $72.5 million quarter over quarter. The increase in deposits, when comparing March 31, 2024 to December 31, 2023, includes $48.4 million of noninterest-bearing deposits. Average portfolio loans-to-deposit ratio of 98.4% for the three months ended March 31, 2024 decreased from 98.8% for the three months ended December 31, 2023.
• The investment securities portfolio continues to be classified as available for sale and had a fair market value of $202.3 million, or 8.7% of total assets, at March 31, 2024 down from $208.3 million at December 31, 2023. The amortized cost of the investment securities portfolio was $218.4 million, with an effective duration of 3.14 years. U.S. Treasury securities represented 64.2% of the overall investment portfolio at March 31, 2024. The accumulated other comprehensive loss on the investment securities portfolio increased $0.5 million during the quarter to $13.6 million as of March 31, 2024, which represents 5.3% of total stockholders' equity. The Company does not have a held to maturity ("HTM") investment securities portfolio.

Net Interest Margin - Net interest margin decreased to 6.24% for the three months ended March 31, 2024, compared to 6.40% for the three months ended December 31, 2023. Adjusted net interest margin(1) (excluding credit card loans) decreased to 3.85% compared to 3.92% for the three months ended December 31, 2023.

• The average yield on interest earning assets of 8.63% increased 1 basis point compared to the fourth quarter 2023. The yield on portfolio loans, as adjusted(1) (excluding credit card loans) of 6.96% for the first quarter 2024 increased 7 basis points from 6.89% for the fourth quarter 2023. New portfolio loans (excluding credit card loans) originated in the first quarter 2024 totaled $122.7 million with a weighted average yield of 8.24% as compared to $91.1 million with a weighted average yield of 8.46% in the fourth quarter 2023.
• The average rate on interest-bearing liabilities increased 22 basis points compared to the fourth quarter 2023. The average rate for time deposits increased 27 basis points to 4.99% and average balances increased $69.2 million, compared to the fourth quarter 2023. Further, the average rate on money market accounts increased 5 basis points to 4.21% and the average rate on interest-bearing demand accounts increased 6 basis points to 0.24%.

Deposits - Total deposits at March 31, 2024 increased by $109.7 million, or 5.8%, compared to December 31, 2023.

• Noninterest-bearing deposits of $665.8 million increased $48.4 million, or 7.8%, compared to December 31, 2023, primarily due to increases in title account balances. Interest-bearing deposits of $1.3 billion increased $61.3 million, or 4.8%, compared to December 31, 2023 including an increase in money market accounts of $15.3 million and other time deposits of $33.7 million partially offset by a reduction in interest-bearing demand accounts of $5.3 million and savings of $0.7 million. Brokered time deposits totaled $160.6 million at March 31, 2024, an increase of $18.3 million from December 31, 2023.

Cost of Interest-Bearing Liabilities - The elevated interest rate environment, combined with an increase in time deposits, resulted in the average cost of interest-bearing liabilities increasing to 3.90% for the quarter ended March 31, 2024, compared to 3.68% for the fourth quarter 2023.

• Average time deposits of $450.0 million increased $69.2 million, or 18.2%, compared to December 31, 2023.
• Average noninterest-bearing deposits of $637.1 million increased $14.2 million, or 2.3%, compared to December 31, 2023, and represented 32.5% of total average deposits at March 31, 2024.
• Average borrowed funds of $59.0 million increased $17.1 million, or 41.0%, compared to December 31, 2023.

Robust Capital Positions - As of March 31, 2024, the Company reported a common equity tier 1 capital ratio of 14.92%, compared to 15.43% at December 31, 2023, and an allowance for credit losses to total loans ratio of 1.49%, compared to an allowance for credit losses to total loans ratio of 1.50% at December 31, 2023. Shares repurchased and retired during the three months ended March 31, 2024, as part of the Company's stock repurchase program, totaled 67,869 shares at an average price of $20.62, for a total cost of $1.4 million including commissions. Tangible book value per common share(1) grew 2.0% to $18.68 at March 31, 2024 when compared to December 31, 2023. The Company did not have goodwill or other intangible assets during any of the periods presented and therefore, tangible book value per share(1) is equal to book value per share.

