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CCBG > SEC Filings for CCBG > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CAPITAL CITY BANK GROUP INC

Form 10-Q for CAPITAL CITY BANK GROUP INC


8-May-2014

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 2014 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 2013 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 and fees 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 deposit fees, wealth management 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 2013 Form 10-K.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



                                       2014                                       2013                                                        2012
(Dollars in Thousands, Except
Per Share Data)                        First           Fourth            Third           Second            First           Fourth            Third            Second
Summary of Operations:
Interest Income                    $    19,236      $    20,076      $    20,250      $    20,698      $    21,128      $    21,787      $    22,326      $    22,437
Interest Expense                           950            1,080            1,050            1,103            1,183            1,232            1,295            1,372
Net Interest Income                     18,286           18,996           19,200           19,595           19,945           20,555           21,031           21,065
Provision for Loan Losses                  359              397              555            1,450            1,070            2,766            2,864            5,743
Net Interest Income After
Provision for Loan Losses               17,927           18,599           18,645           18,145           18,875           17,789           18,167           15,322
Noninterest Income                      12,785           13,825           14,026           13,731           13,528           13,915           13,416           13,719
Noninterest Expense                     28,366           29,647           30,153           30,464           31,140           29,265           30,042           32,106
Income (Loss) Before Income
Taxes                                    2,346            2,777            2,518            1,412            1,263            2,439            1,541           (3,065 )
Income Tax (Benefit) Expense            (1,405 )              5              927              569              424              564              420           (1,339 )
Net Income (Loss)                  $     3,751      $     2,772      $     1,591      $       843      $       839      $     1,875      $     1,121      $    (1,726 )
Net Interest Income (FTE)          $    18,424      $    19,141      $    19,355      $    19,744      $    20,079      $    20,697      $    21,179      $    21,219

Per Common Share:
Net Income (Loss) Basic            $      0.22      $      0.16      $      0.09      $      0.05      $      0.05      $      0.11      $      0.07      $     (0.10 )
Net Income (Loss) Diluted                 0.22             0.16             0.09             0.05             0.05             0.11             0.07            (0.10 )
Cash Dividends Declared                   0.02             0.00             0.00             0.00             0.00             0.00             0.00             0.00
Diluted Book Value                       16.02            15.85            14.44            14.36            14.35            14.31            14.54            14.48
Market Price:
High                                     14.59            12.69            13.08            12.64            12.54            11.91            10.96             8.73
Low                                      11.56            11.33            11.06            10.12            10.95             9.04             7.00             6.35
Close                                    13.28            11.77            11.78            11.53            12.35            11.37            10.64             7.37

Selected Average Balances:
Loans, Net                         $ 1,395,506      $ 1,414,909      $ 1,436,039      $ 1,456,904      $ 1,496,432      $ 1,518,280      $ 1,541,262      $ 1,570,827
Earning Assets                       2,268,320        2,206,286        2,201,390        2,206,694        2,240,889        2,178,946        2,209,166        2,262,847
Total Assets                         2,598,307        2,553,653        2,558,395        2,564,528        2,598,680        2,534,011        2,566,239        2,624,417
Deposits                             2,124,960        2,050,870        2,059,498        2,067,647        2,102,967        2,051,099        2,075,482        2,135,653
Shareowners' Equity                    279,729          253,999          251,617          250,485          249,557          253,017          251,746          252,644
Common Equivalent Average
Shares:
Basic                                   17,399           17,341           17,336           17,319           17,302           17,229           17,215           17,192
Diluted                                 17,439           17,423           17,396           17,355           17,309           17,256           17,228           17,192

Performance Ratios:
Return on Average Assets                  0.59 %           0.43 %           0.25 %           0.13 %           0.13 %           0.29 %           0.17 %          (0.26 )%
Return on Average Equity                  5.44             4.33             2.51             1.35             1.36             2.95             1.77            (2.75 )
Net Interest Margin (FTE)                 3.29             3.45             3.49             3.59             3.64             3.78             3.82             3.77
Noninterest Income as % of
Operating Revenue                        42.05            43.85            42.82            41.68            40.62            40.81            39.31            39.88
Efficiency Ratio                         91.02            90.22            90.42            91.07            92.67            84.68            86.89            91.18

