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CCBG > SEC Filings for CCBG > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for CAPITAL CITY BANK GROUP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CAPITAL CITY BANK GROUP INC


9-May-2013

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 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 2013 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."

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 2012 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

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 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 2012 Form 10-K.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



                                       2013                                        2012                                                         2011
(Dollars in Thousands, Except
Per Share Data)                        First           Fourth            Third            Second            First             Fourth            Third           Second
Summary of Operations:
Interest Income                    $    21,128      $    21,787      $    22,326      $    22,437       $    23,130       $    23,912       $    24,891      $    25,467
Interest Expense                         1,183            1,232            1,295            1,372             1,469             1,515             1,791            2,028
Net Interest Income                     19,945           20,555           21,031           21,065            21,661            22,397            23,100           23,439
Provision for Loan Losses                1,070            2,766            2,864            5,743             4,793             7,600             3,718            3,545
Net Interest Income After
Provision for Loan Losses               18,875           17,789           18,167           15,322            16,868            14,797            19,382           19,894
Noninterest Income                      13,588           14,118           13,575           13,906            13,586            13,873            14,193           14,448
Noninterest Expense                     31,200           29,468           30,201           32,293            32,597            31,103            30,647           31,167
Income (Loss) Before Income
Taxes                                    1,263            2,439            1,541           (3,065 )          (2,143 )          (2,433 )           2,928            3,175
Income Tax Expense (Benefit)               424              564              420           (1,339 )            (981 )          (1,898 )             951            1,030
Net Income (Loss)                  $       839      $     1,875      $     1,121      $    (1,726 )     $    (1,162 )     $      (535 )     $     1,977      $     2,145
Net Interest Income (FTE)          $    20,079      $    20,697      $    21,179      $    21,219       $    21,833       $    22,560       $    23,326      $    23,704

Per Common Share:
Net Income (Loss) Basic            $      0.05      $      0.11      $      0.07      $     (0.10 )     $     (0.07 )     $     (0.03 )     $      0.12      $      0.12
Net Income (Loss) Diluted                 0.05             0.11             0.07            (0.10 )           (0.07 )           (0.03 )            0.12             0.12
Cash Dividends Declared                   0.00             0.00             0.00             0.00              0.00              0.00              0.10             0.10
Diluted Book Value                       14.35            14.31            14.54            14.48             14.60             14.68             15.20            15.20
Market Price:
High                                     12.54            11.91            10.96             8.73              9.91             11.11             11.18            13.12
Low                                      10.95             9.04             7.00             6.35              7.32              9.43              9.81             9.94
Close                                    12.35            11.37            10.64             7.37              7.45              9.55             10.38            10.26

Selected Average Balances:
Loans, Net                         $ 1,496,432      $ 1,518,280      $ 1,541,262      $ 1,570,827       $ 1,596,480       $ 1,646,715       $ 1,667,720      $ 1,704,348
Earning Assets                       2,240,889        2,178,946        2,209,166        2,262,847         2,268,307         2,146,463         2,202,927        2,258,931
Total Assets                         2,598,680        2,534,011        2,566,239        2,624,417         2,636,907         2,509,915         2,563,251        2,618,287
Deposits                             2,102,967        2,051,099        2,075,482        2,135,653         2,161,388         2,032,975         2,061,913        2,107,301
Shareowners' Equity                    249,557          253,017          251,746          252,644           254,447           264,276           263,902          262,371
Common Equivalent Average
Shares:
Basic                                   17,302           17,229           17,215           17,192            17,181            17,160            17,152           17,127
Diluted                                 17,309           17,256           17,228           17,192            17,181            17,161            17,167           17,139

Performance Ratios:
Return on Average Assets                  0.13 %           0.29 %           0.17 %          (0.26 )%          (0.18 )%          (0.08 )%           0.31 %           0.33 %
Return on Average Equity                  1.36             2.95             1.77            (2.75 )           (1.84 )           (0.80 )            2.97             3.28
Net Interest Margin (FTE)                 3.64             3.78             3.82             3.77              3.87              4.17              4.20             4.21
Noninterest Income as % of
Operating Revenue                        40.62            40.81            39.31            39.88             38.64             38.34             38.14            38.13
Efficiency Ratio                         92.67            84.68            86.89            91.18             92.04             85.37             81.69            81.72

