Business context and reporting period
Capital City Bank Group, Inc. (CCBG), a Florida-based financial holding company, reported for the fiscal year ended December 31, 2018. Its bank subsidiary operates 59 offices in Florida, Georgia, and Alabama; Florida generated approximately 88% of revenue. Banking accounted for most revenue.
Financial performance and condition
- Revenue: Approximately $151.0 million, comprising $99.4 million interest income and $51.6 million noninterest income.
- Profit: Net income was $26.2 million, or $1.54 per diluted share; return on average assets was 0.92% and return on average equity was 8.89%.
- Interest income and margins: Net interest income rose 11.5% to $92.5 million; tax-equivalent net interest margin increased 27 basis points to 3.64%. Average loans grew 6.2% to $1.718 billion.
- Credit costs and asset quality: Provision for loan losses was $2.9 million. Allowance was $14.2 million, or 0.80% of loans, covering 207% of nonperforming loans. Nonperforming assets declined to $9.1 million (0.31% of assets); net charge-offs were 0.12% of average loans.
- Expenses and efficiency: Noninterest expense increased 1.9% to $111.5 million. The efficiency ratio improved to 77.05%.
- Liquidity and cash flow: Year-end cash and cash equivalents were $276.0 million. Operating cash flow was $34.6 million, investing cash outflow $94.0 million, and financing cash inflow $50.0 million; cash decreased $9.4 million. Management reported approximately $1.324 billion of additional available liquidity beyond overnight funds sold.
- Deposits, debt, and capital: Deposits were $2.532 billion at year-end, up from $2.470 billion. Total borrowings and subordinated notes were approximately $75.0 million. Total capital ratio was 17.13%, CET1 was 13.58%, and leverage was 10.89%; the Bank was categorized as well capitalized.
- Shareowner returns: Dividends declared were $0.32 per share, up 33%; CCBG repurchased 324,441 shares for approximately $8.0 million.
Material changes versus prior periods
- Net income rose from $10.9 million in 2017, while net interest income increased $9.5 million and income tax expense fell $8.8 million.
- The comparison is affected by unusual tax items: 2017 included $4.1 million of expense from remeasuring deferred taxes after federal tax reform; 2018 included $3.3 million of tax benefits related mainly to 2017 pension contributions made in 2018. The reported 2018 effective tax rate was 12%; management cited an approximately 24% rate excluding discrete items.
- Noninterest income was nearly flat, down 0.3%; lower mortgage banking fees were largely offset by higher wealth-management and other income. Interest expense increased 74.5%, primarily from higher rates paid on negotiated-rate deposits.
- Asset quality improved: nonperforming assets fell 18% and classified assets fell 28%. TDRs declined to $24.7 million from $34.5 million.
- Average deposits increased 2.2%, the fifth consecutive year of growth. Shareowners’ equity increased to $302.6 million from $284.2 million.
Outlook, commentary, risks, and unusual items
- Management cited record loan growth, rising rates, the core deposit base, and tax reform as contributors to improved results. It intends to pursue organic growth and evaluate acquisitions, principally in Florida, Georgia, and Alabama; no specific earnings guidance was provided.
- Management anticipates an approximately 24% effective tax rate absent future discrete items, and approximately $7 million of capital expenditures over the next 12 months.
- CECL is scheduled to take effect January 1, 2020. Management expects it to increase the allowance for credit losses, but the impact could not yet be reasonably estimated.
- Interest-rate sensitivity was outside policy limits in the down-200-basis-point scenarios: modeled 12-month net interest income change was -12.4% versus a -10.0% limit; 24-month change was -20.0% versus a -12.5% limit. Economic value of equity change was -36.8% versus a -20.0% limit. Management said it did not plan immediate action, judging the scenario unlikely in the short run.
- Key risks include concentrated real-estate lending in northern Florida and middle Georgia, interest-rate and deposit-pricing sensitivity, liquidity, cyber threats, regulatory requirements, and potential weather-related losses. Approximately 70% of loans involved real estate collateral.
- Unusual items included a $2.0 million gain on sale of a Tallahassee banking office, partly offset by Hurricane Michael-related building costs and damage; and the $3.3 million 2018 tax benefit noted above. Management reported no known litigation expected to materially affect results or financial position.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of the earnings increase is sustainable after excluding discrete tax benefits and the office-sale gain; confirm the expected ongoing tax rate.
- Loan growth, real-estate and geographic concentrations, potential problem loans, TDR performance, and allowance adequacy ahead of CECL adoption.
- Deposit pricing and funding trends, and management’s response to the out-of-policy falling-rate sensitivity results.
- Availability of stated contingent liquidity, capital headroom under the fully phased-in conservation buffer, and the regulatory capacity to continue dividends and repurchases.
- Terms and governance of the 324,441-share repurchase from the estate of a 5% beneficial owner, and the new authorization for up to 750,000 shares.