Capital City Bank Group, Inc.

Reports Second Quarter 2018 Results

TALLAHASSEE, Fla. (July 24, 2018) – Capital City Bank Group, Inc. (NASDAQ: CCBG) today reported net income of $6.0 million, or $0.35 per diluted share for the second quarter of 2018 compared to net income of $5.8 million, or $0.34 per diluted share for the first quarter of 2018, and $3.6 million, or $0.21 per diluted share, for the second quarter of 2017.  For the first six months of 2018, net income totaled $11.8 million, or $0.69 per diluted share, compared to net income of $6.3 million, or $0.37 per diluted share for the same period of 2017.

Net income for the first six months of 2018 included tax benefits totaling $2.9 million, or $0.17 per diluted share (1Q - $1.5 million, or $0.09 per diluted share and 2Q - $1.4 million, or $0.08 per diluted share) related to 2017 plan year pension plan contributions.        

HIGHLIGHTS

·       Net interest income up 4.6% sequentially and 10.7% over prior year

·       Net interest margin of 3.58%, up 15 basis points over prior quarter

·       Period-end loan growth of $66 million, or 4.0% over prior quarter

·       Strong year over year growth in average deposit balances of $54 million, or 2.3%

·       Year-to-date net charge-offs at 16 basis points continues to reflect the quality of our loan portfolio

·       Common equity tier 1 ratio of 13.5% and total risk based capital ratio of 17.0%

“I am very encouraged by our results in the first half and particularly pleased with the loan growth and margin expansion achieved in the second quarter,” said William G. Smith, Jr., Chairman, President and CEO. “Rising rates, loan growth and a phenomenal core deposit base are all contributing to higher net interest income. Credit quality continues to improve and the strength of our Florida and Georgia economies is driving continued improvement in our market demographics. Lowering our efficiency ratio is a top priority, and we have multiple strategies in place to grow revenues and manage expenses. There is more to be done, but I am pleased with our progress as we remain focused on strategies that produce long-term value for our shareowners.”

Compared to the first quarter of 2018, the $0.5 million increase in operating profit reflected a $1.0 million increase in net interest income and higher noninterest income of $0.1 million, partially offset by higher noninterest expense of $0.5 million and a $0.1 million increase in the loan loss provision.

Compared to the second quarter of 2017, the $1.0 million increase in operating profit was attributable to higher net interest income of $2.3 million, partially offset by lower noninterest income of $0.6 million, a $ 0.5 million increase in noninterest expense, and a $0.2 million increase in the loan loss provision.

The increase in operating profit for the first six months of 2018 versus the comparable period of 2017 was attributable to higher net interest income of $4.3 million that was partially offset by lower noninterest income of $0.8 million, higher noninterest expense of $0.5 million, and $0.7 million increase in the loan loss provision.

Our return on average assets (“ROA”) was 0.84% and our return on average equity (“ROE”) was 8.25% for the second quarter of 2018.  These metrics were 0.81% and 8.14% for the first quarter of 2018, respectively, and 0.51% and 5.07% for the second quarter of 2017, respectively.  For the first six months of 2018, our ROA was 0.83% and our ROE was 8.20% compared to 0.45% and 4.54%, respectively, for the same period of 2017.

Discussion of Operating Results

Tax-equivalent net interest income for the second quarter of 2018 was $22.9 million compared to $21.9 million for the first quarter of 2018 and $20.8 million for the second quarter of 2017.  The increase in tax-equivalent net interest income compared to both prior periods reflected higher interest rates and a favorable shift in the earning asset mix. Higher rates were earned on overnight funds, investment securities, and variable rate loans, partially offset by a higher cost on our negotiated rate deposits.  For the first six months of 2018, tax-equivalent net interest income totaled $44.9 million compared to $40.8 million for the comparable period in 2017.  The year-over-year increase was driven by growth in the loan and investment portfolios, coupled with higher short-term rates, partially offset by a higher rate paid on negotiated rate deposits.

The federal funds target rate was increased seven times since December 2015 to 2.00% by the end of the second quarter of 2018, which positively affected our net interest income due to favorable repricing of our variable and adjustable rate earning assets. Although these increases have also resulted in higher rates paid on our negotiated rate deposit products, we continue to prudently manage our overall cost of funds, which was 26 basis points for the second quarter of 2018, and 23 basis points for the first quarter of 2018. Due to highly competitive fixed-rate loan pricing across most markets, we have continued to review our loan pricing and make adjustments where appropriate and prudent.   

