Capital City Bank Group, Inc. Reports Second Quarter 2012 Results

TALLAHASSEE, Fla., July 24, 2012 (GLOBE NEWSWIRE) -- Capital City Bank Group, Inc. (Nasdaq:CCBG) today reported a net loss of $1.7 million, or $0.10 per diluted share, compared to a net loss of $1.2 million, or $0.07 per diluted share for the first quarter of 2012, and net income of $2.1 million, or $0.12 per diluted share, for the second quarter of 2011. For the first six months of 2012, the Company reported a net loss of $2.9 million, or $0.17 per diluted share, compared to net income of $3.5 million, or $0.20 per diluted share for the same period in 2011.

Compared to the first quarter of 2012, performance reflects lower operating revenues of $0.3 million and a higher loan loss provision of $0.9 million, partially offset by lower noninterest expense of $0.3 million and income taxes of $0.4 million.

Compared to the second quarter of 2011, the reduction in earnings was due to lower operating revenues of $2.9 million, a higher loan loss provision of $2.2 million, and an increase in noninterest expense of $1.1 million, partially offset by lower income taxes of $2.4 million.

The decrease in earnings for the first half of 2012 is attributable to lower operating revenues of $7.0 million, a higher loan loss provision of $2.9 million, and an increase in noninterest expense of $0.3 million, partially offset by lower income taxes of $3.8 million. Earnings for the first half of 2011 reflect the sale of our Visa Class B shares of stock which resulted in a net pre-tax gain of $2.6 million ($3.2 million pre-tax gain included in noninterest income and recognition of a $0.6 million swap liability included in noninterest expense).

"Although there are some noted improvements, the north Florida and south Georgia economies, which are heavily dependent on real estate markets, continue to present a difficult operating environment," said William G. Smith, Jr., Chairman, President and CEO. "While weak loan demand puts pressure on our net interest margin, our pre-tax, pre-credit cost earnings were comparable to the first quarter as we continue to trim expenses. On the credit quality front, we continue to experience a lighter volume of loans moving to nonperforming status while sales of other real estate remain active. Our office network will always be an important distribution channel for Capital City, but our clients are changing the way they wish to transact business with us and, as a result, we are adjusting our strategies to meet our clients' needs. We recently announced the closure of four offices, which not only reflects the changing habits of our clients, but supports our overall efforts to improve efficiency. While disappointed with the second quarter loss, our management team is working diligently to capitalize on market opportunities and to allocate resources to those aspects of our business that will return Capital City to its historical earnings level."

The Return on Average Assets was -0.26% and the Return on Average Equity was -2.75% for the second quarter of 2012. These metrics were -0.18% and -1.84% for the first quarter of 2012, and 0.33% and 3.28% for the second quarter of 2011, respectively.

For the first half of 2012, the Return on Average Assets was -0.22% and the Return on Average Equity was -2.29% compared to 0.26% and 2.66%, respectively, for the first half of 2011.

Discussion of Financial Condition

Average earning assets were $2.263 billion for the second quarter of 2012, a decrease of $5.5 million, or 0.2%, from the first quarter of 2012, and an increase of $116.4 million, or 5.4%, over the fourth quarter of 2011.  As compared to the linked quarter, the decline in average earning assets attributable to problem loan resolutions and lower deposits was partially offset by an increase in short-term borrowings and other liabilities. The shift in the mix of earning assets continued as the loan and investment portfolio declined when compared to the prior quarter. The increase compared to the fourth quarter of 2011 primarily reflects the higher level of deposits resulting from the seasonal influx of public funds. 

We maintained an average net overnight funds (deposits with banks plus fed funds sold less fed funds purchased) sold position of $411.4 million during the second quarter of 2012 compared to an average net overnight funds sold position of $373.0 million in the linked quarter and an average overnight funds sold position of $191.8 million in the fourth quarter of 2011.  The higher balance when compared to both periods reflects a decrease in the loan and investment portfolios. Higher public fund balances was also a significant contributor to the increase when compared to the fourth quarter of 2011.

When compared to the first quarter of 2012 and the fourth quarter of 2011, average loans declined (a portion of which is attributable to problem loan resolution) by $25.7 million and $75.9 million, respectively. Most loan categories have experienced declines with the reduction primarily in the commercial real estate and residential categories. Our core loan portfolio continues to be impacted by normal amortization and a higher level of payoffs that have outpaced our new loan production. New loan production continues to be impacted by weak loan demand attributable to the trend toward consumers and businesses deleveraging, the lack of consumer confidence, and a persistently sluggish economy. 

Several new lending programs were introduced during the first half of 2012 to mitigate the impact that consumer and business deleveraging is having on our portfolio. These programs, which are primarily used in our business and commercial real estate lending areas, have had a positive impact as the rate of decline has slowed during the quarter.        