Liquidity - Total sources of available borrowings at March 31, 2024 totaled $743.9 million, including available collateralized lines of credit of $465.6 million, unsecured lines of credit with other banks of $76.0 million and unpledged investment securities available as collateral for potential additional borrowings of $202.3 million.

Commercial Bank

Continued Portfolio Loan Growth - Portfolio loans, excluding credit cards, increased by $71.2 million, to $1.9 billion, gross, at March 31, 2024 compared to December 31, 2023.

Net Interest Income - Interest income of $32.5 million increased $1.5 million compared to $31.0 million for the fourth quarter 2024, driven primarily by loan growth. Interest expense of $13.2 million increased $1.3 million, driven by an increase in average balances and average cost of interest-bearing liabilities in the first quarter 2024.

Credit Metrics - Nonperforming assets decreased 10 basis points to 0.62% of total assets at March 31, 2024 compared to 0.72% at December 31, 2023 as a result of a decrease in nonaccrual loans at March 31, 2024 to $14.4 million compared to $16.0 million at December 31, 2023. The near complete resolution of a single nonperforming asset from $7.6 million to $0.6 million was offset by a $5.4 million increase in nonperforming assets comprised of $2.4 million of residential real estate secured loans and $3.0 million of non owner-occupied commercial real estate loans to various borrowers that the Company is proactively managing toward resolution.

At March 31, 2024 commercial real estate loans with office space exposure totaled $55.0 million, or 2.8% of total portfolio loans, with a weighted average loan-to-value ("LTV") of 48.1%. Included in the total are owner-occupied commercial real estate loans with office exposure totaling $43.2 million with a weighted average LTV of 47.0% and non owner-occupied commercial real estate loans with office exposure totaling $11.8 million with a weighted average LTV of 52.9%. At March 31, 2024 multi-family loans totaled $153.4 million, or 7.8% of total portfolio loans, with a weighted average LTV of 47.3%.

OpenSky™

Revenues - Total revenue of $18.8 million decreased $0.2 million from the fourth quarter 2023. Interest income of $14.9 million decreased $0.1 million from the fourth quarter 2023. Average OpenSky™ loan balances, net of reserves and deferred fees of $110.5 million for the first quarter 2024, decreased $4.1 million, or 3.6%, compared to $114.6 million for the fourth quarter 2023. Noninterest income of $3.9 million decreased $0.1 million from the fourth quarter 2023.

Noninterest Expense - Total noninterest expense of $13.6 million increased $0.9 million from the fourth quarter 2023. Data processing expense was lower in the fourth quarter 2023, attributable primarily to processor rebates. During the first quarter 2024, the number of OpenSky™ credit card accounts increased by 1,636 to 526,950.

Loan and Deposit Balances - OpenSky™ loan balances, net of reserves, of $111.9 million at March 31, 2024 decreased by $11.4 million, or 9.3%, compared to $123.3 million at December 31, 2023. Corresponding deposit balances of $171.8 million at March 31, 2024 decreased $2.1 million, or 1.2%, compared to $173.9 million at December 31, 2023. Gross unsecured loan balances of $28.5 million at March 31, 2024 decreased $2.3 million, or 7.5%, compared to $30.8 million at December 31, 2023.

OpenSky™ Credit - Card delinquencies remained stable in the first quarter 2024 when compared to the fourth quarter 2023. The provision for credit losses decreased $0.6 million compared to the fourth quarter 2023 as card balances, net of reserves, decreased $11.4 million during the first quarter 2024 as compared to an increase of $0.8 million during the fourth quarter 2023.

