CCBG - Capital City Bank Group Inc. Reports Second Quarter 2022 Results

TALLAHASSEE, Fla., July 26, 2022 (GLOBE NEWSWIRE) -- Capital City Bank Group, Inc. (NASDAQ: CCBG) today reported net income attributable to common shareowners of $8.7 million, or $0.51 per diluted share, for the second quarter of 2022 compared to net income of $8.5 million, or $0.50 per diluted share, for the first quarter of 2022, and $7.4 million, or $0.44 per diluted share, for the second quarter of 2021.

For the first six months of 2022, net income attributable to common shareowners totaled $17.2 million, or $1.01 per diluted share, compared to net income of $16.9 million, or $1.00 per diluted share, for the same period of 2021.

QUARTER HIGHLIGHTS (2 ^nd Quarter 2022 versus 1 ^st Quarter 2022)

• Net interest income grew 14.7% driven by strong loan growth and higher interest rates
• Period end loan balances grew $228.1 million, or 11.5%, with residential loan purchases from Capital City Home Loans (CCHL) contributing $132 million and solid growth from residential construction and commercial mortgage
• Provision for credit losses increased $1.5 million driven by strong loan growth – overall credit quality remained strong
• Average deposit balances grew $51.3 million, or 1.4%, driven by higher noninterest bearing and savings balances
• Noninterest income decreased $0.9 million, or 3.5%, due to lower insurance commission revenues at Capital City Strategic Wealth (CCSW), which had a very strong first quarter – deposit, bank card, and retail brokerage fees all realized solid improvement
• Noninterest expense increased $1.3 million, or 3.2%, primarily due to higher performance-based compensation and to a lesser extent annual merit raises and staffing additions in new markets
• Tangible book value per share declined $0.04, or 0.2%, buoyed by strong earnings that significantly mitigated the impact of rapidly increasing interest rates and the related impact on our unrealized loss on investment securities
  

“Strong loan growth and higher rates produced another quarter of solid financial performance,” said William G. Smith, Jr., Chairman, President and CEO of Capital City Bank Group. “The quality of our core deposit base, deployment of liquidity into the loan portfolio and higher interest rates all contributed to an increase in our net interest margin percentage of 32 basis points during the second quarter. The $1.5 million loan loss provision recorded in this quarter was primarily driven by loan growth as our credit quality metrics remain very favorable. From a macro-economic perspective, we continue to face a high level of uncertainty. While much of this is out of our control, we believe we are well positioned to navigate through this year and beyond. Although higher rates will generate unrealized losses in our available-for-sale investment portfolio, our asset-sensitive balance sheet and pension liability should respond well to rising rates. Additionally, our expansion efforts in west Florida and the northern arc of Atlanta are producing favorable results. While challenges remain, we continue to focus on identifying opportunities and executing strategies we believe are sustainable and add long-term value for our shareowners.”

Discussion of Operating Results

Net Interest Income/Net Interest Margin

Tax-equivalent net interest income for the second quarter of 2022 totaled $28.4 million, compared to $24.8 million for the first quarter of 2022, and $26.1 million for the second quarter of 2021. For the first six months of 2022, tax-equivalent net interest income totaled $53.2 million compared to $50.7 million for the same period of 2021. Compared to the referenced prior periods, the increase reflected higher interest rates, strong loan growth, and higher investment balances.

Our net interest margin for the second quarter of 2022 was 2.87%, an increase of 32 basis points over the first quarter of 2022 primarily attributable to higher interest rates and an overall improved earning asset mix. For the month of June 2022, our net interest margin was 3.05%. Excluding the impact of overnight funds in excess of $200 million, our net interest margin for the second quarter of 2022 was 3.24%. Compared to the three and six month periods of 2021, the net interest margin decreased two and 16 basis points, respectively, primarily due to growth in earning assets (driven by higher deposit balances), which drove net interest income dollars higher, but negatively impacted the margin percentage.

Provision for Credit Losses

We recorded a provision for credit losses of $1.5 million for the second quarter of 2022 compared to no provision in the first quarter of 2022 and a provision benefit of $0.6 million for the second quarter of 2021. Compared to the first quarter of 2022, the higher level of provision was primarily attributable to strong loan growth. For the first six months of 2022, the provision was $1.5 million compared to a benefit of $1.6 million for the same period of 2021. Improvement in credit quality and the release of reserves held for pandemic related losses favorably impacted our provision for credit losses in 2022. We discuss the allowance for credit losses further below.