Asset Quality:
Allowance for Loan Losses          $    22,110      $    23,095      $    25,010      $    27,294      $    27,803      $    29,167      $    30,222      $    29,929
Allowance for Loan Losses to
Loans                                     1.57 %           1.65 %           1.75 %           1.89 %           1.90 %           1.93 %           1.97 %           1.93 %
Nonperforming Assets ("NPAs")           78,594           85,035           94,700           96,653          103,869          117,648          127,247          132,829
NPAs to Total Assets                      2.98             3.26             3.77             3.77             3.99             4.47             5.10             5.02
NPAs to Loans plus ORE                    5.42             5.87             6.38             6.44             6.81             7.47             8.02             8.23
Allowance to Non-Performing
Loans                                    63.98            62.48            60.00            65.66            61.17            45.42            40.80            40.03
Net Charge-Offs to Average
Loans                                     0.39             0.65             0.78             0.54             0.66             1.00             0.66             1.80

Capital Ratios:
Tier I Capital                           16.85 %          16.56 %          15.60 %          15.36 %          14.95 %          14.35 %          14.43 %          14.17 %
Total Capital                            18.22            17.94            16.97            16.73            16.32            15.72            15.80            15.54
Tangible Capital                          7.66             7.58             6.84             6.64             6.49             6.35             6.86             6.40
Leverage                                 10.47            10.46            10.16            10.07             9.81             9.90             9.83             9.60

FINANCIAL OVERVIEW

A summary overview of our financial performance is provided below.

Results of Operations

Net income of $3.8 million, or $0.22 per diluted share for the first quarter of 2014 compared to net income of $2.8 million, or $0.16 per diluted share in the fourth quarter of 2013, and net income of $0.8 million, or $0.05 per diluted share for the first quarter of 2013. First quarter 2014 earnings were favorably impacted by a tax benefit of $2.2 million, or $0.13 per share related to an adjustment to our reserve for uncertain tax positions.

Total credit costs (loan loss provision plus other real estate owned ("OREO") expenses) were $1.8 million, $1.6 million, and $4.0 million for the quarters ended March 31, 2014, December 31, 2013, and March 31, 2013, respectively. Slower problem loan migration, lower loan losses, and improved credit metrics have resulted in a normalized loan loss provision. Continued progress in disposing of OREO properties and firming of property values in our real estate markets has favorably impacted our level of OREO costs.

Tax equivalent net interest income for the first quarter of 2014 totaled $18.4 million, a $0.7 million, or 3.7%, decrease from the fourth quarter of 2013 and a $1.7 million, or 8.2%, decline from the first quarter of 2013. 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 2014 totaled $12.8 million, a decrease of $1.0 million, or 7.5%, from the fourth quarter of 2013 primarily attributable to lower deposit and wealth management fees. Compared to the same prior year period, noninterest income decreased $0.7 million, or 5.5%, attributable to lower mortgage banking and deposit fees.

Noninterest expense (excluding OREO expense) for the first quarter of 2014 totaled $27.0 million, a decrease of $1.4 million, or 5.0%, from the fourth quarter of 2013 and $1.3 million, or 4.8%, from the first quarter of 2013. The decrease compared to both periods was driven primarily by lower pension costs and FDIC insurance fees. Lower legal fees also contributed to the decrease from the same prior year period.

Financial Condition

Average earning assets totaled $2.268 billion for the first quarter of 2014, an increase of $62.0 million, or 2.8%, over the fourth quarter of 2013, and $27.4 million, or 1.2%, over the first quarter of 2012. The increase compared to both prior periods primarily reflects a higher level of deposits resulting from a seasonal influx of public funds and noninterest bearing deposits.

Average loans decreased $19.4 million, or 1.4%, from the fourth quarter of 2013 and $100.9 million, or 6.7%, from the first quarter of 2013 as loan payoffs, normal amortization and problem loan resolutions outpaced new production. Our loan pipelines are growing at a slow pace mirroring the slow recovery in our markets, however we did realize growth in end of period loan balances for the first quarter of 2014 reflective of increased production as well as a lower level of payoffs.

