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CCBG > SEC Filings for CCBG > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CAPITAL CITY BANK GROUP INC

Form 10-Q for CAPITAL CITY BANK GROUP INC


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled "Business Overview," "Financial Overview," "Results of Operations," "Financial Condition," "Market Risk and Interest Rate Sensitivity," "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Critical Accounting Policies." The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2012 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, are referred to as "CCBG," "Company," "we," "us," or "our."

In this MD&A, we present an operating efficiency ratio which is not calculated based on accounting principles generally accepted in the United States ("GAAP"), but that we believe provides important information regarding our results of operations. Our calculation of the operating efficiency ratio is computed by dividing noninterest expense less intangible amortization, by the sum of tax equivalent net interest income and noninterest income. Management uses this non-GAAP measure as part of its assessment of its performance in managing noninterest expenses. We believe that excluding intangible amortization and merger expenses in our calculations better reflect our periodic expenses and is more reflective of normalized operations.

Although we believe the above-mentioned non-GAAP financial measure enhances investors' understanding of our business and performance this non-GAAP financial measure should not be considered an alternative to GAAP. In addition, there are material limitations associated with the use of this non-GAAP financial measure such as the risks that readers of our financial statements may disagree as to the appropriateness of items included or excluded in this measure and that our measure may not be directly comparable to other companies that calculate this measure differently. Our management compensates for this limitation by providing a detailed reconciliation between GAAP information and the non-GAAP financial measure as detailed below.

Reconciliation of operating efficiency ratio to efficiency ratio:

                                     Three Months Ended                 Nine Months Ended
                            Sept 30,      June 30,      Sept 30,      Sept 30,      Sept 30,
                              2012          2012          2011          2012          2011
Efficiency ratio                87.99 %       91.18 %       81.68 %       90.42 %       82.55 %
Effect of intangible
amortization expense            (0.31 )%      (0.30 )%      (0.28 )%      (0.30 )%      (0.48 )%
Operating efficiency
ratio                           87.68 %       90.88 %       81.40 %       90.12 %       82.07 %


The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this MD&A section, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our 2011 Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

BUSINESS OVERVIEW

Our Business

We are a bank holding company headquartered in Tallahassee, Florida, and we are the parent of our wholly-owned subsidiary, Capital City Bank (the "Bank" or "CCB"). The Bank offers a broad array of products and services through a total of 66 full-service offices located in Florida, Georgia, and Alabama. The Bank offers commercial and retail banking services, as well as trust and asset management, retail securities brokerage and data processing services.

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as service charges on deposit accounts, asset management and trust fees, retail securities brokerage fees, mortgage banking fees, bank card fees, and data processing fees.

A detailed discussion regarding the economic conditions in our markets and our long-term strategic objectives is included as part of the MD&A section of our 2011 Form 10-K.


FINANCIAL OVERVIEW

A summary overview of our financial performance is provided below.

Results of Operations

? Net income of $1.1 million, or $0.07 per diluted share for the third quarter of 2012 compared to a net loss of $1.7 million, or $0.10 per diluted share in the second quarter of 2012, and net income of $2.0 million, or $0.12 per diluted share for the third quarter of 2011. For the first nine months of 2012, we realized a net loss of $1.8 million, or $0.10 per diluted share, compared to net income of $5.4 million, or $0.32 per diluted share, for the comparable period of 2011. Performance in 2011 reflects the sale of our Visa stock which resulted in a net pre-tax gain of $2.6 million.

? Tax equivalent net interest income for the third quarter of 2012 was $21.2 million, which is comparable to the second quarter of 2012 and was $23.3 million for the third quarter of 2011. For the nine months of 2012, tax equivalent net interest income totaled $64.2 million compared to $70.3 million in 2011. The reduction from both periods in 2011 was due to a reduction in loan income primarily attributable to declining loan balances and unfavorable asset repricing, partially offset by a reduction in interest expense and a lower level of foregone interest on loans

? Total credit costs (loan loss provision plus other real estate owned ("OREO") costs) were $5.5 million, $9.2 million, and $6.3 million for the quarters ended September 30, 2012, June 30, 2012, and September 30, 2011, respectively. Total credit costs for the first nine months of 2012 were $23.0 million compared to $20.6 million for the same period of 2011.

