Capital City Bank Group, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Capital City Bank Group is a Florida-based bank holding company serving customers through 57 full-service offices in Florida, Georgia, and Alabama. This unaudited quarterly report covers the three and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior balance |
|---|---|---|
| Net income | $8.5 million; diluted EPS $0.50 | Q3 2018: $6.0 million; $0.35 per diluted share |
| Nine-month net income | $22.2 million; diluted EPS $1.32 | Nine months 2018: $17.8 million; $1.04 per diluted share |
| Net interest income, tax-equivalent | $26.3 million; net interest margin 3.92% | Q3 2018: $23.8 million; margin 3.72% |
| Noninterest income / expense | $13.9 million / $27.9 million | Q3 2018: $13.3 million / $28.7 million |
| Total assets | $2.935 billion | December 31, 2018: $2.959 billion |
| Loans, net of allowance | $1.813 billion | December 31, 2018: $1.760 billion |
| Deposits | $2.473 billion | December 31, 2018: $2.532 billion |
| Cash and cash equivalents | $238.5 million | December 31, 2018: $276.0 million |
| Shareowners’ equity | $321.6 million | December 31, 2018: $302.6 million |
For the first nine months, operating cash flow was $43.9 million, investing activities used $10.8 million, and financing activities used $70.6 million; cash and cash equivalents declined $37.5 million. Period-end borrowings comprised $10.6 million short-term, $52.9 million subordinated notes, and $7.0 million other long-term borrowings. The company reported $1.349 billion of additional available liquidity, excluding $177 million of overnight funds sold.
Q3 return on average assets was 1.14%, return on average equity was 10.51%, and the efficiency ratio was 69.27%. The allowance for loan losses was $14.3 million, or 0.78% of loans; nonperforming assets were $5.5 million, or 0.19% of total assets. Total risk-based capital was 17.59%, and tangible common equity was 8.31% (non-GAAP); regulatory ratios exceeded well-capitalized thresholds.
Material changes versus prior periods
- Q3 net income increased $2.5 million year over year. Higher net interest income, lower noninterest expense, and higher noninterest income contributed; income tax expense increased.
- Nine-month net interest income on a tax-equivalent basis increased to $77.5 million from $68.6 million, supported by loan growth and higher rates. Nine-month net interest margin was 3.84%, versus 3.58% in 2018.
- Nine-month noninterest income increased 2.3% to $39.2 million, led by wealth-management and mortgage-banking fees; noninterest expense declined 0.6% to $84.5 million.
- Loans grew while deposits declined from year-end. Nonperforming assets fell 40.1% from December 31, 2018, to $5.5 million.
- Q3 net charge-offs rose to $1.1 million, or 0.23% annualized of average loans, from $0.2 million and 0.04% in Q2 2019. Nine-month net charge-offs were $2.1 million versus $1.6 million in 2018.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management said it would continue monitoring liquidity and interest rates and expected approximately $7.0 million of capital expenditures over the next 12 months.
- The Federal Reserve cut rates by a total of 50 basis points during Q3. Management said lower asset repricing had so far been offset by loan growth and lower negotiated-deposit costs. Interest-rate simulations showed the 24-month down-100-basis-point net-interest-income scenario and the down-100-basis-point economic-value-of-equity scenario outside policy limits, due to limited ability to reduce deposit rates.
- CECL was scheduled to take effect January 1, 2020. Management expected the new methodology to increase the credit-loss allowance, but said the amount could not yet be reasonably estimated.
- Income tax expense for the first nine months of 2019 was $7.4 million, compared with $1.3 million in 2018. The prior-year period included $3.3 million of pension-contribution-related tax benefits; Q3 2019 tax expense included $0.2 million of net unfavorable discrete items.
- At September 30, 2019, the company had $524.4 million of commitments to extend credit and $6.4 million of standby letters of credit. Management did not expect material losses from these arrangements. Management reported no pending litigation expected to have a material financial effect.
- A Visa-related swap liability of approximately $0.1 million followed a September 2019 revision to Visa’s litigation reserve and share-conversion ratio; quarterly fixed payments are approximately $153,000 until the reserve is liquidated.
- Key disclosed risks include credit and loan-concentration exposure, interest-rate and liquidity risk, competition, economic conditions in its markets, regulatory and technology risks, and the uncertainty of estimates including loan-loss reserves and pension obligations.
Important facts for investors to verify
- Whether elevated Q3 charge-offs persist and how credit quality, criticized loans, and allowance coverage evolve.
- Deposit composition and funding costs, including the effect of seasonal public-fund balances and rate competition on net interest margin.
- The final CECL adoption impact on the allowance, retained earnings, and regulatory capital.
- Liquidity capacity and the implications of the disclosed down-rate interest-sensitivity scenarios.
- The sustainability of earnings growth after considering the unusually low 2018 tax expense and pension-related tax benefits.