The resolution of problem loans (which has the effect of lowering the loan portfolio as loans are either charged off or transferred to other real estate "OREO") also contributed to the overall decline.  During the second quarter of 2012, loan charge-offs and loans transferred to OREO accounted for $15.9 million, or 70%, of the net reduction in total loans of $22.6 million from the first quarter of 2012. Compared to the fourth quarter of 2011, loan resolution accounted for $25.3 million, or 35%, of the net reduction in loans of $72.4 million¹. 

Nonperforming assets (nonaccrual loans and OREO) totaled $132.8 million at the end of the second quarter of 2012 compared to $136.8 million at the end of the first quarter of 2012 and $137.6 million at the end of the fourth quarter of 2011. Nonaccrual loans totaled $74.8 million, a decrease of $3.9 million from the first quarter of 2012 and $0.3 million from the fourth quarter of 2011, reflective of loan charge-offs and the migration of loans to OREO, which outpaced gross additions.   Gross additions declined for the second straight quarter and represented the lowest quarterly amount thus far in this cycle. The balance of OREO totaled $58.1 million at the end of the second quarter, comparable to the prior quarter and a $4.5 million decrease from the fourth quarter of 2011. We continue to experience progress in our efforts to dispose of OREO by selling properties totaling $13.1 million during the first half of the year. Nonperforming assets represented 5.02% of total assets at June 30, 2012 compared to 5.14% at March 31, 2012 and 5.21% at December 31, 2011.

Average total deposits were $2.136 billion for the second quarter of 2012, a decrease of $25.7 million, or 1.2%, from the linked quarter and higher by $102.7 million, or 5.1%, from the fourth quarter of 2011.  The decrease in deposits when compared to the linked quarter resulted from lower public funds, certificates of deposit and noninterest bearing accounts, partially offset by growth in regular savings and money market accounts. Compared to the fourth quarter of 2011, the increase was driven primarily by higher public fund balances, savings and noninterest bearing deposits. This was partially offset by a reduction of certificates of deposit.  Although public funds are seasonal in nature, they continue to represent a large component of our deposit mix.

Our mix of deposits continues to change as higher cost certificates of deposit are replaced with lower rate non-maturity deposits and noninterest bearing demand accounts.  Prudent pricing discipline will continue to be the key to managing our mix of deposits.  Therefore, we do not attempt to compete with higher rate paying competitors for deposits. 

During the second half of 2012, we may realize some attrition in noninterest bearing deposit balances due to the unlimited government guarantee on noninterest bearing accounts, which if not extended, is set to expire at year-end. Our average noninterest bearing deposits are approximately 27.9% of our total deposits.

Borrowings increased by $23.3 million when compared to the first quarter of 2012 and were higher by $20.3 million when compared to the fourth quarter of 2011, as a result of higher balances in repurchase agreements, partially offset by payments on FHLB advances.

Discussion of Operating Results

Tax equivalent net interest income for the second quarter of 2012 was $21.2 million compared to $21.8 million for the first quarter of 2012 and $23.7 million for the second quarter of 2011.  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 and a lower level of foregone interest on loans.  The lower interest expense is primarily attributable to certificates of deposit and reflects both lower balances and favorable repricing. For the six months ended June 30, 2012, tax equivalent net interest income totaled $43.1 million compared to $47.0 million for the same period of 2011.

The decline in the loan portfolio, coupled with the low rate environment continues to put pressure on our net interest income.  The loan portfolio yield is declining as the average rate on the production is lower and the existing portfolio reprices. 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. 

The net interest margin for the second quarter of 2012 was 3.77%, a decrease of 10 basis points from the first quarter of 2012 and a decline of 44 basis points from the second quarter of 2011.  Year-to-date net interest margin of 3.82% declined 35 basis points from the comparable period in 2011. The decrease in the margin for all comparable periods is attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a lower average cost of funds.

The provision for loan losses for the second quarter of 2012 was $5.7 million compared to $4.8 million in the first quarter of 2012 and $3.5 million for the second quarter of 2011. The increase over both periods was driven by higher loan loss experience and the associated impact on our general reserve needs. For the first six months of 2012, the loan loss provision totaled $10.5 million compared to $7.7 million for the same period in 2011 with the increase primarily attributable to an increase in impaired loans. Net charge-offs for the second quarter of 2012 totaled $7.0 million, or 1.80%, of average loans (annualized) compared to $4.6 million, or 1.16%, for the first quarter of 2012 and $6.3 million, or 1.49%, in the second quarter of 2011. For the first half of 2012, net charge-offs totaled $11.6 million, or 1.48%, of average loans (annualized) compared to $12.0 million, or 1.41%, for the same period of 2011. At quarter-end, the allowance for loan losses of $29.9 million was 1.93% of outstanding loans (net of overdrafts) and provided coverage of 40% of nonperforming loans compared to 1.98% and 40%, respectively, at March 31, 2012, and 1.91% and 41%, respectively, at December 31, 2011.

