Capital City Bank Group, Inc. — Q1 2020 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2020. Capital City Bank Group is a Florida-based bank holding company operating in Florida, Georgia, and Alabama. On March 1, its bank subsidiary acquired a 51% interest in Brand Mortgage Group, consolidated as Capital City Home Loans (CCHL); the quarter includes one month of CCHL results.
Key financial results and condition
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net income attributable to common shareholders | $4.3 million; diluted EPS $0.25 | $6.4 million; $0.38 in Q1 2019 |
| Net interest income, taxable-equivalent | $25.9 million | $25.0 million in Q1 2019 |
| Net interest margin, taxable-equivalent | 3.78% | 3.75% in Q1 2019; 3.89% in Q4 2019 |
| Provision for credit losses | $5.0 million | $0.8 million in Q1 2019 |
| Noninterest income / expense | $15.5 million / $31.0 million | $12.6 million / $28.2 million in Q1 2019 |
| Total assets | $3.087 billion | $3.089 billion at Dec. 31, 2019 |
| Loans held for investment, gross | $1.862 billion | $1.836 billion at Dec. 31, 2019 |
| Deposits | $2.546 billion | $2.645 billion at Dec. 31, 2019 |
- Net income fell year over year, primarily reflecting the higher credit-loss provision and increased expenses, partly offset by stronger noninterest income and net interest income. Mortgage banking revenue rose to $3.0 million, largely reflecting CCHL’s March contribution.
- Cash and cash equivalents were $269.6 million, down from $378.4 million at year-end. Operating cash flow was negative $55.2 million, compared with positive $15.2 million in Q1 2019; loan originations held for sale and changes in other assets and liabilities were significant cash-flow factors.
- Short-term borrowings were $76.5 million, versus $6.4 million at year-end, mainly due to CCHL mortgage warehouse funding. Subordinated notes were $52.9 million and other long-term borrowings $5.9 million. Management reported $1.362 billion of additional available liquidity, excluding $197 million of overnight funds sold.
- The allowance for credit losses was $21.1 million, or 1.13% of loans held for investment, and covered 433% of nonperforming loans. Net charge-offs were $1.1 million. Regulatory capital ratios remained above the well-capitalized thresholds; total risk-based capital was 17.19% and tangible common equity was 7.98%.
Material changes and unusual items
- Adoption of CECL on January 1 increased the loan allowance by $3.3 million and the off-balance-sheet commitment allowance by $0.7 million; retained earnings decreased by $3.1 million after tax. The filing also attributes a further $3.9 million increase in the loan allowance during the quarter to forecast deterioration, principally COVID-19-related unemployment expectations.
- CCHL acquisition accounting included $4.5 million of goodwill and temporary equity for the remaining 49% noncontrolling interest. CCHL’s March operations had a nominal negative effect on Q1 net income, according to management.
- Noninterest expense included a $1.0 million gain on sale of a banking office, contributing to negative reported OREO expense.
- Cash dividends were $0.14 per share; the company repurchased 33,074 shares for approximately $0.7 million during the quarter.
Outlook, risks, and contingencies
- Management warned that emergency Federal Reserve rate cuts totaling 150 basis points would pressure net interest income until rates normalize. It expects PPP-related interest and fees and deposit-rate adjustments to partly offset the impact. No full-year earnings or revenue guidance is provided.
- The company had obtained SBA approvals for approximately $135 million of first-phase PPP loans and $50 million of second-phase loans by the dates specified in the filing; management expected most or all to be funded from existing liquidity. By May 5, it reported 2,100 loan extensions totaling $310 million, about 17% of the loan portfolio.
- Management identified hotel, restaurant, retail/shopping-center, stock-secured, and other exposures as 11% of loans in aggregate. It expected borrower distress and credit effects to increase, and noted that reserve estimates depend on uncertain forecasts and government stimulus effectiveness.
- Management said liquidity was sufficient for ongoing needs and PPP funding. It expected approximately $7 million of capital expenditures over the next 12 months and an annual effective tax rate near 24%, absent discrete items. It expects the efficiency ratio to improve as CCHL scales.
- Other disclosed risks include deposit withdrawals, further credit deterioration, prolonged low rates, market volatility, operational disruption, and uncertainty surrounding COVID-19. The company reported no known pending litigation expected to have a material effect and stated it was in compliance with significant warehouse-line covenants.
Important facts for investors to verify
- Track credit quality, charge-offs, criticized loans, loan-extension performance, and the adequacy of CECL reserves as pandemic effects become clearer.
- Monitor deposit trends, cash levels, warehouse borrowings and maturities, and whether reported contingent liquidity remains accessible.
- Assess the sustainability of net interest margin under low rates and the realized profitability, integration costs, and potential synergies of CCHL.
- Reconcile reported net income: the income statement shows $4.010 million of net income and a $0.277 million loss attributable to noncontrolling interests, resulting in $4.287 million attributable to common shareholders.