Capital City Bank Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Capital City Bank Group is a Florida-based bank holding company operating 63 full-service offices in Florida, Georgia, and Alabama.
Financial performance
Amounts below are in millions, except per-share data and ratios. Income-statement comparisons are year over year.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $19.1 | $18.9 | $56.6 | $55.6 |
| Net interest income, tax-equivalent basis | $19.3 | $19.0 | $57.0 | $56.0 |
| Provision for loan losses | $0.4 | $0.4 | $1.1 | $1.3 |
| Noninterest income | $13.2 | $13.4 | $40.9 | $39.5 |
| Noninterest expense | $29.2 | $28.6 | $87.0 | $86.0 |
| Net income | $1.7 | $2.1 | $6.5 | $7.3 |
| Diluted earnings per share | $0.09 | $0.12 | $0.37 | $0.42 |
- Q3 net interest margin was 3.31% on a tax-equivalent basis, down 11 basis points year over year. The efficiency ratio was 89.79%.
- For the first nine months, net charge-offs were $3.9 million, or 0.35% annualized of average loans, versus $5.3 million, or 0.50%, in 2014.
- Operating cash flow was $28.0 million for the first nine months, compared with $23.8 million in 2014. Investing activities used $177.2 million and financing activities used $25.2 million; cash and cash equivalents declined $174.4 million to $210.7 million.
Financial position, debt and liquidity
- At September 30, total assets were $2.615 billion, loans net of allowance were $1.460 billion, and total deposits were $2.115 billion. Since year-end 2014, loans grew $43.8 million while deposits declined $31.8 million.
- Cash and cash equivalents fell from $385.1 million at December 31, 2014, largely as funds were redeployed into loans and securities. Total investment securities rose to $638.0 million from $505.1 million.
- Total borrowings were approximately $157.3 million: $65.4 million short-term, $62.9 million subordinated notes, and $29.0 million other long-term borrowings. Shareowners’ equity was $273.7 million.
- Management reported $1.14 billion of additional liquidity available through borrowing and other resources and considered liquidity sufficient for ongoing needs. Planned capital expenditures were approximately $4.0 million over the next 12 months.
- Regulatory capital ratios remained above “well-capitalized” thresholds: total risk-based capital 17.24%, Tier 1 capital 16.36%, and Common Equity Tier 1 12.76%.
Material changes and management commentary
- Nine-month net income declined $0.8 million year over year despite higher net interest income and noninterest income. Higher taxes and operating expenses more than offset those gains. The 2014 comparison included a $2.2 million tax benefit from an adjustment to uncertain-tax-position reserves; 2015 included $1.7 million of tax-free bank-owned life insurance proceeds in Q2.
- Q3 earnings fell from $3.8 million in Q2 2015, when the BOLI proceeds boosted results. Q3 also had higher OREO expense and compensation costs, including a pension-expense true-up.
- Loan growth was broad-based; average loans increased 4.0% from Q4 2014. Nonperforming assets improved to $38.4 million, or 1.47% of assets, from $52.4 million, or 2.00%, at year-end 2014. The allowance was $14.7 million, 0.99% of loans and 112% of nonperforming loans.
- Management cited low interest rates and loan-pricing competition as continuing pressure on yields and margins. It said it was maintaining short-duration balance-sheet positions rather than reaching further for yield. Management anticipated a 34%–35% effective tax rate absent future discrete events; no earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Key risks include interest-rate and liquidity exposure, loan and geographic concentration, local economic conditions, credit-loss estimates, regulatory changes, cybersecurity and fraud, and competition. The rate-risk analysis showed rising-rate scenarios benefiting modeled net interest income, while the down-100-basis-point scenario had a modest negative effect. The modeled economic-value-of-equity decline in that scenario exceeded the stated policy parameter.
- Off-balance-sheet commitments included $358.9 million to extend credit and $6.3 million of standby letters of credit; actual funding needs may be lower because commitments may expire unused.
- Management said ordinary-course lawsuits were not expected to have a material effect. The company also described a Visa-related swap obligation involving potential conversion-ratio payments and quarterly fixed charges of approximately $63,000 until the litigation reserve is liquidated.
- Other real estate owned was $25.2 million, down from $35.7 million at year-end; nine-month sales were $12.7 million, with $1.6 million of valuation write-downs. The company had $2.1 million of residential loans in foreclosure. Management considered securities’ unrealized losses temporary and did not record other-than-temporary impairment.
Most important facts for investors to verify
- Whether core earnings can improve as margin pressure, loan pricing competition, and higher compensation costs continue.
- Whether credit-quality improvement and falling nonperforming assets persist, and whether the $14.7 million allowance remains adequate as loans grow.
- The sustainability of noninterest income, particularly deposit fees, mortgage banking fees, and the impact of one-time BOLI proceeds.
- Liquidity and deposit trends, including seasonal public-fund movements, and the availability of the reported $1.14 billion of contingent liquidity under stress.
- Interest-rate sensitivity assumptions and the implications of the modeled down-rate EVE exposure, alongside capital levels and ongoing share repurchases.