Capital City Bank Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company provides commercial and retail banking, trust, asset management, and brokerage services through 57 offices in Florida, Georgia, and Alabama. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $7.3; diluted EPS $0.44 | Q2 2018: $6.0; $0.35 per diluted share |
| Six-month net income | $13.8; diluted EPS $0.82 | Six months 2018: $11.8; $0.69 per diluted share |
| Net interest income, tax-equivalent | Q2: $26.1; six months: $51.2 | Q2 2018: $22.9; six months 2018: $44.9 |
| Net interest margin, tax-equivalent | Q2: 3.85%; six months: 3.80% | Q2 2018: 3.58%; six months 2018: 3.51% |
| Noninterest income / expense | Q2: $12.8 / $28.4; six months: $25.3 / $56.6 | Six months 2018: $25.0 / $56.3 |
| Total assets | $3,017.7 | December 31, 2018: $2,959.2 |
| Loans, net of allowance | $1,820.6; gross loans $1,835.2 | December 31, 2018: net $1,760.0; gross $1,774.2 |
| Deposits | $2,561.1 | December 31, 2018: $2,531.9 |
| Cash and cash equivalents | $287.8 | December 31, 2018: $276.0 |
| Shareowners’ equity | $314.6 | December 31, 2018: $302.6 |
- Q2 pretax income was $9.7 million and income tax expense was $2.4 million. Six-month tax expense was $4.4 million, versus an $0.1 million tax benefit in first-half 2018. The prior-year period included $2.9 million of tax benefits related to 2017 pension contributions, affecting year-over-year net income comparisons.
- Q2 net charge-offs were $0.2 million, or 0.04% annualized of average loans; first-half net charge-offs were $1.0 million, compared with $1.3 million in first-half 2018. The allowance for loan losses was $14.6 million, 0.79% of loans and 260% of nonperforming loans.
- Nonperforming assets were $6.6 million, or 0.22% of assets, down from $9.1 million and 0.31% at year-end 2018. Nonaccrual loans were $5.6 million; other real estate owned was $1.0 million.
- Regulatory capital remained strong: total risk-based capital ratio 17.13%, common equity Tier 1 ratio 13.67%, and leverage ratio 10.64%. Management reported all regulatory capital ratios above the Basel III “well-capitalized” thresholds. Tangible common equity ratio, a non-GAAP measure, was 7.83%.
- First-half cash flows were $31.3 million provided by operating activities, $38.6 million used in investing, and $19.1 million provided by financing; cash and equivalents increased $11.8 million. Investing cash use included net loan growth; financing included $29.2 million of deposit growth, $3.7 million of dividends, and $1.8 million of share repurchases.
- At June 30, borrowings included $9.8 million short-term, $52.9 million subordinated notes, and $7.3 million other long-term borrowings. Subordinated notes have variable rates tied to three-month LIBOR; the company is assessing the expected LIBOR discontinuation.
Changes and management commentary
- Compared with Q2 2018, net income rose $1.3 million. Management attributed the improvement primarily to higher net interest income, supported by loan and earning-asset growth and improved yields, as well as a lower loan-loss provision.
- For the first six months, tax-equivalent net interest income increased $6.3 million year over year. Higher loan yields and growth in earning assets helped; the average cost of funds in Q2 was 0.40%, down two basis points from Q1, partly due to deposit mix.
- Average loans increased 2.4% from Q1 2019. The company purchased commercial and residential loan pools totaling $18.6 million during the first half. Management cited growth across most loan types and continued competitive fixed-rate loan pricing.
- First-half noninterest expense increased 0.5% year over year, as higher compensation was largely offset by lower other real estate owned, professional-fee, processing, and legal costs. The Q2 efficiency ratio improved to 73.02% from 80.07% in Q2 2018.
- Noninterest income grew modestly in the first half, with higher wealth-management and bank-card fees partly offset by lower deposit and mortgage-banking fees. Assets under management were approximately $1.735 billion, up from $1.500 billion at year-end 2018.
- The board authorized repurchases of up to 750,000 shares through February 2024. The company repurchased 77,000 shares in Q2 at an average $23.40 per share and declared $0.11 per share in dividends for the quarter.
Outlook, risks, and contingencies
- The filing gives no specific earnings or revenue guidance. Management expects approximately $7.0 million of capital expenditures over the next 12 months, primarily for facilities, equipment, and technology, funded from existing resources.
- Management reported $1.330 billion of additional available liquidity, excluding $234 million in overnight funds sold, and stated that liquidity was sufficient for ongoing needs and its business strategy. It planned to monitor liquidity and reinvestment of investment-portfolio cash flows.
- Interest-rate simulations show exposure if rates fall: the company reported policy-limit exceptions for 12-month net interest income under a 200-basis-point decline, 24-month net interest income under 100- and 200-basis-point declines, and economic value of equity under 100- and 200-basis-point declines. Management cited limited ability to reduce deposit rates further. Model outcomes depend on assumptions and may differ from actual results.
- CECL accounting was scheduled for adoption January 1, 2020. Management expected the transition to increase the allowance for credit losses but said the amount could not yet be reasonably estimated; implementation testing and parallel modeling were underway.
- Credit risks include loan-portfolio and geographic/industry concentrations, borrower repayment capacity, collateral values, and economic conditions. Special-mention and substandard loans totaled $40.5 million at June 30, up from $34.5 million at year-end 2018. The filing also identifies interest-rate, liquidity, regulatory, technology/security, competitive, weather, and other risks.
- Off-balance-sheet commitments to extend credit were $509.8 million, with $5.4 million of standby letters of credit. Management said many commitments may expire undrawn and did not anticipate material losses from letters of credit. The company reported no known litigation expected to have a material effect.
- Operating lease accounting was adopted January 1, 2019, recognizing lease right-of-use assets and liabilities; management reported no significant impact on income or cash flows. Related-party lease obligations were $1.1 million at quarter-end.
Most important facts for investors to verify
- Whether loan growth and improved net interest margin persist as funding costs, deposit mix, and market rates change.
- Credit-quality trends, particularly the increase in criticized loans, nonperforming-loan composition, charge-offs, and reserve adequacy.
- The eventual CECL impact on the allowance, capital, and reported earnings at adoption.
- Liquidity and interest-rate sensitivity, including the disclosed policy exceptions in falling-rate scenarios and reliance on deposit funding.
- How prior-year pension-related tax benefits affect comparisons, and whether expense growth remains controlled as compensation costs rise.
- Progress on planned capital spending, share repurchases, dividends, and the transition away from LIBOR for subordinated notes.