Capital City Bank Group, Inc. Reports Second Quarter 2020 Results

TALLAHASSEE, Fla., July 21, 2020 (GLOBE NEWSWIRE) -- Capital City Bank Group, Inc. CCBG today reported net income of $9.1 million, or $0.55 per diluted share for the second quarter of 2020 compared to net income of $4.3 million, or $0.25 per diluted share for the first quarter of 2020, and $7.3 million, or $0.44 per diluted share for the second quarter of 2019.  For the first six months of 2020, net income totaled $13.4 million, or $0.80 per diluted share, compared to net income of $13.8 million, or $0.82 per diluted share, for the same period of 2019.

QUARTER HIGHLIGHTS

• Return on assets improved to 1.10% and efficiency ratio to 67%
• Diversified revenue and strong balance sheet continue to buffer impact of pandemic and lower interest rates
• Strong performance by Capital City Home Loans ("CCHL") contributed significantly ($0.20/share)
• Pandemic related stimulus programs contributed $190 million in loan growth and deposit balances totaling $243 million

"Though the second quarter presented a challenging environment, I am pleased with our financial performance and how we responded to the COVID-19 pandemic," said William G. Smith, Jr., Chairman, President and CEO. "We issued $190 million in Paycheck Protection Program (PPP) loans to assist our small business clients and took critical precautions to protect the health and welfare of our associates and clients as we reopened our offices for routine lobby service. Despite a challenged economy, the mortgage market has been robust, and our recent alliance with CCHL contributed $0.20 per share during the second quarter. Earnings from CCHL and SBA/PPP fees helped mitigate the adverse impacts of a lower interest rate environment and reserve build attributable to the adoption of CECL and COVID-19. I anticipate the second half of 2020 will remain challenging but am hopeful it will bring improvement. We have taken a prudent and measured approach to managing through this ongoing crisis and continue to focus on our commitments to our associates, clients, communities, and shareowners. I remain optimistic about the long-term outlook for Capital City and appreciate your continued support."

COVID-19 Update

• Lobby access has been re-opened for 56 of our 57 banking offices and operations are subject to national guidelines and local safety ordinances to protect both clients and associates – we will continue to monitor changing conditions with the pandemic and its impact on client and associate interactions within our banking offices
• Most operational associates returned to work in early June, but we have extended some remote work arrangements on a case-by-case basis
• Enhanced digital access options are available for banking products and access to sales associates
• Continue to monitor COVID-19 case count trends in our markets and respond appropriately to help ensure client and associate safety
• Continued support of clients with the Small Business Administration Payment Protection Program ("SBA PPP") - we will actively assist our clients with the forgiveness process in coming quarters
• We continued to assist our clients and communities in the second quarter by processing a total of 2,217 loan extensions ($330 million, or 16% of loan balances at June 30, 2020).

Discussion of Operating Results

Summary Overview

Compared to the first quarter of 2020, the $11.1 million increase in operating profit was attributable to a $14.7 million increase in noninterest income (primarily mortgage banking revenues) and a $3.0 million decrease in the provision for credit losses, partially offset by higher noninterest expense of $6.3 million and lower net interest income of $0.3 million. 

Compared to the second quarter of 2019, the $6.6 million increase in operating profit was attributable to a $17.4 million increase in noninterest income, partially offset by a higher noninterest expense of $8.9 million, a $1.4 million increase in the provision for credit losses and lower net interest income of $0.5 million. 

The $3.4 million increase in operating profit for the first six months of 2020 versus the comparable period of 2019 was attributable to higher noninterest income of $20.4 million and net interest income of $0.3 million, partially offset by a $5.6 million increase in the provision for credit losses and higher noninterest expense of $11.7 million.  

The aforementioned period over period variances reflect the acquisition of a 51% membership interest and consolidation of CCHL late in the first quarter of 2020.

