Capital City Bank Group, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Capital City Bank Group is a Florida-based bank holding company operating 66 full-service offices in Florida, Georgia and Alabama. Its services include commercial and retail banking, trust and asset management, brokerage and data processing. This unaudited report covers the three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012, and operating comparisons are primarily to Q1 2012.
Financial performance and condition
- Earnings: Net income was $0.8 million, or $0.05 per diluted share, versus a $1.2 million loss, or $0.07 per share, in Q1 2012. Pretax income was $1.3 million. Return on average assets was 0.13%; return on average equity was 1.36%.
- Revenue and margins: Net interest income was $19.9 million GAAP and $20.1 million on a taxable-equivalent basis, down 8.0% from Q1 2012. Net interest margin was 3.64%, versus 3.87%. Noninterest income was $13.6 million, essentially flat year over year. Noninterest expense was $31.2 million, down 4.3%. The efficiency ratio was 92.67%, compared with 92.04% a year earlier.
- Credit costs and asset quality: Loan-loss provision was $1.1 million, down from $4.8 million in Q1 2012. Net charge-offs were $2.4 million, or 0.66% annualized of average loans, versus $4.6 million, or 1.16%. Nonperforming assets were $103.9 million (3.99% of assets), down from $136.8 million (5.14%) a year earlier. Nonaccrual loans were $45.4 million and other real estate owned (OREO) was $58.4 million. The allowance was $27.8 million, 1.90% of loans and 61.17% of nonperforming loans.
- Balance sheet and liquidity: Total assets were $2.605 billion; loans, net of allowance, were $1.427 billion; deposits were $2.114 billion; and cash and cash equivalents were $514.4 million. Deposits declined $31.0 million from year-end, while loans net of unearned income declined $52.2 million. Management reported approximately $585.6 million of additional available liquidity.
- Cash flow: Operating activities provided $6.4 million and investing activities provided $31.0 million; financing activities used $32.7 million. Cash and cash equivalents increased $4.7 million to $514.4 million.
- Debt and capital: At quarter-end, short-term borrowings were $50.7 million, subordinated notes $62.9 million and other long-term borrowings $41.2 million. Total shareowners’ equity was $248.6 million. Tier 1 capital was 14.95%, total risk-based capital 16.32%, tangible capital 6.49% and leverage 9.81%. The company reported it exceeded the regulatory “well-capitalized” threshold.
Material changes versus comparable periods
- The company returned to quarterly profitability versus a loss in Q1 2012, mainly reflecting lower loan-loss provision and lower operating expenses; lower operating revenue and higher tax expense partly offset the improvement.
- Net interest income and margin continued to decline, driven by lower loan balances and unfavorable asset repricing, partly offset by lower funding costs.
- Average loans fell 6.3% year over year, reflecting weak demand, payoffs, amortization and resolution of problem loans. Average deposits fell 2.7% year over year, although seasonal public-fund balances lifted average deposits sequentially.
- Nonperforming assets improved year over year, but OREO increased about $5.0 million from year-end. Criticized loans declined to $225.0 million from $250.9 million at year-end; total TDRs were $61.4 million, up from $57.4 million.
Outlook, management commentary and risks
- Management anticipated continued net interest margin pressure during the remainder of 2013 due to low rates, asset repricing and weak loan demand. It intended to reduce excess overnight funds during the year and continue efforts to stimulate loan growth without relaxing underwriting standards.
- Expected capital expenditures were approximately $3.0 million over the next 12 months. The filing provides no specific earnings or revenue guidance.
- Since February 2012, the company has deferred interest payments on its trust-preferred notes, while continuing to accrue interest. Federal Reserve approval is required for certain debt actions and interest payments; dividend payments to shareholders have been suspended since December 2011, and regulatory approval restrictions remain.
- Management found goodwill was not impaired at March 31, 2013, despite the company’s book equity exceeding market capitalization and the reporting unit failing the first step of the impairment test. A $0.6 million bank preferred-stock investment remained under monitoring due to the issuer’s negative operating trends.
- Key disclosed risks include concentrated geographic and industry lending, further deterioration or volatility in real estate and loan quality, interest-rate and liquidity risk, weak local economic conditions and loan demand, regulatory restrictions, and uncertainty in significant estimates such as the loan-loss allowance, pension obligations and goodwill valuation. Management said ordinary-course litigation was not expected to have a material effect.
Important facts for investors to verify
- Whether loan balances and net interest margin continue to decline, and whether planned loan growth can be achieved without easing underwriting standards.
- Whether improvement in nonperforming assets and charge-offs is sustained, particularly given rising OREO balances, TDRs and continuing property valuation adjustments.
- The adequacy of the $27.8 million loan-loss allowance relative to portfolio risk and the 61.17% coverage of nonperforming loans.
- Available liquidity and deposit stability, including the seasonal nature of public funds and the company’s reliance on borrowing capacity.
- Terms and accumulated obligations associated with deferred trust-preferred interest, regulatory constraints on debt and dividends, and future developments in the Visa-related swap obligation.