CAPITAL CITY BANK GROUP INC quarterly report, Q3 FY2020

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Business Context and Reporting Period

Capital City Bank Group, Inc. (CCBG) is a Florida-based bank holding company operating in Florida, Georgia, and Alabama. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020. On March 1, 2020, CCBG acquired a 51% interest in Brand Mortgage Group, now Capital City Home Loans (CCHL), and began consolidating its mortgage operations.

Unless otherwise stated, amounts below are in millions. Comparisons are with the third quarter or first nine months of 2019, as applicable.

Financial Results and Condition

  • Earnings: Third-quarter net income attributable to common shareholders was $10.4 million, or $0.62 per diluted share, versus $8.5 million, or $0.50, a year earlier. Nine-month income was $23.8 million, or $1.42 per diluted share, versus $22.2 million, or $1.32.
  • Revenue and margins: Third-quarter net interest income on a taxable-equivalent basis was $25.2 million, down from $26.3 million. Net interest margin was 3.12%, down 80 basis points year over year; excluding SBA Paycheck Protection Program (PPP) loans, it was 3.17%. Noninterest income was $35.0 million, compared with $13.9 million, driven principally by CCHL mortgage banking revenue of $23.0 million. Nine-month noninterest income was $80.6 million versus $39.2 million.
  • Expenses and credit costs: Third-quarter noninterest expense rose to $40.3 million from $27.9 million, largely reflecting CCHL. Provision for credit losses was $1.3 million for the quarter and $8.3 million year to date, versus $0.8 million and $2.2 million, respectively, in 2019. The year-to-date increase reflected pandemic-related economic deterioration and expected losses.
  • Balance sheet and liquidity: At September 30, total assets were $3.59 billion, deposits $3.01 billion, and loans held for investment (HFI) $2.00 billion. Cash and cash equivalents were $702.6 million, including $626.1 million in federal funds sold and interest-bearing deposits. Deposits increased $364.0 million from year-end 2019, partly reflecting stimulus-related inflows. Management reported $1.253 billion of additional available liquidity, excluding overnight funds sold.
  • Cash flow: For the first nine months, operating activities used $55.8 million, compared with providing $43.9 million in 2019; investing activities used $58.6 million and financing activities provided $438.6 million. Cash and cash equivalents increased $324.2 million to $702.6 million. The filing does not provide a single summary attribution for the operating cash-flow swing; mortgage loan originations and sales were substantially higher.
  • Debt and capital: Short-term borrowings were $90.9 million, mainly reflecting CCHL warehouse financing; subordinated notes were $52.9 million and other long-term borrowings $5.3 million. Total risk-based capital was 17.88%, common equity Tier 1 was 14.20%, and the non-GAAP tangible common equity ratio was 7.16%. The company reported that regulatory capital ratios exceeded well-capitalized thresholds.
  • Credit quality: The allowance for credit losses was $23.1 million, or 1.16% of HFI loans and 1.28% excluding government-guaranteed PPP loans. Nonaccrual loans were $5.5 million (0.28% of HFI loans), and nonperforming assets were $6.7 million. PPP loans averaged and ended the quarter at approximately $190 million.

Material Changes Versus Comparable Periods

  • Reported earnings improved year over year, but results include CCHL, consolidated beginning March 1, 2020. CCHL contributed $3.8 million, or $0.23 per diluted share, to third-quarter earnings.
  • Lower market rates and substantial growth in low-yield overnight funds reduced net interest income and margin, despite lower deposit costs. Third-quarter average funds sold were $567.9 million.
  • CECL adoption on January 1, 2020 increased the opening loan allowance by $3.3 million and the allowance for unfunded commitments by $0.7 million, with a $3.1 million after-tax reduction to retained earnings.
  • Core HFI loans grew 8.8% from year-end, while period-end balances declined 1.2% from the prior quarter. Management cited residential mortgage runoff and lower commercial-line utilization, partly offset by PPP lending.
  • Shareowners’ equity was $339.4 million, versus $327.0 million at year-end 2019. It included a $17.2 million temporary-equity balance associated with the CCHL noncontrolling-interest buyout agreement.

Outlook, Risks, and Unusual Items

  • Management expected net interest margin to remain at lower levels until stimulus-related funding is paid down or deployed into higher-yielding assets. It gave no specific earnings or revenue guidance. It expected a full-year 2020 effective tax rate of approximately 18%–19%, excluding discrete items, and about $7 million of capital expenditures over the next 12 months.
  • COVID-19, economic conditions, unemployment, borrower performance, stimulus-related deposit volatility, and interest rates were identified as key uncertainties. At-risk loan segments were approximately 8% of HFI loans, including hotels, restaurants, and retail/shopping centers. Of $325 million in loans extended, approximately $285 million had resumed scheduled payments; $40 million remained on extension at September 30.
  • Interest-rate simulations showed the 24-month, down-100-basis-point net interest income sensitivity at negative 11.8%, outside the stated negative 10.0% policy limit. The modeled economic-value-of-equity decline in the down-100-basis-point scenario was 60.9%, also outside the negative 15.0% tolerance. Management said it was monitoring these results and had not made immediate balance-sheet changes.
  • Warehouse facilities included borrowings with maturities in September and October 2020; the filing reports they were renewed or extended in October. CCBG was in compliance with significant debt covenants at quarter-end.
  • Off-balance-sheet commitments to extend credit totaled $704.3 million and standby letters of credit $6.9 million. Management stated that pending litigation was not expected to have a material effect.

Investor Verification Priorities

  1. Assess how much reported earnings and fee growth depend on CCHL mortgage production and whether that activity is sustainable.
  2. Track net interest margin, excess liquidity deployment, and deposit trends as stimulus-related balances change.
  3. Review loan extensions, sector concentrations, PPP forgiveness, criticized loans, and the adequacy of credit-loss allowances as economic forecasts evolve.
  4. Verify the terms and renewal status of CCHL warehouse facilities and monitor the modeled interest-rate exposures that exceeded stated policy limits.
  5. Reconcile the CCHL noncontrolling-interest redemption value and temporary-equity accounting with future cash, earnings, and capital effects.