Capital City Bank Group, Inc.

Reports First Quarter 2014 Results

TALLAHASSEE, Fla. (April 28, 2014) – Capital City Bank Group, Inc. (Nasdaq: CCBG) today reported 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, 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 operating expenses 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 operating expenses 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.

“Capital City posted a solid performance in the first quarter,” said William G. Smith, Chairman, President, and CEO of Capital City Bank Group.  The board reinstituted the quarterly dividend and authorized the repurchase of up to 1.5 million shares of common stock over the next five years – two important events taking place during the quarter.  Nonperforming assets fell 7.6% and, while it is too early to suggest the loan portfolio has stabilized, it was encouraging to report quarter-over-quarter growth for the first time since 2009.  Improving our credit quality and stabilizing our loan portfolio remain primary areas of focus in our 2014 strategy, as will continued efforts to right-size our expense base and identify new revenue opportunities. The economic outlook continues to brighten, though the pace of improvement is slow. There is still work to be done, but I am proud of our accomplishments and like our momentum coming out of the first quarter of 2014.”

The Return on Average Assets was 0.59% and the Return on Average Equity was 5.44% for the first quarter of 2014, compared to 0.43% and 4.33%, respectively, for the fourth quarter of 2013, and 0.13% and 1.36%, respectively, for the first quarter in 2013.

Discussion of Financial Condition

Average earning assets were $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 an increase of $27.4 million, or 1.2%, over the first quarter of 2013.  The increase compared to the fourth quarter of 2013 and first quarter of 2013 primarily reflects a higher level of deposits resulting from the influx of public funds and noninterest bearing deposits.

We maintained an average net overnight funds (deposits with banks plus federal funds sold less federal funds purchased) sold position of $467.3 million during the first quarter of 2014 compared to an average net overnight funds sold position of $411.6 million in the fourth quarter of 2013 and an average overnight funds sold position of $448.4 million in the first quarter of 2013.  The higher balance when compared to both prior periods primarily reflects the decline in the loan portfolio and higher deposits.

Slow economic growth in our markets and deleveraging by our clients continues to generate a historically high level of liquidity, which, given the current operating environment, is difficult to profitably deploy without taking inordinate risks. Where practical, we are working to lower the level of overnight funds by adding to our investment portfolio with short-duration, high quality securities and reducing deposit balances. We continue to use a fully-insured money market account which is offered by a third party and can serve as an alternative investment for some of our higher balance depositors while at the same time allowing us to maintain the account relationship. Until such time that attractive investment alternatives arise, we will continue to execute these strategies as well as seek other initiatives in an effort to lower our overnight fund balances.

When compared to the fourth and first quarters of 2013, average loans declined by $19.4 million and $100.9 million, respectively. Most loan categories have experienced declines with the reduction primarily in the commercial real estate and residential real estate categories. Without compromising our credit standards or taking on inordinate interest rate risk, we have modified several lending programs in our business and commercial real estate areas to try to mitigate the significant impact that consumer and business deleveraging is having on our portfolio. On a linked quarter basis, period-end loans increased $7.4 million, which was the first time since the second quarter of 2009 we have experienced quarter over quarter growth. Loan categories posting growth included commercial and industrial, construction and auto finance. The quarter over quarter growth reflects both an increase in production (which has increased in four of the last five quarters) as well as lower payoffs.

Nonperforming assets (nonaccrual loans and other real estate owned “OREO”) totaled $78.6 million at the end of the first quarter of 2014, a decrease of $6.4 million (8%) from the fourth quarter of 2013 and $25.3 million (24%) from the first quarter of 2013. Nonaccrual loans totaled $34.6 million at the end of the first quarter of 2014, a decrease of $2.4 million and $10.9 million, respectively, from the same prior year periods. Nonaccrual loan additions in the first quarter of 2014 totaled $7.5 million compared to $14.5 million and $7.7 million for the fourth and first quarters of 2013, respectively. The balance of OREO totaled $44.0 million at the end of the first quarter of 2014, a decrease of $4.0 million and $14.4 million, respectively, from the fourth and first quarters of 2013. For the first quarter of 2014, we added properties totaling $1.3 million, sold properties totaling $4.6 million, and recorded valuation adjustments totaling $0.7 million. 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.

Average total deposits 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.  The increase in deposits when compared to the fourth quarter of 2013 resulted primarily from the higher level of public funds, partially offset by a reduction in certificates of deposit. When compared to the first quarter of 2013, the increase was primarily a result of a higher level of noninterest bearing deposits and savings accounts, partially offset by lower certificates of deposit.

Deposit levels remain strong and our mix of deposits continues to improve 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.

