CORRECTING and REPLACING Broad Lane Capital Management Sends Letter to Board of Directors of Capital City Bank Group; Urges Board to Take Immediate Action to Reverse Company’s Underperformance Instead of Maintaining Status Quo

Please replace the release with the following version due to a correction to a company name in the headline and body. All mentions of Capital City Banking Group should instead read Capital City Bank Group.

The corrected release reads:

BROAD LANE CAPITAL MANAGEMENT SENDS LETTER TO BOARD OF DIRECTORS OF CAPITAL CITY BANK GROUP; URGES BOARD TO TAKE IMMEDIATE ACTION TO REVERSE COMPANY’S UNDERPERFORMANCE INSTEAD OF MAINTAINING STATUS QUO

Sell Branches in Georgia, Alabama and Central Florida; Focus Exclusively on North Florida

Launch Expense Reduction Initiative to Fix Capital City’s Bloated Operating Cost Structure; Deliver on Chairman and CEO’s ‘no sacred cows’ Pledge

Immediately Return $30 million of Excess Capital to Shareholders

Broad Lane Capital Management LLC today announced that it has sent a letter to the Board of Directors of Capital City Bank Group [NASDAQ:CCBG]. The full text of the letter is as follows:

April 20, 2016

Capital City Bank Group, Inc.
Members of the Board of Directors
Attn: Mr. William G. Smith, Jr., Chairman, President and Chief Executive Officer
217 North Monroe Street
Tallahassee, Florida 32301

Dear Board Members:

Broad Lane Capital Management LLC and its affiliates (collectively “Broad Lane”) have invested in the shares of Capital City Bank Group (“Capital City”, “CCBG” or “Company”). Broad Lane invests in strong yet undervalued companies that have identifiable and actionable catalysts for unlocking significant shareholder value.

We invested in Capital City because we believe that the Company has one of the strongest banking franchises in North Florida. But, as we are sure you will agree, Capital City’s recent operating performance is unacceptable. In terms of key performance metrics such as Efficiency Ratio, Return on Assets and Return on Tangible Equity, Capital City is at or near the bottom of its peer group. Additionally, forward-looking research analyst estimates indicate that this underperformance is expected to sustain for at least the next two years.

We believe that this underperformance is starting to damage Capital City’s franchise. And sustained underperformance will make it difficult for Capital City to compete for business from attractive customers, invest in new technology and products, and attract talented bankers.

We strongly urge the Board and management team to engage in self-help and take immediate action to reverse the underperformance instead of maintaining the status quo and waiting for interest rates to rise. After all there is a real possibility that interest rates will continue to remain at historically low levels for an extended period. And even if interest rates do rise, we believe that Capital City will continue to be at or near the bottom of its peer group in terms of key performance metrics unless the Board actively addresses the issues pertaining to the Company’s haphazard branch network and bloated operating cost structure. If the Board does not take immediate and decisive action to address these key problems Capital City’s 121 year old franchise will be irreparably harmed.

Below are details of specific actions that need to be taken urgently by Capital City’s Board and management team:

1. Sell Georgia, Alabama and Central Florida Branches; Return Proceeds from Sale to Shareholders; Focus Exclusively on North Florida

Capital City’s current branch footprint in Georgia, Alabama and Central Florida is haphazard and sub-scale. The counties in Georgia where Capital City has a presence are non-contiguous to each other, and except for Grady county, are non-contiguous to its core North Florida footprint.

As the table below illustrates, on an average, Capital City has $22 million in deposits per branch in its Georgia footprint. Compared to this, all other banks in the footprint have an average of $51 million in deposits per branch – 2.3x more than Capital City. Similarly, in Central Florida (Citrus, Hernando and Pasco counties), on an average, all other banks have 3.4x more deposits per branch than Capital City. Despite acquiring a presence in these markets over 10-15 years ago, this disparity in branch productivity is a clear indication that Capital City is having difficulty competing against other banks in these markets.

Note that Capital City’s markets in Georgia, Alabama and Central Florida are fairly attractive (hence highly competitive) but the Company does not have the operating scale required in these and surrounding markets to compete successfully and is in no position to acquire scale. Therefore, we believe that the most strategic course of action for Capital City is to sell its branches in these markets.

Based on data from recent transactions in Georgia and Florida, we estimate that these branches with approximately $456 million in deposits (as of June 2015) can potentially be sold for $45-$70 million. Upon completion of the sale, these proceeds should be returned to shareholders by the way of a special dividend or a tender offer. The Board should take advantage of the robust M&A environment for small banking assets in Georgia and Florida and immediately engage a reputed investment bank to commence a sale process for these branches.

