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

Show all filings for CAPITAL CITY BANK GROUP INC

Form 10-Q for CAPITAL CITY BANK GROUP INC


9-Aug-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 63 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. Since 2009, an elevated level of other real estate owned has had a significant impact on our profitability due to property valuation adjustments, carrying costs, and losses from the sale of properties.

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)                       Second            First           Fourth            Third            Second            First             Fourth            Third
Summary of Operations:
Interest Income                    $    20,698      $    21,128      $    21,787      $    22,326      $    22,437       $    23,130       $    23,912       $    24,891
Interest Expense                         1,103            1,183            1,232            1,295            1,372             1,469             1,515             1,791
Net Interest Income                     19,595           19,945           20,555           21,031           21,065            21,661            22,397            23,100
Provision for Loan Losses                1,450            1,070            2,766            2,864            5,743             4,793             7,600             3,718
Net Interest Income After
Provision for Loan Losses               18,145           18,875           17,789           18,167           15,322            16,868            14,797            19,382
Noninterest Income                      13,849           13,588           14,118           13,575           13,906            13,586            13,873            14,193
Noninterest Expense                     30,582           31,200           29,468           30,201           32,293            32,597            31,103            30,647
Income  (Loss) Before Income
Taxes                                    1,412            1,263            2,439            1,541           (3,065 )          (2,143 )          (2,433 )           2,928
Income Tax Expense (Benefit)               569              424              564              420           (1,339 )            (981 )          (1,898 )             951
Net Income (Loss)                  $       843      $       839      $     1,875      $     1,121      $    (1,726 )     $    (1,162 )     $      (535 )     $     1,977
Net Interest Income (FTE)          $    19,744      $    20,079      $    20,697      $    21,179      $    21,219       $    21,833       $    22,560       $    23,326

Per Common Share:
Net Income (Loss) Basic            $      0.05      $      0.05      $      0.11      $      0.07      $     (0.10 )     $     (0.07 )     $     (0.03 )     $      0.12
Net Income (Loss) Diluted                 0.05             0.05             0.11             0.07            (0.10 )           (0.07 )           (0.03 )            0.12
Dividends Declared                        0.00             0.00             0.00             0.00             0.00              0.00              0.00              0.10
Diluted Book Value                       14.36            14.35            14.31            14.54            14.48             14.60             14.68             15.20
Market Price:
High                                     12.64            12.54            11.91            10.96             8.73              9.91             11.11             11.18
Low                                      10.12            10.95             9.04             7.00             6.35              7.32              9.43              9.81
Close                                    11.53            12.35            11.37            10.64             7.37              7.45              9.55             10.38

Selected Average Balances:
Loans, Net                         $ 1,456,904      $ 1,496,432      $ 1,518,280      $ 1,541,262      $ 1,570,827       $ 1,596,480       $ 1,646,715       $ 1,667,720
Earning Assets                       2,206,694        2,240,889        2,178,946        2,209,166        2,262,847         2,268,307         2,146,463         2,202,927
Total Assets                         2,564,528        2,598,680        2,534,011        2,566,239        2,624,417         2,636,907         2,509,915         2,563,251
Deposits                             2,067,647        2,102,967        2,051,099        2,075,482        2,135,653         2,161,388         2,032,975         2,061,913
Shareowners' Equity                    250,485          249,557          253,017          251,746          252,644           254,447           264,276           263,902
Common Equivalent Average
Shares:
Basic                                   17,319           17,302           17,229           17,215           17,192            17,181            17,160            17,152
Diluted                                 17,355           17,309           17,256           17,228           17,192            17,181            17,161            17,167

Performance Ratios:
Return on Average Assets                  0.13 %           0.13 %           0.29 %           0.17 %          (0.26 )%          (0.18 )%          (0.08 )%           0.31 %
Return on Average Equity                  1.35             1.36             2.95             1.77            (2.75 )           (1.84 )           (0.80 )            2.97
Net Interest Margin (FTE)                 3.59             3.64             3.78             3.82             3.77              3.87              4.17              4.20
Noninterest Income as % of
Operating
 Revenue                                 41.68            40.62            40.81            39.31            39.88             38.64             38.34             38.14
Efficiency Ratio                         91.07            92.67            84.68            86.89            91.18             92.04             85.37             81.69

