Capital City Bank Group, Inc.
Reports Second Quarter 2010 Results
TALLAHASSEE, Fla. (July 20, 2010) – Capital City Bank Group, Inc. (NASDAQ: CCBG) today reported net income for the second quarter of 2010 totaling $0.7 million ($0.04 per diluted share) compared to a net loss of $3.5 million ($0.20 per diluted share) for the first quarter of 2010 and net income of $0.8 million ($0.04 per diluted share) for the second quarter of 2009. For the first six months of 2010, the Company reported a net loss of $2.7 million ($0.16 per diluted share) compared to net income of $1.4 million ($0.08 per diluted share) for the same period in 2009.
Net income for the second quarter reflects a loan loss provision of $3.6 million compared to $10.7 million for the first quarter of 2010 and $8.4 million for the second quarter of 2009. The decline in the loan loss provision was the primary factor driving earnings improvement over the first quarter. Operating revenues (net interest income plus noninterest income) increased $1.1 million, or 2.8%, over the first quarter due to higher fee income and an improved net interest margin, but were offset by higher noninterest expense of $1.2 million, or 3.7%. Compared to the second quarter of 2009, a $4.8 million reduction in the loan loss provision was offset by a decline in net interest income of $2.7 million, or 10.1%, and higher noninterest expense of $1.7 million, or 5.1%.
The decline in earnings for the first half of 2010 is attributable to lower net interest income of $5.7 million, or 10.5%, as well as higher noninterest expense of $2.8 million, or 4.3%. For the first six months of 2010, the Company recorded a loan loss provision of $14.4 million compared to $16.8 million for the same period of 2009.
“Improvement in our credit quality metrics was an encouraging sign during the second quarter,” said William G. Smith, Jr., Chairman, President and Chief Executive Officer. While we continue to anticipate the road to recovery will be bumpy, we are encouraged by our return to profitability and overall performance in the second quarter.”
“Other positive aspects of the quarter include healthy capital ratios, which were essentially unchanged quarter over quarter, ample liquidity affording us flexibility in an uncertain market and a very stable, low cost core deposit base. Although we have worked hard to continue to originate loans throughout this prolonged cycle, the availability of quality new credits remains limited and has resulted in a net reduction in our loan portfolio over the last three quarters,” Smith stated.
The Return on Average Assets was .11% and the Return on Average Equity was 1.11% for the second quarter of 2010. These metrics were -.52% and -5.23% for the first quarter of 2010, and .12% and 1.12% for the second quarter of 2009, respectively.
For the first half of 2010, the Return on Average Assets was -.20% and the Return on Average Equity was -2.07% compared to .12% and 1.03%, respectively, for the first half of 2009.
Discussion of Financial Condition
Average earning assets were $2.329 billion for the second quarter of 2010, a decrease of $28.9 million, or 1.2%, from the first quarter of 2010, and an increase of $91.8 million, or 4.1%, from the fourth quarter of 2009. The decrease from the first quarter is primarily attributable to a reduction in the funds position of $35.7 million and a decline in the loan portfolio of $45.0 million, partially offset by an increase to the investment portfolio of $51.8 million. Growth over the fourth quarter is primarily attributable to an increase in the overnight funds position of $154.8 million and a higher investment portfolio of $40.5 million, partially offset by a $103.5 million decline in the loan portfolio. Average loans have declined throughout the portfolio, driven primarily by reductions in the commercial real estate and construction loan categories. The portfolio continues to be impacted by diminished loan demand, attributable to the weak economy, as we have experienced lower production levels in recent quarters. In addition to lower production and normal amortization and payoffs, the reduction in the portfolio is also attributable to charge-offs and the transfer of loans to the Other Real Estate Owned category, which collectively, accounted for $43.7 million, or 42%, of the net reduction during the first half of 2010.
At the end of the second quarter, nonperforming assets (including nonaccrual loans, restructured loans and other real estate owned) totaled $149.8 million, a decrease of $3.9 million from the first quarter of 2010, driven primarily by a decrease in restructured loans of $3.6 million. Nonaccrual loans decreased $1.9 million in the current quarter reflecting the continued slowing of loans migrating into our problem loan pool and the transfer of loans to the other real estate owned category, which increased $1.7 million. Quarter over quarter, gross additions to our problem loan pool fell by more than 50%. Nonperforming assets represented 8.01% of loans and other real estate at the end of the second quarter compared to 8.10% at the prior quarter-end and 7.38% at year-end 2009.
