UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-13358
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CAPITAL CITY BANK GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Florida 59-227354259-227354
------- -------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
217 North Monroe Street, Tallahassee, Florida 32301
--------------------------------------------- -----
(Address of principal executive office) (Zip Code)
(850) 671-0300
--------------
Registrant's(Registrant's telephone number, including area code:code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer[filer [ ] Accelerated filer[X]filer [X] Non-accelerated filer[filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At April 28,July 31, 2006, 18,666,60718,530,472 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
1
CAPITAL CITY BANK GROUP, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31,JUNE 30, 2006
TABLE OF CONTENTS
PART I PAGE
- --------------------------------------------------------------------------------------
1. Consolidated Financial Statements 4
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
3. Quantitative and Qualitative Disclosure About Market Risk 29
4. Controls and Procedures 31
PART II
- -------
1. Legal Proceedings 32
1.A. Risk Factors 32
2. Unregistered Sales of Equity Securities and
Use of Proceeds 32
3. Defaults Upon Senior Securities 32
4. Submission of Matters to a Vote of Security Holders 32
5. Other Information 32
6. Exhibits 32
Signatures 33
PART I PAGE
- -----------------------------------------------------------------------------
1. Consolidated Financial Statements 4
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
3. Quantitative and Qualitative Disclosure About Market Risk 31
4. Controls and Procedures 34
PART II
1. Legal Proceedings 34
1.A. Risk Factors 34
2. Unregistered Sales of Equity Securities and
Use of Proceeds 34
3. Defaults Upon Senior Securities 35
4. Submission of Matters to a Vote of Security Holders 35
5. Other Information 36
6. Exhibits 36
Signatures 36
2
INTRODUCTORY NOTE:
Caution Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements about our
beliefs, plans, objectives, goals, expectations, estimates and intentions
that are subject to significant risks and uncertainties and are subject to
change based on various factors, many of which are beyond our control. The
words "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan," "target," "goal," and similar expressions are
intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those
set forth in our forward-looking statements.
For information concerning these factors and related matters, see Part I,
Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Part II, Item 1A "Risk Factors" in this Quarterly
Report on Form 10-Q, and the following sections of our Annual Report on Form
10-K for the year ended December 31, 2005 (the "2005 Form 10-K"): (a)
"Introductory Note"; (b) "Risk Factors" in Part I, Item 1A; and (c)
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7. However, other factors besides those
referenced also could adversely affect our results, and you should not
consider any such list of factors to be a complete set of all potential risks
or uncertainties. Any forward-looking statements made by us or on our behalf
speak only as of the date they are made. We do not undertake to update any
forward-looking statement, except as required by applicable law.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
(Dollars Inin Thousands, Except Per Share Data)(1) 2006 2005 2006 2005
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $ 37,343 $ 28,842$38,967 $32,105 $76,310 $60,947
Investment Securities:
U.S. Treasury 79 13698 121 177 257
U.S. GovernmentGovt. Agencies and Corporations 814 820929 834 1,743 1,654
States and Political Subdivisions 439 382583 335 1,023 717
Other Securities 198 135206 157 403 292
Funds Sold 539 159
---------- ----------586 358 1,125 517
------- ------- ------- -------
Total Interest Income 39,412 30,474
---------- ----------41,369 33,910 80,781 64,384
INTEREST EXPENSE
Deposits 7,722 4,3098,716 4,618 16,438 8,927
Short-Term Borrowings 824 450776 734 1,600 1,184
Subordinated Notes Payable 926 441667 1,852 1,108
Other Long-Term Borrowings 810 720
---------- ----------764 769 1,574 1,489
------- ------- ------- -------
Total Interest Expense 10,282 5,920
---------- ----------11,182 6,788 21,464 12,708
------- ------- ------- -------
Net Interest Income 29,130 24,55430,187 27,122 59,317 51,676
Provision for Loan Losses 667 410
---------- ----------121 388 788 798
------- ------- ------- -------
Net Interest Income After Provision
for Loan Losses 28,463 24,144
---------- ----------30,066 26,734 58,529 50,878
------- ------- ------- -------
NONINTEREST INCOME
Service Charges on Deposit Accounts 5,680 4,3486,096 5,035 11,776 9,383
Data Processing 637 607703 650 1,340 1,257
Asset Management Fees 1,050 1,1121,155 1,013 2,205 2,125
Securities Transactions (4) - (4) -
Mortgage Banking Revenues 721 763903 1,036 1,624 1,799
Other 4,957 4,230
---------- ----------5,150 4,307 10,107 8,537
------- ------- ------- -------
Total Noninterest Income 13,045 11,060
---------- ----------14,003 12,041 27,048 23,101
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and Associate Benefits 15,430 12,56015,204 13,187 30,634 25,747
Occupancy, Net 2,223 1,9372,358 2,035 4,581 3,972
Furniture and Equipment 2,500 2,1122,661 2,192 5,161 4,304
Intangible Amortization 1,530 1,1961,536 1,296 3,066 2,492
Merger Expense - 234 - 234
Other 8,409 7,462
---------- ----------9,311 7,652 17,720 15,114
------- ------- ------- -------
Total Noninterest Expense 30,092 25,267
---------- ----------31,070 26,596 61,162 51,863
Income Before Income Taxes 11,416 9,93712,999 12,179 24,415 22,116
Income Taxes 3,995 3,560
---------- ----------4,684 4,311 8,679 7,871
------- ------- ------- -------
NET INCOME $ 7,4218,315 $ 6,377
========== ==========7,868 $15,736 $14,245
======= ======= ======= =======
BASIC NET INCOME PER SHARE $ .40.44 $ .36
========== ==========.44 $ .84 $ .80
======= ======= ======= =======
DILUTED NET INCOME PER SHARE $ .40.44 $ .36
========== ==========.44 $ .84 $ .80
======= ======= ======= =======
Average Basic Shares Outstanding 18,651,746 17,700,07118,633,132 18,094,256 18,642,387 17,898,253
========== ========== ========== ==========
Average Diluted Shares Outstanding 18,665,136 17,706,96518,652,963 18,102,200 18,657,691 17,908,580
========== ========== (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective July 1, 2005.========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
4
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31,
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2006 AND DECEMBER 31, 2005
(Unaudited)
March 31,June 30, December 31,
(Dollars In Thousands, Except Per Share Data) 2006 2005
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 104,486103,078 $ 105,195
Funds Sold and Interest Bearing Deposits 110,604126,210 61,164
---------- ----------
Total Cash and Cash Equivalents 215,090229,288 166,359
Investment Securities, Available-for-Sale 180,760191,232 171,019
Loans, Net of Unearned Interest 2,054,6562,052,860 2,067,494
Allowance for Loan Losses (17,279)(17,264) (17,410)
---------- ----------
Loans, Net 2,037,3772,035,596 2,050,084
Premises and Equipment, Net 76,69381,407 73,818
Goodwill 84,810 84,829
Other Intangible Assets 24,14822,612 25,622
Other Assets 55,84152,541 53,731
---------- ----------
Total Assets $2,674,719$2,697,486 $2,625,462
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 562,140572,549 $ 559,492
Interest Bearing Deposits 1,547,0161,581,310 1,519,854
---------- ----------
Total Deposits 2,109,1562,153,859 2,079,346
Short-Term Borrowings 89,10577,571 82,973
Subordinated Notes Payable 62,887 62,887
Other Long-Term Borrowings 68,76463,022 69,630
Other Liabilities 33,74428,403 24,850
---------- ----------
Total Liabilities 2,363,6562,385,742 2,319,686
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value, 3,000,000
shares authorized; no shares outstanding - -
Common Stock, $.01 par value;value, 90,000,000
shares authorized; 18,666,60418,530,469 and 18,631,706
shares issued and outstanding at March 31,June 30, 2006
and December 31, 2005, respectively 187185 186
Additional Paid-In Capital 84,29180,272 83,304
Retained Earnings 227,920233,201 223,532
Accumulated Other Comprehensive Loss, Net of Tax (1,335)(1,914) (1,246)
---------- ----------
Total Shareowners' Equity 311,063311,744 305,776
---------- ----------
Total Liabilities and Shareowners' Equity $2,674,719$2,697,486 $2,625,462
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
5
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
Additional Accumulated Other
Common Paid-In Retained Comprehensive
(Dollars in Thousands, Except Per Share Data)
Stock Capital Earnings Loss, Net of Taxes Total
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $186 $83,304 $223,532 $(1,246) $305,776
Comprehensive Income:
Net Income - - 7,42115,736 - 7,421
Net Change in Unrealized Loss
On Available-for-Sale Securities - - - (89) (89)(668)
Total Comprehensive Income - - - - 7,33215,068
Cash Dividends ($.1625.3250 per share) - - (3,033)(6,067) - (3,033)(6,067)
Stock Performance Plan Compensation - 442889 - - 442889
Issuance of Common Stock 1 545918 - - 546919
Repurchase of Common Stock (2) (4,839) - - (4,841)
---- ------- -------- ------- --------
Balance, March 31,June 30, 2006 $187 $84,291 $227,920 $(1,335) $311,063$185 $80,272 $233,201 $(1,914) $311,744
==== ======= ======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30
(Unaudited)
(Dollars in Thousands) 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,42115,736 $ 6,37714,245
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 667 410788 798
Depreciation 1,657 1,3603,539 2,769
Net Securities Amortization 220 414362 783
Amortization of Intangible Assets 1,530 1,1963,066 2,492
Origination of Loans Held-for-Sale (40,260) (41,820)(95,580) (99,574)
Proceeds From SaleSales of Loans Held-for Sale 42,705 43,604Held-for-Sale 97,968 100,195
Net Gain From Sales of Loans Held-for-Sale (721) (763)(1,624) (1,799)
Non-Cash Compensation 442 338889 339
Deferred Income Taxes 2,722 (497)1,831 1,587
Net Decrease (Increase) Decrease in Other Assets (2,019) 3882,000 (4,539)
Net Increase in Other Liabilities 6,629 5,2491,966 8,167
-------- --------
Net Cash Provided byBy Operating Activities 20,993 16,25630,941 25,463
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Available-for-Sale:Available--for-Sale:
Purchases (41,170) -(85,590) (29,468)
Sales - -283 34,729
Payments, Maturities, and Calls 31,024 17,63263,614 42,628
Net Decrease (Increase) in Loans 9,828 (16,464)12,297 (96,867)
Net Cash Acquired in Acquisition - 37,412
Purchase of Premises & Equipment (4,558) (2,846)(11,409) (9,918)
Proceeds From Sales of Premises & Equipment 26 5280 134
-------- --------
Net Cash Used In Investing Activities (4,850) (1,673)(20,525) (21,350)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits 29,810 (5,528)74,513 4,157
Net Increase (Decrease)Decrease in Short-Term Borrowings 2,711 (17,465)(8,878) (74,909)
Proceeds from Subordinated Note Payable - 31,959
Increase in Other Long-Term Borrowings 3,250 -3,600
Repayment of Other Long-Term Borrowings (694) (531)(6,382) 51,134
Dividends Paid (3,033) (2,691)(6,067) (5,541)
Repurchase of Common Stock (4,841) -
Issuance of Common Stock 546 70918 925
-------- --------
Net Cash Provided By (Used In) Financing Activities 32,588 (26,145)52,513 11,325
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 48,731 (11,562)62,929 15,438
Cash and Cash Equivalents at Beginning of Period 166,359 161,545
-------- --------
Cash and Cash Equivalents at End of Period $215,090 $149,983$229,288 $176,983
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 7,61216,105 $ 4,3728,210
======== ========
Interest Paid on Debt $ 2,5585,092 $ 1,6063,525
======== ========
Taxes Paid $ 278,135 $ 226,468
======== ========
Loans Transferred to Other Real Estate $ 488638 $ 5999
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 644889 $ 338339
======== ========
Transfer of Current Portion of Long-Term Borrowings
to Short-Term Borrowings $ 3,0003,061 $ 43
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
7
Notes to Consolidated Financial StatementsCAPITAL CITY BANK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, including Regulation S-X. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations. Prior period financial statements
have been reformatted and/or amounts reclassified, as necessary, to conform
with the current presentation.
