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CCBG > SEC Filings for CCBG > Form 10-Q on 8-Nov-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


8-Nov-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)                        Third           Second            First           Fourth            Third            Second            First             Fourth
Summary of Operations:
Interest Income                    $    20,250      $    20,698      $    21,128      $    21,787      $    22,326      $    22,437       $    23,130       $    23,912
Interest Expense                         1,050            1,103            1,183            1,232            1,295            1,372             1,469             1,515
Net Interest Income                     19,200           19,595           19,945           20,555           21,031           21,065            21,661            22,397
Provision for Loan Losses                  555            1,450            1,070            2,766            2,864            5,743             4,793             7,600
Net Interest Income After
Provision for Loan Losses               18,645           18,145           18,875           17,789           18,167           15,322            16,868            14,797
Noninterest Income                      14,306           13,849           13,588           14,118           13,575           13,906            13,586            13,873
Noninterest Expense                     30,433           30,582           31,200           29,468           30,201           32,293            32,597            31,103
Income (Loss) Before Income
Taxes                                    2,518            1,412            1,263            2,439            1,541           (3,065 )          (2,143 )          (2,433 )
Income Tax Expense (Benefit)               927              569              424              564              420           (1,339 )            (981 )          (1,898 )
Net Income (Loss)                  $     1,591      $       843      $       839      $     1,875      $     1,121      $    (1,726 )     $    (1,162 )     $      (535 )
Net Interest Income (FTE)          $    19,355      $    19,744      $    20,079      $    20,697      $    21,179      $    21,219       $    21,833       $    22,560

Per Common Share:
Net Income (Loss) Basic            $      0.09      $      0.05      $      0.05      $      0.11      $      0.07      $     (0.10 )     $     (0.07 )     $     (0.03 )
Net Income (Loss) Diluted                 0.09             0.05             0.05             0.11             0.07            (0.10 )           (0.07 )           (0.03 )
Dividends Declared                        0.00             0.00             0.00             0.00             0.00             0.00              0.00              0.00
Diluted Book Value                       14.44            14.36            14.35            14.31            14.54            14.48             14.60             14.68
Market Price:
High                                     13.08            12.64            12.54            11.91            10.96             8.73              9.91             11.11
Low                                      11.06            10.12            10.95             9.04             7.00             6.35              7.32              9.43
Close                                    11.78            11.53            12.35            11.37            10.64             7.37              7.45              9.55

Selected Average Balances:
Loans, Net                         $ 1,436,039      $ 1,456,904      $ 1,496,432      $ 1,518,280      $ 1,541,262      $ 1,570,827       $ 1,596,480       $ 1,646,715
Earning Assets                       2,201,390        2,206,694        2,240,889        2,178,946        2,209,166        2,262,847         2,268,307         2,146,463
Total Assets                         2,558,395        2,564,528        2,598,680        2,534,011        2,566,239        2,624,417         2,636,907         2,509,915
Deposits                             2,059,498        2,067,647        2,102,967        2,051,099        2,075,482        2,135,653         2,161,388         2,032,975
Shareowners' Equity                    251,617          250,485          249,557          253,017          251,746          252,644           254,447           264,276
Common Equivalent Average
Shares:
Basic                                   17,336           17,319           17,302           17,229           17,215           17,192            17,181            17,160
Diluted                                 17,396           17,355           17,309           17,256           17,228           17,192            17,181            17,161

Performance Ratios:
Return on Average Assets                  0.25 %           0.13 %           0.13 %           0.29 %           0.17 %          (0.26 )%          (0.18 )%          (0.08 )%
Return on Average Equity                  2.51             1.35             1.36             2.95             1.77            (2.75 )           (1.84 )           (0.80 )
Net Interest Margin (FTE)                 3.49             3.59             3.64             3.78             3.82             3.77              3.87              4.17
Noninterest Income as % of
Operating
 Revenue                                 42.82            41.68            40.62            40.81            39.31            39.88             38.64             38.34
Efficiency Ratio                         90.42            91.07            92.67            84.68            86.89            91.18             92.04             85.37