Asset Quality:
Allowance for Loan Losses          $    27,294      $    27,803           29,167      $    30,222      $    29,929            31,217       $    31,035       $    29,658
Allowance for Loan Losses to
Loans                                     1.89 %           1.90 %           1.93 %           1.97 %           1.93 %            1.98 %            1.91 %            1.79 %
Nonperforming Assets ("NPAs")           96,653          103,869          117,648          127,247          132,829           136,826           137,623           114,592
NPAs to Total Assets                      3.77             3.99             4.47             5.10             5.02              5.14              5.21              4.54
NPAs to Loans + OREO                      6.44             6.81             7.47             8.02             8.23              8.36              8.14              6.67
Allowance to Non-Performing
Loans                                    65.66            61.17            45.42            40.80            40.03             39.65             41.37             55.54
Net Charge-Offs to Average
Loans                                     0.54             0.66             1.00             0.66             1.80              1.16              1.50              1.22

Capital Ratios:
Tier 1 Capital Ratio                     15.36 %          14.95 %          14.35 %          14.43 %          14.17 %           14.17 %           13.96 %           14.05 %
Total Capital Ratio                      16.73            16.32            15.72            15.80            15.54             15.54             15.32             15.41
Tangible Capital Ratio                    6.64             6.49             6.35             6.86             6.40              6.42              6.51              7.19
Leverage Ratio                           10.07             9.81             9.90             9.83             9.60              9.71             10.26             10.20

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 second quarter of 2013 compared to net income of $0.8 million, or $0.05 per diluted share in the first quarter of 2013, and a net loss of $1.7 million, or $0.10 per diluted share for the second quarter of 2012. For the first six months of 2013, we realized net income of $1.7 million, or $0.10 per diluted share, compared to a net loss of $2.9 million, or $0.17 per diluted share, for the comparable period of 2012.

Total credit costs (loan loss provision plus other real estate owned ("OREO") costs) were $3.9 million, $4.0 million, and $9.2 million for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012, respectively. Total credit costs for the first half of 2013 were $7.8 million compared to $17.5 million for the same period of 2012. The improvement primarily reflects improving credit quality trends and reduced OREO costs.

Tax equivalent net interest income for the second quarter of 2013 was $19.7 million compared to $20.1 million for the first quarter of 2013 and $21.2 million for the second quarter of 2012. For the first half of 2013, tax equivalent net interest income totaled $39.8 million compared to $43.1 million in 2012. The reduction from all 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 second quarter of 2013 totaled $13.9 million, an increase of $0.3 million, or 1.9%, over the first quarter of 2013 and a decrease of $0.1 million, or 0.4%, from the second quarter of 2012. The increase over the first quarter of 2013 was due to higher other income, primarily gains from the sale of OREO properties and an increase in bank card fees. Lower deposit fees drove the slight decline from the second quarter of 2012. For the first six months of 2013, noninterest income totaled $27.4 million, a slight decrease of $0.1 million, or 0.2% from the same period of 2012, primarily reflecting lower deposit fees and bank card fees partially offset by higher mortgage banking fees and wealth management fees.

Noninterest expense for the second quarter of 2013 totaled $30.6 million, a decrease of $0.6 million, or 2.0%, from the first quarter of 2013 and $1.7 million, or 5.3%, from the second quarter of 2012. The decrease from the first quarter of 2013 was primarily attributable to lower compensation expense, occupancy expense, and other expense. Lower occupancy expense and other expense drove the reduction in noninterest expense compared to the second quarter of 2012. For the first six months of 2013, noninterest expense totaled $61.8 million, a decrease of $3.1 million, or 4.8%, over the same period of 2012 primarily attributable to lower occupancy and other expense. Lower OREO costs drove the favorable variance in other expense for all periods while lower legal fees, professional fees, advertising costs, and postage costs contributed to the decrease from both periods in 2012.

Financial Condition

Average earning assets were $2.206 billion for the second quarter of 2013, a decrease of $34.2 million, or 1.5%, from the first quarter of 2013 and an increase of $27.7 million, or 1.3%, over the fourth quarter of 2012. The change in earning assets from the prior quarter reflects a decline in the overnight funds position resulting from lower level of public fund deposits. The increase compared to the fourth quarter of 2012 primarily reflects the higher level of deposits resulting from an increase in the public funds. The change in both quarters reflects the seasonal fluctuation in public fund deposits as the fourth quarter generally reflects the seasonal low while the first quarter the seasonal high.