Our return on average assets ("ROA") was 1.10% and our return on average equity ("ROE") was 11.03% for the second quarter of 2020.  These metrics were 0.57% and 5.20% for the first quarter of 2020, respectively, and 0.98% and 9.37% for the second quarter of 2019, respectively.  For the first six months of 2020, our ROA was 0.85% and our ROE was 8.12% compared to 0.92% and 8.94%, respectively, for the same period of 2019. 

Net Interest Income/Net Interest Margin

Tax-equivalent net interest income for the second quarter of 2020 was $25.6 million compared to $25.9 million for the first quarter of 2020 and $26.1 million for the second quarter of 2019.  The decrease compared to both prior periods reflected lower rates earned on overnight funds, investment securities and variable rate loans, partially offset by lower cost for our negotiated rate deposits.  For the first six months of 2020, tax-equivalent net interest income totaled $51.4 million compared to $51.2 million in 2019.  The increase was primarily due to loan growth and a reduction in the cost of our negotiated rate deposits, partially offset by lower rates on our earning assets.

The federal funds target rate ended the second quarter of 2020 in a range of 0.00%-0.25%, unchanged from the end of the first quarter of 2020.  However, since 150 basis points of rate cuts were made late in the first quarter of 2020, we experienced lower repricing of our variable/adjustable rate earning assets and investment securities during the second quarter 2020.  We continue to prudently manage our deposit mix and overall cost of funds, which was 14 basis points for the second quarter of 2020 compared to 23 basis points for the first quarter of 2020.  Due to highly competitive fixed-rate loan pricing in our markets, we continue to review our loan pricing and make adjustments where we believe appropriate and prudent.     

Our net interest margin for the second quarter of 2020 was 3.41%, a decrease of 37 basis points from the first quarter of 2020 and 44 basis points from the second quarter of 2019.  For the first six months of 2020, the net interest margin decreased 21 basis points to 3.59%.  The decrease compared to all prior periods was attributable to lower rates on our variable and adjustable rate earning assets, partially offset by a lower cost of funds.  Our net interest margin for the second quarter of 2020 excluding the impact of SBA PPP loans was 3.46%.  We discuss the effect of the pandemic related stimulus programs on our balance sheet in more detail below under Discussion of Financial Condition.

Provision for Credit Loss

The provision for credit losses for the second quarter of 2020 was $2.0 million compared to $5.0 million for the first quarter of 2020 and $0.6 million for the second quarter of 2019.  For the first six months of 2020, the provision was $7.0 million compared to $1.4 million in 2019.  The higher provision in 2020 reflected expected losses due to deterioration in economic conditions related to COVID-19.  We discuss this exposure further below.

Noninterest Income and Noninterest Expense

CCHL's mortgage banking operations impacted our noninterest income and noninterest expense for the three and six month periods ended June 30, 2020, and thus, the period over period comparisons reflect the impact of the CCHL consolidation, which occurred late in the first quarter 2020.  The table below provides an overview of CCHL's impact on our noninterest income and noninterest expense for 2020.

Noninterest income for the second quarter of 2020 totaled $30.2 million compared to $15.5 million for the first quarter of 2020 and $12.8 million for the second quarter of 2019.  The increase over both periods was driven by higher mortgage banking fees and other income (loan origination fees) at CCHL, partially offset by lower deposit fees (overdraft fees).  Deposit fees decreased $1.3 million, or 25.1% compared to the first quarter of 2020 and reflected slower consumer spending and the impact of stimulus payments in the second quarter related to the COVID-19 pandemic.

Noninterest expense for the second quarter of 2020 totaled $37.3 million compared to $31.0 million for the first quarter of 2020 and $28.4 million for the second quarter of 2019.  The increase over the first quarter of 2020 was attributable to higher compensation expense of $4.2 million, occupancy expense of $0.8 million, and other real estate ("ORE") expense of $1.1 million.  The increase in compensation and occupancy expense was primarily due to the integration of CCHL late in the first quarter of 2020.  We also realized approximately $0.8 million in expenses in the second quarter related to SBA PPP loan origination activities and pandemic related costs.  Approximately $0.3 million were one-time SBA PPP expenses and the remainder are pandemic related and will phase out over time.  The increase in ORE expense reflected a $1.0 million gain on the sale of a banking office in the first quarter of 2020.  For the first six months of 2020, noninterest expense totaled $68.3 million compared to $56.6 million for the same period of 2019 with the increase driven primarily by the same aforementioned factors. 

