Capital City Bank Group, Inc. Reports Third Quarter 2010 Results

TALLAHASSEE, Fla., Oct. 26, 2010 (GLOBE NEWSWIRE) -- Capital City Bank Group, Inc. (Nasdaq:CCBG) today reported net income for the third quarter of 2010 totaling $0.4 million, or $0.02 per diluted share, compared to net income of $0.7 million, or $0.04 per diluted share, for the second quarter of 2010 and a net loss of $1.5 million, or $0.08 per diluted share, for the third quarter of 2009. For the first nine months of 2010, the Company reported a net loss of $2.3 million, or $0.14 per diluted share compared to a net loss of $0.1 million, or $0.00 per diluted share for the same period in 2009.

Net income for the third quarter reflects a loan loss provision of $5.7 million compared to $3.6 million for the second quarter of 2010. The increase in the loan loss provision and lower noninterest income of $1.2 million, partially offset by higher net interest income of $0.4 million and lower noninterest expense of $2.3 million, were the primary factors driving the reduction in earnings from the linked second quarter. Compared to the third quarter of 2009, a $6.7 million reduction in the loan loss provision, partially offset by a decline in net interest income of $1.8 million, lower noninterest income of $0.9 million and higher noninterest expense of $0.7 million, drove the improvement in earnings.

For the first nine months of 2010, lower net interest income of $7.5 million, a decline in noninterest income of $0.9 million, and higher noninterest expense of $3.6 million were the primary reasons for the decline in earnings over 2009.  A lower loss provision of $9.1 million helped offset the aforementioned unfavorable variances. 

"Given the current state of our economy, we were pleased to report a profit for the second consecutive quarter.  Credit related costs continue to be elevated, but our diligence and focus on resolving problem assets is paying benefits as our nonperforming assets fell $4.2 million to $145.6 million as of quarter-end.  Our capital levels remain strong and we believe we are well positioned to capitalize on opportunities evolving in our markets.  While resolving problem assets is a high priority, it is not to the detriment of serving our existing clients and growing our business," said William G. Smith, Jr., Chairman, President and Chief Executive Officer.

The Return on Average Assets was 0.06% and the Return on Average Equity was 0.60% for the third quarter of 2010. These metrics were 0.11% and 1.11% for the second quarter of 2010, and -0.24% and -2.15% for the third quarter of 2009, respectively.

For the first nine months of 2010, the Return on Average Assets was -0.12% and the Return on Average Equity was -1.17% compared to 0.00% and -0.03%, respectively, for the same period in 2009.

Discussion of Financial Condition

Average earning assets were $2.273 billion for the third quarter of 2010, a decrease of $56.2 million, or 2.4%, from the second quarter of 2010, and an increase of $35.6 million, or 1.6%, from the fourth quarter of 2009. The decrease from the second quarter is primarily attributable to a lower level of overnight funds of $15.1 million (reflecting the reduction in deposits), and problem loan resolutions, which have the effect of lowering the loan portfolio as loans are either charged off or transferred to the other real estate owned category. Growth over the fourth quarter is attributable to increases in overnight funds and investment securities of $139.6 million and $33.4 million, respectively, which were primarily funded by higher deposit balances. These increases were partially offset by problem loan resolutions. Average loans have declined throughout the portfolio, driven by reductions in the commercial real estate and construction loan categories. The portfolio continues to be impacted by weak loan demand attributable to the sluggish economy, but not at the levels we have experienced in recent quarters. In addition to lower production and normal amortization and payoffs, the reduction in the portfolio is also attributable to gross charge-offs and the transfer of loans to the other real estate owned category, which collectively accounted for $60.9 million, or 53%, of the net reduction of $114.7 million¹ in the portfolio during the first nine months of 2010.

At the end of the third quarter, nonperforming assets (including nonaccrual loans, restructured loans and other real estate owned) totaled $145.6 million, a decrease of $4.2 million from the second quarter of 2010, driven primarily by a decrease in restructured loans of $6.9 million - two large loans were restored to performing status due to paying as agreed under restructured terms. Nonaccrual loans realized a net decrease of $0.4 million in the current quarter as the volume of loans migrating to nonaccrual status was essentially offset by resolutions and transfers to the other real estate owned category. The $3.1 million increase in the other real estate owned balance reflects the aforementioned migration of nonaccrual loans through the foreclosure process as well as a slight slowdown in property dispositions. Nonperforming assets represented 7.86% of loans and other real estate at the end of the third quarter compared to 8.01% at the prior quarter-end and 7.38% at year-end 2009.