? Noninterest income for the third quarter of 2012 totaled $13.6 million, a decrease of $0.3 million from the second quarter of 2012 and a decrease of $0.6 million from the third quarter of 2011. The decrease compared to second quarter of 2012 was due to lower wealth management and bank card fees and the decline from the third quarter of 2011 reflects lower deposit fees and gains from the sale of OREO properties. For the first nine months of 2012, noninterest income totaled $41.1 million, a decrease of $3.9 million from the same period of 2011 primarily attributable to a $3.2 million gain from the sale of our Visa stock realized in 2011 and a lower level of gains from the sale of OREO properties.

? Noninterest expense for the third quarter of 2012 totaled $30.2 million, a decrease of $2.1 million, or 6.5%, from the second quarter of 2012 and $0.4 million, or 1.5%, from the third quarter of 2011. The decrease from the second quarter of 2012 was primarily attributable to lower compensation expense, advertising expense, and OREO expense. Lower compensation expense and occupancy costs drove the decrease compared to the same period in 2011. For the first nine months of 2012, noninterest expense totaled $95.1 million, a decrease of $0.1 million from the same period of 2011 driven by lower occupancy costs.

Financial Condition

? Average earning assets were $2.209 billion for the third quarter of 2012, an increase of $62.7 million, or 2.9%, over the fourth quarter of 2011 reflective of a higher level of overnight funds driven by higher deposit balances, primarily public funds.

? Nonperforming assets totaled $127.2 million at September 30, 2012, a decrease of $10.4 million from December 31, 2011 driven by a reduction in our OREO balance, reflecting continued progress in disposing of properties. Nonperforming assets represented 5.10% of total assets at September 30, 2012 compared to 5.21% at December 31, 2011.

? As of September 30, 2012, we are well-capitalized with a risk based capital ratio of 15.80% and a tangible common equity ratio of 6.86% compared to 15.32% and 6.51%, respectively, at December 31, 2011.


RESULTS OF OPERATIONS

Net Income

For the third quarter of 2012, we realized net income of $1.1 million, or $0.07 per diluted share, compared to a net loss of $1.7 million, or $0.10 per diluted share for the second quarter of 2012, and net income of $2.0 million, or $0.12 per diluted share, for the third quarter of 2011. For the first nine months of 2012, we realized a net loss of $1.8 million, or $0.10 per diluted share, compared to net income of $5.4 million, or $0.32 per diluted share, for the same period in 2011.

Compared to the second quarter of 2012, the increase in earnings reflects a lower loan loss provision of $2.9 million, and a $2.1 million decline in noninterest expense, partially offset by lower operating revenues (net interest income plus noninterest income) of $0.4 million and higher income taxes of $1.8 million.

Compared to the third quarter of 2011, the reduction in earnings was due to lower operating revenues of $2.7 million partially offset by a $0.9 million decrease in the loan loss provision, a $0.4 million reduction in noninterest expense, and lower income taxes of $0.5 million.

The decrease in earnings for the nine month period ended September 30, 2012 is attributable to lower operating revenues of $9.7 million, and a higher loan loss provision of $2.0 million, partially offset by lower noninterest expense of $0.1 million and income taxes of $4.4 million. Earnings in 2011 reflect the sale of our Visa Class B shares of stock which resulted in a net pre-tax gain of $2.6 million ($3.2 million pre-tax gain included in noninterest income and recognition of a $0.6 million swap liability included in noninterest expense).