In the opinion of management, the consolidated financial statements contain
all adjustments, which are those of a recurring nature, and disclosures
necessary to present fairly the financial position of the Company as of March
31,June
30, 2006 and December 31, 2005, the results of operations for the three and
six month periods ended March 31,June 30, 2006 and 2005, and cash flows for the threesix
month periods ended March 31,June 30, 2006 and 2005.
The Company and its subsidiary follow accounting principles generally
accepted in the United States of America and reporting practices applicable
to the banking industry. The principles that materially affect its financial
position, results of operations and cash flows are set forth in the Notes to
Consolidated Financial Statements which are included in the Company's 2005
Annual Report on Form 10-K.
Stock-BasedStock-based Compensation
On January 1, 2006, the Company changed its accounting policy related to
stock-based compensation in connection with the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment
(Revised 2004)" ("SFAS 123R"). See Note 7 - Stock-Based Compensation for
additional information.
(2) INVESTMENT SECURITIES
The amortized cost and related market value of investment securities
available-for-sale at March 31,June 30, 2006 and December 31, 2005 were as follows:
March 31,June 30, 2006
-------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 11,49611,064 $ - $ 59122 $ 11,43710,942
U.S. Government Agencies and Corporations 67,947 2 981 66,96860,934 - 1,350 59,584
States and Political Subdivisions 69,017 24 620 68,42182,017 9 797 81,229
Mortgage-Backed Securities 19,751 8 512 19,24725,851 - 807 25,044
Other Securities(1) 14,68714,433 - - 14,68714,433
-------- ------- ------ --------
Total Investment Securities $182,898 $34 $2,172 $180,760$194,299 $ 9 $3,076 $191,232
======== ======= ====== ========
December 31, 2005
-------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------
--------------------------------------------------------------------------------------
U.S. Treasury $ 9,065 $ - $ 50 $ 9,015
U.S. Government Agencies and Corporations 75,233 - 1,017 74,216
States and Political Subdivisions 53,611 44 512 53,143
Mortgage-Backed Securities 20,948 35 452 20,531
Other Securities(1) 14,114 - - 14,114
-------- ------- ------ --------
Total Investment Securities $172,971 $79 $2,031 $171,019
======== ======= ====== ========
(1) FHLB and FRB stock recorded at cost.
8
(3) LOANS
The composition of the Company's loan portfolio at March 31,June 30, 2006 and December
31, 2005 was as follows:
(Dollars in Thousands) March 31,June 30, 2006 December 31, 2005
- -----------------------------------------------------------------------------
Commercial, Financial and Agricultural $ 209,642220,345 $ 218,434
Real Estate - Construction 172,317Estate-Construction 180,049 160,914
Real Estate - Commercial 693,617Estate-Commercial 672,881 718,741
Real Estate - Residential 566,356Estate-Residential 560,435 553,124
Real Estate - HomeEstate-Home Equity 163,189171,835 165,337
Real Estate - LoansEstate-Loans Held-for-Sale 3,9675,695 4,875
Consumer 245,568241,620 246,069
---------- ----------
Loans, Net of Unearned Interest $2,054,656$2,052,860 $2,067,494
========== ==========
(4) ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the three-six month
periods ended March 31,June 30, 2006 and 2005, wasis as follows:
March 31,
-------------------------
(Dollars in Thousands) 2006 2005
- ----------------------------------------------------------------------------
Balance, Beginning of Period $17,410 $16,037
Acquired Reserves - 1,385
Provision for Loan Losses 667 410788 798
Recoveries on Loans Previously Charged-Off 428 428907 943
Loans Charged-Off (1,226) (835)(1,841) (1,712)
------- -------
Balance, End of Period $17,279 $16,040$17,264 $17,451
======= =======
Impaired loans are primarily defined as all nonaccruing loans for the loan
categories which are included within the scope of SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan." Selected information pertaining to
impaired loans is depicted in the table below:
March 31,June 30, 2006 December 31, 2005
-------------------- -----------------------------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Impaired Loans:
With Related Valuation Allowance $4,129 $2,383$5,079 $2,377 $5,612 $2,915
Without Related Valuation Allowance $2,8193,218 - $1,6581,658 -
Three Months Ended
----------------------------------
(Dollars in Thousands) March 31, 2006 December 31, 2005
- -----------------------------------------------------------------------------------
Average Recorded Investment in Impaired Loans $8,718 $9,786
(5) INTANGIBLE ASSETS
The Company had intangible assets of $109.0$107.4 million and $110.5 million at
March 31,June 30, 2006 and December 31, 2005, respectively. Intangible assets were as
follows:
March 31,June 30, 2006 December 31, 2005
----------------------- --------------------------------------------- ----------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- ------------------------------------------------------------------------------------
Core Deposit Intangibles $ 47,176 $24,723$26,133 $ 47,176 $23,312
Goodwill 88,596 3,786 88,615 3,786
Customer Relationship Intangible 1,867 353401 1,867 305
Non-Compete Agreement 539 358436 483 287
-------- ------- -------- -------
Total Intangible Assets $138,178 $29,220$30,756 $138,141 $27,690
======== ======= ======== =======
Net Core Deposit Intangibles: As of March 31,June 30, 2006 and December 31, 2005, the
Company had net core deposit intangibles of $22.5$21.0 million and $23.9 million,
respectively. Amortization expense for the first threesix months of 2006 and 2005
was $1.4$2.8 million and $1.1$2.3 million, respectively. Estimated annual
amortization expense is $5.6 million.
9
Goodwill: As of March 31,June 30, 2006 and December 31, 2005, the Company had
goodwill, net of accumulated amortization, of $84.8 million. Goodwill is the
Company's only intangible asset that is no longer subject to amortization
under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets."
Other: As of March 31,June 30, 2006 and December 31, 2005, the Company had a customer
relationship intangible, net of accumulated amortization, of $1.5 million and
$1.6 million, respectively. This intangible was bookedrecorded as a result of the
March 2004 acquisition of trust customer relationships from Synovus Trust
Company. Amortization expense for the first threesix months of 2006 and 2005 was
$48,000 and $47,000, respectively.$96,000. Estimated annual amortization expense is $191,000 based on use of a
10-year useful life.
As of March 31,June 30, 2006 and December 31, 2005, the Company also had a non-
competenon-compete
intangible, net of accumulated amortization, of $181,000$103,000 and $196,000,
respectively. This intangible was recorded as a result of the October 2004
acquisition of Farmers and Merchants Bank of Dublin, Georgia. Amortization
expense for the first threesix months of 2006 and 2005 was $71,000$149,000 and $59,000,$118,000,
respectively. Estimated annual amortization expense for the remainder of 2006 is
$181,000.$103,000.
(6) DEPOSITS
The composition of the Company's interest-bearinginterest bearing deposits at March 31,June 30, 2006
and December 31, 2005 was as follows:
(Dollars in Thousands) March 31,June 30, 2006 December 31, 2005
- -------------------------------------------------------------------------------------------------------------------------------------------------
NOW Accounts $ 518,024555,350 $ 520,878
Money Market Accounts 369,416377,958 331,094
Savings Deposits 137,780135,330 144,296
Other Time Deposits 521,796512,672 523,586
---------- ----------
Total Interest Bearing Deposits $1,547,016$1,581,310 $1,519,854
========== ==========
(7) STOCK-BASED COMPENSATION
In accordance with the Company's adoption of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), in the first quarter of 2003, the
cost related to stock-based associate compensation included in net income has
been accounted for under the fair value method in all reported periods.
On January 1, 2006, the Company adopted SFAS 123R. The Company continues to
include the cost of its share-based compensation plans in net income under
the fair value method.
As of March 31,June 30, 2006, the Company had three stock-based compensation plans,
consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate
Stock Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan.Plan
("DSPP"). For 2006, the Company also has a stock option arrangement with a
key executive officer. Total compensation expense associated with these
plans for the threesix months ended March 31,June 30, 2006 and 2005, was approximately
$461,000$889,000 and $258,000,$538,000, respectively.
2005 AIP. The Company's 2005 AIP allows the Company's Board of Directors to
award key associates various forms of equity-based incentive compensation.
Under the 2005 AIP, the Company has adopted the Stock-Based Incentive Plan
(the "Incentive Plan"), effective January 1, 2006, which is a performance-
based equity bonus plan for selected members of management, including all
executive officers. Under the Incentive Plan, all participants are eligible
to earn an equity award, consisting of performance shares, in each year of
the five-year period ending December 31, 2010. Annual awards are tied to the
annual earnings progression necessary to achieve the Project 2010 goal. The
grant-date fair value of an annual compensation award is $1.5 million.
A total of 43,437 shares are eligible for issuance annually.
10
At the end of each calendar year, the Compensation Committee will confirm
whether the performance goals have been met prior to the payout of any
awards. Any performance shares earned under the Incentive Plan will be
issued in the calendar quarter following the calendar year in which the
shares were earned.
In accordance with the provisions of SFAS 123R, the Company recognized
expense of approximately $367,000$745,000 for the first quartersix months of 2006 related to
the Incentive Plan. Under a substantially similar predecessor plan, the
Company recognized expense of $166,000$381,000 for the first quartersix months of 2005.
A total of 875,000 shares of common stock have been reserved for issuance
under the 2005 AIP. To date, the Company has issued 28,093 shares of common
stock.
2005 Director Stock Purchase Plan ("DSPP").DSPP. The Company's DSPP allows the directors to purchase the Company's
common stock at a price equal to 90% of the closing price on the date of
purchase. Stock purchases under the DSPP are limited to the amount of the
directors' annual retainer and meeting fees. The DSPP has 93,750 shares
reserved for issuance. A total of 11,62313,591 shares have been issued since the
inception of the DSPP. For the first quartersix months of 2006, the Company issued
5,0347,002 shares under the DSPP and recognized $18,000$24,000 in expense related to this
plan. For the first quartersix months of 2005, the Company issued 4,8165,123 shares and
recognized $14,000$18,000 in expense related to the DSPP.
