CAPITAL CITY BANK GROUP INC quarterly report, Q3 FY2021

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Capital City Bank Group, Inc. — Q3 2021 Form 10-Q

Business context and reporting period

Capital City Bank Group is a Florida-based financial holding company operating 57 full-service banking offices in Florida, Georgia, and Alabama, with banking, wealth management, and residential mortgage businesses. This unaudited 10-Q covers the quarter and nine months ended September 30, 2021. Unless noted otherwise, amounts below are in millions.

Financial performance and condition

  • Q3 earnings: Net income attributable to common shareowners was $10.1 million, or $0.60 per diluted share, versus $10.4 million, or $0.62, in Q3 2020. For the first nine months, it was $27.0 million, or $1.60 per diluted share, versus $23.8 million, or $1.42.
  • Net interest income: GAAP net interest income was $27.7 million in Q3, up from $25.1 million in Q3 2020. Tax-equivalent net interest income was $27.8 million and the tax-equivalent net interest margin was 2.98%, down from 3.12% a year earlier. Nine-month tax-equivalent net interest income was $78.4 million, versus $76.7 million.
  • Credit provision and asset quality: No loan-loss provision was recorded in Q3; the comparable 2020 quarter had a $1.3 million provision. Nine-month provision was a $1.6 million credit, compared with $8.3 million of expense in 2020. The loan allowance was $21.5 million, or 1.11% of held-for-investment loans. Nonaccrual loans were $3.0 million, down from $5.9 million at year-end 2020; nonperforming assets were $3.2 million.
  • Noninterest income and expense: Q3 noninterest income was $26.6 million versus $35.0 million a year earlier, mainly reflecting lower mortgage banking revenue ($12.3 million versus $23.0 million). Q3 noninterest expense was $39.7 million versus $40.3 million. Nine-month noninterest income rose to $82.9 million from $80.6 million, while expense increased to $122.3 million from $108.6 million. The Q3 efficiency ratio was 73.09%, versus 67.01% in Q3 2020.
  • Balance sheet and liquidity: Total assets were $4.05 billion at September 30, compared with $3.80 billion at December 31, 2020. Deposits were $3.47 billion, up from $3.22 billion; noninterest-bearing deposits increased to $1.59 billion. Held-for-investment loans were $1.94 billion, down from $2.01 billion, while investment securities increased to $987.1 million from $494.8 million. Cash and cash equivalents were $782.1 million, including $709.0 million of funds sold.
  • Cash flow: Nine-month operating cash flow was $86.2 million, investing cash outflow was $444.2 million, and financing cash inflow was $211.6 million. Cash and cash equivalents declined $146.4 million during the period to $782.1 million.
  • Debt and capital: Short-term borrowings were $51.4 million, subordinated notes $52.9 million, and other long-term borrowings $1.6 million. The total risk-based capital ratio was 16.70%; tangible common equity was 6.46% (non-GAAP). Management said all regulatory capital ratios exceeded well-capitalized thresholds.

Material changes and management commentary

  • Management attributed improved nine-month net interest income mainly to SBA Paycheck Protection Program (PPP) loan fees and interest and lower funding costs. Q3 margin improved sequentially on higher PPP fees but remained below the prior-year quarter, in part because deposit growth increased earning assets.
  • Core loans excluding PPP grew: period-end balances were up $102.8 million versus year-end 2020, according to management. Reported total loans declined as PPP balances ran off; $7.5 million of PPP loans remained at quarter-end, with forgiveness applications expected to be completed in Q4 2021.
  • Deposit growth reflected core growth and government stimulus-related balances. Management cautioned that those balances could leave unpredictably into 2022, while describing liquidity as robust. The company reported $1.456 billion of additional available liquidity, excluding $709 million of overnight funds sold.
  • The company acquired Strategic Wealth Group assets in April 2021 for $4.4 million, recording $2.8 million of goodwill and a $1.6 million customer-relationship intangible. It also completed the 2020 acquisition of a 51% interest in Brand Mortgage Group, now Capital City Home Loans (CCHL); CCHL’s mortgage activity materially affects fee and expense comparisons.

Outlook, risks, contingencies, and unusual items

  • Management expected an annual effective tax rate of approximately 18%–19% for the remainder of 2021, absent discrete items, and anticipated additional pension settlement expense in Q4. Nine-month 2021 pension settlement charges totaled $2.5 million, including $0.5 million in Q3.
  • Management expected approximately $7.0 million of capital expenditures over the next 12 months, principally for office remodeling, equipment, and technology, funded from existing resources. It said it would continue monitoring liquidity and consider further securities purchases.
  • Interest-rate modeling showed rising-rate scenarios benefiting projected net interest income; a 100-basis-point decline was projected to reduce 12-month net interest income by 5.7%. The down-100-basis-point economic-value-of-equity measure was slightly outside its stated percentage limit, although management said the associated ratio kept the position within Board policy. These are model estimates subject to assumptions.
  • Key risks include COVID-19 effects, credit and interest-rate risk, deposit outflows, geographic and industry loan concentration, regulatory changes, cybersecurity, and mortgage origination and servicing risks. The company expected likely coverage under OSHA’s then-pending vaccination-or-testing standard and warned of possible workforce attrition.
  • Off-balance-sheet commitments to extend credit were $750.4 million and standby letters of credit were $5.7 million. The allowance for noncancellable unfunded commitments was $3.1 million. Management reported no known litigation expected to have a material effect.

Important facts for investors to verify

  • Whether PPP forgiveness and deposit outflows change loan growth, liquidity, and net interest margin as management anticipated.
  • How mortgage banking volumes and gain-on-sale margins evolve, given the sharp year-over-year decline in Q3 mortgage revenue.
  • Whether credit quality and the allowance remain adequate as economic conditions and loan mix change.
  • The size and timing of further pension settlement charges and other expense growth.
  • Current regulatory capital, liquidity availability, and interest-rate sensitivity; the filing’s projections depend on assumptions and are not guarantees.