Capital City Bank Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company provides banking and related services through 59 offices in Florida, Georgia, and Alabama. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2018 / Sep. 30, 2018 | Comparable period / prior date |
|---|---|---|
| Net income | $6.0; diluted EPS $0.35 | Q3 2017: $4.6; $0.27 per diluted share |
| Net interest income, tax-equivalent | $23.8; net interest margin 3.72% | Q3 2017: $21.6; margin 3.48% |
| Provision for loan losses | $0.9 | Q3 2017: $0.5 |
| Noninterest income / expense | $13.3 / $28.7 | Q3 2017: $13.0 / $26.7 |
| Total assets | $2,819.2 | Dec. 31, 2017: $2,898.8 |
| Loans, net | $1,759.5 | Dec. 31, 2017: $1,640.2 |
| Deposits | $2,381.2 | Dec. 31, 2017: $2,469.9 |
| Cash and cash equivalents | $75.3 | Dec. 31, 2017: $285.4 |
| Shareowners’ equity | $298.0 | Dec. 31, 2017: $284.2 |
For the first nine months, net income was $17.8 million, or $1.04 per diluted share, versus $10.9 million, or $0.64, in 2017. Tax-equivalent net interest income rose to $68.6 million from $62.4 million. Operating cash flow was $21.5 million versus $36.2 million; cash declined by $210.2 million, mainly as loan growth, securities activity, and deposit outflows used funds. The filing reports no separate headline net-profit margin.
At September 30, nonperforming assets were $9.6 million, or 0.34% of assets; the allowance for loan losses was $14.2 million, equal to 0.80% of loans and 207% of nonperforming loans. Regulatory capital ratios included 16.94% total risk-based capital, 13.43% common equity tier 1, and 10.99% leverage; all exceeded the well-capitalized thresholds. The company reported $1.416 billion of additional available liquidity, excluding $27 million in overnight funds sold. Debt included $52.9 million of subordinated notes, $16.6 million of short-term borrowings, and $12.5 million of other long-term borrowings.
Changes versus comparable periods
- Q3 net income increased about 32% year over year. Higher net interest income and noninterest income more than offset increased expenses and loan-loss provision.
- Nine-month net income increased about 64%; however, 2018 included $3.3 million of discrete tax benefits related to pension contributions for the 2017 plan year. Management said the effective tax rate excluding those items was approximately 24%.
- Loan balances grew $120.3 million from year-end 2017, while deposits fell $88.7 million. Management attributed loan growth to broad-based expansion except in home equity loans; deposit changes included seasonal public-fund movements.
- Nonperforming assets decreased from $11.1 million at year-end, although they rose from $9.1 million at June 30, 2018. Nine-month net charge-offs were $1.6 million, versus $1.5 million in 2017.
- Nine-month noninterest income decreased 1.3%, principally from lower mortgage banking and deposit fees. Noninterest expense rose 3.0%, including higher professional fees, OREO expense, and a non-routine operating loss.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management cited higher interest rates and a favorable earning-asset mix as drivers of net interest income, partly offset by rising deposit costs. It planned to continue monitoring liquidity and reinvestment needs.
- Interest-rate modeling was outside policy limits in the newly introduced down-200-basis-point scenario: estimated net interest income fell 11.9% over 12 months and 18.6% over 24 months; estimated economic value of equity fell 33.3%. Management said it did not plan immediate corrective action, citing its expectation that rates would continue to rise.
- Hurricane Michael made landfall on October 10, 2018, after quarter-end. The company was assessing effects on borrowers, collateral, and offices and said its initial assessment did not indicate a material operational impact.
- The quarter included a non-routine operating loss. MD&A describes approximately $0.4 million in expense, while its net-income discussion describes a $0.2 million impact; verify the reconciliation. Higher consulting and professional fees were associated with projects substantially complete by quarter-end.
- Off-balance-sheet commitments to extend credit totaled $461.8 million and standby letters of credit $4.4 million. Management did not expect material losses from these commitments or a material impact from ordinary-course litigation.
- The company expected the 2020 adoption of the expected-credit-loss standard to increase its allowance, but said the amount could not yet be reasonably estimated. It reported the 2019 lease standard was not expected to have a significant impact.
Important facts for investors to verify
- How much of the nine-month earnings increase is sustainable after excluding the $3.3 million of tax benefits?
- Whether deposit costs continue to rise relative to asset yields, and how the bank responds to the down-200-basis-point risk scenario.
- The quality and funding of loan growth, including trends in nonperforming loans, criticized loans, and the allowance.
- The cause and exact after-tax effect of the non-routine operating loss, and the post-quarter impact of Hurricane Michael.
- How cash and deposit balances evolve as loans grow, and whether reported liquidity capacity remains available under stress.