Average total deposits were $2.172 billion for the third quarter, a decrease of $62.0 million, or 2.8%, from the second quarter of 2010 and an increase of $82.2 million, or 3.9%, from the fourth quarter of 2009. Deposit levels are strong, but down slightly from the second quarter level, primarily attributable to lower money market account and certificates of deposit balances, and a decline in public funds. The money market account promotion launched during the third quarter of 2009 and concluded in the fourth quarter, experienced runoff as rates were eased during the current quarter to standard levels. Despite the lowering of rates, the bank has retained in excess of $24.4 million in new deposit balances. This initiative served to support our core deposit growth strategy while succeeding in further strengthening the Bank's overall liquidity position. Certificates of deposit declined primarily due to the maturity of one large public fund CD and a reduction in the number of single relationship, higher yielding certificates of deposit with the Bank.   Public funds balances have declined as anticipated from the linked quarter reflecting seasonality within this deposit category. Our Absolutely Free Checking ("AFC") products continue to be successful as both balances and the number of accounts increased quarter over quarter. 

We continue to pursue prudent pricing discipline to manage the mix of our deposits. Therefore, we are not attempting to compete with higher rate paying competitors for deposits. The increase from the fourth quarter of 2009 reflects higher public funds of $37.3 million and core deposits of $44.9 million, fueled primarily by the success of the AFC products. 

We maintained an average net overnight funds (deposits with banks plus fed funds sold less fed funds purchased) sold position of $246.9 million during the third quarter of 2010 compared to an average net overnight funds sold position of $262.2 million in the prior quarter and an average overnight funds sold position of $112.8 million in the fourth quarter of 2009. The lower balance when compared to the linked quarter primarily reflects the decline in deposits mentioned above, partially offset by the lower investment and loan portfolios. The favorable variance as compared to year-end is primarily attributable to the growth in deposits and net reductions in the loan portfolio, partially offset by a higher balance in the investment portfolio. Late in the third quarter, a portion of the funds sold position was deployed into the investment portfolio.   We will continue to evaluate deploying the excess funds sold position into the investment portfolio during the fourth quarter of 2010.

Equity capital was $260.7 million as of September 30, 2010, compared to $261.7 million as of June 30, 2010 and $267.9 million as of December 31, 2009. Our leverage ratio was 9.75%, 9.58%, and 10.39%, respectively, for the comparable periods. Further, our risk-adjusted capital ratio of 14.29% at September 30, 2010 exceeds the 10.0% threshold to be designated as "well-capitalized" under the risk-based regulatory guidelines. At September 30, 2010, our tangible common equity ratio was 6.98%, compared to 6.80% at June 30, 2010 and 6.84% at December 31, 2009.   

Discussion of Operating Results

Tax equivalent net interest income for the third quarter of 2010 was $25.1 million compared to $24.7 million for the second quarter of 2010 and $27.1 million for the third quarter of 2009. For the first nine months of 2010, tax equivalent net interest income totaled $74.3 million compared to $82.4 million in 2009.

The increase of $0.4 million in tax equivalent net interest income on a linked quarter basis was due to lower interest expense, one additional calendar day, and a continued decrease in foregone interest on nonaccrual loans, partially offset by a reduction in loan income attributable to declining loan balances, and continued unfavorable asset repricing. Lower interest expense reflects a reduction in deposit rates primarily in the categories of NOWs, money market accounts and certificates of deposit.  

The decrease of $8.1 million in tax equivalent net interest income for the first nine months of 2010, as compared to the same period in 2009, resulted from a reduction in loans outstanding, lower earning assets yields reflecting unfavorable asset repricing, higher foregone interest and lower loan fees, partially offset by a reduction in interest expense.

The net interest margin in the third quarter of 2010 was 4.38%, an increase of 12 basis points over the linked quarter and a decline of 61 basis points from the third quarter of 2009. The increase in the margin when compared to the linked quarter was a result of a 12 basis point reduction in the cost of funds, as the yield on earning assets remained constant. The lower cost of funds resulted from a reduction in the rates on NOW accounts primarily to comply with the Transaction Account Guarantee Program changes. Rates were lowered on the money market promotional accounts while certificates of deposit rates were significantly reduced in all markets. The decline in the margin for the first nine months of 2010 is attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a favorable variance in our average cost of funds. Strong deposit growth experienced in the fourth quarter of 2009 and the first half of 2010 improved our liquidity position, but has also adversely impacted our margin in the short term as a significant portion of this growth is currently invested in overnight funds.  

