Capital Bancorp beats estimates as shares slide on margin pressure
Bank reported $0.91 EPS vs $0.83 consensus, but net interest margin compression and rising nonperforming assets weigh on investor sentiment
Capital Bancorp reported better-than-expected fourth-quarter earnings on Monday, but shares fell 4% as investors focused on widening margin pressure and deteriorating credit quality at the Maryland-based regional lender.
The bank holding company reported earnings per share of $0.91, beating the consensus estimate of $0.83 by 9.6%. Revenue came in at $62.7 million, modestly exceeding analyst projections. Yet the market's reaction underscored growing concerns about profitability headwinds facing regional banks in a high-rate environment.
The net interest margin compressed 42 basis points to 5.94%, a significant decline that reflects the challenging rate landscape squeezing banks nationwide. Margin compression has become a persistent theme across the sector, with Morningstar DBRS noting that "the era of easy profitability driven by high interest rates is considered over" for U.S. lenders heading into 2026.
Credit quality also showed signs of strain, with nonperforming assets rising to $58.3 million, representing 1.62% of total assets—an increase of 7 basis points from the third quarter. The metric, which increased by $6 million quarter-over-quarter, suggests that borrowers are feeling the impact of elevated borrowing costs after the Federal Reserve's aggressive rate hiking cycle.
Despite these headwinds, Capital Bancorp demonstrated strong balance sheet expansion. Loans grew by $137.5 million, or 19.3% on an annualized basis, driven primarily by commercial and industrial lending, which added $79.1 million. Residential real estate and construction loans contributed an additional $41 million combined.
The bank's return on average assets reached 1.71%, while return on average equity stood at 15.23% for the quarter. Tangible book value per share increased 15.5% year-over-year, demonstrating the bank's ability to build shareholder value despite the operating environment. Core net income totaled $15 million, flat compared to the third quarter.
Management sought to emphasize the bank's diversified business model as a source of resilience. "Our diversified business model continues to be a source of consistency and strength enabling us to perform at a high level in different market conditions," said Ed Barry, chief executive officer. Barry noted that with the integration of IFH now complete, the company is focused on executing its strategic plan and leveraging its growth options.
Chairman Steven J Schwartz highlighted the bank's progress in building tangible book value and expanding its loan portfolio, expressing confidence that the net interest margin has "proven durable." Schwartz pointed to ongoing investments in technology and human capital, as well as the company's opportunistic stock buyback program, as positioning Capital Bancorp for continued profitable growth and potential acquisitions.
The board declared a quarterly dividend of $0.12 per share, payable February 28 to shareholders of record February 9. At current levels, the stock offers a dividend yield of approximately 1.4%.
Analysts maintain a cautiously optimistic outlook on the shares. Four analysts cover Capital Bancorp, with three rating it a buy and one maintaining a hold recommendation. The average price target stands at $34.50, implying roughly 17% upside from current levels. The stock trades at 10 times trailing earnings and 1.2 times book value, metrics that suggest the market has already priced in some of the profitability challenges ahead.
The broader banking sector has struggled to gain traction in January despite strong results from the largest institutions. While the Financial Select Sector SPDR ETF (XLF) recorded $3.2 billion in inflows during the month, regional lenders have faced pressure from high investor expectations, rising operating costs, and management teams' conservative outlooks on regulatory and geopolitical risks.
Looking ahead, investors will be watching whether Capital Bancorp can stabilize its net interest margin in the coming quarters and whether the increase in nonperforming assets represents a temporary uptick or a longer-term credit cycle deterioration. The bank's ability to continue its double-digit loan growth while maintaining credit quality will be critical to sustaining its strong return metrics and justifying its premium valuation relative to peers.
With the Federal Reserve signaling that rate cuts may be on the horizon in 2026, margin pressure could eventually ease, potentially providing relief to regional banks that have borne the brunt of the rate environment. However, Morningstar DBRS maintains a neutral outlook for the U.S. banking sector, citing macroeconomic headwinds and regulatory uncertainties that are likely to persist through the year.