A condensed earnings summary of each major component of our financial performance is provided below:

                                      Three Months Ended                    Nine Months Ended
(Dollars in Thousands,      Sept 30,       June 30,       Sept 30,       Sept 30,       Sept 30,
except per share data)        2012           2012           2011           2012           2011
Interest Income            $    22,326    $    22,437    $    24,891    $    67,893    $    75,547
Taxable equivalent
Adjustments                        148            154            226            474            762
Total Interest Income
(FTE)                           22,474         22,591         25,117         68,367         76,309
Interest Expense                 1,295          1,372          1,791          4,136          6,022
Net Interest Income
(FTE)                           21,179         21,219         23,326         64,231         70,287
Provision for Loan
Losses                           2,864          5,743          3,718         13,400         11,396
Taxable Equivalent
Adjustments                        148            154            226            474            762
Net Interest Income
After provision for
Loan Losses                     18,167         15,322         19,382         50,357         58,129
Noninterest Income              13,575         13,906         14,193         41,067         44,975
Noninterest Expense             30,201         32,293         30,647         95,091         95,145
Income (Loss) Before
Income Taxes                     1,541         (3,065 )        2,928         (3,667 )        7,959
Income Tax Expense
(Benefit)                          420         (1,339 )          951         (1,900 )        2,527
Net Income (Loss)          $     1,121    $    (1,726 )  $     1,977    $    (1,767 )  $     5,432

Basic Net Income (Loss)
Per Share                  $      0.07    $     (0.10 )  $      0.12    $     (0.10 )  $      0.32
Diluted Net Income
(Loss) Per Share           $      0.07    $     (0.10 )  $      0.12    $     (0.10 )  $      0.32

Return on Average
Equity                            1.77 %        (2.75 )%        2.97 %        (0.93 )%        2.77 %
Return on Average
Assets                            0.17 %        (0.26 )%        0.31 %        (0.09 )%        0.28 %


Net Interest Income

Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets less interest expense paid on interest bearing liabilities. This information is provided on a "taxable equivalent" basis to reflect the tax-exempt status of income earned on certain loans and investments, the majority of which are state and local government debt obligations. We provide an analysis of our net interest income including average yields and rates in Table I on page 41.

Tax equivalent net interest income for the third quarter of 2012 was $21.2 million, which is comparable to the second quarter of 2012, and down from $23.3 million for the third quarter of 2011. For the nine months ended September 30, 2012, tax equivalent net interest income totaled $64.2 million compared to $70.3 million for the same period of 2011. Factors affecting net interest income relative to the second quarter of 2012 include a reduction in loan income primarily attributable to declining loan balances, primarily offset by one additional calendar day and interest recoveries. When compared to the three and nine months periods of 2011, the decrease was primarily driven by declines in loan income attributable to lower portfolio balances, which was partially offset by a reduction in interest expense. The lower interest expense is primarily attributable to certificates of deposit and reflects both lower balances and favorable repricing.

Tax equivalent interest income for the third quarter of 2012 was $22.5 million compared to $22.6 million for the second quarter of 2012 and $25.1 million for the third quarter of 2011. The decrease when compared to all periods is specifically attributable to both the shift in earning asset mix and lower yields. The declining loan portfolio has resulted in the higher yielding earning assets being replaced with lower yielding federal funds or investment securities. Additionally, lower yields on new loan and investment production and loan portfolio repricing continue to unfavorably affect net interest income.

Interest expense for the third quarter of 2012 was $1.3 million compared to $1.4 million for the second quarter of 2012 and $1.8 million for the third quarter in 2011. The lower cost of funds when compared to both periods was a result of continued rate reductions on all deposit products except savings accounts. The rate reductions on deposits reflect our response to a historically low interest rate environment and desire to continue our focus on core banking relationships.

The decline in the loan portfolio, coupled with the low rate environment continues to put downward pressure on our net interest income. The loan portfolio yield has been declining because the average rate on new loans is lower than the loans being paid off and the existing adjustable rate loans reprice lower. Lowering our cost of funds, to the extent we can, and continuing to shift the mix of our deposits will help to partially mitigate the unfavorable impact of weak loan demand and repricing, although the impact is expected to be minimal.