Average deposit balances were $2.125 billion for the first quarter of 2014, an increase of $74.1 million, or 3.6%, over the fourth quarter of 2013 and $22.0 million, or 1.1%, over the first quarter of 2013. Higher public funds balances partially offset by lower certificate of deposit balances drove the increase compared to the fourth quarter of 2013, while the increase over the first quarter of 2013 reflects higher noninterest bearing deposits and savings accounts, partially offset by lower certificate of deposit balances.

Nonperforming assets totaled $78.6 million at March 31, 2014, a decrease of $6.4 million from December 31, 2013 and $24.3 million from March 31, 2013. Nonperforming assets represented 2.98% of total assets at March 31, 2014 compared to 3.26% at December 31, 2013 and 3.99% at March 31, 2013.

As of March 31, 2014, we are well-capitalized with a risk based capital ratio of 18.22% and a tangible common equity ratio of 7.66% compared to 17.94% and 7.58%, respectively, at December 31, 2013, and 16.32% and 6.49%, respectively, at March 31, 2013.

RESULTS OF OPERATIONS

Net Income

For the first quarter of 2014, we realized net income of $3.8 million, or $0.22 per diluted share compared to net income of $2.8 million, or $0.16 per diluted share for the fourth quarter of 2013, and net income of $0.8 million, or $0.05 per diluted share for the first quarter of 2013.

Compared to the fourth quarter of 2013, performance reflects lower noninterest expense of $1.3 million and income taxes of $1.4 million, partially offset by lower net interest income of $0.7 million and noninterest income of $1.0 million.

Compared to the first quarter of 2013, the increase in earnings was due to lower noninterest expense of $2.8 million, a lower loan loss provision of $0.7 million, and a reduction in income taxes of $1.8 million, partially offset by lower net interest income of $1.6 million and noninterest income of $0.7 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)                                   2014                2013               2013
Interest Income                           $    19,236        $     20,076        $    21,128
Taxable Equivalent Adjustments                    138                 145                134
Total Interest Income (FTE)                    19,374              20,221             21,262
Interest Expense                                  950               1,080              1,183
Net Interest Income (FTE)                      18,424              19,141             20,079
Provision for Loan Losses                         359                 397              1,070
Taxable Equivalent Adjustments                    138                 145                134
Net Interest Income After Provision
for Loan Losses                                17,927              18,599             18,875
Noninterest Income                             12,785              13,825             13,528
Noninterest Expense                            28,366              29,647             31,140
Income Before Income Taxes                      2,346               2,777              1,263
Income Tax (Benefit) Expense                   (1,405 )                 5                424
Net Income                                $     3,751        $      2,772        $       839

Basic Net Income Per Share                $      0.22        $       0.16        $      0.05
Diluted Net Income Per Share              $      0.22        $       0.16        $      0.05

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 39.

Tax equivalent net interest income for the first quarter of 2014 was $18.4 million compared to $19.1 million for the fourth quarter of 2013 and $20.1 million for the first quarter of 2013. The decrease in tax equivalent net interest income compared to the prior periods was 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. The lower interest expense is attributable to favorable repricing on FHLB advances and certificates of deposit, which reflected both lower balances and favorable repricing.

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 are 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.

The net interest margin for the first quarter of 2014 was 3.29%, a decrease of 16 basis points from the fourth quarter of 2013 and a decline of 35 basis points from the first quarter of 2013. The shift in interest earning asset mix primarily attributable to the declining loan portfolio, coupled with the low rate environment continues to put pressure on our net interest income. Additionally, as compared to the fourth quarter of 2013, 10 of the 16 basis point decline in the margin was attributable to the higher level of earning assets during the first quarter of 2014, which is attributable to the seasonal influx of public funds.

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 historically 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 in 2014.

Provision for Loan Losses

The provision for loan losses for the first quarter of 2014 was $0.4 million compared to $0.4 million for the fourth quarter of 2013 and $1.1 million for the first quarter of 2013. The lower level of provision reflects favorable problem loan migration, lower loan losses, and continued improvement in key credit metrics. Net charge-offs for the first quarter of 2014 totaled $1.3 million, or 0.39% (annualized), of average loans compared to $2.3 million, or 0.65% (annualized), for the fourth quarter of 2012 and $2.4 million, or 0.66% (annualized), for the first quarter of 2013. At March 31, 2014, the allowance for loan losses of $22.1 million was 1.57% of outstanding loans (net of overdrafts) and provided coverage of 64% of nonperforming loans compared to 1.65% and 62%, respectively, at December 31, 2013, and 1.90% and 61%, respectively, at March 31, 2013.

