Capital City Bank Group, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2021. The Florida-based financial holding company provides banking, wealth management, brokerage, and residential mortgage services in Florida, Georgia, and Alabama. Its results include Capital City Home Loans (CCHL), in which it acquired a 51% interest in March 2020; therefore, year-over-year comparisons reflect a fuller period of CCHL operations.
Financial performance and condition
- Earnings: Net income attributable to common shareholders was $9.5 million, or $0.56 per diluted share, versus $4.3 million, or $0.25, in Q1 2020. The consolidated income statement reports net income of $12.0 million before the $2.5 million attributable to noncontrolling interests.
- Revenue and margin: Tax-equivalent net interest income was $24.6 million, down from $25.9 million a year earlier. Net interest margin was 2.85%, versus 3.78%, primarily reflecting lower asset yields and growth in low-yielding overnight funds. Noninterest income was $29.8 million, up from $15.5 million, driven mainly by mortgage banking revenue of $17.1 million versus $3.3 million.
- Credit costs: The company recorded a $1.0 million net negative provision, compared with $5.0 million of provision expense in Q1 2020. The allowance for credit losses on held-for-investment loans was $22.0 million, or 1.07% of those loans; the quarter included $0.5 million of net recoveries.
- Expenses: Noninterest expense was $40.5 million, up from $31.0 million, primarily reflecting CCHL. The efficiency ratio was 74.36%, compared with 74.89% in Q1 2020.
- Assets, loans, and deposits: Total assets were $3.93 billion at quarter-end. Held-for-investment loans were $2.06 billion, up 10.5% year over year; deposits were $3.36 billion, up $812.5 million year over year. Management attributed deposit growth in part to government stimulus and PPP-related balances.
- Cash flow and liquidity: Cash and cash equivalents were $925.9 million, compared with $928.5 million at year-end 2020. Operating cash flow was $50.9 million, investing cash outflow was $166.4 million, and financing cash inflow was $112.9 million; cash declined $2.7 million during the quarter. The company reported $1.262 billion of additional available liquidity, excluding $852 million of overnight funds sold.
- Debt and capital: Quarter-end short-term borrowings were $55.7 million, subordinated notes were $52.9 million, and other long-term borrowings were $1.8 million. The total risk-based capital ratio was 17.20%; management said regulatory capital ratios exceeded well-capitalized thresholds. Tangible common equity was 6.13% (non-GAAP).
Material changes, outlook, risks, and unusual items
- Compared with Q1 2020, the earnings increase reflected stronger noninterest income and lower credit provision, partly offset by higher expenses and lower net interest income. Mortgage banking growth was largely associated with CCHL’s inclusion in consolidated results.
- Management said it expects the annual effective tax rate, absent discrete items, to be approximately 18%–19% in 2021. It anticipated potential margin improvement as some overnight funds are deployed and said it was planning to invest an additional $500 million in the securities portfolio. The filing provides no specific earnings or revenue guidance.
- Management reported that approximately $328 million of the $333 million in loans granted COVID-19 extensions had resumed scheduled payments; $2.9 million of those balances were over 30 days delinquent and $0.6 million was on nonaccrual at quarter-end. It continues to monitor pandemic-related borrower and business-continuity risks.
- Deposits may be volatile as stimulus-related balances flow out. Interest-rate modeling showed the 24-month down-100-basis-point net-interest-income scenario and the down-100-basis-point economic-value-of-equity scenario outside policy limits; management cited limited ability to reduce deposit rates and the low-rate environment. The company’s LIBOR-linked borrowings and contracts also face reference-rate transition risk.
- Other items to note: $65.4 million of new PPP loans originated during the quarter; the allowance for unfunded commitments rose to $3.0 million. The company reported no known litigation expected to have a material effect and stated that disclosure controls were effective.
Important facts for investors to verify
- How much of mortgage banking revenue and year-over-year earnings growth is sustainable, given CCHL’s contribution and the quarter’s mortgage production environment.
- Whether stimulus-related deposits persist, and how effectively the company can deploy excess liquidity without pressuring margins or increasing interest-rate risk.
- Whether improving economic forecasts and the negative loan-loss provision remain appropriate as PPP forgiveness progresses and COVID-19 borrower support ends.
- Credit quality trends, including classified loans of $20.6 million, nonaccrual loans of $5.4 million, and performance of previously extended loans.
- Execution and implications of the planned $500 million securities investment, capital spending, and LIBOR transition; assess the company’s interest-rate sensitivity disclosures and policy-limit exceptions.