2005 Associate Stock Purchase Plan ("ASPP").ASPP. Under the Company's ASPP, substantially all associates may
purchase the Company's common stock through payroll deductions at a price
equal to 90% of the lower of the fair market value at the beginning or end of
each six-month offering period. Stock purchases under the ASPP are limited
to 10% of an associate's eligible compensation, up to a maximum of $25,000
(fair market value on each enrollment date) in any plan year. Shares are
issued at the beginning of the quarter following each six-month offering
period. The ASPP has 593,750 shares of common stock reserved for issuance.
A total of 26,938 shares have been issued since inception of the ASPP. For
the first quartersix months of 2006, the Company issued 9,343 shares under the ASPP
and recognized $23,000$45,000 in expense related to this plan. For the first quartersix
months of 2005, the Company issued 8,928 shares and recognized $22,000$42,000 in
expense related to the ASPP.
Based on the Black-Scholes option pricing model, the weighted average
estimated fair value of the purchase rights granted under the ASPP Plan was
$6.22 for the first quartersix months of 2006. For the first quartersix months of 2005,
the weighted average fair value of the purchase rights granted was $5.64.
In calculating compensation, the fair value of each stock purchase right was
estimated on the date of grant using the following weighted average
assumptions:
First Quarter
-----------------Six Months Ended
June 30,
----------------
2006 2005
- ----------------------------------------------
Dividend yield 1.8% 1.9%
Expected volatility 25.0% 26.0%
Risk-free interest rate 4.0% 2.2%
Expected life (in years) 0.5 0.5
Executive Stock Option Agreement. In 2006, the Company's Board of Directors
approved a stock option agreement for a key executive officer (William G.
Smith, Jr. - Chairman, President and CEO, CCBG). Similar stock option
agreements were approved in 2003-2005. These agreements grant a non-
qualified stock option award upon achieving certain annual earnings per share
conditions set by the Board, subject to certain vesting requirements. The
options granted under the agreements have a term of ten years and vest at a
rate of one-third on each of the first, second, and third anniversaries of
the date of grant. Under the 2004 and 2003 agreements, 37,246 and 23,138
options, respectively, were issued, none of which hashave been exercised. The
fair value of a 2004 option was $13.42, and the fair value of a 2003 option
was $11.64. The exercise prices for the 2004 and 2003 options are $32.69 and
$32.96, respectively. Under the 2005 agreement, the earnings per share
conditions were not met; therefore, no economic value was earned by the
executive. In accordance with the provisions of SFAS 123R and SFAS 123, the
Company recognized expense of approximately $53,000$95,000 and $56,000$97,000 for the first
quartersix months of 2006 and first quarter of 2005, respectively, related to the aforementioned
agreements.
11
A summary of the status of the Company's nonvested option shares as of March
31,June 30, 2006 is
presented below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term Value
- ----------------------------------------------------------------------------------
Outstanding at January 1, 2006 60,384 $32.83$32.79 8.6 $ 88,161
Granted - - - -
Exercised - - - -
Forfeited or expired - - - -
------ ------ --- --------
Outstanding at March 31,June 30, 2006 60,384 $32.83 8.4 $164,244$32.79 8.1 $ -
====== ====== === ========
Exercisable at March 31,June 30, 2006 27,841 $32.83 8.4$32.79 8.1 $ 75,728-
====== ====== === ========
As of March 31,June 30, 2006, there was $268,000$220,000 of total unrecognized compensation
cost related to the nonvested option shares granted under the agreements.
That cost is expected to be recognized over a remaining weighted-average
period of 1613 months.
(8) EMPLOYEE BENEFIT PLANS
The components of the net periodic benefit costs for the Company's qualified
benefit pension plan and Supplemental Executive Retirement Plan ("SERP") were as follows:
Three months ended March 31,
------------------------------------------
Qualified Plan SERPMonths Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in Thousands) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Discount Rate 5.75% 6.00% 5.75% 6.00%
Long-Term Rate of Return on Assets 8.00% 8.00% N/A N/A8.00% 8.00%
Service Cost $1,250 $1,040 $ 30 $ 35$2,500 $2,080
Interest Cost 875 800 56 541,750 1,600
Expected Return on Plan Assets (975) (798) (1,950) (1,596)
Prior Service Cost Amortization 50 55 100 110
Net Loss Amortization 375 295 750 590
Net Periodic Benefit Cost $1,575 $1,392 $3,150 $2,784
The components of the net periodic benefit costs for the Company's
Supplemental Executive Retirement Plan ("SERP") were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in Thousands) 2006 2005 2006 2005
- --------------------------------------------------------------------------------------
Discount Rate 5.75% 6.00% 5.75% 6.00%
Long-Term Rate Of Return On Assets N/A N/A N/A N/A
Service Cost $ 30 $ 35 $ 60 $ 70
Interest Cost 56 54 112 108
Expected Return On Plan Assets N/A N/A N/A N/A
Prior Service Cost Amortization 50 55 15 15 30 30
Net Loss Amortization 375 295 19 21 38 42
Net Periodic Benefit Cost $1,575 $1,392 $120 $125 $240 $250
12
(9) COMMITMENTS AND CONTINGENCIES
Lending Commitments. The Company is a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the
financing needs of its clients.customers. These financial instruments consist of
commitments to extend credit and standby letters of credit.
The Company's maximum exposure to credit loss under standby letters of credit
and commitments to extend credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet
instruments. As of March 31,June 30, 2006, the amounts associated with the Company's
off-balance sheet obligations were as follows:
(Dollars in Thousands)Millions) Amount
- ---------------------------------------------------------------------------------------------
Commitments to Extend Credit(1) $440,312$454.6
Standby Letters of Credit $ 18,90119.1
(1) Commitments include unfunded loans, revolving lines of credit, and other
unused commitments.
12
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Contingencies. The Company is a party to lawsuits and claims arising out of
the normal course of business. In management's opinion, there are no known
pending claims or litigation, the outcome of which would, individually or in
the aggregate, have a material effect on the consolidated results of
operations, financial position, or cash flows of the Company.
(10) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that certain
transactions and other economic events that bypass the income statement be
displayed as other comprehensive income (loss). Comprehensive income totaled
$7.7 million and $15.1 million, respectively, for the three and six months
ended June 30, 2006, and $8.3 million and $13.9 million, respectively, for
the comparable periods in 2005. The Company's comprehensive income consists
of net income and changes in unrealized gains (losses) on securities
available-for-sale, net of income taxes. Changes in unrealized gains
(losses), net of taxes, on securities totaled $(89,000)$(576,000) and $(797,000)$(668,000),
respectively, for the three and six months ended March 31,June 30, 2006, and 2005, respectively.
12$452,000
and $(345,000), respectively, for the three and six months ended June 30,
2005. Reclassification adjustments consist only of realized gains and losses
on sales of investment securities and were not material for the six months
ended June 30, 2006 and 2005.
13
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)(1)
2006 2005 2004
-------------------------------- ---------------------------------------------- --------------------------------------------------------
Second First Fourth Third Second First Fourth Third Second
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 41,369 $ 39,412 $ 38,780 $ 36,889 $ 33,910 $ 30,474 $ 29,930 $ 24,660
$ 24,265
Interest Expense 11,182 10,282 9,470 7,885 6,788 5,920 5,634 3,408 3,221
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 30,187 29,130 29,310 29,004 27,122 24,554 24,296 21,252
21,044
Provision for
Loan Losses 121 667 1,333 376 388 410 300 300 580
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 30,066 28,463 27,977 28,628 26,734 24,144 23,996 20,952 20,464
Gain on Sale of Credit
Card Portfolios - - - - - - 324 6,857
-
Noninterest Income 14,003 13,045 12,974 13,123 12,041 11,060 11,596 10,864
11,031
Conversion/
Merger Expense - - 24 180 234 - 436 68
4
Noninterest Expense 31,070 30,092 29,318 28,429 26,362 25,267 24,481 21,565 21,597
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 12,999 11,416 11,609 13,142 12,179 9,937 10,999 17,040
9,894
Provision for
Income Taxes 4,684 3,995 4,150 4,565 4,311 3,560 3,737 6,221 3,451
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 8,315 $ 7,421 $ 7,459 $ 8,577 $ 7,868 $ 6,377 $ 7,262 $ 10,819
$ 6,443
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 30,591 $ 29,461 $ 29,652 $ 29,329 $ 27,396 $ 24,835 $ 24,619 $ 21,528
$ 21,333
Per Common Share:
Net Income Basic $ .44 $ .40 $ .40 $ .46 $ .44 $ .36 $ .40 $ .66
$ .38
Net Income Diluted .44 .40 .40 .46 .44 .36 .40 .66
.38
Dividends Declared .163 .163 .163 .152 .152 .152 .152 .144
.144
Diluted Book Value 16.81 16.65 16.39 16.17 15.87 14.69 14.51 13.19
12.64
Market Price:
High 35.39 37.97 39.33 38.72 33.46 33.60 36.78 32.96
34.52
Low 29.51 33.79 33.21 31.78 28.02 29.30 30.17 26.66
28.40
Close 30.20 35.55 34.29 37.71 32.32 32.41 33.44 30.97
31.67
Selected Average
Balances:
Loans $2,040,656 $2,048,642 $2,062,775 $2,046,968 $1,932,637 $1,827,327 $1,779,736 $1,524,401
$1,491,142
Earning Assets 2,278,817 2,275,667 2,279,010 2,250,902 2,170,483 2,047,049 2,066,111 1,734,708
1,721,655
Assets 2,603,090 2,604,458 2,607,597 2,569,524 2,458,788 2,306,807 2,322,870 1,941,372
1,929,485
Deposits 2,047,755 2,040,248 2,027,017 2,013,427 1,932,144 1,847,378 1,853,588 1,545,224
1,538,630
Shareowners' Equity 315,794 311,461 306,208 300,931 278,107 260,946 248,773 217,273
210,211
Common Equivalent
Average Shares:
Basic 18,633 18,652 18,624 18,623 18,094 17,700 17,444 16,604
16,593
Diluted 18,653 18,665 18,654 18,649 18,102 17,708 17,451 16,609
16,596
Ratios:
ROA 1.28% 1.16% 1.14% 1.32% 1.28% 1.12% 1.24% 2.22%(2) 1.34%(1)
ROE 10.56% 9.66% 9.67% 11.31% 11.35% 9.91% 11.61% 19.81%(2) 12.33%(1)
Net Interest
Margin (FTE) 5.38% 5.25% 5.16% 5.17% 5.07% 4.92% 4.75% 4.94%
4.99%
Efficiency Ratio 66.23% 67.20% 65.22% 63.60% 63.56% 67.06% 63.85% 52.60%(2) 63.87%
(1)
All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005.