______________(1) Refer to Appendix for reconciliation of non-GAAP measures.

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

Operating Results - Comparison of Three Months Ended March 31, 2024 and 2023

For the three months ended March 31, 2024, net interest income of $35.0 million increased slightly from $34.5 million in the same period in 2023. The net interest margin decreased 41 basis points to 6.24% for the three months ended March 31, 2024 from the same period in 2023 as interest income on credit card decreased $1.4 million. Net interest margin, excluding credit card loans, increased to 3.85% for the three months ended March 31, 2024, compared to 3.81% for the same period in 2023 as yields on interest-bearing deposits and portfolio loans generally kept pace with the rising costs of deposits, including money market accounts and time deposits.

For the three months ended March 31, 2024, average interest earning assets increased $150.7 million, or 7.2%, to $2.3 billion as compared to the same period in 2023, and the average yield on interest earning assets increased 26 basis points. Compared to the same period in the prior year, average interest-bearing liabilities increased $144.0 million, or 11.7%, and the average cost of interest-bearing liabilities increased to 3.90%, a 97 basis point increase from 2.93%.

For the three months ended March 31, 2024, the provision for credit losses was $2.7 million, an increase of $1.1 million from the same period in 2023, primarily driven by loan growth. Net charge-offs for the three months ended March 31, 2024 were $2.0 million, or 0.41% on an annualized basis of average portfolio loans, compared to $2.6 million, or 0.61% on an annualized basis of average loans for the same period in 2023. Of the $2.0 million in net charge-offs during the first quarter 2024, $1.2 million related to secured and partially secured cards in the credit card portfolio and $0.5 million related to unsecured cards.

For the three months ended March 31, 2024, noninterest income of $6.0 million decreased $0.1 million, or 0.9%, from the same period in 2023. Mortgage banking revenue of $1.5 million increased $0.3 million due to an increase in home loan sales. Credit card fees of $3.9 million decreased $0.3 million primarily related to lower interchange and other fee income.

Credit card loan balances, net of reserves, decreased by $1.0 million to $111.9 million as of March 31, 2024, from $112.9 million at March 31, 2023. The related deposit account balances decreased 7.1% to $171.8 million at March 31, 2024 when compared to $184.8 million at March 31, 2023, reflective of the reduction in the number of open secured card customer accounts year over year.

The efficiency ratio for the three months ended March 31, 2024 was 71.95% compared to 64.72% for the three months ended March 31, 2023.

For the three months ended March 31, 2024, noninterest expense of $29.5 million increased $3.3 million, or 12.5%, from $26.2 million for the same period in 2023. The change includes increases in advertising expense of $1.5 million, merger-related expenses of $0.7 million, other operating expense of $0.5 million, occupancy and equipment expenses of $0.4 million, salaries and employee benefits expenses of $0.4 million and data processing expense of $0.2 million, partially offset by a decrease professional fees of $0.4 million.

Financial Condition

Total assets at March 31, 2024 were $2.3 billion, an increase of $98.1 million, or 4.4%, from the balance at December 31, 2023 and an increase of $79.0 million, or 3.5%, from the balance at March 31, 2023.

Net portfolio loans, which exclude mortgage loans held for sale, totaled $2.0 billion at March 31, 2024, an increase of $61.2 million, up 3.2% or 12.9% annualized, compared to December 31, 2023, and an increase of $176.4 million, or 9.9%, compared to $1.8 billion at March 31, 2023.

The Company recorded a provision for credit losses of $2.7 million during the three months ended March 31, 2024, which increased the allowance for credit losses to $29.4 million, or 1.49% of total loans at March 31, 2024, representing an increase of $0.7 million over the balance at December 31, 2023.

Nonperforming assets, which were comprised solely of nonperforming loans as of March 31, 2024, were $14.4 million, or 0.62% of total assets, down from $16.0 million, or 0.72% of total assets at December 31, 2023, and down from $16.3 million, or 0.73% of total assets at March 31, 2023. The near complete resolution of a single nonperforming asset from $7.6 million to $0.6 million was offset by a $5.8 million increase in nonperforming assets comprised of $2.4 million of residential real estate secured loans and $3.0 million of non owner-occupied commercial real estate loans to various borrowers that the Company is proactively managing toward resolution.