Nonperforming assets totaled $96.7 million at June 30, 2013, a decrease of $7.2 million from March 31, 2013 and $20.9 million from December 31, 2012 driven by a faster pace of nonaccrual loan resolutions and continued progress in disposing of OREO properties. Nonperforming assets represented 3.77% of total assets at June 30, 2013 compared to 3.99% at March 31, 2013 and 4.47% at December 31, 2012.

As of June 30, 2013, we are well-capitalized with a risk based capital ratio of 16.73% and a tangible common equity ratio of 6.64% compared to 16.32% and 6.49%, respectively, at March 31, 2013 and 15.72% and 6.35%, respectively, at December 31, 2012.

RESULTS OF OPERATIONS

Net Income

For the second quarter of 2013, we realized net income of $0.8 million, or $0.05 per diluted share, compared to net income of $0.8 million, or $0.05 per diluted share for the first quarter of 2013, and a net loss of $1.7 million, or $0.10 per diluted share, for the second quarter of 2012. For the first six months of 2013, we realized net income of $1.7 million, or $0.10 per diluted share, compared to a net loss of $2.9 million, or $0.17 per diluted share for the same period in 2012.

Compared to the first quarter of 2013, performance reflects lower noninterest expense of $0.6 million that was partially offset by a higher loan loss provision of $0.4 million, a $0.1 million decline in operating revenues, and a $0.1 million increase in income taxes.

Compared to the second quarter of 2012, the increase in earnings was due to a lower loan loss provision of $4.3 million and a $1.7 million decrease in noninterest expense, partially offset by lower operating revenues of $1.6 million and higher income taxes of $1.9 million.

The increase in earnings for the first half of 2013 versus the comparable period in 2012 was attributable to a lower loan loss provision of $8.0 million and a decrease in noninterest expense of $3.1 million, partially offset by lower operating revenues of $3.2 million and higher income taxes of $3.3 million.

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

                                                 Three Months Ended                            Six Months Ended
(Dollars in Thousands, except
per share data)                  June 30, 2013     March 31, 2013     June 30, 2012     June 30, 2013     June 30, 2012
Interest Income                 $      20,698     $       21,128     $      22,437     $      41,826     $      45,567
Taxable Equivalent
Adjustments                               149                134               154               283               326
Total Interest Income (FTE)            20,847             21,262            22,591            42,109            45,893
Interest Expense                        1,103              1,183             1,372             2,286             2,841
Net Interest Income (FTE)              19,744             20,079            21,219            39,823            43,052
Provision for Loan Losses               1,450              1,070             5,743             2,520            10,536
Taxable Equivalent
Adjustments                               149                134               154               283               326
Net Interest Income After
provision for Loan Losses              18,145             18,875            15,322            37,020            32,190
Noninterest Income                     13,849             13,588            13,906            27,437            27,492
Noninterest Expense                    30,582             31,200            32,293            61,782            64,890
Income (Loss)  Before Income
Taxes                                   1,412              1,263            (3,065 )           2,675            (5,208 )
Income Tax Expense (Benefit)              569                424            (1,339 )             993            (2,320 )
Net Income (Loss)               $         843     $          839     $      (1,726 )   $       1,682     $      (2,888 )

Basic Net Income (Loss) Per
Share                           $        0.05     $         0.05     $       (0.10 )   $        0.10     $       (0.17 )
Diluted Net Income (Loss) Per
Share                           $        0.05     $         0.05     $       (0.10 )   $        0.10     $       (0.17 )

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 43.

Tax equivalent net interest income for the second quarter of 2013 was $19.7 million compared to $20.1 million for the first quarter of 2013 and $21.2 million for the second quarter of 2012. For the first six months of 2013, tax equivalent net interest income totaled $39.8 million compared to $43.1 million for the same period of 2012.

The declines of $0.4 million and $1.5 million in tax equivalent net interest income from the first quarter of 2013 and second quarter of 2012, respectively, were due to a reduction in loan income primarily attributable to declining loan balances and continued unfavorable asset repricing, partially offset by a reduction in interest expense and a lower level of foregone interest on loans. The lower interest expense is attributable to favorable repricing on FHLB advances and certificates of deposit, which reflects both lower balances and favorable repricing.