(2)(1) Includes $6.9 million ($4.2 million after-tax) one-time gain on sale of credit card portfolio.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis ("MD&A") provides supplemental
information, which sets forth the major factors that have affected our
financial condition and results of operations and should be read in
conjunction with the Consolidated Financial Statements and related notes.
The MD&A is divided into subsections entitled "Business Overview," "Financial
Overview," "Results of Operations," "Financial Condition," "Liquidity and
Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting
Policies." Information therein should facilitate a better understanding of
the major factors and trends that affect our earnings performance and
financial condition, and how our performance during 2006 compares with prior
years. Throughout this section, Capital City Bank Group, Inc., and its
subsidiary, collectively, are referred to as "CCBG," "Company," "we," "us,"
or "our."
Capital City Bank is referred to as "CCB" or the "Bank."
The period-to-date averages used in this report are based on daily balances
for each respective period. In certain circumstances, comparing average
balances for the comparable quarters of consecutive years may be more
meaningful than simply analyzing year-to-date averages. Therefore, where
appropriate, quarterly averages have been presented for analysis and have
been noted as such. See Table I for average balances and interest rates
presented on a quarterly basis.
In this MD&A, we present an operating efficiency ratio and an operating net
noninterest expense as a percent of average assets, both of which are not
calculated based on accounting principles generally accepted in the United
State ("GAAP"), but that we believe provide important information
regarding our results of operations. Our calculation of the operating
efficiency ratio is computed by dividing non-interest expense less intangible
amortization and one-time merger expenses, by the sum of tax equivalent net
interest income and noninterest income. We calculate our operating net
noninterest expense as a percent of average assets by subtracting noninterest
expense excluding intangible amortization and one-time merger expenses from
noninterest income. We believe that excluding intangible amortization and
one-time merger expenses in our calculations better reflect our periodic
expenses and is more reflective of normalized operations.
Although we believe the above-mentioned non-GAAP financial measures enhance
investors' understanding of our business and performance, these non-GAAP
financial measures should not be considered an alternative to GAAP.
We provide reconciliations for all non-GAAP financial measures below:
Reconciliation of operating efficiency ratio to efficiency ratio
Six Months Ended
June 30
-------------------
2006 2005
- --------------------------------------------------------------------
Efficiency ratio 70.22% 68.85%
Effect of intangible amortization and
one-time merger expenses (3.52)% (3.63)%
Operating efficiency ratio 66.70% 65.22%
Reconciliation of operating net noninterest expense to net noninterest expense
Six Months Ended
June 30
-------------------
2006 2005
- --------------------------------------------------------------------
Net noninterest expense as a percent of
average assets 2.64% 2.43%
Effect of intangible amortization and
one-time merger expenses (0.24)% (0.23)%
Operating net noninterest expense as a
percent of average assets 2.40% 2.20%
16
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in this
Quarterly Report on Form 10-Q.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A section, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include,
among others, statements about our beliefs, plans, objectives, goals,
expectations, estimates and intentions that are subject to significant risks
and uncertainties and are subject to change based on various factors, many of
which are beyond our control. The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan," "target,"
"goal," and similar expressions are intended to identify forward-looking
statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those
set forth in our forward-looking statements. Please see the Introductory
Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, which
should be read in conjunction with this Quarterly Report (as updated by
Item 1A, "Risk Factors," in Part II of this Quarterly Report), and in our
other filings made from time to time with the SEC after the date of this
report. Our ability to achieve our financial objectives could be adversely
affected by the factors discussed in detail in Item 1A, "Risk Factors," in
our Annual Report on Form 10-K, as well as:
* our ability to integrate the business and operations of companies and
banks that we have acquired, and those we may acquire in the future;
* strength of the United States economy in general and the strength of
the local economies in which we conduct operations;
* effects of harsh weather conditions, including hurricanes;
* inflation, interest rate, market and monetary fluctuations;
* effect of changes in the stock market and other capital markets;
15
* legislative or regulatory changes;
* willingness of customers to accept third-party products and services
for our products and services and vice versa;
* changes in the securities and real estate markets;
* increased competition and its effect on pricing;
* technological changes;
* changes in monetary and fiscal policies of the U.S. government;
* changes in consumer spending and savings habits;
* growth and profitability of our noninterest income;
* changes in accounting principles, policies, practices or guidelines;
* other risks described from time to time in filings with the
Securities and Exchange Commission; and
* our ability to manage the risks involved in the foregoing.
16
However, other factors besides those listed above, in our Quarterly Report or
in our Annual Report also could adversely affect our results, and you should
not consider any such list of factors to be a complete set of all potential
risks or uncertainties. Any forward-looking statements made by us or on our
behalf speak only as of the date they are made. We do not undertake to
update any forward-looking statement, except as required by applicable law.
BUSINESS OVERVIEW
We are a financial holding company headquartered in Tallahassee, Florida and
are the parent of our wholly-owned subsidiary, Capital City Bank (the "Bank"
or "CCB"). The Bank offers a broad array of products and services through a
total of 69 full-service offices located in Florida, Georgia, and Alabama.
The Bank also has mortgage lending offices in three additional Florida
communities, and one Georgia community. The Bank offers commercial and
retail banking services, as well as trust and asset management, merchant
services, brokerage and data processing services.
Our profitability, like most financial institutions, is dependent to a large
extent upon net interest income, which is the difference between the interest
received on earning assets, such as loans and securities, and the interest
paid on interest-bearing liabilities, principally deposits and borrowings.
Results of operations are also affected by the provision for loan losses,
operating expenses such as salaries and employee benefits, occupancy and
other operating expenses including income taxes, and non-interest income such
as service charges on deposit accounts, asset management and trust fees,
mortgage banking revenues, merchant services,service fees, brokerage and data
processing revenues.
Our philosophy is to grow and prosper, building long-term relationships based
on quality service, high ethical standards, and safe and sound banking
practices. We are a super-community bank in the relationship banking
business with a locally oriented, community-based focus, which is augmented
by experienced, centralized support in select specialized areas. Our local
market orientation is reflected in our network of banking office locations,
experienced community executives, and community advisory boards which support
our focus on responding to local banking needs. We strive to offer a broad
array of sophisticated products and to provide quality service by empowering
associates to make decisions in their local markets.
16
Pursuant to our long-term strategic initiative, "Project 2010", we have
continued our expansion, emphasizing a combination of growth in existing
markets and acquisitions. Acquisitions will continue to be focused on a
three state area including Florida, Georgia, and Alabama with a particular
focus on financial institutions, which are $100 million to $400 million in
asset size and generally located on the outskirts of major metropolitan
areas. We continue to evaluate de novo expansion opportunities in attractive
new markets in the event that acquisition opportunities are not feasible.
Other expansion opportunities that will be evaluated include asset
management, insurance, and mortgage banking.
Recent Acquisitions.Acquisition. On May 20, 2005, we completed our merger with First
Alachua Banking Corporation ("FABC"), headquartered in Alachua, Florida. We
issued approximately 906,000 shares of common stock and paid approximately
$29.0 million in cash for a total purchase price of $58.0 million. FABC's
wholly-owned subsidiary, First National Bank of Alachua, had $228.3 million
in assets at closing with seven offices in Alachua County and an eighth
office in Hastings, Florida, which is in St. Johns County.
17
FINANCIAL OVERVIEW
A summary overview of our financial performance for the first quarter of 2006 versus the first quarter of 2005 is
provided below.
Results2006 Financial Performance Highlights -
* Earnings of $8.3 million, up 5.7% and $15.7 million, up 10.5% for the
firstthree and six months ended June 30, 2006 as compared to the same
periods in 2005.
* Diluted earnings per share of $.44 for the second quarter of 2006
includeconsistent with the impact of the acquisition of FABCsame period in May 2005. Highlights -
* Quarterly earnings totaled $7.4 million, or $0.40Earnings per diluted share
increasesfor the six months ended June 30, 2006 of 16.4% and 11.1%, respectively.$.84 represents a 5.0%
increase over the same period in 2005.
* EarningsGrowth in earnings was attributable to improvement driven by growth in operating
revenue reflectiverevenues of an 18.6% increase in12.8% and 15.5% for the three and six month periods,
respectively, driven primarily by higher net interest income and
17.9% increase in
noninterest income.
* Growth inTaxable equivalent net interest income is reflective of loangrew 11.7% and 15.0% for the
three and six month periods, respectively, due to earning asset growth
from the May
2005 acquisition and strong organic loan growth throughout 2005, and
improvement in thean improved net interest margin.
* Net interest margin percentage improved 3331 basis points primarily due to aand 32 basis
points for the three and six month periods, respectively, driven by
favorable re-pricing on existing assetsrepricing spread and higher yieldsyield on new loan production.
* Growth in noninterestNoninterest income isgrew 16.3% and 17.1% for the three and six month
periods, respectively, due primarily due to a 30.6% increase inhigher deposit service charge
fees primarily reflective of growth in free
checking accounts.and card processing fees.
* Continued strong credit quality as reflected by a nonperforming asset
ratio of .28% and an annualized net charge-off ratio of .16%..03% for the
second quarter of 2006 compared to .08% for the same period in 2005.
At quarter-end the allowance for loan losses was .84% of outstanding
loans and provided coverage of 326% of nonperforming loans compared to
.85% and 289%, respectively, for the same period in 2005.
* Credit quality remains strong and a key driver in bank performance and
growth. Nonperforming assets totaled $5.8 million, or .28% of total
loans and other real estate at quarter-end compared to .30% and .28%,
respectively, for the second quarter of 2005 and first quarter of 2006.
* Average deposits grew 6.0% and 8.1% for the three and six month
periods, respectively, due to our May 2005 acquisition and strong
growth in balances related to "Absolutely Free" deposit products, and
our Cash Power money market product.
* We remain well capitalizedwell-capitalized with a risk based capital ratio of 13.94%13.92%.
RESULTS OF OPERATIONS
Net Income
Earnings for the three and six months ended June 30, 2006 were $7.4$8.3 million,
or $.40$.44 per diluted share, for the first quarter
of 2006. This compares to $6.4and $15.7 million, or $.36$.84 per diluted share,
for the
first quarter of 2005, increases of 16.4%respectively. This compared to $7.9 million, or $.44 per diluted share and
11.1%, respectively.$14.2 million, or $.80 per diluted share in 2005. Results include the impact
of the acquisition of FABC in May 2005.
The increaseGrowth in our earnings for the second quarter of 2006 was primarily attributable
to an increase in operating revenue (defined as net interest income plus
noninterest income) of $6.6$5.0 million, or 18.4%12.8%, and a decrease in our loan
loss provision of $267,000, or 68.8%, partially offset by an increase in
our loan loss
provision of $257,000, or 62.7%, noninterest expense of $4.8$4.5 million, or 19.1%16.8%, and income taxes of $435,000,
17$373,000,
or 8.7%. The increase in operating revenue
18
reflects an 11.3% increase in net interest income and a 16.3% increase in
noninterest income.