Asset Quality:
Allowance for Loan Losses          $    27,803      $    29,167      $    30,222      $    29,929       $    31,217       $    31,035       $    29,658      $    31,080
Allowance for Loan Losses to
Loans                                     1.90 %           1.93 %           1.97 %           1.93 %            1.98 %            1.91 %            1.79 %           1.84 %
Nonperforming Assets ("NPAs")          103,869          117,648          127,247          132,829           136,826           137,623           114,592          122,092
NPAs to Total Assets                      3.99             4.47             5.10             5.02              5.14              5.21              4.54             4.70
NPAs to Loans plus ORE                    6.81             7.47             8.02             8.23              8.36              8.14              6.67             6.98
Allowance to Non-Performing
Loans                                    61.17            45.42            40.80            40.03             39.65             41.37             55.54            50.89
Net Charge-Offs to Average
Loans                                     0.66             1.00             0.66             1.80              1.16              1.50              1.22             1.49

Capital Ratios:
Tier I Capital                           14.95 %          14.35 %          14.43 %          14.17 %           14.17 %           13.96 %           14.05 %          13.83 %
Total Capital                            16.32            15.72            15.80            15.54             15.54             15.32             15.41            15.19
Tangible Capital                          6.49             6.35             6.86             6.40              6.42              6.51              7.19             6.96
Leverage                                  9.81             9.90             9.83             9.60              9.71             10.26             10.20             9.95

FINANCIAL OVERVIEW

A summary overview of our financial performance is provided below.

Results of Operations

Net income of $0.8 million, or $0.05 per diluted share for the first quarter of 2013 compared to net income of $1.9 million, or $0.11 per diluted share in the fourth quarter of 2012, and a net loss of $1.2 million, or $0.07 per diluted share for the first quarter of 2012.

Total credit costs (loan loss provision plus other real estate owned ("OREO") expenses) were $4.0 million, $4.7 million, and $8.3 million for the quarters ended March 31, 2013, December 31, 2012, and March 31, 2012, respectively. The improvement primarily reflects improving credit quality trends and lower loan losses.

Tax equivalent net interest income for the first quarter of 2013 totaled $20.1 million, a $0.6 million, or 3.0%, decrease from the fourth quarter of 2012 and a $1.7 million, or 8.0%, decline from the first quarter of 2012. The decrease compared to both prior periods 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.

Noninterest income for the first quarter of 2013 totaled $13.6 million, a decrease of $0.5 million, or 3.8%, from the fourth quarter of 2012 primarily attributable to a decline in deposit fees reflective of lower utilization of our overdraft product due to client receipt of tax refunds as well as two less processing days. Compared to the same prior year period, noninterest income remained flat as higher retail brokerage fees and mortgage banking fees were offset by lower deposit fees and bank card fees.

Noninterest expense for the first quarter of 2013 totaled $31.2 million, an increase of $1.7 million, or 5.9%, over the fourth quarter of 2012 and a decrease of $1.4 million, or 4.3%, from the first quarter of 2012. The increase compared to the fourth quarter of 2012 was primarily attributable to higher pension plan expense and OREO expense. The favorable variance in noninterest expense compared to the first quarter of 2012 was attributable to lower compensation expense, OREO expense, professional fees, legal fees, advertising costs, and postage.

Financial Condition

Average earning assets totaled $2.241 billion for the first quarter of 2013, an increase of $61.9 million, or 2.8% over the fourth quarter of 2012, and a decline of $27.4 million, or 1.2%, from the first quarter of 2012. The increase compared to the fourth quarter of 2012 primarily reflects a higher level of deposits resulting from the seasonal influx of public funds. The slight decline from the same prior year period was due to reduction in the loan portfolio resulting from the resolution of problem loans.

Average loans decreased $21.8 million, or 1.4%, from the fourth quarter of 2012 and $100.0 million, or 6.3%, from the first quarter of 2012 due to weak loan demand attributable to consumer and business deleveraging, the lack of consumer confidence, and a sluggish economy. Normal amortization and a higher level of payoffs as well as the resolution of problem loans also affected the balance of loans.

Average deposit balances were $2.103 billion for the first quarter of 2013, an increase of $51.9 million, or 2.5%, over the fourth quarter of 2012 and a decrease of $58.4 million, or 2.7%, from the first quarter of 2012. Higher public funds balances partially offset by lower certificates of deposit balances drove the increase compared to the fourth quarter of 2012, while the reduction from the first quarter of 2012 reflects lower public funds, certificates of deposit and noninterest bearing deposit balances.

Nonperforming assets totaled $103.9 million at March 31, 2013, a decrease of $13.8 million from December 31, 2012 and $33.0 million from March 31, 2012. Nonperforming assets represented 3.99% of total assets at March 31, 2013 compared to 4.47% at December 31, 2012 and 5.14% at March 31, 2012.

