Capital City Bank Group, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2022; results are unaudited. Capital City Bank Group is a Florida-based financial holding company operating 57 full-service offices in Florida, Georgia, and Alabama, offering banking, mortgage, wealth management, and related services.
Financial performance and condition
| Metric | Q3 2022 | Comparable period |
|---|---|---|
| Net income attributable to common shareowners | $11.3 million; $0.67 per diluted share | $10.1 million; $0.60 per diluted share in Q3 2021 |
| Net interest income | $33.3 million | $27.7 million in Q3 2021 |
| Tax-equivalent net interest margin | 3.31% | 2.98% in Q3 2021; 2.91% for both nine-month periods |
| Provision for credit losses | $2.1 million expense | No provision in Q3 2021 |
| Noninterest income | $22.9 million | $26.6 million in Q3 2021 |
| Noninterest expense | $39.8 million | $39.7 million in Q3 2021 |
| Operating efficiency ratio | 70.66% | 73.09% in Q3 2021 |
For the first nine months of 2022, common-shareowner net income was $28.5 million ($1.68 per diluted share), versus $27.0 million ($1.60 per diluted share) in 2021. Net interest income was $86.4 million, compared with $78.2 million; noninterest income was $73.7 million, down from $82.9 million; and noninterest expense was $119.5 million, down from $122.3 million.
- Balance sheet at September 30: Total assets were $4.33 billion; loans held for investment were $2.35 billion, up 21.5% from year-end 2021; deposits were $3.76 billion, up 1.3%. Cash and cash equivalents were $570.4 million, down from $1.04 billion at year-end.
- Credit quality: Allowance for credit losses on held-for-investment loans was $22.5 million, or 0.96% of loans. Nonperforming assets were $2.4 million, 0.06% of assets, versus $4.3 million and 0.10% at year-end. Classified loans increased $1.4 million from the prior quarter to $21.0 million.
- Cash flow, nine months: Operating activities provided $51.8 million, investing activities used $573.0 million, and financing activities provided $56.2 million. Cash and cash equivalents decreased $465.0 million.
- Debt and liquidity: Period-end short-term borrowings were $52.3 million, subordinated notes payable $52.9 million, and other long-term borrowings $0.6 million. The company reported $1.479 billion of additional available liquidity, excluding $497.7 million of overnight funds sold, and said liquidity was sufficient for ongoing needs.
- Capital: Total risk-based capital ratio was 15.75%; tangible common equity ratio was 6.61%. Both were above applicable well-capitalized thresholds. Shareowners’ equity was $373.2 million, compared with $383.2 million at year-end, reflecting primarily increased unrealized securities losses.
Material changes versus prior periods
- Higher interest rates, loan growth, and a more favorable earning-asset mix lifted Q3 net interest margin and net interest income. September monthly margin was 3.41%; Q3 margin excluding overnight funds above $200 million was 3.54%.
- Mortgage banking revenue fell to $7.1 million in Q3 from $12.3 million a year earlier, and to $25.1 million for nine months from $42.6 million. Management cited reduced refinancing and purchase activity amid higher rates. Growth in adjustable-rate residential lending partly shifted production into the loan portfolio.
- Deposit fees and wealth management fees increased year over year, including higher service charges and revenue following the 2021 wealth-management acquisition. Nine-month mortgage revenue weakness was partly offset by those fee increases.
- The securities portfolio had $97.5 million of aggregate unrealized losses at quarter-end. During Q3, the company transferred 33 securities with $168.4 million amortized cost and $159.0 million fair value from available-for-sale to held-to-maturity; $8.8 million of related unrealized loss remained in accumulated other comprehensive loss to be amortized over the securities’ lives.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management expected a 2022 annual effective tax rate of approximately 21%, absent discrete items; it also expected additional pension settlement expense during the remainder of 2022 and approximately $8 million of capital expenditures over the next 12 months.
- Management said inflation had not significantly affected costs to date, while noting tight labor conditions and higher costs in some premises and processing contracts. It described overall credit quality as strong and deposit liquidity as strong.
- Interest-rate simulations showed higher rates generally benefiting net interest income, while falling-rate scenarios of 200 and 300 basis points were outside policy limits for net interest income at risk because deposit rates could not be reduced in line with market rates. Economic value of equity remained within policy limits across modeled scenarios. Results depend on assumptions and may differ from actual outcomes.
- Key risks include credit, interest-rate and liquidity risk; inflation and economic conditions; deposit pricing and funding; mortgage-market contraction; geographic and industry concentrations; regulation; technology and cybersecurity; and natural disasters or other geopolitical events.
- The company reported no known pending litigation expected to have a material effect. It was in compliance with significant warehouse-line debt covenants. Off-balance-sheet commitments to extend credit totaled $791.6 million, with $5.5 million in standby letters of credit; many commitments may not be drawn.
- Q3 comprehensive income was $3.9 million despite $11.3 million of net income attributable to common shareowners, primarily reflecting other comprehensive losses on securities and the securities reclassification. Management’s estimates for credit losses, pension obligations, goodwill, and taxes are subject to uncertainty.
Important facts for investors to verify
- Whether loan growth and higher interest rates continue to support net interest income as deposit costs reprice and liquidity declines.
- How mortgage banking contraction affects fee income, and whether growth in other fee businesses offsets the decline.
- Future credit quality, criticized/classified loans, charge-offs, and whether the allowance remains adequate as the loan portfolio expands.
- The impact of unrealized securities losses, the held-to-maturity transfer, and any implications for capital or liquidity management.
- Actual liquidity availability, deposit trends, and exposure to off-balance-sheet lending commitments.