The net interest margin for the third quarter of 2012 was 3.82%, an increase of five basis points from the second quarter of 2012 and a decline of 38 basis points from the third quarter of 2011. Year-to-date net interest margin of 3.81% declined 37 basis points from the comparable period in 2011. The increase in margin compared to the second quarter of 2012 reflects a lower level of earning assets and an increase in interest recoveries. The decrease in the net interest margin compared to the third quarter of 2011 and year-to-date is attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a lower average cost of funds.

Historically low interest rates, foregone interest, lower loan fees, unfavorable asset repricing without the flexibility to significantly adjust deposit rates, and core deposit growth (which has strengthened our liquidity position, but contributed to an unfavorable shift in our earning asset mix), have all placed pressure on our net interest margin. Our current strategy, as well as our historic strategy, is to not accept greater interest rate risk by reaching further out on the curve for yield, particularly given the fact that short term rates are at historical lows. We continue to maintain short duration portfolios on both sides of the balance sheet and believe we are well positioned to quickly respond to changing market conditions. Although this strategy has unfavorably impacted our net interest margin in the current environment, over time this strategy has consistently resulted in our net interest margins significantly exceeding those in our peer group. Given the unfavorable asset repricing and low rate environment, we anticipate continued downward pressure on the net interest margin for the remainder of 2012 and into 2013.

Provision for Loan Losses

The provision for loan losses for the third quarter of 2012 was $2.9 million compared to $5.7 million in the second quarter of 2012 and $3.7 million for the third quarter of 2011. The decrease from both periods was driven by slower problem loan migration and lower net charge-offs resulting in a favorable impact on our general reserve allocation. For the first nine months of 2012, the loan loss provision totaled $13.4 million compared to $11.4 million for the same period in 2011 with the increase primarily attributable to an increase in impaired loans. Net charge-offs for the third quarter of 2012 totaled $2.6 million, or 0.66%, of average loans (annualized) compared to $7.0 million, or 1.80%, for the second quarter of 2012 and $5.1 million, or 1.22%, in the third quarter of 2011. For the first nine months of 2012, net charge-offs totaled $14.2 million, or 1.21%, of average loans (annualized) compared to $17.2 million, or 1.35%, for the same period of 2011. At quarter-end, the allowance for loan losses of $30.2 million was 1.97% of outstanding loans (net of overdrafts) and provided coverage of 41% of nonperforming loans compared to 1.93% and 40%, respectively, at June 30, 2012, and 1.91% and 41%, respectively, at December 31, 2011.


Charge-off activity for the respective periods is set forth below:

                                    Three Months Ended                 Nine Months Ended
(Dollars in Thousands,     Sept 30,      June 30,      Sept 30,      Sept 30,     Sept 30,
except per share data)       2012          2012          2011          2012          2011
CHARGE-OFFS
Commercial, Financial
and Agricultural          $      331    $       57    $      186    $      657    $   1,208
Real Estate -
Construction                     127           275            75           402           90
Real Estate -
Commercial Mortgage              512         3,519         1,031         5,562        4,270
Real Estate -
Residential                      981         3,894         3,287         6,843        9,115
Real Estate - Home
Equity                           834           425           580         2,152        2,513
Consumer                         355           550           832         1,635        2,055
Total Charge-offs              3,140         8,720         5,991        17,251       19,251

RECOVERIES
Commercial, Financial
and Agricultural                  53            83            33           203          145
Real Estate -
Construction                       9            27             -            36           15
Real Estate -
Commercial Mortgage               34            42            37           214          164
Real Estate -
Residential                       76           969           271         1,208          444
Real Estate - Home
Equity                            15           116           108           149          201
Consumer                         382           452           402         1,228        1,108
Total Recoveries                 569         1,689           851         3,038        2,077

Net Charge-offs           $    2,571    $    7,031    $    5,140    $   14,213    $  17,174

Net Charge-offs
(Annualized)
as a percent of Average
Loans Outstanding, Net
of
Unearned Income                 0.66 %        1.80 %        1.22 %        1.21 %       1.35 %

Noninterest Income

Noninterest income for the third quarter of 2012 totaled $13.6 million, a decrease of $0.3 million, or 2.4%, from the second quarter of 2012 and a decrease of $0.6 million, or 4.4%, from the third quarter of 2011. The decrease from the second quarter of 2012 was driven primarily by lower wealth management fees (i.e., trust fees and retail brokerage fees) of $0.2 million and bank card fees of $0.2 million, partially offset by higher mortgage banking fees of $0.1 million. Compared to the third quarter of 2011, the decrease primarily reflects a reduction in deposit fees of $0.2 million, wealth management fees of $0.2 million, data processing fees of $0.1 million, and other income of $0.5 million, partially offset by higher mortgage banking fees of $0.3 million.