We firmly believe that focusing exclusively on North Florida is a significantly more efficient use of capital, resources and management bandwidth for Capital City given the attractiveness of this market and the Company’s operating scale.

2. Launch Expense Reduction Initiative to Cut Core Operating Costs by $8 million in 2016

Capital City’s ratio of compensation expense to average assets in 2015 was 2.4%. This ratio, which indicates whether a bank is effectively utilizing its employee resources, was in the range of 1.8% - 2.0% for a majority of the Company’s peers. In fact, we measured Capital City’s employee productivity and efficiency using other metrics such as Assets / FTEs and Deposits / FTEs, and based on each of these metrics, Capital City was at or near the bottom of its peer group. Employee productivity and efficiency is the most critical performance improvement issue for Capital City and needs to be addressed immediately by the Board and management team concurrently with the branch sale process.

In his most recent letter to shareholders Chairman Bill Smith indicated that “there are no sacred cows” when it comes to reducing expenses and that “no process or practice will be spared scrutiny, transformation or elimination”. We eagerly await the results of this focus on expense reduction but at the bare minimum we believe the management team should take immediate steps to bring Capital City’s expense base in line with its peers.

We are not advocating a slash and burn approach to expense reduction that will hurt the franchise’s long-term value. But Capital City needs to challenge the status quo and take a careful look at its business practices and benchmark them against peers who operate in smaller markets. We believe that even in the Company’s North Florida markets, there are opportunities to leverage technology and optimize the distribution network and resource allocation.

We strongly believe that a reduction of approximately $8 million in pre-tax non-cycle core operating expenses by the end of 2016 is achievable and would bring Capital City’s expense structure relatively in line with peers. Applying a conservative 10x multiple to this savings on an after tax basis would unlock approximately $50 million in value for all shareholders.

3. Return $30 million of Excess Capital to Shareholders

Capital City currently operates with a substantial excess capital position. If the management team were a best in class operator with strong expense discipline, we would encourage them to use a portion of the excess capital to acquire small in-market banks or branches in North Florida. There are certain markets in North Florida such as Alachua, Clay and St. Johns where Capital City has an opportunity to increase scale via accretive acquisitions. But, unfortunately, as it currently stands, given its poor expense discipline and lackluster return profile, Capital City is in the M&A penalty box from the perspective of potential sellers and shareholders. Until management brings the Company’s expense structure in line with peers, we cannot be confident that they will be able to extract the requisite synergies from any potential acquisition to make it financially attractive.

Given that this excess capital is currently yielding approximately 30bps at the Company, we believe that the most prudent course of action is to immediately return $30mm to shareholders in the form of a special dividend and increased share buybacks. The remainder of the excess capital will enable the Company to pursue organic loan growth in its core North Florida market and also serve as a capital cushion.

4. Provide Quarterly Guidance and Long Term Targets to Hold Management Accountable

Capital City does not provide short term guidance or long term performance targets. We disagree with this approach. It may be fine for some management teams who do not have a substantial ownership position in a company to not provide targets, because in case of systematic underperformance, they can be held accountable and terminated by the Board without significant disruption. In the case of Capital City, members of the management team beneficially own approximately 30% of the Company and if they consistently underperform, the Board and shareholders have no realistic recourse. With this in mind, we believe that this management team must hold itself to a higher standard and hold itself fully accountable to the other 70% of shareholders by providing quarterly guidance for items under its control such as loan and deposit growth and expenses and long term targets for items such as Return on Assets and Return on Tangible Equity.

***

We completely understand that we are asking the Board and management team to make tough decisions. But, we firmly believe that the cumulative impact of the actions we recommend will put Capital City on a trajectory to earn a Return on Assets of 1+% and a Return on Tangible Equity of 10+%. However, if the Board and management team feel that they are not up to the task, then the only prudent course of action to protect value for all shareholders is to sell the Company. We believe that Capital City is an attractive acquisition target. Because of Capital City’s strong deposit franchise and Florida based footprint, we estimate that in a sale the Company’s shares will fetch a premium of more than 25% compared to its current market price.

In summary, we strongly believe that the Board of Capital City needs to take immediate action to reverse the Company’s underperformance and significantly increase shareholder value. We expect that the Board and management team will use the Annual Shareowners Meeting on April 26th 2016 to announce that the actions we recommend are being set in motion.

We look forward to being a constructive long term shareholder of Capital City.

Sincerely,

Ajay Banerjee
Managing Principal
Broad Lane Capital Management LLC

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