Overall, CCHL contributed significantly to the improvement in our efficiency ratio for the second quarter of 2020.

Income Taxes

We realized income tax expense of $2.9 million (effective rate of 18%) for the second quarter of 2020 compared to $1.3 million (effective rate of 24%) for the first quarter of 2020 and $2.4 million (effective rate of 25%) for the second quarter of 2019.  For the first six months of 2020, we realized income tax expense of $4.2 million (effective rate of 20%) compared to $4.4 million (effective rate of 24%) for the same period of 2019.  The decrease in our effective tax rate for the three and six month periods ended June 30, 2020 reflected the impact of converting CCHL to a partnership for tax purposes in the second quarter of 2020.  Absent discrete items, we expect our annual effective tax rate to approximate 19%-20%. 

Discussion of Financial Condition

Earning Assets

Average earning assets were $3.017 billion for the second quarter of 2020, an increase of $264.9 million, or 9.6% over the first quarter of 2020, and an increase of $322.1 million, or 12.0% over the fourth quarter of 2019.  The increase over both prior periods was primarily driven by higher deposit balances which funded growth in the loan portfolio and overnight funds sold.  The impact of pandemic related stimulus programs on our balance sheet in the second quarter of 2020 is discussed in further detail below.       

We maintained an average net overnight funds (deposits with banks plus FED funds sold less FED funds purchased) sold position of $351.5 million during the second quarter of 2020 compared to an average net overnight funds sold position of $234.4 million in the first quarter of 2020 and $228.1 million in the fourth quarter of 2019.  The increase compared to both prior periods was primarily driven by pandemic related stimulus programs (see below – Funding). 

Average loans held for investment ("HFI") increased $135.2 million, or 7.3%, over the first quarter of 2020 and $148.9 million, or 8.1%, over the fourth quarter of 2019.  Period-end HFI loans increased $159.8, or 8.6%, over the first quarter of 2020 and $186.2 million, or 10.1%, over the fourth quarter of 2019.  Demand from the SBA PPP was strong with SBA PPP loans (reflected in commercial loans) averaging $133.8 million in the second quarter of 2020 and totaling $190 million at June 30, 2020.  In total, we funded 2,208 loans for $193 million under the SBA PPP, all from current balance sheet liquidity.  To date, our borrowers have submitted a nominal level of forgiveness applications, but these applications are expected to accelerate in the second half of the year.  We received 100% of our SBA PPP loan fees totaling approximately $6.3 million (net) late in the second quarter.  Amortized SBA PPP loan fees totaled approximately $0.4 million for the second quarter of 2020.

Allowance for Credit Losses

At June 30, 2020, the allowance for credit losses totaled $22.5 million compared to $21.1 million at March 31, 2020 and $13.9 million at December 31, 2019.  At June 30, 2020, the allowance represented 1.11% of outstanding loans held for investment (HFI) and provided coverage of 322% of nonperforming loans compared to 1.13% and 433%, respectively, at March 31, 2020 and 0.75% and 311%, respectively, at December 31, 2019.  At June 30, 2020, excluding SBA PPP loans (100% government guaranteed), the allowance represented 1.23% of loans held for investment.

The adoption of ASC 326 ("CECL") on January 1, 2020 had an impact of $4.0 million ($3.3 million increase in the allowance for credit losses and $0.7 million increase in the allowance for unfunded loan commitments (other liability account)).  The $5.7 million build (provision of $7.0 million less net charge-offs of $1.3 million) in the allowance for credit losses for the first six months of 2020 reflected a higher forecasted rate of unemployment due to stressed economic conditions related the COVID-19 pandemic.   