Growth in earnings for the six month period of $1.5 million, or 12.2%10.5% was
primarily attributable to an increase in operating revenue (defined as net
interest income plus noninterest income) of $11.6 million, or 15.5%,
partially offset by an increase in noninterest expense of $9.3 million, or
17.9%, and income taxes of $808,000, or 10.3%. The increase in operating
revenue reflects an 18.6%14.8% increase in net interest income and a 17.9%17.1%
increase in noninterest income. The increase
in net interest income is attributable to loan growth and an improving net
interest margin. Our noninterest income increased because of higher deposit
service charge fees, retail brokerage fees, and card processing fees. The
higher loan loss provision reflects a higher level of required reserves.
Higher expense for compensation and occupancy drove the increase in
noninterest expense.
A condensed earnings summary is presented below:
For the Three Months Ended March 31,
----------------------------Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in Thousands) 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------------------------
Interest Income $39,412 $30,474$41,369 $33,910 $80,781 $64,384
Taxable Equivalent Adjustment(1) 331 281404 274 735 555
------- ------- ------- -------
Interest Income (FTE) 39,743 30,75541,773 34,184 81,516 64,939
Interest Expense 10,282 5,920(11,182) (6,788) (21,464) (12,708)
------- ------- ------- -------
Net Interest Income (FTE) 29,461 24,83530,591 27,396 60,052 52,231
Provision for Loan Losses 667 410(121) (388) (788) (798)
Taxable Equivalent Adjustment 331 281(404) (274) (735) (555)
------- ------- ------- -------
Net Int. Inc.Interest Income After Provision 28,463 24,14430,066 26,734 58,529 50,878
Noninterest Income 13,045 11,06014,003 12,041 27,048 23,101
Merger Expense - 234 - 234
Noninterest Expense 30,092 25,267(31,070) (26,362) (61,162) (51,629)
------- ------- ------- -------
Income Before Income Taxes 11,416 9,93712,999 12,179 24,415 22,116
Income Taxes 3,995 3,560(4,684) (4,311) (8,679) (7,871)
------- ------- ------- -------
Net Income $ 7,4218,315 $ 6,3777,868 $15,736 $14,245
======= ======= ======= =======
Percent Change 16.37% 30.84%5.68% 22.12% 10.47% 26.17%
Return on Average Assets(2) 1.16% 1.12%1.28% 1.28% 1.22% 1.21%
Return on Average Equity(2) 9.66% 9.91%10.56% 11.35% 10.12% 10.66%
(1) Computed using a statutory tax rate of 35%
(2) Annualized
Net Interest Income
Net interest income represents ourthe Company's single largest source of
earnings and is equal to interest income and fees generated by earning
assets, less interest expense paid on interest bearing liabilities. FirstSecond
quarter taxable-
equivalentof 2006 taxable-equivalent net interest income increased $4.6$3.2
million, or 18.6%11.7%, over the comparable quarter in 2005. During the first
half of 2006, taxable-equivalent net interest income increased $7.8 million,
or 15.0%, respectively, over the first half of 2005. This increase was
caused by the effect of our acquisition of FABC, higher earning asset yields
and a slight improvement in earning asset mix, partially offset by higher
funding costs and a change in deposit mix. The increase in yields and funding
costs are a result of the higher interest rate environment. The combination
of these factors resulted in a 3331 basis point improvement in the net interest
margin as compared to the firstsecond quarter of 2005. Table I provides a
comparative analysis of our average balances and interest rates.
For the three month period ended June 30, 2006, taxable-equivalent interest
income increased $7.6 million or 22.2%, over the comparable period in 2005.
During the first quarterhalf of 2006, taxable-equivalent interest income increased
$9.0improved
$16.6 million, or 29.2%25.5%, respectively, over the comparable quarterperiod in 2005.
The increase was attributable to a change in earning asset mix and higher
yields on earning assets, and the acquisition of FABC.assets. Earning asset yields improved 100103 basis points to
7.08%7.35% in the firstsecond quarter of 2006 from 6.09%6.32% in the firstsecond quarter of 2005
and 6.81%7.08% from the prior quarter, primarily attributable to the higher
interest rate environment. We anticipate that our income on earning assets
will expand during the secondthird quarter due to the higher rate environment.
19
Interest expense for the first quarterthree and six month periods ended June 30, 2006
increased $4.4 million, or 73.7%64.7% and $8.8 million, or 68.9%, respectively,
from the comparable prior-year period.prior year periods. The unfavorable variance is
attributable to higher rates paid on all interest bearing liabilities and an
increase in long-term debt costs resulting from debt secured to fund the FABC
acquisition. The average rate 18
paid on interest bearing liabilities of 2.39%2.58%
in the firstsecond quarter of 2006 represents an increase of 2289 and 7819 basis
points, respectively, over the fourthsecond quarter of 2005 and first quartersquarter of
2005.2006. We anticipate that our interest expense will continue to increase in
the secondthird quarter as a result of the higher rate environment and increased
competition.competition for deposits.
Our interest rate spread (defined as the average federalfully taxable-equivalent
yield on earning assets less the average rate paid on interest bearing
liabilities) increased from 4.48%4.56% in the first quarterhalf of 2005 to 4.69%4.72% in the
comparable period of 2006, reflecting the higher yield on earning assets.
Our net yield on earning assets (defined as federalfully taxable-equivalent net
interest income divided by average earning assets) was 5.25% in5.38% and 5.31%,
respectively, for the first
three monthsand six month periods of 2006, versus 4.92%5.07% and
4.99%, respectively, for the comparable periods in the first three months of 2005. The increase in
margin reflects higher asset yields driven by rising interest rates. If interest rates continue to rise at a measured pace, we anticipate
that the net yield on earning assets will remain constant or may slightly
improve during the second quarter of 2006 as higher yields will only be
partially offset by the rising costs of funds. Net
interest income is expected to expand slightly during the secondthird quarter,
which is attributable to anticipated higher net yield on earning assets favorable shift in mix of
earning assets and
other factors noted above.
ProvisionsProvision for Loan Losses
The provision for loan losses of $667,000was $121,000 and $788,000, respectively, for
the quarterthree and six month periods ended June 30, 2006, compared to $388,000 and
$798,000 for the same periods in 2005. The decrease in the provision for
both of the aforementioned periods was higher than the
first quarter of 2005 due to a higherlower level of required
reserves based on our
analysisreflective of the allowance for loan losses at quarter-end.improved credit quality.
Net charge-offs totaled $798,000,$136,000, or .16%.03% of average loans for the second
quarter of 2006 compared to $407,000,$362,000, or .08% for the second quarter of 2005.
For the six-month period ended June 30, 2006, net charge-offs totaled
$934,000, or .09% of average loans compared to $769,000, or .08% of average
loans for the first quarter ofcomparable period in 2005. At quarter-end the allowance for
loan losses was .84% of outstanding loans and provided coverage of 331%326% of
nonperforming loans.
Detail of charge-off
Charge-off activity for the respective periods is set forth below:
Three Months Ended March 31,
--------------------Six Months Ended
June 30, June 30,
------------------ -------------------
(Dollars in Thousands) 2006 2005 2006 2005
- --------------------------------------------------------------------------------------------------------------------------------------------------------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 322144 $ 88302 $ 466 $ 390
Real Estate - Construction - - - -
Real Estate - Commercial - 2 291 46
Real Estate - Residential 22 2523 37 46 62
Consumer 591 718448 536 1,038 1,254
------ ------ ------ ------
Total Charge-offs 1,226 835615 877 1,841 1,712
------ ------ ------ ------
RECOVERIES
Commercial, Financial and Agricultural 62 963 98 126 107
Real Estate - Construction - - - -
Real Estate - Commercial 32 - 4 -
Real Estate - Residential 7 2 14 8 16
Consumer 356 417412 403 769 820
------ ------ ------ ------
Total Recoveries 428 428479 515 907 943
------ ------ ------ ------
Net Charge-offs $ 798136 $ 407362 $ 934 $ 769
====== ====== ====== ======
Net Charge-OffsCharge-offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .16%.03% .08% .09% .08%
====== ====== ====== ======
Noninterest Income
Noninterest income increased $2.0 million, or 17.9%16.3%, fromand $3.9 million, or
17.1%, respectively, over the first quarter
ofcomparable three and six month periods in 2005,
primarily due to higher deposit service charge fees, retail brokerage fees,
and card processing fees, and other income.fees. Noninterest income represented 30.9%31.7% and 31.3% of
operating revenues inrevenue for the first quarterthree and six month periods of 2006 compared to
31.1%30.7% and 30.9% for the same periodperiods in 2005. 19
The increase is due to the
aforementioned strong growth in noninterest income.
The table below reflects the major components of noninterest income.
Three Months Ended March 31,
---------------------Six Months Ended
June 30, June 30,
------------------ -------------------
(Dollars in Thousands) 2006 2005 2006 2005
- ------------------------------------------------------------------------------------------------------------------------------------------------------
Noninterest Income:
Service Charges on Deposit Accounts $ 5,6806,096 $ 4,3485,035 $11,776 $ 9,383
Data Processing 637 607703 650 1,340 1,257
Asset Management Fees 1,050 1,1121,155 1,013 2,205 2,125
Retail Brokerage Fees 483 299502 313 985 612
Mortgage Banking Revenues 721 763903 1,036 1,624 1,799
Merchant ServicesService Fees 1,725 1,5641,793 1,532 3,518 3,096
Interchange Fees 675 491788 535 1,464 1,026
ATM/Debit Card Fees 599 538627 535 1,226 1,074
Other 1,475 1,3381,436 1,392 2,910 2,729
------- ------- ------- -------
Total Noninterest Income $13,045 $11,060$14,003 $12,041 $27,048 $23,101
======= ======= ======= =======
Various significant components of noninterest income are discussed in more
detail below.
Service Charges on Deposit Accounts. Deposit service charge fees increased
$1.3$1.1 million, or 30.6%21.1%, fromand $2.4 million, or 25.5%, respectively, over the
comparable periodthree and six month periods in 2005. The increase reflects higher
overdraft and nonsufficient funds fees due primarily to growth in deposit
accounts attributable to an increase in free checking accounts.accounts and improved
fee collection efforts.
21
Asset Management Fees. Income from asset management activities decreased
$62,000,increased
$142,000, or 5.6%14.0%, and $80,000, or 3.8%, respectively, over the comparable
three and six month periods in 2005. The improvement for both periods is
primarily due to growth in new business within existing and new markets. At
June 30, 2006, assets under management totaled $685.0 million, representing
an increase of $34.0 million, or 5.2% from the comparable period in 2005.
Mortgage Banking Revenues. Mortgage banking revenues decreased $42,000,$133,000, or
5.5%12.8%, and $175,000, or 9.7%, respectively, from the comparable periodthree and six
month periods in 2005. The decrease reflects the local and national trend of
a slower housing market and a decreased level of refinance activity.