As of March 31, 2013, we are well-capitalized with a risk based capital ratio of 16.32% and a tangible common equity ratio of 6.49% compared to 15.72% and 6.35%, respectively, at December 31, 2012, and 15.54% and 6.42%, respectively, at March 31, 2012.

RESULTS OF OPERATIONS

Net Income

For the first quarter of 2013, we realized net income of $0.8 million, or $0.05 per diluted share, compared to net income of $1.9 million, or $0.11 per diluted share in the fourth quarter of 2012 and a net loss of $1.2 million, or $0.07 per diluted share for the first quarter of 2012.

Compared to the fourth quarter of 2012, performance reflects lower operating revenues of $1.1 million and a $1.7 million increase in noninterest expense, offset by a $1.7 million reduction in the loan loss provision. Compared to the first quarter of 2012, the increase in net income was due to a lower loan loss provision of $3.7 million and lower noninterest expense of $1.4 million, which was partially offset by lower operating revenues of $1.7 million and higher income tax expense of $1.4 million.

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

                                                           Three Months Ended
                                            March 31,         December 31,         March 31,
(Dollars in Thousands, except per
share data)                                   2013                2012               2012
Interest Income                           $    21,128        $     21,787        $    23,130
Taxable Equivalent Adjustments                    134                 142                172
Total Interest Income (FTE)                    21,262              21,929             23,302
Interest Expense                                1,183               1,232              1,469
Net Interest Income (FTE)                      20,079              20,697             21,833
Provision for Loan Losses                       1,070               2,766              4,793
Taxable Equivalent Adjustments                    134                 142                172
Net Interest Income After Provision
for Loan Losses                                18,875              17,789             16,868
Noninterest Income                             13,588              14,118             13,586
Noninterest Expense                            31,200              29,468             32,597
Income (Loss) Before Income Taxes               1,263               2,439             (2,143 )
Income Tax Expense (Benefit)                      424                 564               (981 )
Net Income (Loss)                         $       839        $      1,875        $    (1,162 )

Basic Net Income (Loss) Per Share         $      0.05        $       0.11        $     (0.07 )
Diluted Net Income (Loss) Per Share       $      0.05        $       0.11        $     (0.07 )

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 37.

Tax equivalent net interest income for the first quarter of 2013 was $20.1 million compared to $20.7 million for the fourth quarter of 2012 and $21.8 million for the first quarter of 2012. The decrease in tax equivalent net interest income compared to the prior periods was due to a continued decline in loan income, partially offset by a reduction in interest expense and a lower level of foregone interest on loans.

Tax equivalent interest income for the first quarter of 2013 was $21.3 million compared to $21.9 million for the fourth quarter of 2012 and $23.3 million for the first quarter of 2012. The decrease in interest income when compared to both periods reflects unfavorable asset repricing and declining loan balances, which has been partially offset by lower foregone interest on nonaccrual loans.

Interest expense was $1.2 million for both the first quarter of 2013 and fourth quarter of 2012, respectively, and $1.5 million for the first quarter of 2012. The lower interest expense is attributable to favorable repricing on FHLB advances and certificates of deposit, which reflects both lower balances and favorable repricing.

The net interest margin for the first quarter of 2013 was 3.64%, a decrease of 14 basis points from the fourth quarter of 2012 and a decline of 23 basis points from the first quarter of 2012. The decrease for all comparable periods was primarily attributable to the adverse impact of lower rates and a change in the mix of earning assets, which more than offset the repricing of our deposit base.

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 repricing 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 any further impact is expected to be minimal.

Given the unfavorable asset repricing and low rate environment, we anticipate continued pressure on the margin during the remainder of 2013.

Provision for Loan Losses

The provision for loan losses for the first quarter of 2013 was $1.1 million compared to $2.8 million in the fourth quarter of 2012 and $4.8 million for the first quarter of 2012. The decrease in the loan loss provision compared to both prior periods reflects a lower level of impaired loan additions and related reserves as well as improving trends in loan delinquencies, classified loans, and loan losses. Net charge-offs for the first quarter of 2013 totaled $2.4 million, or 0.66% (annualized), of average loans compared to $3.8 million, or 1.00%, for the fourth quarter of 2012 and $4.6 million, or 1.16%, in the first quarter of 2012. The decline in net charge-offs compared to both prior periods reflects both a lower level of loan defaults and related loss content.