Average borrowings decreased by $14.4 million when compared to the fourth quarter of 2013 as a result of lower balances in repurchase agreements, and were lower by $14.8 million when compared to the first quarter of 2013 due to a reduction in Federal Home Loan Bank (“FHLB”) advances.

Discussion of Operating Results

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 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.  The lower interest expense is attributable to favorable repricing on FHLB advances and certificates of deposit, which reflects both lower balances and favorable repricing.

Pressure on net interest income continues primarily as a result of the low rate environment and the declining loan portfolio.  The low rate environment, although favorable to the repricing of deposits, continues to negatively impact the loan and investment portfolios. Increased lending competition in all markets has also unfavorably impacted the pricing for loans.

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 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 decrease in the margin for both 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. 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.

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 quarter-end, 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.

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. The decrease in deposit fees was 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 less processing days in the current quarter. The decrease in wealth management fees was primarily attributable to a lower level of account activity by our retail brokerage clients as well as a decline in new retail investment product sales, which were very strong in the prior quarter. Data processing fees declined due to a lower level of fees from a government processing contract for which processing activity is gradually declining due to the client’s migration to a new processor in the second quarter of 2014. 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. The decline in mortgage banking fees reflects lower refinancing volume which is attributable to the higher rate environment. The decrease in deposit fees was due to a lower level of overdraft fees generally reflective of improved financial management by our clients.

Noninterest expense for the first quarter of 2014 totaled $28.4 million, a decrease of $1.3 million, or 4.3%, from the fourth quarter of 2013. The decrease reflects lower compensation expense of $0.8 million and a $0.6 million decrease in other expense partially offset by a $0.1 million increase in OREO expense. The decline in compensation expense reflects a $1.2 million reduction in pension plan expense partially offset by higher payroll taxes of $0.2 million and unemployment taxes of $0.2 million. The decrease in our pension plan expense is primarily attributable to the utilization of a higher discount rate in 2014 for determining plan liabilities reflective of an increase in long-term bond interest rates. The increase in payroll taxes reflects the reset of social security taxes and the increase in unemployment taxes is attributable to timing as a large portion of the annual premium is paid in the first quarter. Other expense decreased primarily due to lower FDIC insurance fees, with lower legal fees, processing fees, and advertising costs contributing to a lesser extent. Compared to the first quarter of 2013, noninterest expense decreased $2.8 million, or 8.9%, attributable to lower compensation expense of $1.0 million, OREO expense of $1.4 million, occupancy expense of $0.1 million, and other expense of $0.2 million. Lower pension expense of $1.3 million partially offset by a $0.3 million increase in performance compensation (cash incentives) drove the reduction in compensation expense. The decline in OREO expense was primarily attributable to lower losses from the sale of OREO and a decrease in property valuation adjustments. Lower facility maintenance costs and office lease expense drove the decline in occupancy expense. Other expense decreased due to lower FDIC insurance fees and legal fees.

We realized an income tax benefit of $1.4 million in the first quarter of 2014 compared to income tax expense of $5,000 and $0.4 million for the fourth and first quarters of 2013, respectively.  The first quarter was favorably impacted by a $2.2 million state tax benefit attributable to an adjustment in our reserve for uncertain tax positions associated with prior year matters. A similar adjustment in the amount of $0.9 million was realized in the fourth quarter of 2013. During 2014, we do not anticipate any further adjustments of this nature and, therefore, expect our effective income tax rate for the full year to be higher than the effective tax rate for the first quarter of 2014.

About Capital City Bank Group, Inc.

Capital City Bank Group, Inc. (Nasdaq: CCBG) is one of the largest publicly traded bank holding 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 63 full-service offices and 71 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 accuracy of the Company’s financial statement estimates and assumptions, including the estimate used for the Company’s loan loss provision and deferred tax valuation allowance; 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; 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 long-term impact on our net interest margin from the repeal of Regulation Q; negative publicity and the impact on our reputation; technological changes, especially changes that allow out of market competitors to compete in our markets; the effects of security breaches and computer viruses that may affect the Company’s computer systems; the Company’s need and our ability to incur additional debt or equity financing; a decrease to the market value of the Company that could result in an impairment of goodwill; changes in consumer spending and savings habits; the Company’s growth and profitability; changes in accounting; 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, 2013, 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.

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EARNINGS HIGHLIGHTS

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CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

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CONSOLIDATED STATEMENT OF OPERATIONS

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ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENT ASSETS

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AVERAGE BALANCE AND INTEREST RATES(1)

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(1) Interest and average rates are calculated on a tax-equivalent basis using the 35% Federal tax rate.

(2) Rate calculated based on average earning assets.