The residential pipeline picked up momentum toward the
end of the first quarter and is now at a level slightly lower than the first
quarter of 2005.
Card Fees. Card processing fees (including merchant services fees,
interchange fees, and ATM/debit card fees) increased $406,000,$606,000, or 15.7%23.3%, and
$1.0 million, or 19.5%, respectively, over the comparable periodthree and six
periods in 20052005. The increase in merchant service fees is primarily due to
higher transaction volume reflective of growth in transaction volume.merchant accounts. Higher
interchange fees and ATM/debit card fees reflect an increase in deposit
accounts.
Other. Other income increased $137,000,$286,000, or 10.2%12.1%, and $638,000, or 13.9%,
respectively, over the comparable periodthree and six month periods in 2005 due
primarily to increases in credit life/vendor single interest
commissionretail brokerage fees, asset based lending fees,
data processing fees, and check printing fees.a one-time gain on the sale of a real estate parcel
in the amount of $109,000.
Noninterest Expense
Noninterest expense in the first quarter of 2006 increased $4.8$4.5 million, or 19.1%16.8%, and $9.3 million, or
17.9%, respectively, over the first quarter ofcomparable three and six month periods in 2005.
20
The table below reflects the major components of noninterest expense.
Three Months Ended March 31,
---------------------Six Months Ended
June 30, June 30,
------------------- --------------------
(Dollars in Thousands) 2006 2005 2006 2005
- --------------------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense:
Salaries $11,715$11,444 $ 9,6589,980 $23,159 $19,638
Associate Benefits 3,715 2,9023,760 3,207 7,475 6,109
------- ------- ------- -------
Total Compensation 15,430 12,56015,204 13,187 30,634 25,747
Premises 2,223 1,9372,358 2,035 4,581 3,972
Equipment 2,500 2,1122,661 2,192 5,161 4,304
------- ------- ------- -------
Total Occupancy 4,723 4,0495,019 4,227 9,742 8,276
Legal Fees 517 368445 444 962 812
Professional Fees 754 696865 879 1,618 1,575
Processing Services 434 399419 349 854 748
Advertising 999 1,2001,253 747 2,252 1,948
Travel and Entertainment 386 265485 340 871 604
Printing and Supplies 607 451670 666 1,277 1,117
Telephone 622 519588 559 1,210 1,078
Postage 281 325321 291 602 617
Intangible Amortization 1,530 1,1961,536 1,296 3,066 2,492
Interchange Fees 1,494 1,3411,546 1,349 3,040 2,690
Courier Service 330 308327 334 657 641
Miscellaneous 1,985 1,5902,392 1,928 4,377 3,518
------- -------
Total Other 9,939 8,658 ------- -------
Total Noninterest Expense $30,092 $25,267$31,070 $26,596 $61,162 $51,863
======= ======= ======= =======
21
Various significant components of noninterest expense are discussed in more
detail below.
Compensation. Salaries and associate benefitbenefits expense increased $2.9$2.0
million, or 22.9%15.3%, and $4.9 million, or 19.0% over the comparable three and
six month periods in 2005. For the first quarterhalf of 2005. This increase is due primarily to
higherthe year, we experienced
increases in associate salaries of $3.3 million, payroll tax expense of
$196,000, associate insurance expense of $365,000, pension plan expense of
$382,000, and payroll taxes of $1.4 million, higher cash
performance basedstock-based compensation of $387,000 (cash incentive and profit
participation), higher stock based compensation of $223,000, higher benefit
expense (insurance and pension) of $483,000, and lower realized loan cost of
$235,000.$507,000. The increase in
associate salaries and payroll tax expenses
primarilyexpense reflects the addition of associates from the FABC
acquisition in
May 2005 andassociates, annual merit/market based raises for associates. The increase
in cash performance based compensation reflects a higher achievement rate of
performance goals. Higher stock based compensation reflects an increase in
plan participantsassociates, and higher target awards due to the adoption of our new
Stock-Based Incentive Plan. The increase in expense for insurance and
pension benefits is also reflective of an increase in eligible participants.lower
realized loan cost. Realized loan cost reflects the impact of SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Acquiring
Loans", which requires deferral and amortization of loan costs that are
accounted for as a credit offset to salary expense. The decrease in loan
production for the quarterfirst half of the year reduced the amount of this offset
as compared to the first quarterhalf of 2005. The increase in expense for insurance
and pension benefits is reflective of an increase in eligible participants.
The higher pension expense is also due to a lower discount rate used for the
2006 expense projection. Higher stock based compensation reflects an
increase in plan participants and higher target awards due to the adoption of
our new Stock-Based Incentive Plan.
Occupancy. Occupancy expense (including premises and equipment) increased
$674,000,$792,000, or 16.7%18.7%, and $1.5 million, or 17.7%, respectively over the
comparable three and six month periods in 2005. For the first quarterhalf of 2005. Wethe
year, we experienced increases in depreciation of $297,000,$770,000, maintenance and
repairs (building and FF&E) of $135,000,$190,000, utilities of $72,000, and$174,000, maintenance
agreements (FF&E) of $173,000$298,000, and building insurance of $66,000 from the
comparable period in 2005, all of which reflect the increase in the number of
banking offices from recent acquisitionsour May 2005 acquisition and new banking office openings
during the later part of 2005.
Other. Other noninterest expense increased $1.3$1.7 million, or 14.8%18.1%, and $2.9
million, or 16.5%, respectively over the three and six month periods in 2005.
For the first quarterhalf of 2005.the year, the increase was primarily attributable to
higher expense for the following categories: 1) legal fees - $150,000, 2)
advertising - $304,000, 3) travel and entertainment - $267,000, 4) printing
and supplies - $160,000, 5) telephone expense - $132,000, 6) intangible
amortization - $574,000, 7) interchange fees - $350,000, and 8) miscellaneous
- - $859,000. Legal feesexpenses have increased due to a general increase in legal
services tied to corporate activities. The increase in advertising expense
is due to an increase in promotional expenses associated with the addition of
new banking offices in late 2005 and an expansion in our line of free
checking products. The higher expense for travel and entertainment is linked
primarily to associate related events that took place during the quarter.first half
of the year. The increase in printing and supplies expense was
driven by an increase
21
in the number of banking offices requiring printed
brochures for bank products and services, and supplies. Telephone expense
increased also due to an increase in banking offices. The increase in
intangible amortization reflects new core deposit amortization from the FABC
acquisition. The increase in interchange fees is due to increased merchant
card transaction volume. Miscellaneous expense grew due to increases in
other losses, ATM/debit card production, associate hiring expense, and
seminars/education expense.
NetOperating net noninterest expense (noninterest income minus noninterest
expense, excluding intangible amortization)amortization and one-time merger expenses) as a
percent of average assets was 2.38%
in2.40% for the first quarterhalf of 2006 compared to
2.29%2.20% in 2005. Our operating efficiency ratio (noninterest expense,
excluding intangible amortization and one-time merger expenses, expressed as
a percent of the sum of taxable-equivalent net interest income plus
noninterest income) was 67.20% in66.70% for the first quarterhalf of 2006 compared to 67.06%65.23%
for the comparable quartersame period in 2005.2005 due to expense growth as discussed above.
Income Taxes
TheRelative to the prior year periods, the provision for income taxes increased
$435,000,$373,000, or 12.2%8.7%, overduring the second quarter and $808,000, or 10.3%, during
the first quartersix months
23
of 2005,2006, reflecting higher taxable income. Our effective tax rate for the
first quarterhalf of 2006 was 35.1%35.55% compared to 35.8%35.59% for the same quarterperiod in 2005. The decrease in the effective tax rate is primarily
attributable to a higher level of tax-free securities income.
FINANCIAL CONDITION
Asset and liability balances include the integration of FABC in May 2005.
Average assets decreased $3.1$4.5 million, or .12%.17%, to $2.604$2.603 billion for the
quarter-ended March 31,June 30, 2006 from $2.607$2.608 billion in the fourth quarter of
2005. Average earning assets of $2.276$2.279 billion decreased $3.3 million,$193,000, or ..15%.01%,
from the fourth quarter of 2005, attributable to a $14.1 million
decline2005. A decrease in average loans and a $6.5of $22.1
million decline in average investment
securities,was partially offset by a $17.3$5.4 million increase in investment
securities and a $16.5 million increase in average short term investments.
These variances are discussed in more detail below.
Funds Sold
We ended the firstsecond quarter with approximately $29.5$35.7 million in average net
overnight funds sold, compared to $5.7 million net overnight funds purchased
in the fourth quarter of 2005. The improvement reflects the increase in
deposits that is discussed in further detail below (Deposits). Growth in
deposits during the quarter helped to reducefirst part of the reliance on purchasingyear has reduced the bank's position in
overnight funds.funds purchased.
Investment Securities
Our investment portfolio is a significant component of our operations and, as
such, it functions as a key element of liquidity and asset/liability
management. As of March 31,June 30, 2006, the average investment portfolio decreased
$6.5increased
$5.4 million, or 3.6%2.9%, from the fourth quarter of 2005. We will continue to
evaluate the need to purchase securities for the investment portfolio
throughout 2006, taking into consideration liquidity needed to fund loan
growth and to meet pledging requirements.
Securities classified as available-for-sale are recorded at fair value and
unrealized gains and losses associated with these securities are recorded,
net of tax, as a separate component of shareowners' equity. At March 31,June 30, 2006
and December 31, 2005, shareowners' equity included a net unrealized loss of
$1.3$1.9 million and $1.2 million, respectively.
Loans
Average loans for the firstsecond quarter decreased $14.1$22.1 million, or .69%1.07%, from
the fourth quarter, due to higher than expected loan activity (principal pay-
downs and pay-offs). Lower than expectedWe expect the loan production was realized during
the first quarter, however,
22
the pipeline of new loan requests has acceleratedto remain stable and net loan growth is
expected inloans
outstanding to remain flat for the second quarter.half of the year.
Our nonperforming loans were $5.2$5.3 million at March 31,June 30, 2006 versus $5.3
million atand December 31,
2005. As a percent of nonperforming loans, the allowance for loan losses
represented 326% at June 30, 2006 and 331% at March 31, 2006 and December 31, 2005.
Nonperforming loans include nonaccruing and restructured loans. Other real
estate, which includes property acquired either through foreclosure or by
receiving a deed in lieu of foreclosure, was $0.6$0.5 million at March 31,June 30, 2006
versus $0.3 million at December 31, 2005. The ratio of nonperforming assets
as a percent of loans plus other real estate was .28% at March 31,June 30, 2006,
compared to .27% at December 31, 2005.
We maintain an allowance for loan losses at a level sufficient to provide for
the estimated credit losses inherent in the loan portfolio as of the balance
sheet date. Credit losses arise from borrowers' inability or unwillingness
to repay, and from other risks inherent in the lending process, including
collateral risk, operations risk, concentration risk and economic risk. All
related risks of lending are considered when assessing the adequacy of the
loan loss reserve. The allowance for loan losses is established through a
provision charged to expense. Loans are charged against the allowance when
management believes collection of the principal is unlikely. The allowance
for loan losses is based on management's judgment of overall loan quality.