The provision for loan losses for the third quarter of 2010 was $5.7 million compared to $3.6 million in the second quarter of 2010 and $12.3 million for the third quarter of 2009. For the first nine months of 2010, the loan loss provision totaled $20.0 million compared to $29.2 million for the same period in 2009. The higher provision over the second quarter primarily reflects an increase in the volume of loans migrating to impaired status and collateral devaluation on existing impaired loans. The lower provision for the first nine months of the year primarily reflects a reduction in the level of loans migrating into our problem loan pool as well as other stabilizing trends within the loan portfolio. Net charge-offs in the third quarter totaled $6.4 million, or 1.40% of average loans, compared to $6.4 million, or 1.39%, in the second quarter of 2010. At quarter-end, the allowance for loan losses was 2.10% of outstanding loans (net of overdrafts) and provided coverage of 40% of nonperforming loans compared to 2.11% and 38%, respectively, at the end of the prior quarter.

Noninterest income for the third quarter decreased $1.2 million, or 8.3%, from the linked quarter attributable to lower deposit fees ($0.6 million), retail brokerage fees ($0.2 million), and other income ($0.5 million). The decline in deposit fees was attributable to a lower level of overdraft fees due to reduced activity and to a lesser extent a higher level of overdraft charge-offs. The reduction in overdraft activity reflects current economic conditions and a higher level of consumer awareness that have both impacted consumer and business spending habits, as well as the recent implementation of new rules under Regulation E, which regulate our ability to post one-time debit card/ATM transactions for clients who have not opted in to our overdraft protection service. The lower level of retail brokerage fees is primarily reflective of lower trading activity. The decline in other income is due to a reduced level of merchant fees - a substantial portion of our merchant portfolio was sold in July 2008 and over the course of 2009 our merchants migrated to a new processor. For 2010, we continued to service our largest remaining merchant who migrated to a new processor during the third quarter of 2010. The reduction in this revenue source has been substantially offset by a reduction in processing costs which is reflected in noninterest expense (interchange fees). For the first nine months of 2010, noninterest income declined $0.9 million, or 2.1%, from the same period in 2009 attributable to lower deposit fees ($0.9 million) and other income ($1.2 million), partially offset by an increase in debit card and interchange fees ($0.9 million). The declines in deposit and merchant fees are attributable the same aforementioned factors for the current quarter. The higher level of debit card fees reflect a new rewards program implemented in early 2010 as well as a higher level of card activation and utilization.   

Total noninterest expense decreased $2.3 million, or 6.5%, from the linked quarter driven by a reduction in expense for other real estate properties ($0.8 million), FDIC insurance ($0.4 million), advertising costs ($0.5 million), pension plan expense ($0.4 million), and interchange fees ($0.3 million). The decline in other real estate expense reflects a lower level of property valuation write-downs. The favorable variance in FDIC insurance reflects a higher required expense in the prior quarter due to an adjustment in our premium rate. The lower level of pension expense reflects a year-to-date adjustment after receipt of accounting reports from our actuary which included better than estimated asset return performance. The decline in interchange fees reflects the migration of our last merchant services client to a new processor – this decline is substantially offset by a corresponding decline in merchant fee revenue. For the first nine months of 2010, as compared to the same period in 2009, noninterest expense increased $3.6 million, or 3.7%, due primarily to higher expense for other real estate properties ($6.2 million), partially offset by lower pension expense ($1.4 million), advertising expense ($0.4 million), and intangible asset amortization ($0.9 million). A higher level of other real estate owned properties drove the increase in other real estate expenses. The decline in pension expense reflects improved return on pension plan assets. Closer management of costs related to our free checking products as well as lower public relations expense contributed to the decline in advertising expense. The lower level of intangible asset amortization reflects the full amortization of a core deposit intangible.   

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 79 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 frequency and magnitude of foreclosure of the Company's loans; the effects of the Company's lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; the accuracy of the Company's financial statement estimates and assumptions, including the estimate for the Company's loan loss provision and the valuation allowance on deferred tax assets; restrictions on our operations, including the inability to pay dividends without our regulators' consent; continued depression of the market value of the Company that could result in an impairment of goodwill; the Company's ability to integrate acquisitions; the strength of the U.S. economy and the local economies where the Company conducts operations; harsh weather conditions and manmade disasters; fluctuations in inflation, interest rates, or monetary policies; changes in the stock market and other capital and real estate markets; legislative or regulatory changes; customer acceptance of third-party products and services; increased competition and its effect on pricing; 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; 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, 2009, 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 $114.7 million reduction in the loan portfolio and the $60.9 million in loan resolutions are based on "as of" balances not averages.