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CCBG > SEC Filings for CCBG > Form 10-K on 7-Mar-2014All Recent SEC Filings

Show all filings for CAPITAL CITY BANK GROUP INC



Annual Report

Item 7. 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 included in the Annual Report on Form 10-K. The MD&A is divided into subsections entitled "Business Overview,""Executive Overview,""Results of Operations,""Financial Condition,""Liquidity and Capital Resources,""Off-Balance Sheet Arrangements," "Fourth Quarter, 2013 Financial Results," and "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 2013 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and its subsidiary, collectively, are referred to as "CCBG,""Company,""we,""us," or "our."


This Annual Report on Form 10-K, 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 this Annual Report for a discussion of factors that could cause our actual results to differ materially from those in the forward-looking statements.

However, other factors besides those listed in Item 1A Risk Factorsor discussed in this 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.


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 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 interest 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.

Strategic Review

Our philosophy is to build long-term client relationships based on quality service, high ethical standards, and safe and sound banking practices. We maintain a locally oriented, community-based focus, which is augmented by experienced, centralized support in select specialized areas. Our local market orientation is reflected in our network of banking office locations, experienced community executives with a dedicated President for each market, and community boards which support our focus on responding to local banking needs. We strive to offer a broad array of sophisticated products and to provide quality service by empowering associates to make decisions in their local markets.

We have sought to build a franchise in small-to medium-sized, less competitive markets, located on the outskirts of the larger metropolitan markets where we are positioned as a market leader. Many of our markets are on the outskirts of these larger markets in close proximity to major interstate thoroughfares such as Interstates I-10 and I-75. Our three largest markets are Tallahassee (Leon-Florida), Gainesville (Alachua-Florida), and Macon (Bibb-Georgia). In 13 of 20 markets in Florida and three of five markets in Georgia, we rank within the top four banks in terms of market share. Furthermore, in the counties in which we operate, we maintain an average 8.80% market share in the Florida counties and 6.09% in the Georgia counties, suggesting that there is significant opportunity to grow market share within these geographic areas. The larger employers in many of our markets are state and local governments, healthcare providers, educational institutions, and small businesses. While we realize that the markets in our footprint do not provide for a level of potential growth that the larger metropolitan markets may provide, our markets do provide good growth dynamics and have historically grown in excess of the national average. We strive to provide value added services to our clients by being their banker, not just a bank. This element of our strategy distinguishes Capital City Bank from our competitors.

While our recent growth is below historical norms, our long-term vision remains to profitably expand our franchise through a combination of organic growth in existing markets and acquisitions. We have long understood that our core deposit funding base is a predominant driver of our profitability and overall franchise value, and have focused extensively on this component of our organic growth efforts in recent years. While we have not been an active acquirer of banks since 2005, this component of our strategy is still in place.

Potential acquisition growth will continue to be focused on Florida, Georgia, and Alabama with a particular focus on financial institutions located on the outskirts of larger, metropolitan areas. Five markets have been identified, four in Florida and one in Georgia, in which management intends to proactively pursue expansion opportunities. These markets include Alachua, Marion, Hernando/Pasco counties in Florida, the western panhandle of Florida, and Bibb and surrounding counties in central Georgia. Our focus on some of these markets may change as we continue to evaluate our strategy and the impact the current economic cycle is having on any individual market. We will also continue to evaluate de novo expansion opportunities in attractive new markets in the event that acquisition opportunities are not feasible. Other expansion opportunities that will be evaluated include asset management, mortgage banking, and insurance. Embedded in our acquisition strategy is our desire to partner with institutions that are culturally similar, have experienced management and possess either established market presence or have potential for improved profitability through growth, economies of scale, or expanded services. Generally, these target institutions will range in asset size from $100 million to $400 million.


2013 was a turnaround year for our Company as we reported net income of $6.0 million compared to $0.1 million in 2012. The growth in net income on an operating basis reflects lower credit-related costs and, to a lesser extent, higher noninterest income that was partially offset by reduction in net interest income. Below are summary highlights that impacted our performance for the year:

Significant decline in loan loss provision ($12.7 million) reflective of lower loan losses and favorable loan migration

Solid growth in noninterest income ($1.2 million) driven by wealth management

Reduction in operating expenses ($1.8 million) reflective of lower OREO costs and strong expense control

Lower net interest income ($6.6 million) primarily attributable to declining loan balances

Our credit quality metrics improved noticeably in 2013 reflective of a significant decline in the level of our nonperforming assets driven by both strong OREO sales as well as reduced problem loan inflows. We continue to believe that our disciplined approach to capturing the maximum value possible when disposing of our problem assets is in the best long-term interest of our shareowners and 2013 helped to further validate that approach.