Tax equivalent interest income for the second quarter of 2013 was $20.8 million compared to $21.3 million for the first quarter of 2013 and $22.6 million for the second quarter of 2012. The decrease when compared to both periods was 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, low yields on new loan and investment production and loan portfolio repricing continue to unfavorably affect net interest income.

Interest expense for the second quarter of 2013 was $1.1 million compared to $1.2 million for the first quarter of 2013 and $1.4 million for the second quarter in 2012. The lower cost of funds when compared to both periods was a result of continued rate reductions on all deposit products except savings accounts and the FHLB advance favorable repricing. 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 net interest margin for the second quarter of 2013 was 3.59%, a decrease of five basis points from the first quarter of 2013 and a decline of 18 basis points from the second quarter of 2012. Year-to-date net interest margin of 3.61% declined 21 basis points from the comparable period in 2012. The decrease in the margin for all comparable periods was attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a lower average cost of funds.

Pressure on net interest income continues primarily as a result of the declining loan portfolio and the low rate environment. Loans have declined by approximately $110 million since the second quarter of 2012. The low rate environment, although favorable to the repricing of deposits, continues to negatively impact our loan and investment portfolios. Increased lending competition in all markets has also unfavorably impacted the pricing for loans. We believe that 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. Given the unfavorable asset repricing and low rate environment, we anticipate continued pressure on the net interest margin for the remainder of 2013.

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 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 comparisons.

Provision for Loan Losses

The provision for loan losses for the second quarter of 2013 was $1.4 million compared to $1.1 million in the first quarter of 2013 and $5.7 million for the second quarter of 2012. For the first six months of 2013, the loan loss provision totaled $2.5 million compared to $10.5 million for the same period in 2012. The increase compared to the first quarter of 2013 was primarily due to a reserve addition for one existing impaired loan. The reduction from both of the prior year periods reflects a declining trend in loan losses as well as a much slower inflow of problem loans as evidenced by a lower level of loan delinquencies, classified loans and impaired loans. Net charge-offs for the second quarter of 2013 totaled $2.0 million, or 0.54% (annualized), of average loans compared to $2.4 million, or 0.66%, for the first quarter of 2013 and $7.0 million, or 1.80%, in the second quarter of 2012. For the first half of 2013, net charge-offs totaled $4.4 million, or 0.60% (annualized), of average loans compared to $11.6 million, or 1.48%, for the same period of 2012. Lower charge-offs in our residential real estate and commercial real estate portfolios drove the decrease in loan losses comparing 2013 to 2012. Charge-offs for the first half of 2012 reflect the resolution of higher loss exposure construction and land loans.

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

                                                 Three Months Ended                            Six Months Ended
(Dollars in Thousands, except
per share data)                  June 30, 2013     March 31, 2013     June 30, 2012     June 30, 2013     June 30, 2012
CHARGE-OFFS
Commercial, Financial and
Agricultural                    $         119     $         154      $          57     $         273     $         325
Real Estate - Construction                110               610                275               720               275
Real Estate - Commercial
Mortgage                                1,050             1,043              3,519             2,093             5,051
Real Estate - Residential               1,053               683              3,894             1,736             5,861
Real Estate - Home Equity                 322               113                425               435             1,317
Consumer                                  351               296                550               647             1,282
Total Charge-offs                       3,005             2,899              8,720             5,904            14,111

RECOVERIES
Commercial, Financial and
Agricultural                               38                51                 83                89               150
Real Estate - Construction                 -                 -                  27                -                 27
Real Estate - Commercial
Mortgage                                  144                38                 42               182               180
Real Estate - Residential                 396                96                969               492             1,132
Real Estate - Home Equity                 224                18                116               242               134
Consumer                                  244               262                452               506               846
Total Recoveries                        1,046               465              1,689             1,511             2,469

Net Charge-offs                 $       1,959     $       2,434      $       7,031     $       4,393     $      11,642

Net Charge-offs (Annualized)
as a                                     0.54 %            0.66 %             1.80 %            0.60 %            1.48 %
  percent of Average
  Loans Outstanding, Net of
  Unearned Income

Noninterest Income

Noninterest income for the second quarter of 2013 totaled $13.9 million, an . . .

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