Deposits were $2.0 billion at March 31, 2024, an increase of $109.7 million, or 5.8%, from the balance at December 31, 2023 and an increase of $61.3 million, or 3.2%, from the balance at March 31, 2023. Average deposits of $2.0 billion for the three months ended March 31, 2024 increased $72.5 million, or 3.8%, as compared to the three months ended December 31, 2023.

Rising interest rates have resulted in some customers moving balances from noninterest-bearing deposit accounts to interest-bearing deposit accounts. As a result of the migration, average noninterest-bearing deposit balances decreased $16.9 million to $637.1 million as of March 31, 2024, as compared to March 31, 2023.

Noninterest-bearing deposits represented 33.2% of total deposits at March 31, 2024 compared to 36.3% at March 31, 2023. Uninsured deposits were approximately $855.7 million as of March 31, 2024, representing 42.7% of the Company's deposit portfolio, compared to $789.4 million, or 41.6%, at December 31, 2023, and $888.9 million, or 45.7%, at March 31, 2023.

Stockholders’ equity increased to $259.5 million as of March 31, 2024, compared to $254.9 million at December 31, 2023 and $234.5 million at March 31, 2023. Shares repurchased and retired for the three months ended March 31, 2024 as part of the Company's stock repurchase program totaled 67,869 shares at an average price of $20.62, for a total cost of $1.4 million including commissions. As of March 31, 2024, the Bank's capital ratios continued to exceed the regulatory requirements for a “well-capitalized” institution.

The following tables show 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.

_______________(1)   Annualized.(2)   Includes nonaccrual loans.(3)   For the three months ended March 31, 2024, December 31, 2023, and March 31, 2023, collectively, portfolio loans yield excluding credit card loans was 6.96%, 6.89% and 6.30%, respectively.(4)   For the three months ended March 31, 2024, December 31, 2023, and March 31, 2023, collectively, credit card loans accounted for 239, 248 and 284 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.

Effective January 1, 2024, the Company allocated certain expenses previously recorded directly to the Commercial Bank segment to the other segments. These expenses are for shared services also consumed by OpenSkyTM, CBHL, and Corporate. The Company performs an allocation process based on several metrics the Company believes more accurately ascribe shared service overhead to each segment. The Company believes this reflects the cost of support for each segment that should be considered in assessing segment performance. Historical information has been recast to reflect financial information consistently with the 2024 presentation.

The following schedule presents financial information for the periods indicated. Total assets are presented as of March 31, 2024, December 31, 2023, and March 31, 2023.

________________________(1)  Noninterest expense includes $6.1 million, $5.7 million, and $5.9 million in data processing expense in OpenSky’s™ segment for the three months ended March 31, 2024, December 31, 2023, and March 31, 2023, 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.

_______________(1)   Refer to Appendix for reconciliation of non-GAAP measures.(2)   Annualized.

_______________(3)   Credit card loans are presented net of reserve for interest and fees.(4)   Gain on sale percentage is calculated as gain on sale of loans divided by mortgage loans sold.

Appendix

Reconciliation of Non-GAAP Measures

The Company has presented the following non-GAAP (U.S. Generally Accepted Accounting Principles) financial measures because it believes that these measures provide useful and comparative information to assess trends in the Company’s results of operations and financial condition. Presentation of these non-GAAP financial measures is consistent with how the Company evaluates its performance internally and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Company’s industry. Investors should recognize that the Company’s presentation of these non-GAAP financial measures might not be comparable to similarly-titled measures of other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures and the Company strongly encourages a review of its condensed consolidated financial statements in their entirety.

_______________(1)   Annualized.(2)   The efficiency ratio is calculated by dividing noninterest expense by total revenue (net interest income plus noninterest income).