Capital City Bank Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. The company provides banking and related services through 60 offices in Florida, Georgia, and Alabama.
Financial performance
| Metric | Q2 2017 | Comparable period |
|---|---|---|
| Net income | $3.6 million; $0.21 diluted EPS | $3.9 million; $0.22 diluted EPS in Q2 2016 |
| Net interest income, taxable-equivalent | $20.8 million | $19.6 million in Q2 2016 |
| Net interest margin, taxable-equivalent | 3.33% | 3.22% in Q2 2016 |
| Provision for loan losses | $0.6 million | Negative $0.1 million in Q2 2016 |
| Noninterest income | $13.1 million | $15.2 million in Q2 2016 |
| Noninterest expense | $27.9 million | $28.7 million in Q2 2016 |
- For the first six months, net income was $6.3 million ($0.37 diluted EPS), versus $5.6 million ($0.32) in 2016. Taxable-equivalent net interest income was $40.8 million versus $39.0 million; net interest margin was 3.27% versus 3.21%.
- Q2 net income declined year over year, mainly because noninterest income was lower and loan-loss provision was higher; increased net interest income, lower expenses, and lower taxes partly offset the decline. First-half earnings improved as higher net interest income and lower expenses more than offset reduced noninterest income and higher provision.
- Q2 noninterest income included no repeat of the $2.5 million gain on partial retirement of trust preferred securities recorded in Q2 2016. Wealth-management and mortgage-banking fees increased year over year; deposit fees declined.
- Q2 net charge-offs were $0.7 million, or 0.17% annualized of average loans. First-half net charge-offs were $1.1 million, or 0.14% annualized, compared with $0.6 million, or 0.08%, in the first half of 2016.
Financial position, cash flow, and capital
- At June 30, total assets were $2.815 billion, down from $2.845 billion at December 31, 2016. Loans, net of allowance, were $1.608 billion, up from $1.548 billion; total deposits were $2.372 billion, down from $2.412 billion.
- Cash and cash equivalents were $235.2 million, down from $296.0 million at year-end. For the first half, operating activities provided $36.0 million; investing activities used $49.2 million and financing activities used $47.7 million, producing a $60.9 million net decrease in cash and cash equivalents.
- Debt included $52.9 million of subordinated notes, $15.6 million of other long-term borrowings, and $6.1 million of short-term borrowings. The company reported $14.7 million in FHLB advances outstanding.
- Shareowners’ equity was $281.5 million. Regulatory ratios exceeded Basel III “well-capitalized” thresholds: total capital 16.32%, common equity tier 1 12.72%, and leverage 10.20%. Tangible common equity ratio, a non-GAAP measure, was 7.21%.
- Management reported $1.273 billion of additional liquidity available through funding resources, excluding $162 million in overnight funds sold, and stated liquidity was sufficient. The company expects approximately $5.0 million in capital expenditures over the next 12 months.
Material changes, outlook, and risks
- Loan balances grew, including purchases of residential loans earlier in 2017 and a $16.4 million commercial real-estate loan pool purchased in late June. Management attributed the higher provision primarily to loan growth. Nonperforming assets fell to $15.9 million, or 0.57% of assets, from $19.2 million, or 0.67%, at year-end.
- OREO declined to $8.0 million from $10.6 million at year-end. Total nonaccrual loans were $8.0 million; the allowance for loan losses was $13.2 million, 0.81% of loans and 166% of nonperforming loans.
- Management said rising short-term rates and a favorable earning-asset mix supported net interest income. It reported an overall cost of funds of 15 basis points in Q2 and anticipates an effective income tax rate of approximately 35%, absent other discrete events. No broader earnings or revenue guidance is provided.
- Interest-rate modeling showed exposure outside policy limits in the down-100-basis-point scenario: modeled net interest income declines were 8.7% over 12 months and 13.2% over 24 months, versus limits of 7.5% and 10.0%. Management cited limited ability to reduce deposit rates and said extending asset duration to address this was not prudent. Modeled rising-rate scenarios were favorable to net interest income.
- Principal risks include interest-rate and liquidity risk, credit losses and loan concentrations, local economic conditions, regulatory changes, cybersecurity and fraud, competition, and weather or other disasters. The filing reports no known litigation expected to have a material effect. It also describes a Visa-related indemnification/swap arrangement; no amount was payable at quarter-end, and fixed quarterly payments were approximately $85,000.
Important facts for investors to verify
- Whether loan growth is sustaining net interest income and margin as deposit pricing responds to rate changes.
- Whether loan-loss provisions, charge-offs, criticized loans, and nonperforming assets remain controlled as the portfolio expands.
- Deposit trends and the availability and cost of the stated liquidity sources, particularly given seasonal public-fund outflows.
- Performance of fee businesses and the extent to which noninterest income comparisons normalize after the prior-year $2.5 million trust-preferred gain.
- How management monitors the modeled falling-rate policy-limit exceptions and the potential effect of rate changes on borrowers and deposit costs.
- Actual capital spending versus the approximately $5.0 million expectation, and future dividend capacity under applicable capital requirements.