Noninterest Income and Noninterest Expense

Noninterest income for the second quarter of 2022 totaled $24.9 million compared to $25.8 million for the first quarter of 2022 and $26.5 million for the second quarter of 2021. The $0.9 million decrease from the first quarter of 2022 was primarily attributable to lower wealth management fees of $1.7 million, which reflected lower insurance revenues at CCSW of $1.9 million that were partially offset by higher retail brokerage fees of $0.3 million. Combined deposit and bank card fees increased $0.5 million and mortgage banking fees increased $0.1 million. Compared to the second quarter of 2021, the $1.6 million decrease was primarily attributable to lower mortgage banking revenues of $4.2 million that were partially offset by higher deposit fees of $1.2 million and wealth management fees of $1.1 million (insurance revenues of $0.7 million and retail brokerage fees of $0.4 million). For the first six months of 2022, noninterest income totaled $50.7 million compared to $56.3 million for the same period of 2021 with the $5.6 million decrease largely driven by lower mortgage banking fees of $12.3 million partially offset by higher deposit fees of $2.1 million and wealth management fees of $4.1 million (insurance revenues of $3.4 million and retail brokerage fees of $0.7 million). Lower mortgage banking revenues for 2022 reflected a reduction in refinancing activity, and to a lesser degree lower purchase mortgage originations, primarily driven by higher interest rates. In addition, gain on sale margins have been pressured due to a lower level of both governmental loan product originations and mandatory delivery loan sales (both of which provide a higher gain percentage). Strong best efforts (portfolio product) origination volume and continued stability in our construction/permanent loan program have partially offset the slowdown in secondary market originations. For 2022, CCHL contributed $0.6 million ($0.03 per diluted share) to earnings versus $2.5 million ($0.14 per diluted share) in 2021, which has largely been offset by a $1.2 million ($0.07 per diluted share) contribution to earnings by CCSW and improvement in both retail brokerage fees and deposit fees which reflects our continued focus on and commitment to revenue diversification.

Noninterest expense for the second quarter of 2022 totaled $40.5 million compared to $39.2 million for the first quarter of 2022 and $42.1 million for the second quarter of 2021. The $1.3 million increase over the first quarter of 2022 was driven by a $0.9 million increase in other expense and higher compensation of $0.5 million. Higher expense for advertising ($0.2 million), processing ($0.1 million), and travel/entertainment ($0.1 million) drove the increase in other expense. Other expense also reflects a $0.2 million expense for our VISA share swap agreement, which is triggered when VISA funds their merchant litigation reserve which happens infrequently. The $0.5 million increase in compensation was driven by higher salary expense of $0.8 million (CCHL commissions, annual merit, and staffing additions in new markets) that was partially offset by lower associate benefit expense of $0.3 million. Compared to the second quarter of 2021, the $1.6 million decrease was primarily attributable to lower pension settlement expense of $1.8 million. Other expense decreased $0.1 million and reflected lower base pension plan expense of $0.8 million partially offset by higher expense for advertising and miscellaneous (includes $0.2 million VISA share swap expense). For the first six months of 2022, noninterest expense totaled $79.7 million compared to $82.6 million for the same period of 2021 with the $2.9 million decrease primarily attributable to lower pension settlement expense of $1.6 million and lower compensation expense of $1.2 million. The decrease in compensation expense reflected lower salary expense of $1.4 million partially offset by higher associate benefit expense of $0.2 million. Lower performance-based compensation (commissions/incentives) at CCHL partially offset by higher performance based compensation at CCSW and lower realized loan cost (credit offset by salary expense) at the Bank drove the variance in salary expense. To date, the impact of inflation and higher prices on our cost structure has not been significant. While operating in a very tight labor market, we have mitigated the impact of salary pressures by not replacing certain positions that became vacant. Further, we have realized higher than historical increases in certain premises and processing contracts reflective of inflationary pressures and will continue to focus on opportunities to re-negotiate or replace vendors at periodic renewals.

