Capital City Bank Group, Inc. — Q1 2024 Form 10-Q
Business context and reporting period
Capital City Bank Group is a Florida-based bank holding company operating through Capital City Bank in Florida, Georgia and Alabama, with mortgage banking through Capital City Home Loans. This unaudited report covers the three months ended March 31, 2024; comparisons are primarily with Q1 2023 and, where relevant, Q4 2023. Dollar amounts below are in millions unless stated otherwise.
Financial and operating performance
- Earnings: Net income attributable to common shareowners was $12.6 million, or $0.74 per diluted share, versus $13.7 million, or $0.80, in Q1 2023. Income before taxes was $15.4 million versus $17.4 million.
- Revenue and margins: Net interest income was $38.4 million, down from $40.4 million year over year. Tax-equivalent net interest margin was 4.01%, down 3 basis points year over year and 6 basis points sequentially. Interest income rose to $46.8 million, but interest expense increased to $8.5 million from $3.5 million, largely reflecting higher deposit costs. Noninterest income increased to $18.1 million from $17.8 million.
- Expenses and credit costs: Noninterest expense rose to $40.2 million from $37.7 million. Provision for credit losses declined to $0.9 million from $3.1 million. The reported Q1 2023 comparison included a $1.8 million gain on sale of a banking office, which reduced prior-year expense.
- Cash flow: Operating activities provided $14.6 million, investing activities provided $34.2 million, and financing activities used $56.2 million. Cash and cash equivalents decreased $7.4 million during the quarter to $304.7 million.
- Balance sheet and funding: Total assets were $4.260 billion, down from $4.304 billion at year-end 2023. Loans held for investment were $2.731 billion, approximately flat since year-end; deposits were $3.655 billion, down $47.0 million. Short-term borrowings were $31.9 million and subordinated notes were $52.9 million. Total liabilities were $3.805 billion.
- Liquidity and capital: Management reported approximately $1.542 billion of additional potential liquidity, excluding $231 million of overnight funds, and said available liquidity was sufficient for ongoing needs. The company was well-capitalized: total risk-based capital was 16.84%, common equity tier 1 was 13.82%, and tangible common equity was 8.53% (non-GAAP). Tangible common equity would be 8.01% if after-tax unrealized HTM securities losses were recognized in accumulated other comprehensive loss.
- Credit quality: Nonperforming assets were $6.8 million, or 0.16% of assets, versus $4.6 million and 0.10% a year earlier. Classified loans totaled $22.3 million, up $10.1 million year over year. The allowance for credit losses was $29.3 million, or 1.07% of HFI loans; net charge-offs were $1.5 million.
- Shareholder returns: The company paid a $0.21 per-share dividend and repurchased 82,540 shares for $2.3 million in Q1.
Changes versus comparable periods
- Compared with Q1 2023, common-shareowner earnings and net interest income declined as higher deposit interest expense more than offset higher loan interest income. The cost of deposits was 0.85%, versus 0.26% a year earlier.
- Average HFI loans increased 5.7% year over year, led by residential lending, while period-end deposits declined 4.4% year over year. Deposit balances shifted from noninterest-bearing and savings accounts toward money-market accounts and certificates of deposit.
- Wealth management fees increased to $4.7 million from $3.9 million, and mortgage banking revenue was broadly unchanged at $2.9 million. The efficiency ratio was 71.06%, versus 64.67% in Q1 2023; the prior-year ratio benefited from the banking-office sale gain.
- Q1 2024 net interest margin was 4.01% versus 4.04% in Q1 2023. Sequentially, the margin declined from 4.07% in Q4 2023 as deposit costs rose.
Outlook, risks, contingencies and unusual items
- Management expects the 2024 annual effective tax rate to be approximately 23%, absent discrete items or new tax-credit investments. It anticipates approximately $12 million of capital expenditures over the next 12 months, primarily for offices, remodeling, equipment and technology.
- Management said it would continue monitoring deposit costs, liquidity, investment-portfolio cash flows and market conditions. It provided no specific earnings or revenue guidance.
- Interest-rate sensitivity analysis showed net interest income at risk just outside policy limits under a 400-basis-point rate decline over 12 months, and outside policy under declines of 300 and 400 basis points over 24 months. Economic value of equity remained within policy limits across modeled scenarios. Outcomes depend on assumptions, including deposit behavior.
- The investment portfolio had $64.8 million of aggregate unrealized losses at quarter-end; $21.6 million after tax related to HTM losses. Management said it did not intend to sell securities to recognize gains and cited the credit quality of the portfolio. Rate changes could affect securities values and liquidity.
- Disclosure controls and procedures were deemed ineffective because of a previously reported material weakness involving intercompany mortgage transactions, consolidation eliminations and cash-flow classification. Remediation steps were implemented, but management said the weakness would not be considered remediated until controls had operated and been tested for a sufficient period. Management stated that the financial statements in this filing fairly present the periods shown.
- The filing identifies prior restatements of cash-flow statements for 2021–2023 and corresponding interim periods, and warns that errors or deficiencies in the restatement process could require further correction. This control and reporting risk is material for investors to monitor.
- Off-balance-sheet commitments to extend credit were $753.5 million and standby letters of credit were $6.3 million; the filing says many commitments may expire undrawn. Management reported no known litigation expected to have a material effect.
- Other stated risks include deposit competition and funding costs, interest-rate and liquidity exposure, credit concentrations, economic conditions, cyber and fraud risks, regulation, and the effect of the material weakness and restatements.
Most important facts for investors to verify
- Progress and independent testing of remediation for the material weakness; whether any additional cash-flow or other financial-statement corrections are needed.
- Deposit trends, deposit pricing and mix, and the effect of continued funding-cost increases on net interest margin.
- Developments in nonperforming and classified loans, charge-offs, and the adequacy of loan and unfunded-commitment reserves.
- Liquidity capacity under stress and the potential impact of unrealized securities losses, particularly if deposits decline or securities must be sold.
- Performance against the stated approximately 23% tax-rate expectation and $12 million capital-expenditure outlook.