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

                                                             Three Months Ended
(Dollars in Thousands, except per           March 31,                                   March 31,
share data)                                   2013            December 31, 2012           2012
CHARGE-OFFS
Commercial, Financial and
Agricultural                              $       154        $             166        $       268
Real Estate - Construction                        610                      227                  -
Real Estate - Commercial Mortgage               1,043                      468              1,532
Real Estate - Residential                         683                    2,877              1,967
Real Estate - Home Equity                         113                      745                892
Consumer                                          296                      488                732
Total Charge-offs                               2,899                    4,971              5,391

RECOVERIES
Commercial, Financial and
Agricultural                                       51                       87                 69
Real Estate - Construction                          -                        7                  -
Real Estate - Commercial Mortgage                  38                      468                138
Real Estate - Residential                          96                       83                163
Real Estate - Home Equity                          18                      250                 18
Consumer                                          262                      255                392
Total Recoveries                                  465                    1,150                780

Net Charge-offs                           $     2,434        $           3,821        $     4,611

Net Charge-offs (Annualized)                     0.66 %                   1.00 %             1.16 %
  as a percent of Average
  Loans Outstanding, Net of
  Unearned Interest

Noninterest Income

Noninterest income for the first quarter of 2013 totaled $13.6 million, a decrease of $0.5 million, or 3.8%, from the fourth quarter of 2012 reflective of lower deposit fees of $0.6 million, asset management fees of $0.1 million, and other income of $0.2 million, partially offset by higher retail brokerage fees of $0.2 million and mortgage banking fees of $0.1 million. Compared to the first quarter of 2012, noninterest income remained flat as higher retail brokerage fees of $0.2 million and mortgage banking fees of $0.2 million were offset by lower deposit fees of $0.2 million, bank card fees of $0.1 million, and other income of $0.1 million.

Noninterest income represented 40.62% of operating revenues in the first quarter of 2013 compared to 40.81% in the fourth quarter of 2012 and 38.64% in the first quarter of 2012. The increase over the first quarter of 2012 reflects a lower level of operating revenues.

The table below reflects the major components of noninterest income.

                                                  Three Months Ended
                                       March 31,     December 31,     March 31,
(Dollars in Thousands)                   2013            2012           2012
Service Charges on Deposit Accounts   $   6,165     $      6,764     $   6,309
Data Processing Fees                        653              671           675
Asset Management Fees(1)                    993            1,100         1,015
Retail Brokerage Fees(1)                    922              718           758
Mortgage Banking Fees                     1,043              910           848
Interchange Fees(2)                       1,793            1,726         1,526
ATM/Debit Card Fees(2)                      868              886         1,245
Other                                     1,151            1,343         1,210
Total Noninterest Income              $  13,588     $     14,118     $  13,586

(1) Together "Wealth Management Fees"

(2) Together "Bank Card Fees"

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

Service Charges on Deposit Accounts. Deposit service charge fees decreased $599,000, or 8.9%, from the fourth quarter of 2012 and $144,000, or 2.3%, from the first quarter of 2012. The decline from the fourth quarter was primarily due to an expected lower utilization of our overdraft protection service during the first quarter as clients receive tax refunds and, to a lesser extent, two fewer processing days in the first quarter of 2013. Compared to the first quarter of 2012, the reduction was due to a higher level of charged off checking accounts.

Wealth Management Fees. Fees from asset management activities decreased $107,000, or 9.7%, from the fourth quarter of 2012 and $22,000, or 2.1%, from the first quarter of 2012. The decrease in fees compared to the fourth quarter of 2012 reflects a higher level of fees billed during the fourth quarter reflective of accounts that are on an annual billing cycle. The decrease in fees compared to the same period of 2012 reflects a lower level of assets under management, primarily due to account distributions. At March 31, 2013, assets under management totaled $625.0 million compared to $614.3 million at December 31, 2012, and $688.6 million at March 31, 2012. Retail brokerage fees from the sale of retail investment and insurance products increased $204,000, or 28.4%, over the fourth quarter of 2012 and increased $164,000, or 21.6%, over the first quarter of 2012. The change for each period reflected higher trading activity by clients.

Mortgage Banking Fees. Mortgage banking fees increased $133,000, or 14.6%, over the fourth quarter of 2012 and $195,000, or 22.9%, over the first quarter of 2012 driven by a higher level of loans funded and a higher margin realized for sold loans. The mix of new loan production between refinance and home purchase for the first quarter of 2013 was 50%/50%.

Bank Card Fees. Bank card fees (including interchange fees and ATM/debit card fees) increased $49,000, or 1.9%, over the fourth quarter of 2012 and decreased $110,000, or 4.0%, from the first quarter of 2012. The variance for both prior periods reflects higher and lower card utilization, respectively.

. . .

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