CAPITAL CITY BANK GROUP INC quarterly report, Q2 FY2018

Full document

Capital City Bank Group, Inc. — Q2 2018 Form 10-Q

Business and reporting period. The Florida-based financial holding company provides retail and commercial banking, trust and asset management, and brokerage services through Capital City Bank’s 59 offices in Florida, Georgia, and Alabama. This unaudited report covers the quarter and six months ended June 30, 2018. Unless noted otherwise, financial amounts below are in millions of dollars.

Financial performance and condition

  • Profitability: Q2 net income was $6.0 million ($0.35 per diluted share), versus $3.6 million ($0.21) in Q2 2017. First-half net income was $11.8 million ($0.69 per diluted share), compared with $6.3 million ($0.37) in the prior-year period.
  • Net interest income and margin: Q2 net interest income was $22.8 million, or $22.9 million on a taxable-equivalent basis, up from $20.5 million and $20.8 million, respectively, in Q2 2017. First-half taxable-equivalent net interest income was $44.9 million versus $40.8 million. Net interest margin was 3.58% in Q2 and 3.51% for the first half, compared with 3.33% and 3.27%, respectively, a year earlier. Management attributed the gains to higher rates and a favorable earning-asset mix, partly offset by higher deposit costs.
  • Other income and expenses: Q2 noninterest income was $12.5 million, down 4.5% year over year; first-half income was $25.0 million, down 3.2%, mainly from lower deposit and mortgage banking fees. Q2 noninterest expense was $28.4 million, up 1.7%; first-half expense was $56.3 million, up 0.8%, with higher professional fees and a Visa-related charge among the drivers. Q2 provision for loan losses was $0.8 million; first-half provision was $1.6 million, compared with $0.9 million a year earlier.
  • Tax item: First-half results included $2.9 million of discrete tax benefits related to 2017 pension-plan contributions, including $1.4 million in Q2. Management said the effective tax rate excluding these items was approximately 24%.
  • Balance sheet and funding: Total assets were $2.88 billion at June 30, 2018, down from $2.90 billion at year-end 2017. Loans, net of unearned income, grew to $1.72 billion from $1.65 billion; deposits were $2.46 billion versus $2.47 billion. Noninterest-bearing deposits rose to $937 million from $875 million, while interest-bearing deposits declined. Cash and cash equivalents were $163.6 million, down from $285.4 million.
  • Cash flow: For the first half, operating activities provided $5.2 million, compared with $36.0 million a year earlier; investing activities used $112.8 million and financing activities used $14.2 million. Cash and cash equivalents declined $121.8 million. The filing reports a $15.5 million decrease in other liabilities in operating cash flows.
  • Credit quality: Nonperforming assets were $9.1 million, or 0.32% of assets, down from $11.1 million and 0.38% at year-end. Nonaccrual loans were $5.7 million. The allowance for loan losses was $13.6 million, 0.78% of loans and 236% of nonperforming loans. First-half net charge-offs were $1.3 million, or 0.16% annualized of average loans, versus $1.1 million, or 0.14%, in the prior-year period.
  • Capital and debt: Shareowners’ equity was $293.6 million. The company reported a 17.00% total risk-based capital ratio, 13.46% common equity Tier 1 ratio, 10.69% leverage ratio, and 7.47% tangible common equity ratio; all regulatory capital ratios exceeded the Basel III “well-capitalized” thresholds. Reported debt included $52.9 million of subordinated notes, $7.0 million of short-term borrowings, and $12.9 million of other long-term borrowings.

Changes, outlook, and risks

  • Year-over-year earnings growth was driven chiefly by higher net interest income and lower income tax expense, while noninterest income declined and credit-loss provision increased. Loan growth and improved net interest margin were notable; average loans rose 2.7% from Q1 2018.
  • Management expected a deposit-product restructuring, moving from free to fee checking, to benefit deposit fees in the second half of 2018. It also expected non-routine consulting engagements to conclude early in the second half. No formal earnings or revenue guidance was provided.
  • Management expected approximately $5.0 million of capital expenditures over the next 12 months, primarily for facilities, equipment, and technology. It reported $1.417 billion of additional available liquidity, excluding $107 million of overnight funds sold, and considered liquidity sufficient for expected needs.
  • Management said its interest-rate shock scenarios were within policy limits. Modeling indicated higher rates would benefit near-term net interest income, while a 100-basis-point decline would reduce it; management cautioned that actual outcomes may differ from modeling assumptions. Risks include rate and liquidity exposure, loan and geographic concentrations, economic conditions, competition, regulation, cybersecurity, weather events, and the ability to manage credit quality and funding costs.
  • At June 30, 2018, the investment portfolio had $8.4 million of unrealized losses across 535 positions. Management attributed the declines primarily to interest rates rather than credit quality and stated it intended and was able to hold the securities until recovery. The company also disclosed a $0.2 million Visa Class B share swap payable and approximately $119,000 in quarterly fixed payments while the related litigation reserve remains outstanding.
  • The company adopted revenue-recognition guidance in 2018 with no reported financial-statement impact. It expects the new expected-credit-loss standard, effective January 1, 2020, to increase the allowance, but could not yet estimate the amount.
  • Management reported no known litigation expected to have a material effect and concluded disclosure controls were effective; no significant internal-control changes were reported for the quarter.

Important facts for investors to verify

  1. How much of first-half earnings growth is sustainable after excluding the $2.9 million discrete pension-related tax benefit?
  2. Whether loan growth continues while provision expense, charge-offs, criticized loans, and the allowance remain appropriate to portfolio risk.
  3. Whether deposit repricing and the checking-product changes support fee and margin trends without materially raising funding costs.
  4. Whether operating cash flow and liquidity remain adequate as cash balances fall and loans and securities grow.
  5. How interest-rate changes affect both net interest income and securities values, and whether unrealized losses remain attributable to rates rather than credit deterioration.
  6. The eventual cost and timing of the Visa litigation-reserve swap payments, and the transition impact of the expected-credit-loss accounting standard.