We continued to realize an unfavorable change in our earning asset mix during 2013 due to reduction in our loan balances which has resulted in a high level of liquidity and an unfavorable impact on earnings. Loan growth remains challenging as our markets continued a relatively slow recovery in 2013. Efforts to stabilize our loan portfolio balances were ongoing during 2013 as we implemented new loan programs aimed at driving growth in business segments that are showing greater loan demand, including business and indirect auto lending.

Our capital ratios improved noticeably year-over-year due to earnings retention, but more significantly due to a favorable adjustment in the pension component of our other comprehensive income, which increased our tangible capital ratio by 123 basis points to 7.58% at year-end 2013.

While we have allocated significant resources to problem asset resolution in recent years, we have also been intensely focused on our business and our changing industry. Development and implementation of strategies aimed at improving the capacity and efficiency of our loan and deposit delivery channels positions us to capitalize on loan growth opportunities as conditions in our markets improve as well as further enhance our core deposit franchise.

During 2014, efforts to further reduce our nonperforming assets and stabilize our loan portfolio balances will remain our key focus as well as continuation of efforts to diversify and enhance our noninterest income revenue stream and reduce core operating expenses.

Key components of our 2013 financial performance are summarized below:

Results of Operations

For 2013, taxable equivalent net interest income decreased $6.6 million, or 7.8%, to $78.3 million driven by declines in loan income attributable to lower portfolio balances and unfavorable asset repricing, which was partially offset by reductions in interest expense. Our net interest margin of 3.54% in 2013 was 27 basis points lower than the 3.81% recorded in 2012. In 2013, compared to 2012, the yield on interest earning assets declined 31 basis points and was partially offset by a decline in the cost of funds of 4 basis points.

We recorded a loan loss provision of $3.5 million for 2013 compared to $16.2 million in 2012, which reflected favorable problem loan migration, lower loan losses, and overall improvement in key credit metrics. OREO costs declined for the second consecutive year totaling $9.5 million in 2013 and $11.4 million in 2012 attributable to lower carrying costs and a reduced level of valuation adjustments reflecting improved real estate valuations in our markets.

For 2013, noninterest income totaled $56.4 million, a $1.2 million, or 2.2%, increase over 2012 attributable to higher wealth management fees of $1.0 million and other income of $0.9 million, partially offset by lower deposit fees of $0.5 million and mortgage banking fees of $0.1 million. Growth in new accounts and higher trading activity by our clients drove the increase in wealth management fees. Other income increased due to higher gains from the sale of OREO properties. Lower overdraft fees drove the reduction in deposit fees.

For 2013, noninterest expense totaled $122.7 million, a $1.8 million, or 1.5%, decrease from 2012 attributable to a decline in other expense of $3.0 million and occupancy expense of $0.7 million that was partially offset by higher compensation of $1.9 million. Lower OREO expense drove the reduction in other expense with lower legal fees, professional fees, and miscellaneous expense also contributing to a lesser extent. Declines were realized in most of the occupancy expense categories and generally reflect stronger cost controls and other cost reduction initiatives. The increase in compensation expense was attributable to an increase in associate benefit expense of $2.2 million, reflective of higher pension plan expense of $1.0 million and stock compensation expense of $0.9 million, partially offset by a $0.3 million reduction in salary expense.

Financial Condition

Average assets totaled approximately $2.569 billion for 2013, a decrease of $21.5 million, or 0.8%, from 2012. Year-over-year, average short-term investments and investment securities increased $38.6 million and $51.2 million, respectively, while average loans declined $105.8 million. The unfavorable shift in our mix of earning assets reflects slow recovery of loan demand in our markets and reduction in loan balances. We continue to maintain a strong liquidity position as evidenced by average funds sold of approximately $423.0 million for the year.

Average total deposits for 2013 were $2.070 billion, a decrease of $35.6 million, or 1.7%, from 2012. Decreases in NOW accounts and certificates of deposit were partially offset by increases in noninterest-bearing deposits, money market accounts, and savings accounts.

At year-end 2013, our nonperforming assets totaled $85.0 million, a decrease of $32.7 million from year-end 2012. Nonaccrual loans totaled $37.0 million at year-end 2012, a decrease of $27.2 million from year-end 2012, reflective of loan resolutions which outpaced gross additions. Nonaccrual loan additions slowed again for the second consecutive year, by $17 million, or 28%. The balance of OREO totaled $48.1 million at year-end 2013, a decrease of $5.3 million from year-end 2012. We continued to experience progress during 2013 in our efforts to dispose of OREO selling properties totaling $25.9 million compared to $28.2 million in 2012.