Our net interest margin for the second quarter of 2018 was 3.58%, an increase of 15 basis points compared to the first quarter of 2018 and an increase of 25 basis points from the second quarter of 2017.  For the first six months of 2018, the net interest margin increased 24 basis points to 3.51% compared to the same period of 2017. The increase in the margin as compared to all respective periods reflected rising interest rates and a favorable shift in our earning asset mix, which has produced higher net interest income in each period. 

The provision for loan losses for the second quarter of 2018 was $0.8 million compared to $0.7 million for the first quarter of 2018 and $0.6 million for the second quarter of 2017.  For the six months ended June 30, 2018, the loan loss provision was $1.6 million compared to $0.9 million in 2017.  The higher provision in 2018 reflected growth in the loan portfolio.  At June 30, 2018, the allowance for loan losses of $13.6 million represented 0.78% of outstanding loans (net of overdrafts) and provided coverage of 236% of nonperforming loans compared to 0.80% and 181%, respectively, at March 31, 2018 and 0.80% and 186%, respectively, at December 31, 2017.

Noninterest income for the second quarter of 2018 totaled $12.5 million, an increase of $0.1 million, or 0.5%, over the first quarter of 2018 and a $0.6 million, or 4.5%, decrease from the second quarter of 2017.  For the first six months of 2018, noninterest income totaled $25.0 million, a $0.8 million, or 3.2%, decrease from the same period of 2017, primarily due to lower mortgage banking fees of $0.6 million and deposit fees of $0.4 million, partially offset by higher wealth management fees of $0.3 million.  The decrease from the second quarter of 2017 also reflected lower mortgage banking fees and deposit fees.  The lower level of mortgage banking fees was due to a slowdown in secondary market loan production as adjustable rate loan production has picked up momentum and is being booked into our loan portfolio.  Total (secondary market sales and portfolio) residential loan production during the first two quarters of 2018 was comparable to the prior year.  The decrease in deposit fees was attributable to lower overdraft fees and reflected a reduction in accounts utilizing our overdraft protection product.  The increase in wealth management fees over the first six months of 2017 was primarily due to higher trust fees and reflected growth in assets under management.                 

Noninterest expense for the second quarter of 2018 totaled $28.4 million, an increase of $0.5 million, or 1.7%, over the first quarter of 2018 and second quarter of 2017.  For the first six months of 2018, noninterest expense totaled $56.3 million, a $0.5 million, or 0.8%, increase over the same period of 2017.  The increase over the first quarter of 2018 primarily reflected higher professional fees of $0.2 million and a $0.2 million expense for our VISA Class B share swap contract related to VISA’s funding of their litigation reserve.  Compared to the three and six month periods of 2017, the increase was primarily attributable to higher professional fees.    

We realized an income tax benefit of $0.1 million for the six months ended June 30, 2018 which reflected two discrete tax benefit items totaling $2.9 million resulting from the effect of federal tax reform, enacted in December 2017, on pension plan contributions made in 2018.  The discrete tax item for the first quarter of 2018 totaled $1.5 million and the item for the second quarter of 2018 totaled $1.4 million.  Absent these discrete items, our effective tax rate was approximately 24%. 

Discussion of Financial Condition

Average earning assets were $2.566 billion for the second quarter of 2018, a decrease of $26.5 million, or 1.0%, from the first quarter of 2018, and an increase of $54.0 million, or 2.2%, over the fourth quarter of 2017.  The change in average earning assets compared to the first quarter 2018 was attributable to decreases in our short-term investments, primarily due to a decline in our seasonal public fund balances.  The change in average earning assets over the fourth quarter 2017 was attributable to growth in our loan and investment portfolios primarily funded by increases in our noninterest bearing deposits and savings accounts.

We maintained an average net overnight funds (deposits with banks plus fed funds sold less fed funds purchased) sold position of $158.7 million during the second quarter of 2018 compared to an average net overnight funds sold position of $240.9 million in the first quarter of 2018 and $174.6 million in the fourth quarter of 2017.  The decrease in average net overnight funds compared to all prior periods reflected growth in our loan and investment portfolios.  Additionally, part of the decrease compared to the prior quarter was also attributable to the decline in our public deposits.  

Average loans increased $43.7 million, or 2.7% compared to the first quarter of 2018, and have grown $50.5 million, or 3.1% compared to the fourth quarter of 2017.  The increase compared to the prior quarter reflected growth in all loans types except home equity loans. Growth over the fourth quarter of 2017 was experienced in all loan products except for commercial and home equity loans.  During 2018, we have purchased a $4.0 million pool of adjustable rate residential loans (late in first quarter) and a $12.1 million pool of fixed and adjustable rate commercial real estate loans (late in second quarter).