Asset Quality:
Allowance for Loan Losses          $    25,010      $    27,294      $    27,803      $    29,167      $    30,222      $    29,929       $    31,217       $    31,035
Allowance for Loan Losses to
Loans                                     1.75 %           1.89 %           1.90 %           1.93 %           1.97 %           1.93 %            1.98 %            1.91 %
Nonperforming Assets ("NPAs")           94,700           96,653          103,869          117,648          127,247          132,829           136,826           137,623
NPAs to Total Assets                      3.77             3.77             3.99             4.47             5.10             5.02              5.14              5.21
NPAs to Loans + OREO                      6.38             6.44             6.81             7.47             8.02             8.23              8.36              8.14
Allowance to Non-Performing
Loans                                    60.00            65.66            61.17            45.42            40.80            40.03             39.65             41.37
Net Charge-Offs to Average
Loans                                     0.78             0.54             0.66             1.00             0.66             1.80              1.16              1.50

Capital Ratios:
Tier 1 Capital Ratio                     15.60 %          15.36 %          14.95 %          14.35 %          14.43 %          14.17 %           14.17 %           13.96 %
Total Capital Ratio                      16.97            16.73            16.32            15.72            15.80            15.54             15.54             15.32
Tangible Capital Ratio                    6.84             6.64             6.49             6.35             6.86             6.40              6.42              6.51
Leverage Ratio                           10.16            10.07             9.81             9.90             9.83             9.60              9.71             10.26

FINANCIAL OVERVIEW

A summary overview of our financial performance is provided below.

Results of Operations

Net income of $1.6 million, or $0.09 per diluted share, for the third quarter of 2013 compared to net income of $0.8 million, or $0.05 per diluted share, in the second quarter of 2013, and net income of $1.1 million, or $0.07 per diluted share for the third quarter of 2012. For the nine month period ended September 30, 2013, we realized net income of $3.3 million, or $0.19 per diluted share, compared to a net loss of $1.8 million, or $0.10 per diluted share, for the comparable period of 2012.

Total credit costs (loan loss provision plus other real estate owned ("OREO") costs) were $2.7 million, $3.9 million, and $5.5 million for the quarters ended September 30, 2013, June 30, 2013, and September 30, 2012, respectively. Total credit costs for the nine month period of 2013 were $10.5 million compared to $22.9 million for the same period of 2012. The decreases reflect continued improvement in credit quality trends and reduced OREO costs.

Tax equivalent net interest income for the third quarter of 2013 was $19.4 million compared to $19.7 million for the second quarter of 2013 and $21.2 million for the third quarter of 2012. For the nine month period, tax equivalent net interest income totaled $59.2 million compared to $64.3 million in 2012. The reduction from all prior periods was due to a reduction in loan income primarily attributable to declining loan balances and the impact of the extended low interest rate environment which has depressed our loan and investment yields.

Noninterest income for the third quarter of 2013 totaled $14.3 million, an increase of $0.5 million, or 3.3%, over the second quarter of 2013 and $0.7 million, or 5.4%, over the third quarter of 2012. The increase over the second quarter of 2013 was driven by higher deposit fees of $0.3 million and wealth management fees of $0.2 million. The increase over the third quarter of 2012 was driven by higher wealth management fees. For the nine month period, noninterest income totaled $41.7 million, a $0.7 million increase over the same period in 2012 primarily due to higher wealth management fees of $0.6 million and mortgage banking fees of $0.2 million.

Noninterest expense for the third quarter of 2013 totaled $30.4 million, a decrease of $0.1 million, or 0.5%, from the second quarter of 2013 attributable to lower compensation expense of $0.5 million, partially offset by higher occupancy expense of $0.3 million and other expense of $0.1 million. Compared to the third quarter of 2012, noninterest expense increased by $0.2 million, or 0.8%, attributable to higher compensation expense of $0.6 million that was partially offset by lower occupancy expense of $0.2 million and other expense of $0.2 million. For the nine month period, noninterest expense totaled $92.2 million, a decrease of $2.9 million, or 3.0%, from the same period of 2012 attributable to lower occupancy expense of $0.6 million and other expense of $3.3 million, partially offset by higher compensation expense of $1.1 million.

