Capital City Bank Group, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; fourth-quarter results are also summarized. The company is a community bank holding company operating 63 full-service locations in Florida, Georgia, and Alabama. Florida generated approximately 78% of revenue. Banking accounted for about 91.9% of total revenue.
Financial results and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue (interest plus noninterest income) | $138.6 million | $144.9 million |
| Net interest income | $77.7 million | $84.3 million |
| Net income | $6.0 million | $0.1 million |
| Diluted earnings per share | $0.35 | $0.01 |
| Net interest margin, taxable-equivalent | 3.54% | 3.81% |
| Noninterest income | $56.4 million | $55.2 million |
| Noninterest expense | $122.7 million | $124.6 million |
| Efficiency ratio | 91.09% | 88.72% |
| Provision for loan losses | $3.5 million | $16.2 million |
- Net income improved primarily because provision expense fell by $12.7 million, noninterest income increased $1.2 million, and noninterest expense declined $1.8 million. Lower net interest income, down $6.6 million, partly offset these gains.
- Average loans fell 6.8% to $1.451 billion; year-end loans were $1.400 billion. Average deposits declined 1.7% to $2.070 billion. Year-end deposits were $2.136 billion.
- Year-end assets were $2.612 billion, down from $2.634 billion. Shareowners’ equity increased to $276.4 million from $246.9 million, substantially reflecting a favorable pension-related adjustment in other comprehensive income.
- Cash and cash equivalents were $529.9 million. Cash flow from operations was $34.8 million; investing activities used $2.1 million and financing activities used $12.5 million. Cash increased $20.2 million during the year.
- Year-end borrowings included $51.3 million short-term, $62.9 million subordinated notes, and $38.0 million other long-term borrowings. Management reported $623.0 million of additional available liquidity and described liquidity as sufficient for ongoing needs.
- Regulatory capital was strong: total risk-based capital ratio 17.94%, Tier 1 ratio 16.56%, and leverage ratio 10.46%. The Bank was categorized as well capitalized.
Material changes and credit quality
- Nonperforming assets declined to $85.0 million, or 3.26% of assets, from $117.6 million, or 4.47%, in 2012. Nonaccrual loans fell to $37.0 million from $64.2 million; other real estate owned was $48.1 million.
- Net charge-offs decreased to $9.5 million, or 0.66% of average loans, from $18.0 million, or 1.16%. The allowance for loan losses was $23.1 million, equal to 1.65% of loans and 62% of nonperforming loans, versus 1.93% and 45% a year earlier.
- Loans remained concentrated in real estate and the company’s regional markets: approximately 79% of loans had real estate as a collateral component. Commercial mortgage loans were 38.1% of the portfolio; residential mortgage and home equity loans were also significant.
- Average earning-asset mix shifted away from loans toward securities and overnight funds, which management said supported liquidity but weighed on earnings. Average funds sold were approximately $423 million.
- The 2013 efficiency ratio worsened despite lower expenses, reflecting the decline in revenue. Compensation expense increased, including higher pension and stock compensation costs.
Outlook, management commentary, and risks
- Management expects continued net interest margin pressure during 2014, citing low rates, asset repricing, and weak loan demand. It reported no numerical earnings or revenue guidance.
- Management’s stated 2014 priorities include reducing nonperforming assets, stabilizing loan balances, diversifying and growing noninterest income, and reducing core operating expenses. It cited business and indirect auto lending initiatives to support loan growth.
- A major identified revenue risk is the expected significant decline in data-processing fees in 2014, following the anticipated migration of a government client to another processor by mid-2014. That client represented approximately 46% of data-processing fees.
- In December 2013, informal Federal Reserve-requested board resolutions at both the holding company and Bank were rescinded. Restrictions on dividends, new or refinanced debt, trust-preferred payments, and share repurchases were lifted; the company paid $2.8 million of previously deferred trust-preferred interest.
- The board declared a $0.02-per-share dividend in February 2014, the first since the 2011 suspension. Payment was scheduled for March 24, 2014, subject to applicable restrictions. The board also authorized repurchases of up to 1.5 million shares.
- Basel III capital rules were scheduled to begin taking effect in 2015; management expected the company to remain well capitalized. The filing also identifies mortgage ability-to-repay and qualified-mortgage rules, interest-rate and liquidity risk, regional and real-estate concentration, cyber threats, goodwill impairment, and regulatory compliance as material risks.
- Goodwill was $84.8 million. The annual impairment test found estimated fair value above carrying value, so no impairment was recorded. The filing notes that sustained market-value weakness or deteriorating results could lead to future impairment.
- The company reported no known pending litigation expected to have a material effect. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan production can stabilize and improve net interest income as the loan book runs off and margins face further pressure.
- Whether the decline in nonperforming assets continues, and whether the $23.1 million allowance remains adequate against the concentrated real-estate portfolio and criticized loans.
- The actual 2014 impact of losing or transitioning the large data-processing client and the company’s ability to replace that revenue.
- Whether available liquidity, deposit trends, and capital remain adequate as loan commitments are drawn and contractual obligations mature.
- Whether the declared dividend and authorized share repurchases proceed within regulatory, capital, and funding constraints.
- The effects of pension assumptions, goodwill valuation, and future Basel III and mortgage-rule implementation on earnings and capital.