We continue to make minor modifications on some of our lending programs to try to mitigate the impact that consumer and business deleveraging has had on our portfolio.  These programs, coupled with economic improvements in our anchor markets, have helped to increase overall loan growth.

Nonperforming assets (nonaccrual loans and OREO) totaled $9.1 million at June 30, 2018, a decrease of $1.5 million, or 14.4%, from March 31, 2018 and $2.0 million, or 17.9%, from December 31, 2017.  Nonaccrual loans totaled $5.7 million at June 30, 2018, a $1.6 million decrease from March 31, 2018 and a $1.4 million decrease from December 31, 2017.  Nonaccrual loan additions totaled $2.5 million for the second quarter of 2018 compared to $3.8 million for the first quarter of 2018 and $5.6 million for the fourth quarter of 2017.  The balance of OREO totaled $3.4 million at June 30, 2018, an increase of $0.1 million over March 31, 2018 and a decrease of $0.6 million from December 31, 2017.  For the second quarter of 2018, we added properties totaling $0.5 million, sold properties totaling $0.3 million, and recorded valuation adjustments totaling $0.1 million. 

Average total deposits were $2.432 billion for the second quarter of 2018, a decrease of $24.1 million, or 1.0%, from the first quarter of 2018, and an increase of $53.5 million, or 2.3% over the fourth quarter of 2017.  The decline in deposits compared to the first quarter of 2018 reflected lower public fund NOW accounts and certificates of deposit balances, partially offset by increases in all other deposit types.  The increase in deposits when compared to the fourth quarter of 2017 reflected growth in all deposit products except certificates of deposit.  Public fund accounts typically peak in the first quarter and trend downwards through the fourth quarter due to the cycle of tax receipts.

Deposit levels remain strong, particularly given the increases in the fed funds rate.  Average core deposits continue to experience growth.  We monitor deposit rates on an ongoing basis as a prudent pricing discipline remains the key to managing our mix of deposits.

Average borrowings for the second quarter 2018 decreased $2.9 million compared to the first quarter 2018, and declined $3.0 million compared to the fourth quarter of 2017. Decreases occurred in both short-term and long-term borrowings as we reduced our repurchase agreements and Federal Home Loan Bank pay-downs of match funded advances. 

Shareowners’ equity was $293.6 million at June 30, 2018, compared to $288.4 million at March 31, 2018 and $284.2 million at December 31, 2017.  Our leverage ratio was 10.69%, 10.36%, and 10.47%, respectively, on these dates.  Further, at June 30, 2018, our risk-adjusted capital ratio was 17.00% compared to 17.05% and 17.10% at March 31, 2018 and December 31, 2017, respectively.  Our common equity tier 1 ratio was 13.46% at June 30, 2018, compared to 13.44% at March 31, 2018 and 13.42% at December 31, 2017.  All of our capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards. 

About Capital City Bank Group, Inc.

Capital City Bank Group, Inc. (NASDAQ: CCBG) is one of the largest publicly traded financial holding companies headquartered in Florida and has approximately $2.9 billion in assets.  We provide a full range of banking services, including traditional deposit and credit services, mortgage banking, asset management, trust, merchant services, bankcards, and securities brokerage services.  Our bank subsidiary, Capital City Bank, was founded in 1895 and now has 59 banking offices and 73 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 our future results to differ materially.  The following factors, among others, could cause our actual results to differ: the accuracy of the our financial statement estimates and assumptions; legislative or regulatory changes, and the ability to repay and qualified mortgage standards; fluctuations in inflation, interest rates, or monetary policies; the effects of security breaches and computer viruses that may affect our computer systems or fraud related to debit card products; changes in consumer spending and savings habits; our growth and profitability; the strength of the U.S. economy and the local economies where we conduct operations; the effects of a non-diversified loan portfolio, including the risks of geographic and industry concentrations; harsh weather conditions and man-made disasters; 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; changes in accounting; and our ability to manage the risks involved in the foregoing.  Additional factors can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and our 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 we assume no obligation to update forward-looking statements or the reasons why actual results could differ.

USE OF NON-GAAP FINANCIAL MEASURES

We present a tangible common equity ratio and a tangible book value per diluted share that removes the effect of goodwill resulting from merger and acquisition activity.  We believe these measures are useful to investors because it allows investors to more easily compare our capital adequacy to other companies in the industry.  The GAAP to non-GAAP reconciliation is provided below.