Financial Condition

Average earning assets were $2.201 billion for the third quarter of 2013, a decrease of $5.3 million, or 0.2%, from the second quarter of 2013 and an increase of $22.4 million, or 1.0%, over the fourth quarter of 2012. The change in earning assets from the second quarter of 2013 reflected a decline in the overnight funds position primarily as a result of a lower level of deposits. The increase compared to the fourth quarter of 2012 primarily reflected an expected seasonal increase in public fund deposits.

Nonperforming assets totaled $94.7 million at September 30, 2013, a decrease of $2.0 million from June 30, 2013 driven by a decline in our OREO balance as nonaccrual loans remained flat. Nonperforming assets have declined by $22.9 million from December 31, 2012, due to a faster pace of nonaccrual loan resolutions and continued progress in disposing of OREO properties. Nonperforming assets represented 3.77% of total assets at September 30, 2013 compared to 3.77% at June 30, 2013 and 4.47% at December 31, 2012.

As of September 30, 2013, we were well-capitalized with a risk based capital ratio of 16.97% and a tangible common equity ratio of 6.84% compared to 16.73% and 6.64%, respectively, at June 30, 2013 and 15.72% and 6.35%, respectively, at December 31, 2012.

RESULTS OF OPERATIONS

Net Income

For the third quarter of 2013, we realized net income of $1.6 million, or $0.09 per diluted share, compared to net income of $0.8 million, or $0.05 per diluted share, for the second quarter of 2013, and a net income of $1.1 million, or $0.07 per diluted share, for the third quarter of 2012. For the nine month period ended September 30, 2013, we realized net income of $3.3 million, or $0.19 per diluted share, compared to a net loss of $1.8 million, or $0.10 per diluted share, for the same period in 2012.

Compared to the second quarter of 2013, performance reflected a lower loan loss provision of $0.9 million, an increase in noninterest income of $0.5 million and a decrease in noninterest expense of $0.1 million, partially offset by lower net interest income of $0.4 million and higher income taxes of $0.3 million.

Compared to the third quarter of 2012, the increase in earnings was primarily due to a lower loan loss provision of $2.3 million and higher noninterest income of $0.7 million, partially offset by lower net interest income of $1.8 million, an increase in noninterest expense of $0.2 million and higher income taxes of $0.5 million.

The increase in earnings for the nine month period is attributable to a lower loan loss provision of $10.3 million, an increase in noninterest income of $0.7 million and a decrease in noninterest expense of $2.9 million, partially offset by a reduction in net interest income of $5.0 million and higher income taxes of $3.8 million.

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

                                               Three Months Ended                            Nine Months Ended
(Dollars in Thousands,
except per share data)          Sept 30, 2013     June 30, 2013     Sept 30, 2012     Sept 30, 2013     Sept 30, 2012
Interest Income                $      20,250     $      20,698     $      22,326     $      62,076     $      67,893
Taxable Equivalent
Adjustments                              155               149               148               438               474
Total Interest Income (FTE)           20,405            20,847            22,474            62,514            68,367
Interest Expense                       1,050             1,103             1,295             3,336             4,136
Net Interest Income (FTE)             19,355            19,744            21,179            59,178            64,231
Provision for Loan Losses                555             1,450             2,864             3,075            13,400
Taxable Equivalent
Adjustments                              155               149               148               438               474
Net Interest Income After
provision for Loan Losses             18,645            18,145            18,167            55,665            50,357
Noninterest Income                    14,306            13,849            13,575            41,743            41,067
Noninterest Expense                   30,433            30,582            30,201            92,215            95,091
Income (Loss) Before Income
Taxes                                  2,518             1,412             1,541             5,193            (3,667 )
Income Tax Expense (Benefit)             927               569               420             1,920            (1,900 )
Net Income (Loss)              $       1,591     $         843     $       1,121     $       3,273     $      (1,767 )

Basic Net Income (Loss) Per
Share                          $        0.09     $        0.05     $        0.07     $        0.19     $       (0.10 )
Diluted Net Income (Loss)
Per Share                      $        0.09     $        0.05     $        0.07     $        0.19     $       (0.10 )

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 44.