Credit Quality/COVID-19 Exposure

Nonperforming assets (nonaccrual loans and OREO) totaled $8.0 million at June 30, 2020, a $1.7 million increase over March 31, 2020, and a $2.6 million increase over December 31, 2019.  Nonaccrual loans totaled $7.0 million at June 30, 2020, a $2.1 million increase over March 31, 2020 and a $2.5 million increase over December 31, 2019.  The balance of OREO totaled $1.1 million at June 30, 2020, a decrease of $0.4 million from March 31, 2020 and a $0.1 million increase over December 31, 2019.

We continue to analyze our loan portfolio for segments that have been affected by the stressed economic and business conditions caused by the pandemic.  Certain at-risk segments total 8% of our loan balances at June 30, 2020, including hotel (3%), restaurant (1%), retail and shopping centers (3%), and other (1%).  The other segment includes churches, non-profits, education, and recreational.  To assist our clients, in mid-March of 2020, we began allowing short term 60 to 90 day loan extensions for affected borrowers.  A roll-forward of loan extension activity is provided in the table below.  Approximately 83% of these loans were for commercial borrowers and 17% for consumer borrowers.

Funding (Deposits/Debt)

Average total deposits were $2.783 billion for the second quarter of 2020, an increase of $230.8 million, or 9.0% over the first quarter of 2020, and an increase of $258.5 million, or 10.2% over the fourth quarter of 2019.  The estimated deposit inflows, related to the two pandemic related stimulus programs, were $179 million (SBA PPP) and $64 million (Economic Impact Payment stimulus checks).  Period end deposit balances grew $409 million and $310 million over the first quarter of 2020 and fourth quarter of 2019, respectively, indicating strong growth in core deposit balances.  Given these large increases, the potential exists for our deposit levels to be volatile over the coming quarters due to the uncertain timing of the outflows of the stimulus related deposits and the economic recovery.  It is anticipated that current liquidity levels will remain robust due to our strong overnight funds sold position, in addition to cash flow generated from the investment portfolio.  We monitor deposit rates on an ongoing basis and adjust if necessary, as a prudent pricing discipline remains the key to managing our mix of deposits.

Average borrowings increased $39.9 million over the first quarter of 2020 and $65.0 million over the fourth quarter of 2019 as short-term borrowings (warehouse lines used to support HFS loans) were added as part of the CCHL integration. 

Capital

Shareowners' equity was $335.1 million at June 30, 2020 compared to $328.5 million at March 31, 2020 and $327.0 million at December 31, 2019.  For the first six months of 2020, shareowners' equity was positively impacted by net income of $13.4 million, a $3.0 million increase in the unrealized gain on investment securities, net adjustments totaling $0.7 million related to transactions under our stock compensation plans, and stock compensation accretion of $0.4 million.  Shareowners' equity was reduced by common stock dividends of $4.7 million ($0.28 per share), a $3.1 million (net of tax) adjustment to retained earnings for the adoption of ASC 326 ("CECL"), and share repurchases of $1.6 million (76,952 shares).

At June 30, 2020, our total risk-based capital ratio was 17.81% compared to 17.19% at March 31, 2020 and 17.90% at December 31, 2019.  Our common equity tier 1 capital ratio was 14.21%, 13.55%, and 14.47%, respectively, on these dates.  Our leverage ratio was 10.24%, 10.81%, and 11.25%, 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 7.21% at June 30, 2020 compared to 7.98% and 8.06% at March 31, 2020 and December 31, 2019, respectively.

About Capital City Bank Group, Inc.

Capital City Bank Group, Inc. CCBG is one of the largest publicly traded financial holding companies headquartered in Florida and has approximately $3.5 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 and securities brokerage services.  Our bank subsidiary, Capital City Bank, was founded in 1895 and now has 57 banking offices and 85 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: the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions and our business, results of operations and financial condition, including the impact of our participation in government programs related to COVID-19; the accuracy of the our financial statement estimates and assumptions; legislative or regulatory changes; fluctuations in inflation, interest rates, or monetary policies; 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; 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, 2019, 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 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.