Income Taxes

We realized income tax expense of $2.2 million (effective rate of 19.4%) for the second quarter of 2022 comparable to the first quarter of 2022 and $2.1 million (effective rate of 18.9%) for the second quarter of 2021. For the first six months of 2022, we realized income tax expense of $4.4 million (effective rate of 19.6%) compared to $4.8 million (effective rate of 18.8%) for the same period of 2021. For the second quarter of 2022, we realized a favorable discrete tax item for $0.3 million related to state of Florida tax refunds. Absent discrete items, we expect our annual effective tax rate to approximate 20-21% in 2022.

Discussion of Financial Condition

Earning Assets

Average earning assets totaled $3.974 billion for the second quarter of 2022, an increase of $35.4 million, or 0.9%, over the first quarter of 2022, and an increase of $182.9 million, or 4.8%, over the fourth quarter of 2021. The increase over both prior periods was primarily driven by higher deposit balances (see below – Funding ). The mix of earning assets continues to improve driven by strong loan growth and further deployment of liquidity into the investment portfolio, which has increased $135 million in 2022.

We maintained an average net overnight funds (deposits with banks plus FED funds sold less FED funds purchased) sold position of $691.9 million in the second quarter of 2022 compared to $873.1 million in the first quarter of 2022 and $789.1 million in the fourth quarter of 2021.

Average loans held for investment (“HFI”) increased $121.1 million, or 6.2%, over the first quarter of 2022 and increased $136.4 million, or 7.0%, over the fourth quarter of 2021. Period end loans increased $228.1 million, or 11.5%, over the first quarter of 2022 and $282.2 million, or 14.6%, over the fourth quarter of 2022. The growth in 2022 has been broad based with increases realized in all loan categories, more significantly, residential mortgage, residential construction, and consumer (indirect auto) with strong growth in commercial mortgage in the second quarter. The increase in residential mortgage reflected a higher level of loan purchases (second quarter - $132 million, first quarter - $26 million) from CCHL driven by higher demand for portfolio/adjustable rate product. In addition, the increase in commercial mortgage reflected a loan pool purchase (7 loans for $15 million).

Allowance for Credit Losses

At June 30, 2022, the allowance for credit losses for HFI loans totaled $21.3 million compared to $20.8 million at March 31, 2022 and $21.6 million at December 31, 2021. Activity within the allowance is provided on Page 9. The $0.5 million increase in the allowance for the second quarter was driven by growth in reserves for strong new loan origination volume that was partially offset by the release of reserves held for pandemic related losses that have not materialized to the extent projected. Further, net charge-offs increased $0.4 million to $1.1 million for the second quarter and reflected one large commercial charge-off for $0.8 million related to a work-out resolved during the quarter. At June 30, 2022, the allowance represented 0.96% of HFI loans and provided coverage of 678% of nonperforming loans compared to 1.05% and 761%, respectively, at March 31, 2022, and 1.12% and 500%, respectively, at December 31, 2021.

Credit Quality

Overall credit quality remains strong. Nonperforming assets (nonaccrual loans and other real estate) totaled $3.2 million at June 30, 2022 compared to $2.8 million at March 31, 2022 and $4.3 million at December 31, 2021. At June 30, 2022, nonperforming assets as a percentage of total assets totaled 0.07% compared to 0.06% at March 31, 2022 and 0.10% at December 31, 2021. Nonaccrual loans totaled $3.1 million at June 30, 2022, a $0.4 million increase over March 31, 2022 and a $1.2 million decrease from December 31, 2021. Further, classified loans decreased $2.7 million from the first quarter of 2022 to $19.6 million.

Funding (Deposits/Debt)

Average total deposits were $3.765 billion for the second quarter of 2022, an increase of $51.3 million, or 1.4%, over the first quarter of 2022 and $216.2 million, or 6.1%, over the fourth quarter of 2021. Compared to the first quarter of 2022, the increase reflected higher noninterest bearing and savings balances, partially offset by a decline in seasonal public fund balances. Compared to the fourth quarter of 2021, strong growth occurred in our noninterest bearing deposits, NOW accounts, and savings account balances. Over the past few years, we have experienced strong core deposit growth, in addition to growth related to multiple government stimulus programs in response to the Covid-19 pandemic, such as those under the CARES Act and the American Rescue Plan Act. Given these increases, the potential exists for our deposit levels to be volatile for the remainder of 2022 due to the uncertain timing of the outflows of the stimulus related balances, in addition to the frequency and degree to which the Federal Open Market Committee (FOMC) raises the overnight funds rate. It is anticipated that liquidity levels will remain strong given our current level of overnight funds.