Our allowance for loan losses at year-end 2013 was $23.1 million (1.65% of loans) and provided coverage of 62% of nonperforming loans compared to $29.2 million (1.93% of loans) and 45% of nonperforming loans at year-end 2012. Net charge-offs for 2013 totaled $9.5 million, or 0.66% of average loans compared to $18.0 million, or 1.16% in 2012, reflective of lower residential and commercial real estate loan charge-offs. Since 2008, we have recorded a cumulative loan loss provision totaling $135.0 million, or 7.1% of beginning loans and have recognized cumulative net charge-offs of $129.6 million, or 6.8%.

Shareowners' equity increased by $29.5 million from $246.9 million at December 31, 2012 to $276.4 million at December 31, 2013, primarily attributable to an actuarial gain reducing our pension liability. We continue to maintain a strong capital base as evidenced by a risk-based capital ratio of 17.94% and a tangible common equity ratio of 7.58% at year-end 2013 compared to 15.72% and 6.35%, respectively, at year-end 2012.


For 2013, we realized net income of $6.0 million, or $0.35 per diluted share compared to $0.1 million, or $0.01 per diluted share, in 2011, and $4.9 million, or $0.29 per diluted share in 2011.

The increase in earnings for 2013 reflects a lower loan loss provision of $12.7 million, higher noninterest income of $1.2 million, and lower noninterest expense of $1.8 million, partially offset by a reduction in net interest income of $6.6 million and higher income taxes of $3.2 million.

The decline in earnings for 2012 as compared to 2011 was attributable to lower operating revenues of $11.3 million partially offset by a decrease in our loan loss provision of $2.8 million, a decrease in noninterest expense of $1.7 million and a reduction in income taxes of $2.0 million. 2011 performance reflects the sale of our Visa Class B shares of stock ("Visa stock"), which resulted in a $2.6 million net gain ($3.2 million pre-tax included in noninterest income and a swap liability of $0.6 million included in noninterest expense).

A condensed earnings summary for the last three years is presented in Table 1 below:

Table 1


(Dollars in Thousands, Except Per
Share Data)                                   2013              2012              2011
Interest Income                           $   82,152        $   89,680        $   99,459
Taxable Equivalent Adjustments                   583               616               925
Total Interest Income (FTE)                   82,735            90,296           100,384
Interest Expense                               4,416             5,368             7,537
Net Interest Income (FTE)                     78,319            84,928            92,847
Provision for Loan Losses                      3,472            16,166            18,996
Taxable Equivalent Adjustments                   583               616               925
Net Interest Income After Provision
for Loan Losses                               74,264            68,146            72,926
Noninterest Income                            56,416            55,185            58,848
Noninterest Expense                          122,710           124,559           126,248
Income (Loss) Before Income Taxes              7,970            (1,228 )           5,526
Income Tax Expense (Benefit)                   1,925            (1,336 )             629
Net Income                                $    6,045        $      108        $    4,897

Basic Net Income Per Share                $     0.35        $     0.01        $     0.29
Diluted Net Income Per Share              $     0.35        $     0.01        $     0.29

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. We provide an analysis of our net interest income, including average yields and rates in Tables 2 and 3 below. We provide this information 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.

In 2013, our taxable equivalent net interest income decreased $6.6 million, or 7.8%. This follows a decrease of $7.9 million, or 8.5%, in 2012, and a decrease of $6.1 million, or 6.2%, in 2011. The decrease in our taxable equivalent net interest income in these years was primarily driven by declines in loan income attributable to lower portfolio balances and unfavorable asset repricing, which was partially offset by reductions in interest expense. The lower interest expense is primarily attributable to declines in certificates of deposit balances and reflects favorable repricing in all interest-bearing deposit categories.

For 2013, taxable equivalent interest income declined $7.6 million, or 8.4%, from 2012, $10.1 million, or 10.0% in 2012 from 2011, and $11.6 million, or 10.3%, in 2011 from 2010. The decrease for 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 interest 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 adversely affect net interest income.

These factors produced a 31 basis point decline in the yield on interest earning assets, which decreased from 4.05% in 2012 to 3.74% for 2013. This compares to a 47 basis point decline in 2012 over 2011.

Interest expense decreased $952,000, or 17.7%, from 2012, and $2.2 million, or 28.8%, in 2012 over 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 average rate paid on interest-bearing liabilities decreased 5 basis points from 2012, and declined 12 basis points in 2012 from 2011, reflecting the factors mentioned above.

