Capital City Bank Group, Inc. — Q1 2018 Form 10-Q
Business context and period. The Florida-based financial holding company operates Capital City Bank, with 59 full-service offices in Florida, Georgia and Alabama. This unaudited filing covers the three months ended March 31, 2018; income and cash-flow comparisons are with Q1 2017, while balance-sheet comparisons are with December 31, 2017.
Financial performance and condition
- Earnings: Net income was $5.8 million, or $0.34 per diluted share, versus $2.7 million, or $0.16, a year earlier. Pretax income rose to $5.6 million from $4.2 million. Q1 2018 net income included a $1.5 million tax benefit related to a pension contribution; excluding that discrete benefit, management reported an effective tax rate of approximately 24%.
- Revenue and margin: Tax-equivalent net interest income was $21.9 million, up from $20.0 million; net interest margin was 3.43%, up 22 basis points year over year. GAAP net interest income was $21.8 million. Noninterest income declined 1.9% to $12.5 million, including lower deposit and mortgage banking fees; wealth management fees increased. Noninterest expense was essentially flat at $27.9 million. The efficiency ratio improved to 81.07% from 85.33% a year earlier.
- Credit and loans: Loans were $1.662 billion, up from $1.653 billion at year-end; average loans grew 3.9% year over year. Provision for loan losses was $0.7 million versus $0.3 million. Net charge-offs were $0.8 million, or 0.20% annualized, compared with $0.4 million, or 0.10%. The $13.3 million allowance was 0.80% of loans and covered 181% of nonperforming loans.
- Asset quality: Nonperforming assets were $10.6 million, down 40.2% year over year, or 0.36% of assets. Nonaccrual loans were $7.3 million and other real estate owned was $3.3 million. Management cited $0.5 million of OREO valuation adjustments during the quarter.
- Cash flow: Operating cash flow was $2.2 million, down from $23.9 million in Q1 2017. Investing used $13.7 million and financing provided $24.7 million; cash and cash equivalents increased $13.2 million to $298.6 million. The filing attributes substantial operating cash-flow variability to changes in other assets and liabilities, among other items.
- Funding, debt and liquidity: Deposits totaled $2.499 billion, up $29.0 million from year-end. Total liabilities were $2.636 billion. Borrowings included $4.9 million of short-term borrowings, $52.9 million of subordinated notes and $13.3 million of other long-term borrowings. Separately, management reported $11.1 million of outstanding FHLB advances. The company said it could generate $1.282 billion of additional liquidity, excluding $251 million in overnight funds sold, and considered available liquidity sufficient.
- Capital: Shareowners’ equity was $288.4 million. Regulatory ratios were 17.05% total capital, 13.44% common equity Tier 1 and 10.36% leverage; management said all exceeded well-capitalized thresholds. The non-GAAP tangible common equity ratio was 7.17%.
Material changes versus comparable periods
- Year-over-year earnings improved alongside higher net interest income and margin, supported by loan growth and higher yields on overnight funds, securities and variable-rate loans. Higher negotiated-deposit costs partly offset the benefit.
- Noninterest income edged lower, mainly due to lower mortgage banking and deposit fees. Mortgage banking activity reflected seasonal slowdown and lower margins on sold loans.
- Provision and net charge-offs increased year over year, while nonperforming assets declined substantially.
- Compared with Q4 2017, net income rose from $3,000; however, that prior-quarter result included a $4.1 million tax expense from remeasurement of deferred tax assets following tax reform. Q1 2018 also included the $1.5 million pension-related tax benefit.
- Available-for-sale securities recorded a net-of-tax unrealized loss of $1.1 million in Q1 2018, versus a $0.3 million gain in Q1 2017.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management expected seasonal public-fund deposit inflows to decline toward Q4 2018, planned to monitor liquidity and investment opportunities, and estimated approximately $5.0 million of capital expenditures over the next 12 months.
- Management described deposit levels as strong and said it continued to manage funding costs and evaluate expense reductions. It also reported a $0.3 million vendor bonus tied to migration to a new retail brokerage platform.
- Interest-rate simulations showed rising-rate scenarios benefiting short-term net interest income. The 100-basis-point falling-rate EVE sensitivity was negative 17.5%, outside the company’s stated negative 15.0% policy target; management said this exposure had improved from year-end.
- Management expects adoption of the expected-credit-loss standard (ASU 2016-13) in 2020 to increase the credit-loss allowance, but said the amount could not yet be reasonably estimated. Lease accounting changes effective in 2019 were not expected to have a significant impact.
- Principal disclosed risks include interest-rate and liquidity exposure, loan and geographic concentration, economic conditions in operating markets, credit-loss estimates, competition, regulation, cybersecurity, weather events and the ability to pay dividends under capital requirements. Management reported no known litigation expected to materially affect results or financial position.
Investor verification points
- Assess earnings excluding the $1.5 million pension-related tax benefit and compare with the unusually tax-affected Q4 2017 result.
- Track deposit pricing and mix, net interest margin, loan growth and the effect of further interest-rate changes.
- Review charge-offs, criticized and restructured loans, OREO valuation changes, and whether the allowance remains adequate as credit conditions evolve.
- Confirm the sustainability of operating cash flow and the availability and cost of stated contingent liquidity sources.
- Monitor the falling-rate EVE sensitivity and the eventual quantified impact of CECL adoption.