Average borrowings decreased $0.7 million from the first quarter of 2022 primarily due to a decrease in short-term repurchase agreements and declined $15.3 million from the fourth quarter of 2021, reflecting lower warehouse line borrowing needs to support CCHL’s loans held for sale.

Capital

Shareowners’ equity was $371.7 million at June 30, 2022 compared to $372.1 million at March 31, 2022 and $383.2 million at December 31, 2021. For the first six months of 2022, shareowners’ equity was positively impacted by net income attributable to common shareowners of $17.2 million, a $2.2 million increase in the fair value of the interest rate swap related to subordinated debt, net adjustments totaling $0.8 million related to transactions under our stock compensation plans, stock compensation accretion of $0.5 million, and a $0.3 million decrease in the accumulated other comprehensive loss for our pension plan. Shareowners’ equity was reduced by common stock dividends of $5.4 million ($0.32 per share) and a $27.1 million increase in the unrealized loss on investment securities.

At June 30, 2022, our total risk-based capital ratio was 16.07% compared to 16.98% at March 31, 2022 and 17.15% at December 31, 2021. Our common equity tier 1 capital ratio was 13.07%, 13.77%, and 13.86%, respectively, on these dates. Our leverage ratio was 8.77%, 8.78%, and 8.95%, respectively, on these dates. All of our regulatory capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards. Further, our tangible common equity ratio was 6.54% at June 30, 2022 compared to 6.61% and 6.95% at March 31, 2022 and December 31, 2021, respectively. The decline in our regulatory capital ratios was attributable to strong loan growth and higher asset levels. The decline in our tangible capital ratio from the first quarter of 2022 was driven by an $8.0 million increase in the unrealized loss on investment securities which totaled $31.7 million, or 5.3% of available for sale securities at June 30, 2022.

About Capital City Bank Group, Inc.

Capital City Bank Group, Inc. (NASDAQ: CCBG) is one of the largest publicly traded financial holding companies headquartered in Florida and has approximately $4.4 billion in assets. We provide a full range of banking services, including traditional deposit and credit services, mortgage banking, asset management, trust, merchant services, bankcards, securities brokerage services and financial advisory services, including the sale of life insurance, risk management and asset protection services. Our bank subsidiary, Capital City Bank, was founded in 1895 and now has 57 banking offices and 88 ATMs/ITMs in Florida, Georgia and Alabama. For more information about Capital City Bank Group, Inc., visit www.ccbg.com.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this Press Release are based on current plans and expectations that are subject to uncertainties and risks, which could cause our future results to differ materially. The following factors, among others, could cause our actual results to differ: fluctuations in inflation, interest rates, or monetary policies; the accuracy of the our financial statement estimates and assumptions; legislative or regulatory changes; the effects of security breaches and computer viruses that may affect our computer systems or fraud related to debit card products; changes in consumer spending and savings habits; our growth and profitability; the strength of the U.S. economy and the local economies where we conduct operations; the effects of a non-diversified loan portfolio, including the risks of geographic and industry concentrations; natural disasters, widespread health emergencies, military conflict, terrorism or other geopolitical events; changes in the stock market and other capital and real estate markets; the magnitude and duration of the ongoing COVID-19 pandemic and its impact on the global economy and financial market conditions and our business; customer acceptance of third-party products and services; increased competition and its effect on pricing; negative publicity and the impact on our reputation; technological changes, especially changes that allow out of market competitors to compete in our markets; changes in accounting; and our ability to manage the risks involved in the foregoing. Additional factors can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and our other filings with the SEC, which are available at the SEC’s internet site (http://www.sec.gov). Forward-looking statements in this Press Release speak only as of the date of the Press Release, and we assume no obligation to update forward-looking statements or the reasons why actual results could differ.

USE OF NON-GAAP FINANCIAL MEASURES

We present a tangible common equity ratio and a tangible book value per diluted share that removes the effect of goodwill and other intangibles resulting from merger and acquisition activity. We believe these measures are useful to investors because it allows investors to more easily compare our capital adequacy to other companies in the industry.

The GAAP to non-GAAP reconciliations are provided below.