Tax equivalent net interest income for the third quarter of 2013 was $19.4 million compared to $19.7 million for the second quarter of 2013 and $21.2 million for the third quarter of 2012. For the first nine months of 2013, tax equivalent net interest income totaled $59.2 million compared to $64.2 million for the same period of 2012.

The declines of $0.4 million and $1.8 million in tax equivalent net interest income from the second quarter of 2013 and third 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 reflected both lower balances and favorable repricing.

Tax equivalent interest income for the third quarter of 2013 was $20.4 million compared to $20.8 million for the second quarter of 2013 and $22.5 million for the third quarter of 2012. The decrease when compared to both periods was specifically attributable to 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 third quarter of 2013 was $1.0 million compared to $1.1 million for the second quarter of 2013 and $1.3 million for the third 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 money markets and savings accounts and the FHLB advance favorable repricing. The rate reductions on deposits reflected 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 third quarter of 2013 was 3.49%, a decrease of ten basis points from the second quarter of 2013 and a decline of 33 basis points from the third quarter of 2012. Year-to-date net interest margin of 3.57% declined 24 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 $102 million since the third 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 at least the remainder of 2013 and into 2014.

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, historically 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 third quarter of 2013 was $0.6 million compared to $1.4 million in the second quarter of 2013 and $2.9 million for the third quarter of 2012. For the nine month period ended September 30, 2013, the loan loss provision totaled $3.1 million compared to $13.4 million for the same period in 2012. The decrease compared to the second quarter of 2013 reflected continued improvement in key credit metrics, including our level of classified loans which declined noticeably during the quarter. The reduction in the provision from both of the prior periods was primarily due to a significant decline in loan losses, a reduced level of problem loan inflow, and overall improvement in key credit metric trends. Net charge-offs for the third quarter of 2013 totaled $2.8 million, or 0.78% (annualized), of average loans compared to $2.0 million, or 0.54%, for the second quarter of 2013 and $2.6 million, or 0.66%, in the third quarter of 2012. For the first nine months of 2013, net charge-offs totaled $7.2 million, or 0.66% (annualized), of average loans compared to $14.2 million, or 1.21%, 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. As compared to 2013, charge-off experience in 2012 reflects the resolution of higher loss exposure construction and land loans. At September 30, 2013, the allowance for loan losses of $25.0 million was 1.75% of outstanding loans (net of overdrafts) and provided coverage of 60% of nonperforming loans compared to 1.89% and 66%, respectively, at June 30, 2013, and 1.93% and 45%, respectively, at December 31, 2012.

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

                                               Three Months Ended                            Nine Months Ended
(Dollars in Thousands,
except per share data)          Sept 30, 2013     June 30, 2013     Sept 30, 2012     Sept 30, 2013      Sept 30, 2012
CHARGE-OFFS
Commercial, Financial and
Agricultural                   $         138     $         119     $         331     $          411     $         657
Real Estate - Construction               278               110               127                998               402
Real Estate - Commercial
Mortgage                                 882             1,050               512              2,975             5,562
Real Estate - Residential              1,178             1,053               981              2,914             6,843
Real Estate - Home Equity                362               322               834                797             2,152
Consumer                                 674               351               355              1,321             1,635
Total Charge-offs                      3,512             3,005             3,140              9,416            17,251

RECOVERIES
Commercial, Financial and
Agricultural                              87                38                53                176               203
Real Estate - Construction                 1                -                  9                  1                36
Real Estate - Commercial
Mortgage                                 167               144                34                349               214
Real Estate - Residential                167               396                76                659             1,208
Real Estate - Home Equity                 13               224                15                255               149
Consumer                                 238               244               382                744             1,228
Total Recoveries                         673             1,046               569              2,184             3,038

Net Charge-offs                $       2,839     $       1,959     $       2,571     $        7,232     $      14,213

Net Charge-offs (Annualized)
. . .
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