Capital City Bank Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The Florida-based bank holding company operates 61 full-service offices in Florida, Georgia, and Alabama. Dollar amounts are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior date |
|---|---|---|
| Net income | $3.93; $0.22 diluted EPS | Q2 2015: $3.85; $0.22 diluted EPS |
| Six-month net income | $5.58; $0.32 diluted EPS | First half 2015: $4.83; $0.28 diluted EPS |
| Net interest income | $19.38 GAAP; $19.62 taxable-equivalent | Q2 2015 GAAP: $18.98; taxable-equivalent: $19.12 |
| Net interest margin | 3.22% taxable-equivalent | Q2 2015: 3.29% |
| Noninterest income / expense | $15.22 / $28.70 | Q2 2015: $14.79 / $28.44 |
| Loans, net of allowance | $1,506.8 | December 31, 2015: $1,478.3 |
| Total deposits | $2,324.8 | December 31, 2015: $2,302.8 |
| Cash and cash equivalents | $272.5 | December 31, 2015: $378.9 |
| Total assets / equity | $2,767.6 / $274.8 | December 31, 2015: $2,797.9 / $274.4 |
For the first half, operating cash flow was $19.8 million, investing cash outflow was $79.9 million, and financing cash outflow was $46.3 million. Cash and cash equivalents declined $106.4 million. Management reported $1.240 billion of additional available liquidity, excluding $221 million in overnight funds sold.
At June 30, total borrowings included $9.6 million short-term, $52.9 million subordinated notes, and $26.4 million other long-term borrowings. The company’s risk-based capital ratio was 16.44%, common equity tier 1 was 12.65%, leverage was 9.88%, and tangible capital ratio was 7.08%. Management said regulatory capital ratios were well above Basel III “well-capitalized” thresholds.
Changes and notable items
- First-half net income increased 15.4% year over year. Taxable-equivalent net interest income rose to $39.0 million from $37.7 million, while the net interest margin declined to 3.21% from 3.28%.
- Q2 earnings included a $2.5 million pretax gain from retiring $10 million face value of trust preferred securities at a discount. The gain materially boosted noninterest income and the quarter’s efficiency ratio; it is not recurring operating revenue.
- Credit indicators improved: nonperforming assets were $22.8 million, or 0.83% of assets, versus $29.6 million and 1.06% at year-end. The allowance was $13.7 million, 0.89% of loans, covering 167% of nonperforming loans. Q2 recorded net recoveries of $0.2 million.
- Loans grew about 1.9% from year-end; commercial, financial, and agricultural loans increased while commercial mortgage balances declined. Deposits increased about 1.0% from year-end.
- The company repurchased 435,461 shares in the first half for $6.3 million. In June, it privately repurchased 426,845 shares from the estate of a 5% beneficial owner at $14.50 per share.
Outlook, risks, and contingencies
No specific earnings or revenue guidance was provided. Management expected investment-portfolio cash flows to be reinvested in securities during the remainder of 2016, planned to monitor liquidity and deposit pricing, and estimated approximately $5 million of capital expenditures over the next 12 months. Management noted that low rates and competitive loan pricing pressure loan yields, and that competition and reduced overdraft usage weighed on deposit fees.
Interest-rate simulations showed net interest income sensitivity within policy limits. Economic value of equity in the down-100-basis-point scenario was outside the company’s desired policy limit; management attributed this to low deposit costs and limited ability to reduce them further, and said extending asset duration to address the exposure was not prudent in the low-rate environment.
Off-balance-sheet commitments to extend credit totaled $403.5 million and standby letters of credit totaled $6.1 million. Management did not expect material losses from these arrangements and said available liquidity and borrowing sources were sufficient for expected funding needs. The company reported ordinary-course lawsuits, with no known pending matter expected to have a material effect. Key risks include credit and geographic/industry concentration, interest-rate and liquidity exposure, regulatory requirements, cybersecurity and fraud, and economic conditions in its markets.
Important facts for investors to verify
- How much of reported earnings growth reflects the nonrecurring $2.5 million securities-retirement gain, and what are normalized earnings and efficiency?
- Whether loan growth can continue without weakening underwriting, and whether the improvement in nonperforming assets, recoveries, and OREO dispositions is sustainable.
- The status and implications of the down-100-basis-point economic-value-of-equity policy exception, alongside changing rate sensitivity.
- Whether liquidity remains adequate as cash balances fall and credit commitments are drawn, and how deposit balances change with seasonal public-funds flows.
- The effects of share repurchases and the related-party transaction on capital ratios, per-share value, and future capital returns.