Capital City Bank Group, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023; financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise. The company provides banking and related services in Florida, Georgia, and Alabama.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $39.3 | $33.4 | $119.8 | $86.9 |
| Provision for credit losses | $2.4 | $2.2 | $7.7 | $3.9 |
| Noninterest income | $16.7 | $18.5 | $54.5 | $59.9 |
| Noninterest expense | $39.1 | $37.7 | $117.1 | $112.4 |
| Net income attributable to common shareholders | $12.7 | $9.6 | $40.5 | $23.8 |
| Diluted earnings per share | $0.74 | $0.57 | $2.38 | $1.40 |
| Net interest margin, fully tax-equivalent | 4.03% | 3.32% | 4.04% | 2.93% |
- Compared with Q3 2022, quarterly net interest income rose as loan growth and higher rates increased interest income. Higher deposit costs partly offset that benefit. Net interest income declined from $40.2 million in Q2 2023, and the margin eased three basis points sequentially.
- Nine-month earnings growth reflected stronger net interest income. The company also recorded higher credit-loss provisions, while noninterest income fell, mainly due to lower mortgage banking and wealth management revenue.
- The Q3 efficiency ratio was 69.88%, compared with 72.51% a year earlier and 66.93% in Q2 2023. Q3 return on average assets was 1.19% and return on average equity was 11.74%.
Financial condition, liquidity and capital
- At September 30, 2023, total assets were $4.14 billion, down from $4.52 billion at December 31, 2022. Loans held for investment were $2.71 billion, up $157.5 million, or 6.2%, since year-end; growth was concentrated in residential real estate loans.
- Deposits were $3.54 billion, down $398.9 million, or 10.1%, since year-end. Management attributed declines partly to seasonal reductions in public funds, deposit migration to interest-bearing accounts, client spending, and movement of funds to higher-yielding products outside the bank. The deposit decrease was the principal driver of reduced cash and overnight funds.
- Cash and cash equivalents fell to $167.5 million from $600.7 million at year-end. For the nine months, operating cash flow was $55.7 million, investing cash outflow was $62.6 million, and financing cash outflow was $426.2 million; cash declined $433.2 million overall. Management reported approximately $1.59 billion of additional liquidity capacity from borrowing facilities and other sources, excluding overnight funds.
- Borrowings at quarter-end included $41.7 million of short-term borrowings, $52.9 million of subordinated notes, and $0.4 million of other long-term borrowings. The company said it complied with significant debt covenants.
- Regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital was 16.30%, common equity tier 1 was 13.26%, and leverage was 9.98%. Tangible common equity was 8.08%, a non-GAAP measure. The company noted that recognizing after-tax unrealized losses on held-to-maturity securities would reduce its adjusted tangible capital ratio to 7.26%.
- The allowance for credit losses was $29.1 million, or 1.08% of held-for-investment loans, versus $25.1 million and 0.98% at year-end. Nonperforming assets were $4.7 million, or 0.11% of assets; classified loans rose to $21.8 million, including a performing hotel loan downgrade cited by management.
Changes, outlook and risks
- Investment securities had $90.8 million of combined unrealized losses at quarter-end. Management attributed the losses primarily to market conditions and stated that most affected positions were U.S. Treasury or government-agency securities. AFS and HTM securities had fair values of $334.1 million and $582.6 million, respectively.
- Mortgage banking revenue for the first nine months fell to $8.1 million from $11.8 million, reflecting lower production, gain-on-sale margins, and mandatory-delivery sales amid higher interest rates. The company sold mortgage servicing rights in Q2, recording a $1.4 million gain; the servicing portfolio balance was $97.5 million at quarter-end, down from $410.7 million at year-end.
- Management expected a 20%–21% effective tax rate for 2023, absent discrete items or unexpected timing of solar tax-credit benefits, and approximately $8 million of capital expenditures over the next 12 months. No earnings or revenue guidance is provided in the supplied filing text.
- Interest-rate sensitivity modeling showed positive 12-month net interest income effects under rising-rate scenarios and negative effects under falling-rate scenarios. The modeled 24-month net interest income change in a 400-basis-point decline was negative 22.0%, beyond the stated negative 17.5% policy limit. The filing also reports a negative 31.7% EVE change in that scenario against a negative 30.0% limit, while stating EVE was within policy based on its EVE-ratio measure; investors may wish to reconcile these presentations.
- Disclosure controls were deemed ineffective at September 30, 2023 because a previously reported material weakness involving review of intercompany mortgage sales and servicing remained unremediated. Management described remediation work, but said controls must operate and be tested effectively before the weakness can be considered remediated.
- The filing identifies risks including deposit competition and funding costs, interest-rate and liquidity exposure, credit concentrations and economic conditions, mortgage-market volatility, regulatory and technology risks, and the impact of previously issued financial-statement restatements. Management reported no known litigation expected to have a material effect.
- After quarter-end, on December 20, 2023, the holder of the remaining 49% interest in Capital City Home Loans notified the company it would exercise its put option; the transfer is to become effective January 1, 2025.
Investor verification priorities
- Confirm the status, scope, and effects of the referenced financial-statement restatements, and review the unremediated material weakness and remediation testing.
- Track deposit balances, mix, pricing, public-fund seasonality, and actual access to the stated contingent liquidity sources.
- Assess securities’ unrealized losses and the sensitivity of tangible capital to any realization of HTM losses.
- Monitor loan growth, residential and commercial real-estate concentrations, classified loans, charge-offs, and allowance assumptions.
- Clarify the interest-rate risk disclosures, especially the modeled 24-month downside scenario and the difference between the EVE change and the stated policy-compliance conclusion.
- Evaluate the financial and operational implications of the Capital City Home Loans put-option transfer scheduled for January 2025.