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)                                   2014            December 31, 2013           2013
CHARGE-OFFS
Commercial, Financial and
Agricultural                              $        11        $             337        $       154
Real Estate - Construction                         -                        72                610
Real Estate - Commercial Mortgage                 594                      676              1,043
Real Estate - Residential                         731                      921                683
Real Estate - Home Equity                         403                      362                113
Consumer                                          405                      430                296
Total Charge-offs                               2,144                    2,798              2,899

RECOVERIES
Commercial, Financial and
Agricultural                                       75                       33                 51
Real Estate - Construction                          4                       -                  -
Real Estate - Commercial Mortgage                  27                       14                 38
Real Estate - Residential                         395                      179                 96
Real Estate - Home Equity                          11                       39                 18
Consumer                                          288                      221                262
Total Recoveries                                  800                      486                465

Net Charge-offs                           $     1,344        $           2,312        $     2,434

Net Charge-offs (Annualized) as a                0.39 %                   0.65 %             0.66 %
  Percent of Average Loans
Outstanding,
  Net of Overdrafts

Noninterest Income

Noninterest income for the first quarter of 2014 totaled $12.8 million, a decrease of $1.0 million, or 7.5%, from the fourth quarter of 2013 reflective of lower deposit fees of $0.5 million, wealth management fees of $0.3 million, data processing fees of $0.1 million, and other income of $0.1 million. Compared to the first quarter of 2013, noninterest income decreased $0.7 million, or 5.5%, attributable to a $0.4 million reduction in mortgage banking fees and a $0.3 million decline in deposit fees.

Noninterest income represented 42.05% of operating revenues in the first quarter of 2014 compared to 43.85% in the fourth quarter of 2013 and 40.62% in the first quarter of 2013. The increase over the first quarter of 2013 reflects lower net interest income.

The table below reflects the major components of noninterest income.

                                       Three Months Ended
                            March 31,     December 31,     March 31,
(Dollars in Thousands)        2014            2013           2013
Deposit Fees               $   5,869     $      6,398     $   6,165
Bank Card Fees                 2,707            2,656         2,661
Wealth Management Fees         1,918            2,233         1,915
Mortgage Banking Fees            625              654         1,043
Data Processing Fees             541              689           653
Securities Transactions           -                 3            -
Other                          1,125            1,192         1,091
Total Noninterest Income   $  12,785     $     13,825     $  13,528

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

Deposit Fees. Deposit fees decreased $529,000, or 8.3%, from the fourth quarter of 2013 and $296,000, or 4.8%, from the first quarter of 2013. The decline from the fourth quarter of 2013 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 2014. Compared to the first quarter of 2013, the decline was due to a lower level of overdraft fees generally reflective of improved financial management by our clients.

Bank Card Fees. Bank card fees (including interchange fees and ATM/debit card fees) increased $52,000, or 1.9%, over the fourth quarter of 2013 and $47,000, or 1.8%, over the first quarter of 2013. The increase over both prior periods reflects higher card spend volume by our clients.

Wealth Management Fees. Wealth management fees include both trust fees (i.e., managed accounts, trusts/estates, and retirement plans) and retail brokerage fees (i.e., investment and insurance products) and totaled $1.9 million for the first quarter of 2014, a decrease of $315,000, or 14.1%, from the fourth quarter of 2013 and an increase of $3,000, or 0.2%, over the first quarter of 2013. The decrease from the fourth quarter of 2013 reflects lower retail brokerage fees of $197,000 and trust fees of $118,000. Compared to the fourth quarter of 2013, the decrease in retail brokerage fees was primarily attributable to a lower level of account activity by our clients as well as a decline in new retail investment product sales, which were very strong in the prior quarter. The reduction in trust fees was due to higher fee collections during the fourth quarter for accounts that are billed on an annual basis. At March 31, 2014, total assets under management were approximately $1.238 billion compared to $1.259 billion at December 31, 2013 and $1.143 billion at March 31, 2013.

Mortgage Banking Fees. Mortgage banking fees decreased $29,000, or 4.4%, from . . .

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