For the first nine months of 2012, noninterest income totaled $41.1 million, a decrease of $3.9 million from the same period of 2011 attributable to the Visa shares gain realized in the first quarter of 2011. Lower data processing fees of $0.4 million, wealth management fees of $0.4 million, and other income of $1.4 million (i.e., primarily lower gains from the sale of OREO properties), partially offset by higher mortgage banking fees of $0.9 million and bank card fees of $0.5 million, also contributed to the variance.

Noninterest income represented 39.31% of operating revenues (net interest income plus noninterest income) in the third quarter of 2012 compared to 39.88% in the second quarter of 2012 and 38.14% in the third quarter of 2011. For the first nine months of 2012, noninterest income represented 39.3% of operating revenues compared to 39.4% for the same period of 2011.


The table below reflects the major components of noninterest income.

                                     Three Months Ended                    Nine Months Ended
                           Sept 30,       June 30,       Sept 30,       Sept 30,       Sept 30,
(Dollars in Thousands)       2012           2012           2011           2012           2011
Noninterest Income:
Service Charges on
Deposit Accounts          $     6,406    $     6,313    $     6,629    $    19,028    $    18,921
Data Processing Fees              687            680            749          2,042          2,487
Asset Management
Fees(1)                         1,020          1,020          1,080          3,055          3,240
Retail Brokerage
Fees(1)                           666            884            807          2,308          2,475
Mortgage Banking Fees             978            864            645          2,690          1,830
Interchange Fees (2)            1,619          1,580          1,420          4,725          4,223
ATM/Debit Card Fees
(2)                               997          1,204          1,170          3,446          3,421
Gain on Visa Stock                  -              -              -              -          3,172
Other                           1,202          1,361          1,693          3,773          5,206

Total Noninterest
Income                    $    13,575    $    13,906    $    14,193    $    41,067    $    44,975

(1) Together referred to as "Wealth Management Fees"
(2) Together referred to as "Bank Card Fees"

Significant components of noninterest income are discussed in more detail below.

Service Charges on Deposit Accounts. Deposit service charge fees for the third quarter of 2012 totaled $6.4 million, a $93,000, or 1.5%, increase over the second quarter of 2012 and a decrease of $223,000, or 3.4%, from the third quarter of 2011. For the first nine months of 2012, deposit service charge fees totaled $19.0 million, an increase of $107,000, or 0.6%, over the comparable period in 2011. The increase compared to the second quarter of 2012 was due to an increase in overdraft fees. A reduction in overdraft fees drove the variance compared to the third quarter of 2011 while a lower level of overdraft charge-offs was the primary reason for the increase over the corresponding nine month period of 2011.

Data Processing Fees. Fees from data processing services for the third quarter of 2012 totaled $687,000, comparable to the second quarter of 2012. Fees decreased by $62,000, or 8.3%, compared to the third quarter of 2011, attributable to lower processing volume. For the first nine months of 2012, fees totaled $2.0 million, a decrease of $445,000, or 17.9%, primarily due to a reduction in the number of banks that we provide processing services to as two of our user banks were acquired and discontinued service in mid 2011.

Asset Management Fees. Fees from asset management activities totaled $1.0 million for the third quarter of 2012, which is comparable to the second quarter of 2012, and a decrease of $60,000, or 5.6%, from the third quarter of 2011. For the first nine months of 2012, fees totaled $3.1 million, which is a decrease of $185,000, or 5.7%, from the same period of 2011. The decrease from the third . . .

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