Noninterest income for the second quarter of 2012 totaled $13.9 million, an increase of $0.3 million, or 2.4%, over the first quarter of 2012 and a decrease of $0.5 million, or 3.8%, from the second quarter of 2011. The increase over the first quarter of 2012 was driven primarily by higher retail brokerage fees of $0.1 million and an increase in other income of $0.2 million, primarily due to gains from the sale of OREO properties. Compared to the second quarter of 2011, the decrease primarily reflects a reduction in other income due to a lower level of gains realized from the sale of OREO properties. For the first six months of 2012, noninterest income totaled $27.5 million, a decrease of $3.3 million from the same period of 2011 attributable to the Visa gain realized in the first quarter of 2011. Higher deposit fees, mortgage banking fees, and bank card fees partially offset by lower data processing fees and a reduction in gains from the sale of OREO properties also contributed to the variance. The increase in deposit fees reflects a lower level of overdraft charge-offs. Increased loan production drove the higher level of mortgage banking fees reflecting increased home purchase activity in our markets. The increase in bank card fees was attributable to an increase in active cards and higher card utilization. Data processing fees declined due to a reduction in the number of banks that we process for as two of our user banks were acquired and discontinued service in early 2011.                

Noninterest expense for the second quarter of 2012 totaled $32.3 million, a decrease of $0.3 million, or 0.9%, from the first quarter of 2012 and an increase of $1.1 million, or 3.6%, over the second quarter of 2011. The decrease compared to the first quarter of 2012 reflects a reduction in salaries/associate benefit expense of $0.7 million partially offset by higher other expense of $0.4 million. The decrease in salaries/associate benefits was due to a decline in unemployment taxes and pension plan expense. Higher advertising expense and severance costs related to the closing of four banking offices and outsourcing of our items processing function drove the variance in other expense. The increase compared to the second quarter of 2011 was primarily attributable to a higher expense for OREO and an increase in other expense. The increase in OREO expense reflects a higher level of valuation adjustments for our OREO portfolio and the increase in other expense was due to higher professional fees and the aforementioned severance costs. For the first six months of 2012, noninterest expense totaled $64.9 million, an increase of $0.4 million, or 0.6%, over the same period of 2011 primarily attributable to higher expense for salaries/associate benefits of $0.4 million and OREO of $0.3 million, partially offset by lower occupancy expense of $0.3 million. The variance in salaries/associate benefit expense reflects higher expense for our pension plan partially offset by lower performance compensation. Utilization of a lower discount rate in 2012 due to lower long-term bond interest rates drove the increase in pension expense. Higher carrying costs drove the increase in OREO expense. Occupancy expense declined due to lower building maintenance costs.

About Capital City Bank Group, Inc.

Capital City Bank Group, Inc. (Nasdaq:CCBG) is one of the largest publicly traded financial services companies headquartered in Florida and has approximately $2.6 billion in assets. The Company provides a full range of banking services, including traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bankcards, data processing and securities brokerage services. The Company's bank subsidiary, Capital City Bank, was founded in 1895 and now has 70 banking offices and 74 ATMs in Florida, Georgia and Alabama. For more information about Capital City Bank Group, Inc., visit www.ccbg.com.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this Press Release are based on current plans and expectations that are subject to uncertainties and risks, which could cause the Company's future results to differ materially. The following factors, among others, could cause the Company's actual results to differ: the Company's need and our ability to incur additional debt or equity financing; the accuracy of the Company's financial statement estimates and assumptions, including the estimate for the Company's loan loss provision; continued depression of the market value of the Company that could result in an impairment of goodwill; legislative or regulatory changes, including the Dodd-Frank Act and Basel III; the strength of the U.S. economy and the local economies where the Company conducts operations; the frequency and magnitude of foreclosure of the Company's loans; restrictions on our operations, including the inability to pay dividends without our regulators' consent; the effects of the health and soundness of other financial institutions, including the FDIC's need to increase Deposit Insurance Fund assessments; the effects of the Company's lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; harsh weather conditions and man-made disasters; fluctuations in inflation, interest rates, or monetary policies; changes in the stock market and other capital and real estate markets; customer acceptance of third-party products and services; increased competition and its effect on pricing, including the impact on our net interest margin from the repeal of Regulation Q; negative publicity and the impact on our reputation; technological changes; the effects of security breaches and computer viruses that may affect the Company's computer systems; changes in consumer spending and savings habits; the Company's growth and profitability; changes in accounting; the Company's ability to integrate acquisitions; and the Company's ability to manage the risks involved in the foregoing. Additional factors can be found in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and the Company's other filings with the SEC, which are available at the SEC's internet site (http://www.sec.gov). Forward-looking statements in this Press Release speak only as of the date of the Press Release, and the Company assumes no obligation to update forward-looking statements or the reasons why actual results could differ.

¹ The reductions in loan portfolio balances stated in this paragraph are based on "as of" balances, not averages.

CONTACT: For Information Contact:
         J. Kimbrough Davis
         Executive Vice President and Chief Financial Officer
         850.402.7820

Released July 24, 2012