Capital City Bank Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Capital City Bank Group provides banking and related services in Florida, Georgia and Alabama. Its results include Capital City Home Loans (CCHL), following the March 1, 2020 acquisition of a 51% interest in Brand Mortgage Group.
Financial results and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $25.5 million | $26.0 million | $51.2 million | $50.9 million |
| Provision for credit losses | $2.0 million | $0.6 million | $7.0 million | $1.4 million |
| Noninterest income | $30.2 million | $12.8 million | $45.7 million | $25.3 million |
| Noninterest expense | $37.3 million | $28.4 million | $68.3 million | $56.6 million |
| Net income attributable to common shareholders | $9.1 million | $7.3 million | $13.4 million | $13.8 million |
| Diluted earnings per share | $0.55 | $0.44 | $0.80 | $0.82 |
- Q2 net interest margin was 3.41%, down 44 basis points year over year; management estimated 3.46% excluding SBA PPP loans. Six-month margin was 3.59%, versus 3.80% in 2019. The Q2 efficiency ratio was 66.90%, improved from 73.02% a year earlier, primarily reflecting CCHL mortgage income.
- Mortgage banking revenue was $17.8 million in Q2, compared with $1.2 million a year earlier, largely reflecting CCHL consolidation and increased mortgage production. CCHL contributed $3.4 million, or $0.20 per diluted share, to Q2 earnings, according to management.
- At June 30, total assets were $3.50 billion, loans held for investment were $2.02 billion, deposits were $2.95 billion, and shareholders’ equity was $335.1 million. Since year-end 2019, deposits increased $309.5 million and loans held for investment increased $186.2 million.
- Cash and cash equivalents were $588.4 million, up from $378.4 million at year-end. Six-month operating cash flow was negative $27.5 million, investing cash flow negative $122.8 million, and financing cash flow positive $360.3 million. Financing inflows included deposit growth and short-term borrowings.
- Short-term borrowings were $64.0 million; subordinated notes were $52.9 million and other long-term borrowings $5.6 million. Short-term borrowings were mainly mortgage warehouse facilities. Management reported $1.344 billion of additional available liquidity, excluding $513 million in overnight funds sold.
- The allowance for credit losses was $22.5 million, or 1.11% of loans held for investment (1.23% excluding government-guaranteed PPP loans). Nonaccrual loans were $7.0 million, up from $4.5 million at year-end; nonperforming assets were $8.0 million.
- Regulatory capital ratios were above well-capitalized thresholds. The capital table reports total risk-based capital of 17.60%, Tier 1 capital of 16.59%, and common equity Tier 1 of 14.01%. Tangible common equity, a non-GAAP measure, was 7.21%.
Material changes and notable items
- Compared with Q2 2019, common-shareholder net income rose despite lower net interest income, principally because of CCHL-driven mortgage revenue; higher credit-loss provision and operating expenses partly offset the increase. For the first six months, common-shareholder net income declined from $13.8 million to $13.4 million.
- On March 1, the Bank acquired a 51% interest in Brand, now operated as CCHL. The transaction added mortgage operations, $4.3 million of goodwill, and a noncontrolling interest; $11.3 million of temporary equity was reported at June 30. The company agreed to buy out the remaining 49% interest.
- The company adopted CECL on January 1, recording a $3.3 million increase in the loan allowance and a $0.7 million increase in the allowance for unfunded commitments, with a $3.1 million after-tax reduction to retained earnings. Subsequent credit-loss estimates incorporated COVID-related economic deterioration, including unemployment forecasts.
- The company funded 2,208 SBA PPP loans totaling $193 million; $190 million remained outstanding at June 30. It received approximately $6.3 million of net PPP fees late in Q2 and amortized approximately $0.4 million during the quarter.
- Through July 9, the company had extended $330.4 million of loans to affected borrowers. About $95.8 million, or 5.2% of loans excluding PPP, remained on extension; 71% of extended balances had resumed scheduled payments.
Outlook, risks and contingencies
- Management expected net interest margin to remain at lower levels until stimulus-related deposits were reduced or used, citing near-zero market rates and limited room to lower deposit costs. It expected the annual effective tax rate, absent discrete items, to be approximately 19%–20%.
- Management said liquidity was sufficient for ongoing needs and business plans, but noted that stimulus-related deposit balances could be volatile as funds flow out and the economy recovers. Approximately $7.0 million of capital expenditures were expected over the next 12 months.
- Key risks include the magnitude and duration of COVID-19 and its effects on borrowers and local economies, future credit losses and the assumptions underlying CECL reserves, interest-rate and liquidity risks, and the company’s geographic and industry loan concentrations. Interest-rate modeling showed the 24-month down-100-basis-point net-interest-income scenario outside policy limits; management attributed this to limited capacity to reduce deposit rates. Its reported rising-rate economic-value-of-equity sensitivities were favorable and within tolerance.
- Mortgage warehouse facilities include financial covenants and near-term maturities; the company stated it intended to renew them and was in compliance with significant covenants at quarter-end. The filing reported no known pending litigation expected to have a material effect.
Important facts for investors to verify
- How much of mortgage banking income and CCHL’s reported earnings contribution is sustainable, and how the remaining 49% buyout will affect future results and capital.
- Whether loan extensions, borrower repayment performance, nonaccrual loans, and criticized credits deteriorate as pandemic relief and stimulus effects fade.
- The adequacy of the allowance under CECL, including economic forecast assumptions and the treatment of PPP loans and unfunded commitments.
- The durability and cost of stimulus-driven deposits, liquidity availability, and renewal of warehouse facilities as they mature.
- The filing’s capital disclosures differ: the overview cites total risk-based capital of 17.81%, while the detailed capital table reports 17.60%. Confirm the applicable reported ratio.