Capital City Bank Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance sheet comparisons are to December 31, 2018 unless noted. Capital City Bank Group is a Florida-based bank holding company operating 59 full-service offices in Florida, Georgia, and Alabama.
Financial results and position
| Metric | Q1 2019 | Comparison |
|---|---|---|
| Interest income | $27.7 million | Up from $23.2 million in Q1 2018 |
| Net interest income, taxable-equivalent | $25.0 million | Up from $21.9 million in Q1 2018 |
| Net interest margin, taxable-equivalent | 3.75% | Up 32 basis points year over year; down 6 basis points from Q4 2018 |
| Noninterest income | $12.6 million | Up 0.6% year over year |
| Noninterest expense | $28.2 million | Up 1.0% year over year |
| Net income / diluted EPS | $6.4 million / $0.38 | Compared with $5.8 million / $0.34 in Q1 2018 |
| Operating cash flow | $15.2 million | Compared with $2.2 million in Q1 2018 |
| Total assets | $3.052 billion | Up from $2.959 billion at year-end |
| Loans, net | $1.783 billion | Up 1.3% since year-end; average loans up 8.1% year over year |
| Deposits | $2.617 billion | Up $85.4 million since year-end |
| Cash and cash equivalents | $353.7 million | Up from $276.0 million at year-end |
| Shareowners’ equity | $309.0 million | Up from $302.6 million at year-end |
The efficiency ratio was 75.01%, improving from 81.07% in Q1 2018 but worse than 70.21% in Q4 2018. The Q1 2019 effective tax rate was approximately 24%; reported tax expense was $2.1 million. The company declared dividends of $0.11 per share.
Borrowings included $9.0 million of short-term borrowings, $52.9 million of subordinated notes, and $7.7 million of other long-term borrowings at quarter-end. The company reported $1.270 billion of additional available liquidity, excluding $304 million of overnight funds sold. Regulatory capital ratios included 17.09% total risk-based capital, 13.62% common equity tier 1, and 10.53% leverage; all exceeded the stated well-capitalized thresholds.
Material changes and asset quality
- Year-over-year net income rose $0.7 million, supported by $3.1 million higher net interest income; higher expenses and provision partly offset the increase. Q1 2018 included a $1.5 million pension-contribution-related tax benefit.
- Net interest income growth reflected loan growth and higher yields on overnight funds, securities, and variable-rate loans, partly offset by increased deposit costs. Average cost of funds rose to 0.42% from 0.31% in Q4 2018.
- Compared with Q4 2018, net income declined from $8.5 million. That quarter included a $2.0 million gain on sale of a banking office and a $0.3 million discrete tax benefit; Q1 2019 also had higher loan-loss provision and lower noninterest income.
- Nonperforming assets fell to $6.9 million, or 0.23% of assets, from $9.1 million at year-end and $10.6 million a year earlier. Nonaccrual loans were $5.0 million. Net charge-offs were $0.9 million, or 0.20% annualized of average loans.
- The allowance for loan losses was $14.1 million, 0.78% of loans and 280% of nonperforming loans. Special-mention loans increased to $18.3 million from $11.6 million at year-end, while substandard loans were $22.2 million, versus $22.9 million.
Outlook, risks, and unusual items
- Management expects a 2019 effective tax rate of approximately 24%, excluding discrete items, and approximately $7 million of capital expenditures over the next 12 months.
- Management said seasonal public-fund deposit inflows likely peaked and are expected to decline gradually through Q4 2019. It plans to monitor liquidity and determine how much investment-security cash flow to reinvest.
- CECL is scheduled to take effect for the company on January 1, 2020. Management expects the standard to increase the credit-loss allowance but said the amount cannot yet be reasonably estimated; testing and parallel modeling were expected to begin in Q2 2019.
- Interest-rate sensitivity modeling showed net interest income and economic value of equity outside policy limits in certain falling-rate scenarios, particularly a 200-basis-point decline. Management attributed this to limited ability to reduce deposit rates as much as market rates fall.
- Key risks include interest-rate and liquidity exposure, credit and geographic/industry concentration, economic conditions in its markets, regulatory and technology risks, and uncertainty in estimates for credit losses, pensions, and taxes. The filing states pending litigation is not expected to have a material effect.
- Operating lease accounting was adopted January 1, 2019, recognizing $2.0 million of right-of-use assets and $2.8 million of lease liabilities, with no significant income-statement or cash-flow impact. A new authorization permits repurchase of up to 750,000 shares through February 2024; none had been repurchased by March 31.
Most important facts for investors to verify
- Whether loan growth and higher asset yields continue to outpace rising deposit and funding costs.
- Whether the increase in special-mention loans signals future credit deterioration, and whether the allowance remains adequate as charge-offs evolve.
- The company’s response to falling-rate exposure and whether interest-rate sensitivity remains outside policy limits.
- The eventual CECL allowance increase and its effect on capital and earnings at adoption.
- Whether seasonal deposits decline as management expects and whether liquidity remains sufficient without materially affecting profitability.
- Whether earnings comparisons are adjusted for the Q1 2018 tax benefit and Q4 2018 office-sale gain and tax benefit.