Capital City Bank Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Capital City Bank Group provides banking and related services through 70 offices in Florida, Georgia, and Alabama. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $23.4 | $24.4 | $46.4 | $48.4 |
| Provision for loan losses | $3.5 | $3.6 | $7.7 | $14.4 |
| Noninterest income | $14.4 | $14.7 | $30.8 | $28.6 |
| Noninterest expense | $31.2 | $34.6 | $64.5 | $68.0 |
| Net income (loss) | $2.1 | $0.7 | $3.5 | $(2.7) |
| Diluted earnings (loss) per share | $0.12 | $0.04 | $0.20 | $(0.16) |
- Q2 taxable-equivalent net interest income was $23.7 million; net interest margin was 4.21%, down 6 basis points year over year. First-half margin was 4.17%, down 7 basis points.
- Q2 operating efficiency ratio was 81.41%, compared with 86.06% a year earlier. Management says the improvement in the first-half comparison was primarily influenced by the Visa share-sale gain.
- Six-month operating cash flow was $54.3 million; investing cash flow provided $38.9 million and financing activities used $34.7 million. Cash and cash equivalents increased $58.5 million to $294.7 million.
Financial condition, credit and capital
- At June 30, total assets were $2.60 billion, total loans net of allowance were $1.66 billion, deposits were $2.10 billion, and shareowners’ equity was $260.5 million. Total assets were $22.8 million below December 31, 2010; loans declined $71.1 million and deposits were nearly unchanged.
- Borrowings included $65.2 million of short-term borrowings, $62.9 million of subordinated notes, and $49.2 million of other long-term borrowings. The Bank had $59.2 million outstanding in FHLB advances.
- Nonperforming assets were $145.7 million, or 5.60% of total assets, versus $153.3 million at March 31 and $145.3 million at year-end. They included $61.1 million of nonaccrual loans, $23.6 million of restructured loans, and $61.0 million of other real estate owned.
- The allowance for loan losses was $31.1 million, or 1.84% of loans, and covered 36.71% of nonperforming loans. First-half net charge-offs were $12.0 million, down from $19.9 million in the 2010 period. Management considered the allowance adequate, while noting it is an estimate subject to judgment.
- Regulatory capital ratios included a 15.19% total risk-based capital ratio, 13.83% Tier 1 capital ratio, and 9.95% leverage ratio. Management described the company as well-capitalized. Tangible common equity was 6.96%.
- Management reported $701.3 million of additional available liquidity and expected approximately $4.0 million of capital expenditures over the next 12 months, primarily for facilities, equipment, and technology.
Changes, outlook and risks
- First-half earnings turned positive from a year-earlier loss, reflecting a lower loan-loss provision and lower operating expenses, as well as higher noninterest income. Lower net interest income and higher income tax expense partly offset those gains.
- The first quarter included a $3.2 million pretax gain from selling Visa Class B shares and a $0.6 million swap liability, for a net pretax gain of approximately $2.6 million. The related swap exposes the company to potential payments if Visa revises the share conversion ratio.
- Loan balances continued to contract amid weak demand and reductions in commercial real estate, residential, and construction loans. Management attributed loan reductions in part to charge-offs and transfers to foreclosed property; it said it would not relax underwriting standards to pursue growth. OREO increased from the prior quarter, while management cited property sales and slower loan defaults as signs of progress in working through problem assets.
- Management gave no specific earnings forecast. It said it may continue deploying some overnight funds into securities if appropriate. The company believes existing liquidity and borrowing capacity can meet operating and funding needs, but availability of some facilities could diminish under stress.
- Dividends remain subject to regulatory approval. The Bank must obtain Federal Reserve approval before paying dividends to the parent, and the parent may also need approval to pay shareholders. The company paid $0.20 per share in dividends during the first half.
- Key risks include weak Florida and regional economies, depressed real estate values, concentrated lending exposure, further credit losses and foreclosures, interest-rate and deposit-pricing pressure, regulatory change, and the potential effect of the repeal of Regulation Q on competition and funding costs. Management also cited risks around loan-loss and deferred-tax estimates and potential goodwill impairment; interim testing found no goodwill impairment at June 30.
- The filing reports no known pending litigation expected to have a material effect. Management concluded disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Whether credit quality continues to improve, particularly nonperforming assets, OREO dispositions, charge-offs, and allowance coverage.
- Whether core earnings can be sustained without the one-time Visa gain, given declining loans and year-over-year lower net interest income.
- How the Regulation Q repeal and competition for deposits affect deposit costs, net interest margin, and liquidity.
- Whether regulators permit the Bank and holding company to maintain or pay dividends, and whether capital ratios remain strong.
- Potential exposure under the Visa-related swap and the valuation of the impaired preferred bank stock security.
- Whether management’s $4.0 million capital-expenditure estimate and $701.3 million of stated additional liquidity remain achievable as conditions change.