Capital City Bank Group, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; results are unaudited. Capital City Bank Group provides banking, mortgage, wealth-management and related services through 57 offices in Florida, Georgia and Alabama. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and condition
- Q2 earnings: Net income attributable to common shareowners was $7.4 million, or $0.44 per diluted share, versus $9.1 million, or $0.55 per share, in Q2 2020. First-half income was $16.9 million, or $1.00 per diluted share, versus $13.4 million, or $0.80 per share.
- Revenue and margins: Q2 net interest income was $26.0 million and noninterest income was $26.5 million, for $52.5 million of operating revenue on a taxable-equivalent basis. Taxable-equivalent net interest margin was 2.89%, down from 3.41% a year earlier. First-half net interest income was $50.7 million versus $51.4 million in 2020; noninterest income rose to $56.3 million from $45.7 million.
- Credit costs: Q2 provision for credit losses was a negative $0.6 million, compared with $2.0 million of expense in Q2 2020. First-half provision was a negative $1.6 million versus $7.0 million of expense. Management attributed the release to improving economic conditions and net loan recoveries.
- Expenses and profitability: Q2 noninterest expense was $42.1 million, up from $37.3 million a year earlier; the efficiency ratio was 80.18% versus 66.90%. First-half expenses were $82.6 million versus $68.3 million. Q2 included a $2.0 million pretax pension settlement charge.
- Balance sheet and liquidity: At June 30, total assets were $4.011 billion, loans held for investment were $2.009 billion, and deposits were $3.447 billion. Cash and cash equivalents were $845.8 million, including $766.9 million of funds sold. Management reported $1.248 billion of additional available liquidity, excluding funds sold.
- Credit quality: The allowance for credit losses was $22.2 million, or 1.10% of held-for-investment loans. Nonperforming assets were $6.3 million; nonaccrual loans were $5.1 million. Classified loans totaled $19.4 million.
- Debt and capital: Period-end short-term borrowings were $47.2 million, subordinated notes were $52.9 million, and other long-term borrowings were $1.7 million. The total risk-based capital ratio was 16.48%, common equity tier 1 was 13.14%, and leverage was 8.84%; the company said all regulatory capital ratios exceeded well-capitalized thresholds.
- Cash flow: First-half operating cash flow was $52.2 million, investing cash flow was negative $326.0 million, and financing cash flow was $191.1 million. Cash and cash equivalents decreased $82.7 million to $845.8 million.
Material changes versus comparable periods
- Q2 common-shareowner earnings declined year over year, while first-half earnings increased. First-half net interest income was slightly lower, but noninterest income rose, partly reflecting the inclusion of Capital City Home Loans (CCHL) for a longer period than in 2020.
- Mortgage banking revenue fell to $13.2 million in Q2 from $19.4 million in Q2 2020, reflecting lower production and gain-on-sale margins. First-half mortgage banking revenue increased year over year, in part because of CCHL’s inclusion.
- Bank card and wealth-management fees strengthened; management linked higher card fees to increased consumer spending and higher wealth fees to assets under management and trading activity.
- Deposits and investment securities expanded. Management said deposit growth reflected core growth and pandemic-related stimulus balances; the investment portfolio was increased as part of balance-sheet management.
- The allowance for credit losses decreased from $23.8 million at year-end 2020 to $22.2 million at June 30, 2021, reflecting the negative provision and net recoveries.
Outlook, commentary, risks and unusual items
- Management did not provide broad earnings guidance. It expected an annual effective tax rate of approximately 18%–19% for the remainder of 2021, absent discrete items, and approximately $7.0 million of capital expenditures over the next 12 months.
- Management expected strong PPP forgiveness applications to continue through the remainder of 2021 and planned to monitor liquidity and consider additional securities purchases. It cautioned that stimulus-related deposit balances could be volatile.
- The company acquired Strategic Wealth Group assets on April 30, 2021, for $4.4 million in cash, recording $2.8 million of goodwill and $1.6 million of customer-relationship intangibles.
- COVID-19 and the Delta variant remained sources of uncertainty, including potential effects on borrowers, local economies and business continuity. Other disclosed risks include credit, interest-rate and liquidity risk, loan and geographic concentrations, regulatory changes, cybersecurity, and the effects of inflation and market conditions.
- Interest-rate sensitivity modeling showed the 24-month net-interest-income result for a 100-basis-point rate decline outside policy limits; management cited limited ability to reduce deposit rates further. The filing also reported an unfavorable economic-value-of-equity result under a down-rate scenario, while an alternate calculation was within policy limits.
- Management reported no known litigation expected to have a material effect and stated disclosure controls were effective. The company was in compliance with significant warehouse-line covenants at quarter-end.
Important facts for investors to verify
- Whether deposit balances supported by stimulus programs persist or run off, and the resulting effect on liquidity and margin.
- Whether mortgage banking production and gain-on-sale margins stabilize, given the Q2 decline.
- Whether credit quality, recoveries and the allowance remain consistent with management’s improving-economic-condition assumptions.
- How the new wealth-management acquisition contributes to revenue and expenses, and whether integration costs or benefits emerge.
- The effect of interest-rate movements on net interest income, economic value of equity, pension obligations and securities values.
- Confirm the distinction between consolidated net income and income attributable to common shareowners: Q2 consolidated net income was $8.8 million, while common-shareowner net income was $7.4 million.