Average total deposits were $2.234 billion for the second quarter, a decrease of $14.6 million, or 0.7%, from the first quarter of 2010 and an increase of $144.2 million, or 6.9%, from the fourth quarter of 2009. Deposit levels remain strong but down slightly from the first quarter level, primarily attributable to lower money market balances and public funds. Our money market account promotion, which was launched during the third quarter of 2009 and concluded in the fourth quarter, has experienced runoff as rates were eased during the current quarter, but has generated in excess of $50.0 million in new deposit balances and served to support our core deposit growth initiatives and to further strengthen the bank’s overall liquidity position. Public funds balances have declined slightly from the link ed quarter reflecting anticipated seasonality within this deposit category. Our Absolutely Free Checking (“AFC”) products continue to be successful as both balances and the number of accounts continue to post growth quarter over quarter. We continue to pursue prudent pricing discipline and to manage the mix of our deposits. Therefore, we are not attempting to compete with higher rate paying competitors for deposits. The improvement from the fourth quarter reflects higher public funds of $80.2 million and core deposits of $58.6 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 $262.2 million during the second quarter of 2010 compared to an average net overnight funds sold position of $112.8 million in the fourth quarter of 2009 and an average overnight funds sold position of $297.0 million in the prior quarter. The favorable variance as compared to year-end is primarily attributable to the growth in deposits and net reductions in the loan portfolios, partially offset by higher balance in the investment portfolio. The lower balance when compared to the linked quarter primarily reflects the pur chase of investment securities. If appropriate, we will continue to look to deploy a portion of the funds sold position in the investment portfolio during the second half of 2010.
Equity capital was $261.7 million as of June 30, 2010, compared to $262.0 million as of March 31, 2010 and $267.9 million as of December 31, 2009. Our leverage ratio was 9.58%, 9.64%, and 10.39%, respectively, for the comparable periods. Further, our risk-adjusted capital ratio of 14.14% at June 30, 2010 exceeds the 10.0% threshold to be designated as “well-capitalized” under the risk-based regulatory guidelines. At June 30, 2010, our tangible common equity ratio was 6.80%, compared to 6.62% at March 31, 2010 and 6.84% at December 31, 2009.
Discussion of Operating Results
Tax equivalent net interest income for the second quarter of 2010 was $24.7 million compared to $24.5 million for the first quarter of 2010 and $27.7 million for the second quarter of 2009. For the first half of 2010, tax equivalent net interest income totaled $49.2 million compared to $55.3 million in 2009.
The increase of $0.2 million in tax equivalent net interest income on a linked quarter basis was due to one additional calendar day, a decrease in foregone interest on nonaccrual loans and lower interest expense, 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 money market accounts and certificates of deposit.
The decrease of $6.1 million in tax equivalent net interest income for the first half 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 second quarter of 2010 was 4.26%, an increase of five basis points over the linked quarter and a decline of 85 basis points from the second quarter of 2009. The increase in the margin when compared to the linked quarter was a result of a 10 basis point reduction in the cost of funds, partially offset by a lower yield on earning assets of five basis points. The lower cost of funds was a result of a reduction in the rates on the money market promotional accounts and certificates of deposit. The decline from the second quarter of 2009 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 in recent quarters has improved our liquidity position , but has adversely impacted our margin in the short term as a significant portion of this growth is currently invested in overnight funds. As we determine what portion of this growth is permanent, if appropriate, we will begin deploying the overnight funds into the investment portfolio.
The provision for loan losses for the second quarter of 2010 was $3.6 million compared to $10.7 million in the first quarter of 2010 and $8.4 million for the second quarter of 2009. For the first six months of 2010, the loan loss provision totaled $14.4 million compared to $16.8 million for the same period in 2009. The lower provision for the current quarter and first half of the year primarily reflects a significant reduction in the level of loans migrating into our problem loan pool. A lower level of inherent losses for the non-impaired portion of our loan portfolio, driven by improving risk factors, also favorably impacted the provision for the current quarter. Net charge-offs in the second quarter totaled $6.4 million, or .55% of average loans, compared to $13.5 million, or 2.91%, i n the first quarter of 2010. The reduction in net charge-offs compared to the first quarter primarily reflects charge-offs realized in the prior quarter for three large real estate loans that were migrating to the other real estate category. At quarter-end, the allowance for loan losses was 2.11% of outstanding loans (net of overdrafts) and provided coverage of 38% of nonperforming loans compared to 2.23% and 38%, respectively, at the end of the prior quarter.
Noninterest income for the second quarter of 2010 increased $707,000, or 5.1%, from the first quarter of 2010 attributable to higher deposit fees of $411,000 and retail brokerage fees of $281,000. The improvement in deposit fees reflects a favorable one-day calendar variance and higher activity levels. The increase in retail brokerage fees was primarily driven by higher trading volume. For the first six months of 2010, we realized a $34,000, or 0.1%, decline in noninterest income, primarily reflecting lower deposit and mortgage banking fees, partially offset by an increase in retail brokerage fees and debit card fees.
Noninterest expense increased $1.2 million, or 3.7%, from the first quarter of 2010 driven by higher expense for other real estate properties of $1.3 million, which includes holding costs as well as valuation adjustments due to property devaluation, and increased FDIC insurance premiums of $795,000. Lower expense for cash and stock incentives of $800,000, attributable to lower than expected associate and company performance, partially offset the aforementioned increases. For the first six months of 2010, as compared to the same period in 2009, noninterest expense increased $2.8 million, or 4.3%, due primarily to higher expense for other real estate properties of $4.8 million, partially offset by lower pension expense of $1.2 million and intangible amortization of $0.6 million.
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 $2.7 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; 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 con ditions; 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.