This is a significant estimate based on a detailed analysis of the loan
portfolio. The
24
balance can and will change based on changes in the assessment of the
portfolio's overall credit quality. We evaluate the adequacy of the
allowance for loan losses on a quarterly basis.
The allowance for loan losses at March 31,June 30, 2006 was $17.3 million, compared to
$17.4 million at December 31, 2005. At March 31,June 30, 2006 and December 31, 2005,
the allowance represented 0.84% of total loans. While there can be no
assurance that we will not sustain loan losses in a particular period that
are substantial in relation to the size of the allowance, our assessment of
the loan portfolio does not indicate a likelihood of this occurrence. It is
management's opinion that the allowance at March 31,June 30, 2006 is adequate to
absorb losses inherent in the loan portfolio at quarter-end.
Deposits
Average deposits for the firstsecond quarter of 2006 increased $16.2$23.7 million, or
..80%1.17%, from the fourth quarter of 2005 due to continued strong increases in
NOW ($26.526.3 million) and money market ($35.755.8 million) account balances. The
increases reflect new free checking deposits and an increase in Cash Power
money market balances.
The ratio of average noninterest bearing deposits to total deposits was 25.7%25.5%
for the firstsecond quarter of 2006, compared to 26.8% for the fourth quarter of
2005. The decline in the percentage is attributable to the strong growth in
interest bearing nonmaturity deposits, primarily interest bearing free
checking accounts and Cash Power money market accounts. For the same period, the ratio of average interest bearing liabilities
to average earning assets was 76.6%75.3% and 75.8%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
General. Liquidity for a banking institution is the availability of funds to
meet increased loan demand, excessive deposit withdrawals, and the payment of
other contractual cash obligations. Management monitors our financial
position in an effort to ensure we have ready access to sufficient liquid
funds to meet normal transaction requirements and take advantage of
investment opportunities and cover unforeseen liquidity demands. In addition
to core deposit growth, sources of funds available to meet liquidity demands
include cash received through ordinary business activities (i.e., collection
of interest and fees), federal funds sold, loan and investment maturities,
our bank lines of credit, approved lines for the purchase of federal funds by
CCB and Federal Home Loan Bank ("FHLB") advances.
23
Average liquidity (defined as funds sold and interest bearing deposits with
other banks) for the firstsecond quarter of 2006 was approximately $49.6$48.8 million,
an increase of $17.3$16.5 million from the fourth quarter of 2005. The increase
is primarily reflective of deposit growth. Management expects liquidityLiquidity levels to decline inshould fluctuate
during the secondthird quarter due to funding ofconsistent with planned loan growth.
Borrowings. We have the ability to draw on a $25.0 million Revolving Credit
Note,revolving credit
note, due on October 15, 2007. Interest is payable quarterly at LIBOR plus
an applicable margin on advances. The revolving credit note is unsecured.
The existing loan agreement contains certain financial covenants that we must
maintain. At March 31,June 30, 2006, we were in compliance with all of the terms of
the agreement and had $25.0 million available under the credit facility.
For the first three monthshalf of the year, the Bank made scheduled FHLB advance payments totaling
approximately $0.7$6.4 million and obtained one new FHLB advance for $3.2
million.
We issued a $32.0 million junior subordinated deferrable interest note in May
2005 to a wholly owned Delaware statutory trust, Capital City Bank Group
Capital Trust II ("CCBG Capital Trust II"). Interest payments are due
quarterly at a fixed rate of 6.07% for the first five years, then adjustsadjust
annually thereafter based on the three month LIBOR plus a margin of 1.80%.
The note matures on June 15, 2035. The proceeds of the borrowing were used
to fund the cash portion of the acquisition price for theFABC purchase of FABC.price.
25
Contractual Cash Obligations. We maintain certain contractual arrangements
to make future cash payments. The table below details those future cash
payment obligations as of March 31,June 30, 2006. Payments for borrowings do not
include interest. Payments related to leases are based on actual payments
specified in the underlying contracts.
Payments Due By Period
------------------------------------------------------------------------------------------
1 Year 1 - 3 4 - 5 After
(Dollars in Thousands) or Less Years Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Advances $32,112 $3,028$31,414 $31,010 $6,349 $26,673 $ 31,673 $ 73,16295,446
Subordinated Notes Payable - - - 62,887 62,887
Operating Lease Obligations 1,059 2,512 2,180734 2,709 2,226 7,088 12,83912,757
------- ------- ------ ------ --------------- --------
Total Contractual Cash Obligations $33,171 $5,540 $8,529 $101,647 $148,888$32,148 $33,719 $8,576 $96,647 $171,090
======= ======= ====== ====== =============== ========
Capital
Equity capital was $311.1$311.7 million as of March 31,June 30, 2006 compared to $305.8
million as of December 31, 2005. Management continues to monitor itsour capital
position in relation to itsour level of assets with the objective of maintaining
a strong capital position. The leverage ratio was 10.34%10.35% at March 31,June 30, 2006
compared to 10.27% at December 31, 2005. Further, the risk-adjusted capital
ratio of 13.56%13.92% at March 31,June 30, 2006 exceeds the 8.0% minimum requirement under
the risk-based regulatory guidelines. As allowed by the Federal Reserve
Board capital guidelines the trust preferred securities issued by CCBGCapital
City Bank Group Capital Trust I and CCBG Capital Trust II are included as
Tier 1 capital in our capital calculations.
Adequate capital and financial strength is paramount to the stability of CCBG
and the Bank. Cash dividends declared and paid should not place unnecessary
strain on our capital levels. Although a consistent dividend payment is
believed to be favorably viewed by the financial markets and shareowners, the
Board of Directors will declare dividends only if we are considered to have
adequate capital. Future capital requirements and corporate plans are
considered when the Board considers a dividend payment. Dividends declared
and paid during the firstsecond quarter of 2006 totaled $.1625 per share compared
to $.1520 per share for the firstsecond quarter of 2005, an increase of 6.9%. The
dividend payout ratios for the firstsecond quarter ended 2006 and 2005 were 40.1%36.8%
and 41.6%34.5%, respectively.
24
State and federal regulations as well as our long-term debt agreements place
certain restrictions on the payment of dividends by both CCBG and the Bank.
At March 31,June 30, 2006, these regulations and covenants did not impair CCBG or the
Bank's ability to declare and pay dividends or to meet other existing
obligations in the normal course of business.
During the first threesix months of 2006, shareowners' equity increased $5.3$6.0
million, or 6.9%3.9%, on an annualized basis. Growth in equity during the first
threesix months of the year was positively impacted by net income of $7.4$15.7
million, the issuance of common stock of $0.5$0.9 million and, stock-based
compensation accretion of $0.4$0.9 million. Equity was reduced by dividends paid
during the first threesix months of the year by $3.0$6.1 million, or $.1625$.3250 per share, and
an increase in the net unrealized loss on available-for-sale securities of
$0.1$0.7 million, and the repurchase of common stock of $4.8 million. At March 31,June
30, 2006, our common stock had a book value of $16.65$16.81 per diluted share
compared to $16.39 at December 31, 2005.
Our Board of Directors has authorized the repurchase of up to 1,171,875
shares of our outstanding common stock. The purchases are made in the open
market or in privately negotiated transactions. To date, we have repurchased
a total of 715,884864,760 shares at an average purchase price of $15.34$18.28 per share.
We did not repurchase anyrepurchased 148,876 shares of our common stock in the first three
monthssecond quarter of
2006.2006 at an average purchase price of $32.41 per share.
26
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently engage in the use of derivative instruments to hedge
interest rate risks. However, we are a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the
financing needs of our clients.
At March 31,June 30, 2006, we had $440.3$454.6 million in commitments to extend credit and
$18.9$19.1 million in standby letters of credit. Commitments to extend credit are
agreements to lend to a client so long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Standby letters of credit are conditional commitments
issued by us to guarantee the performance of a client to a third party. We
use the same credit policies in establishing commitments and issuing letters
of credit as we do for on-balance sheet instruments.
If commitments arising from these financial instruments continue to require
funding at historical levels, management does not anticipate that such
funding will adversely impact its ability to meet on-going obligations. In
the event these commitments require funding in excess of historical levels,
management believes current liquidity, available lines of credit from the
FHLB, investment security maturities and our revolving credit facility
provide a sufficient source of funds to meet these commitments.
ACCOUNTING POLICIES
Critical Accounting Policies
The consolidated financial statements and accompanying Notes to Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make
various estimates and assumptions (see Note 1 in the Notes to Consolidated
Financial Statements). We believe that, of our significant accounting
policies, the following may involve a higher degree of judgment and
complexity.
Allowance for Loan Losses. The allowance for loan losses is established
through a charge to the provision for loan losses. Provisions are made to
reserve for estimated losses in loan balances. The allowance for loan losses
is a significant estimate and is evaluated quarterly by us for adequacy. The
use of different estimates or assumptions could produce a different required
allowance, and thereby a larger or smaller provision recognized as expense in
any given reporting period. A further 25
discussion of the allowance for loan
losses can be found in the section entitled "Allowance for Loan Losses" and
Note 1 in the Notes to Consolidated Financial Statements in our 2005 Annual
Report on Form 10-K.
Intangible Assets. Intangible assets consist primarily of goodwill, core
deposit assets, and other identifiable intangibles that were recognized in
connection with various acquisitions. Goodwill represents the excess of the
cost of acquired businesses over the fair market value of their identifiable
net assets. We perform an impairment review on an annual basis to determine
if there has been impairment of our goodwill. We have determined that no
impairment existed at December 31, 2005. Impairment testing requires
management to make significant judgments and estimates relating to the fair
value of its identified reporting units. Significant changes to these
estimates may have a material impact on our reported results.
Core deposit assets represent the premium we paid for core deposits. Core
deposit intangibles are amortized on the straight-line method over various
periods ranging from 5-10 years. Generally, core deposits refer to
nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW,
money market and savings. We make certain estimates relating to the useful
life of these assets, and rate of run-off based on the nature of the specific
assets and the client bases acquired. If there is a reason to
27
believe there has been a permanent loss in value, management will assess
these assets for impairment. Any changes in the original estimates may
materially affect reported earnings.
Pension Assumptions. We have a defined benefit pension plan for the benefit
of substantially all of our associates. Our funding policy with respect to
the pension plan is to contribute amounts to the plan sufficient to meet
minimum funding requirements as set by law. Pension expense, reflected in
the Consolidated Statements of Income in noninterest expense as "Salaries and
Associate Benefits," is determined by an external actuarial valuation based
on assumptions that are evaluated annually as of December 31, the measurement
date for the pension obligation. The Consolidated Statements of Financial
Condition reflect an accrued pension benefit cost due to funding levels and
unrecognized actuarial amounts. The most significant assumptions used in
calculating the pension obligation are the weighted-average discount rate
used to determine the present value of the pension obligation, the weighted-
average expected long-term rate of return on plan assets, and the assumed
rate of annual compensation increases. These assumptions are re-evaluated
annually with the external actuaries, taking into consideration both current
market conditions and anticipated long-term market conditions.
