First-quarter REO sales at Capital City Bank Group (CCBG) reached their second highest level since the econominc downturn began as the firm enters the second quarter holding a healthy REO pipeline.

The Tallahassee, Fla.-based financial services provider's REO sales picked up momentum in the first quarter, totaling $7.9 million with more to go in the next.

"As we enter the second quarter, we have a strong pipeline of REO contracts pending," Chief Executive William Smith said.

The firm's balance of REO totaled $58.1 million at March 31, up $2.7 million from a year earlier.

The rental market for REO could reach $100 billion in 2012 with single-family REO investors in Florida — where Capital City is based — and the Midwest reaping the most profit. Those areas boast high cap rates and a large stock of potential REO properties.

During the quarter, charge-offs and loans transferred to REO at Capital City accounted for $9.5 million, or 19%, of the net reduction in total loans of $49.8 million. A year earlier, loan resolution accounted for $57.8 million, or 43%, of the net reduction in loans of $133.9 million.

"Efforts to stimulate new loan growth are ongoing and we have recently introduced new lending programs in our business and commercial real estate lending areas to mitigate the significant impact that consumer and business deleveraging is having on our portfolio," the bank said.

Nonperforming assets represented 5.14% of total assets at the end of the quarter versus 4.86% a year earlier.

Capital City reported a loss of $1.2 million, or 7 cents a share, in the first quarter. In the year-ago period, it reported $1.3 million, or 8 cents a share, of income.

Reduced operating revenues and higher loan loss provisions led to the decline earnings.

"Credit quality continues to be our number one priority," said Smith. "Our past due loans declined 53% to $9.2 million, which represents the lowest level since 2003."