Our interest rate spread (defined as the taxable equivalent yield on average earning assets less the average rate paid on interest bearing liabilities) decreased 26 basis points in 2013 compared to 2012 and declined 35 basis points in 2012 compared to 2011. The decrease in both years was primarily attributable to the adverse impact of lower rates and a change in the mix of interest 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 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 any further impact is expected to be minimal.

Our net interest margin (defined as taxable equivalent interest income less interest expense divided by average earning assets) of 3.54% in 2013 was 27 basis points lower than the 3.81% recorded in 2012 and was 37 basis points lower in 2012 than the 4.18% reported in 2011. In 2013, compared to 2012, the yield on earning assets declined 31 basis points and was partially offset by a decline in the cost of funds of 4 basis points. The earning asset yield decline of 47 basis points in 2012 over 2011 was partially offset by a reduction in the cost of funds by 10 basis points.

The shift in our earning asset mix and continued unfavorable asset repricing resulted in a net interest margin of 3.45% for the fourth quarter of 2013, which represents a decline of 33 basis points over the fourth quarter of 2012. The decline in interest earning assets primarily attributable to the loan portfolio, coupled with the low rate environment continues to put pressure on our net interest income.

As experienced in 2012 and again throughout 2013, historically low interest rates (essentially setting a floor on deposit repricing), foregone interest, 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, which is consistent with our historical strategy, is to not accept greater interest rate risk by reaching further out 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. Over time, this strategy has produced fairly consistent outcomes and a net interest margin that is significantly above peer comparisons. Given the unfavorable asset repricing and low rate environment, we anticipate continued pressure on the margin throughout 2014.

Table 2


                                                                     2013                                     2012                                     2011
                                                       Average                    Average       Average                    Average       Average                      Average
(Taxable Equivalent Basis - Dollars in Thousands)      Balance       Interest      Rate         Balance       Interest      Rate         Balance       Interest        Rate
Loans, Net of Unearned Income(1)(2)                 $ 1,450,806     $ 78,484        5.41 %   $ 1,556,565     $ 85,780        5.51 %   $ 1,686,995     $  95,520          5.66 %
Taxable Investment Securities                           232,173        2,344        0.94         223,429        2,912        1.27         243,059         3,320          1.38
Tax-Exempt Investment Securities(2)                     108,042          830        0.76          65,560          658        1.00          62,497           996          1.59
Funds Sold                                              422,665        1,077        0.25         384,067          946        0.25         228,766           548          0.24
Total Earning Assets                                  2,213,686       82,735        3.74 %     2,229,621       90,296        4.05 %     2,221,317       100,384          4.52 %
Cash & Due From Banks                                    49,978                                   48,924                                   48,823
Allowance for Loan Losses                               (28,167 )                                (30,959 )                                (32,066 )
Other Assets                                            333,165                                  342,587                                  345,123
TOTAL ASSETS                                        $ 2,568,662                              $ 2,590,173                              $ 2,583,197

NOW Accounts                                        $   719,493     $    482        0.07 %   $   771,617     $    634        0.08 %   $   748,774     $     890          0.12 %
Money Market Accounts                                   284,245          211        0.07         280,165          255        0.09         282,271           437          0.15
Savings Accounts                                        203,864          101        0.05         175,712           87        0.05         151,801            73          0.05
Other Time Deposits                                     231,354          637        0.28         267,263        1,132        0.42         330,750         2,547          0.77
Total Interest Bearing Deposits                       1,438,956        1,431        0.10 %     1,494,757        2,108        0.14 %     1,513,596         3,947          0.26 %
Short-Term Borrowings                                    53,922          235        0.44          52,178          196        0.38          68,061           305          0.45
Subordinated Notes Payable                               62,887        1,420        2.23          62,887        1,477        2.31          62,887         1,380          2.16
Other Long-Term Borrowings                               41,077        1,330        3.24          41,513        1,587        3.82          47,841         1,905          3.98
Total Interest Bearing Liabilities                    1,596,842        4,416        0.28 %     1,651,335        5,368        0.33 %     1,692,385         7,537          0.45 %
Noninterest Bearing Deposits                            631,117                                  610,915                                  567,987
Other Liabilities                                        89,276                                   74,963                                   59,777
TOTAL LIABILITIES                                     2,317,235                                2,337,213                                2,320,149

TOTAL SHAREOWNERS' EQUITY                               251,427                                  252,960                                  263,048

TOTAL LIABILITIES & EQUITY                          $ 2,568,662                              $ 2,590,173                              $ 2,583,197

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