Capital City Bank Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Comparisons are with Q1 2022 unless otherwise stated. Dollars are in millions except per-share data and ratios. The company provides banking and related services through 60 offices in Florida, Georgia, and Alabama.
Financial performance and condition
- Earnings: Net income attributable to common shareholders was $15.0 million, or $0.88 per diluted share, versus $8.5 million, or $0.50, a year earlier. Pretax income was $19.1 million; income tax expense was $4.1 million.
- Net interest income and margin: Net interest income was $40.4 million, up from $24.7 million; fully tax-equivalent net interest income was $40.5 million. Net interest margin was 4.04%, compared with 2.55%. Higher rates and loan growth drove improvement, partly offset by higher deposit costs.
- Other income and expenses: Noninterest income declined to $22.2 million from $25.8 million, mainly due to lower wealth-management and mortgage-banking revenue. Noninterest expense rose to $40.5 million from $39.2 million. The efficiency ratio improved to 64.48% from 77.55%, reflecting higher net interest income.
- Loans and credit: Period-end loans held for investment were $2.637 billion, up 4.4% from year-end 2022. The allowance for credit losses was $26.5 million, or 1.01% of loans; Q1 provision expense was $3.1 million and net charge-offs were $1.5 million. Nonperforming assets were $4.6 million, or 0.10% of assets, up from $2.7 million at year-end. Management attributed much of the increase to one $1.8 million business relationship, which it said was adequately secured and reserved for.
- Deposits and liquidity: Period-end deposits were $3.824 billion, down $115.4 million from December 31, 2022; average deposits were $3.817 billion. Management cited seasonal public-fund outflows, transfers to interest-bearing accounts, and customers seeking higher-yielding alternatives. Cash and cash equivalents fell to $388.0 million from $600.7 million. The company reported $1.428 billion of additional available liquidity, excluding $303.4 million of overnight funds sold, and said liquidity was sufficient for ongoing needs.
- Cash flows: Operating activities provided $26.1 million; investing activities used $89.5 million and financing activities used $149.3 million. Cash and cash equivalents decreased $212.7 million during the quarter.
- Debt and capital: At quarter-end, short-term borrowings were $26.6 million, subordinated notes were $52.9 million, and other long-term borrowings were $0.5 million. Regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital was 15.53%, common equity tier 1 was 12.68%, and leverage was 9.28%. Tangible common equity was 7.37% (a non-GAAP measure).
Material changes and notable items
- Loans held for investment increased 32.8% year over year; growth included residential real estate and commercial real estate lending. Residential loan purchases from related party Capital City Home Loans were $120.1 million in Q1 2023, versus $26.3 million a year earlier.
- Interest expense increased to $3.5 million from $0.7 million. The cost of interest-bearing deposits rose to 0.46% from 0.04%; total deposit cost was 0.26% versus 0.02%.
- Investment securities had $74.8 million of aggregate pretax unrealized losses at March 31. The portfolio included $35.0 million of net unrealized losses on available-for-sale securities; held-to-maturity securities were carried at amortized cost. Management said most loss positions were government or agency securities and attributed losses principally to market-rate changes.
- Shareowners’ equity increased to $411.2 million from $394.0 million at year-end, reflecting earnings and improved securities-related accumulated other comprehensive loss, partly offset by dividends and share repurchases. The quarterly dividend declared was $0.18 per share; 25,241 shares were repurchased.
- A gain from the sale of a banking office reduced reported expenses. The company also recorded a sale of $334 million in mortgage servicing rights pending Fannie Mae approval at March 31; approval was obtained after quarter-end. The reported pending gain was $1.38 million.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Absent discrete items, management expects a 2023 annual effective tax rate of approximately 21%–22% and anticipates about $8 million of capital expenditures over the next 12 months.
- Interest-rate sensitivity modeling showed net interest income outside policy limits in the down-300- and down-400-basis-point scenarios over both 12- and 24-month periods. Economic value of equity was within policy limits in all modeled scenarios. Results depend on assumptions about repricing, deposit behavior, prepayments, and other factors.
- Management identified risks from deposit competition and customer behavior, higher funding costs, interest-rate and liquidity changes, credit quality, economic conditions, and adverse developments in the banking sector. The company stated that it was monitoring deposit costs and liquidity.
- Commitments to extend credit totaled $825.8 million and standby letters of credit $5.7 million; these amounts are not necessarily expected cash outflows. The allowance for noncancellable off-balance-sheet commitments was $2.8 million. Management said it knew of no pending litigation expected to have a material financial effect.
Important facts for investors to verify
- How deposit balances, deposit mix, and funding costs evolve, particularly after the Q1 period-end decline.
- Whether strong loan growth is sustained without deterioration in credit quality, and how the $1.8 million nonaccrual relationship and consumer charge-offs develop.
- The sensitivity of earnings and capital to falling rates, including the disclosed breaches of net-interest-income policy limits in severe down-rate scenarios.
- Potential liquidity and capital effects of unrealized securities losses, including the company’s stated adjusted tangible capital ratio of 6.69% if after-tax HTM losses were recognized in accumulated other comprehensive loss.
- Performance of mortgage-banking revenue and the completed post-quarter sale of mortgage servicing rights, including realization of the pending gain.