Description

Capital City Bank Group (CCBG) is a Tallahassee, Fl bank.  Though well capitalized, we still think it is a compelling short.  The thesis is that credit quality is rapidly deteriorating, management is overly optimistic and slow to reserve for loan losses, and valuation is extremely expensive. 

The table below highlights the deteriorating credit and low allowances

Peer analysis (from CCBG’s website, provided by SNL Financial)

Note: CCBG Q3 NPA/Assets is 2.7%.

As the table above indicates, CCBG’s peer group has both better credit quality and higher reserves.  CCBG appears aggressive by comparison on both these metrics

Assuming CCBG took reserves up to the peer median of 87.6% of NPAs, book value would decline by an incremental $28.8MM, or 1.68/share. This is a 14% reduction in TBV and raises P/TBV from 2.4x to nearly 2.8X.  This is a sky high valuation for a no-growth bank with rapidly deteriorating credit.  Sell-side estimates for 2009 are $1.47, but should come down as reality sets in.  We estimate that $1.35 is a more normal earnings number; implying current price is 21x.

Peers trade at about 1.9xTBV.  Using the adjusted TBV of CCBG of $10.26 ($11.94-$1.68), gets to a comp valuation of $19.50, or 14.4x P/E.

Bulls would argue that the loan book is better than many peers, with construction loans only at 7-8% of the portfolio.  While this is true, the loan book is overly exposed to real estate and consumer loans (consumer loans are 70% auto finance).  Needless to say, performance of these assets is bad and getting worse. 

CCBG Q3-08 loan portfolio

Management says that reserves are low as a % of NPAs because collateral levels and the ability to collect remain good.  But they cannot answer how much of their real estate loans are vacant land and they can’t give a current LTV estimate (they say they are working on figuring this out).  Furthermore, they are blaming the increase in the reserves they are taking on overly cautious appraisers.  Management may ultimately be proved right, but the current environment suggests otherwise

* Capital City Bank Group, Inc.'s peer group consists of the following: Ameris Bancorp (ABCB), City Holding Company (CHCO), First Bancorp (FBNC), First Community Bancshares, Inc. (FCBC), Renasant Corporation (RNST), SCBT Financial Corporation (SCBT), Seacoast Banking Corporation of Florida (SBCF), Simmons First National Corporation (SFNC), Superior Bancorp (SUPR)

Capital City Bank Group, Inc.'s financial data is as of 6/30/2008.

Peer financial data is as of 6/30/2008  except for these companies:

SCBT Financial Corporation's financial data is as of 9/30/2008.
Simmons First National Corporation's financial data is as of 9/30/2008. 

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