The weighted-average discount rate is determined by matching anticipated
Retirement Plan cash flows for a 30-year period to long-term corporate Aa-
rated bonds and solving for the underlying rate of return, which investing in
such securities would generate. This methodology is applied consistently
from year-to-year. We anticipate using a 5.75% discount rate for 2006.
The weighted-average expected long-term rate of return on plan assets is
determined based on the current and anticipated future mix of assets in the
plan. The assets currently consist of equity securities, U.S. Government and
Government agency debt securities, and other securities (typically temporary
liquid funds awaiting investment). We anticipate using a rate of return on
plan assets of 8.0% for 2006.
The assumed rate of annual compensation increases of 5.50% for 2006 is based
on expected trends in salaries and the employee base. This assumption is not
expected to change materially in 2006.
Information on components of our net periodic benefit cost is provided in
Note 8 of the Notes to Consolidated Financial Statements included herein and
Note 12 of the Notes to Consolidated Financial Statements in our 2005 Annual
Report on Form 10-K.
26
Recent Accounting Pronouncements
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments."
SFAS 155 amends SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS 155 (i) permits
fair value re-measurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation, (ii)
clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS 133, (iii) establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, (iv) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective for us on January 1,
2007, and is not expected to have a significant impact on our financial
statements.
On January 31,28
In July 2006, we adopted SFAS 123R which requires the costFASB issued FASB Interpretation 48, "Accounting for Income
Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for recognizing
the benefits of tax return positions in the financial statements as "more-
likely-than-not" to be sustained by the taxing authority. The recently
issued literature also provides guidance on the derecognition, measurement
and classification of income tax uncertainties, along with any related
interest and penalties. FIN 48 also includes guidance concerning accounting
for income tax uncertainties in interim periods and increases the level of
disclosures associated with any recorded income tax uncertainties. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
differences between the amounts recognized in the statements of financial
position prior to stock-based associate compensation included in net income tothe adoption of FIN 48 and the amounts reported after
adoption will be accounted for underas a cumulative-effect adjustment recorded to
the fair value method. SFAS 123R will not have a significantbeginning balance of retained earnings. We are currently evaluating the
potential impact of FIN 48 on our consolidated financial statements as stock-based associate compensation has been
accounted for under the provisions of SFAS 123 since the first quarter of
2003.
27statements.
29
TABLE I
AVERAGE BALANCES & INTEREST RATES
For Three Months Ended March 31,
--------------------------------------------------------------------
2006 2005
----------------------------- -----------------------------
Average Average Average Average
(Taxable Equivalent Basis - Dollars in Thousands)
FOR THREE MONTHS ENDED JUNE 30,
2006 005
-------------------------- --------------------------
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------- -------- ----- ---------- -------- -----
ASSETS
Loans, Net of Unearned Interest(1)(2) $2,048,642 $37,439 7.41% $1,827,327 $28,920 6.42%$2,040,656 $39,059 7.68% $1,932,637 $32,200 6.68%
Taxable Investment Securities 118,055 1,091 3.70% 153,543 1,090 2.85%114,521 1,233 4.30% 149,958 1,113 2.96%
Tax-Exempt Investment Securities(2) 59,368 674 4.54% 43,928 586 5.33%74,862 895 4.78% 41,316 513 4.97%
Funds Sold 49,602 539 4.36% 22,251 159 2.85%48,778 586 4.75% 46,572 358 3.04%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,275,667 39,743 7.08% 2,047,049 30,755 6.09%2,278,817 41,773 7.35% 2,170,483 34,184 6.32%
Cash & Due From Banks 109,907 97,32299,830 104,336
Allowance for Loan Losses (17,582) (16,167)(17,443) (16,998)
Other Assets 236,466 178,603241,886 200,967
---------- ----------
TOTAL ASSETS $2,604,458 $2,306,807
========== ==========$2,603,090 $2,458,788
LIABILITIES
NOW Accounts $ 510,270510,088 $ 1,446 1.15%1,664 1.31% $ 359,151413,799 $ 447 0.50%560 0.54%
Money Market Accounts 343,652 2,298 2.71% 251,849 625 1.01%363,754 2,642 2.91% 270,195 830 1.23%
Savings Accounts 139,664 62 0.18% 147,676136,168 67 0.20% 155,286 75 0.21%0.19%
Other Time Deposits 521,966 3,916 3.04% 552,069 3,162 2.32%518,679 4,343 3.36% 547,919 3,153 2.31%
---------- ------- ---- ---------- ------- ----
Total InterestInt. Bearing Deposits 1,515,552 7,722 2.07% 1,310,745 4,309 1.33%1,528,689 8,716 2.29% 1,387,199 4,618 1.34%
Short-Term Borrowings 93,867 824 3.55% 79,582 450 2.29%82,846 776 3.75% 108,508 734 2.71%
Subordinated Notes Payable 62,887 926 5.97% 30,928 441 5.79%5.91% 45,681 667 5.86%
Other Long-Term Borrowings 69,966 810 4.70% 68,200 720 4.28%63,597 764 4.82% 68,975 769 4.47%
---------- ------- ---- ---------- ------- ----
Total InterestInt. Bearing Liabilities 1,742,272 10,282 2.39% 1,489,455 5,920 1.61%1,738,019 11,182 2.58% 1,610,363 6,788 1.69%
Noninterest Bearing Deposits 524,696 536,633519,066 544,945
Other Liabilities 26,029 19,77330,211 25,373
---------- ----------
TOTAL LIABILITIES 2,292,997 2,045,8612,287,296 2,180,681
SHAREOWNERS' EQUITY
Common Stock 186 176
Surplus 83,527 52,606
Other Comprehensive Loss (1,194) (489)
Retained Earnings 228,942 208,653
---------- ----------
TOTAL SHAREOWNERS' EQUITY 311,461 260,946315,794 278,107
---------- ----------
TOTAL LIABILITIES & EQUITY $2,604,458 $2,306,807$2,603,090 $2,458,788
========== ==========
Net
Interest Rate Spread 4.69% 4.48%4.77% 4.63%
==== ====
Net Interest Income $29,461 $24,835$30,591 $27,396
======= =======
Net Interest Margin(3) 5.25% 4.92%5.38% 5.07%
==== ====
FOR SIX MONTHS ENDED JUNE 30,
2006 005
-------------------------- --------------------------
Balance Interest Rate Balance Interest Rate
---------- -------- ----- ---------- -------- -----
ASSETS
Loans, Net of Unearned Interest(1)(2) $2,044,627 $76,498 7.54% $1,880,272 $61,120 6.56%
Taxable Investment Securities 16,278 2,323 3.99% 151,740 2,203 2.91%
Tax-Exempt Investment Securities(2) 67,158 1,570 4.67% 42,615 1,099 5.16%
Funds Sold 49,188 1,125 4.56% 34,479 517 2.98%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,277,251 81,516 7.21% 2,109,106 64,939 6.21%
Cash & Due From Banks 104,841 100,848
Allowance for Loan Losses (17,512) (16,585)
Other Assets 239,190 189,849
---------- ----------
TOTAL ASSETS $2,603,770 $2,383,218
========== ==========
LIABILITIES
NOW Accounts $ 510,178 $ 3,110 1.23% $ 386,626 $ 1,007 0.53%
Money Market Accounts 353,759 4,940 2.82% 261,072 1,455 1.12%
Savings Accounts 137,906 130 0.19% 151,502 151 0.20%
Other Time Deposits 520,314 8,258 3.20% 549,983 6,314 2.31%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Deposits 1,522,157 16,438 2.18% 1,349,183 8,927 1.33%
Short-Term Borrowings 88,326 1,600 3.64% 94,125 1,184 2.54%
Subordinated Notes Payable 62,887 1,852 5.94% 38,345 1,108 5.83%
Other Long-Term Borrowings 66,763 1,574 4.75% 68,590 1,489 4.38%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Liabilities 1,740,133 21,464 2.49% 1,550,243 12,708 1.65%
Noninterest Bearing Deposits 521,865 540,812
Other Liabilities 28,132 22,589
TOTAL LIABILITIES 2,290,130 2,113,644
SHAREOWNERS' EQUITY
TOTAL SHAREOWNERS' EQUITY 313,640 269,574
---------- ----------
TOTAL LIABILITIES & EQUITY 2,603,770 $2,383,218
========== ==========
Interest Rate Spread 4.72% 4.56%
==== ====
Net Interest Income $60,052 $52,231
======= =======
Net Interest Margin(3) 5.31% 4.99%
==== ====
(1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $964,000$979,128
and $479,000,$1.9 million, for the three and six months ended March 31,June 30, 2006, versus $820,478 and 2005, respectively.$1.3 million
for the comparable periods ended June 30, 2005.
(2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest
on tax-exempt loans and securities to a taxable equivalent basis.rate.
(3) Taxable equivalent net interest income divided by average earning assets.
2830
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE FORDISCLOSURES ABOUT MARKET RISK
Overview
Market risk management arises from changes in interest rates, exchange rates,
commodity prices, and equity prices. We have risk management policies to
monitor and limit exposure to market risk and do not participate in
activities that give rise to significant market risk involving exchange
rates, commodity prices, or equity prices. In asset and liability management
activities, policies are in place that are designed to minimize structural
interest rate risk.
Interest Rate Risk Management
The normal course of business activity exposes us to interest rate risk.
Fluctuations in interest rates may result in changes in the fair market value
of our financial instruments, cash flows and net interest income. We seek to
avoid fluctuations in our net interest margin and to maximize net interest
income within acceptable levels of risk through periods of changing interest
rates. Accordingly, our interest rate sensitivity and liquidity are
monitored on an ongoing basis by our Asset and Liability Committee ("ALCO"),
which oversees market risk management and establishes risk measures, limits
and policy guidelines for managing the amount of interest rate risk and its
effects on net interest income and capital. A variety of measures are used
to provide for a comprehensive view of the magnitude of interest rate risk,
the distribution of risk, the level of risk over time and the exposure to
changes in certain interest rate relationships.
ALCO continuously monitors and manages the balance between interest rate-
sensitive assets and liabilities. ALCO's objective is to manage the impact
of fluctuating market rates on net interest income within acceptable levels.
In order to meet this objective, management may adjust the rates charged/paid
on loans/deposits or may shorten/lengthen the duration of assets or
liabilities within the parameters set by ALCO.
Our financial assets and liabilities are classified as other-than-trading.
An analysis of the other-than-trading financial components, including the
fair values, are presented in Table II. This table presents our consolidated
interest rate sensitivity position as of March 31,June 30, 2006 based upon certain
assumptions as set forth in the Notes to the Table. The objective of
interest rate sensitivity analysis is to measure the impact on our net
interest income due to fluctuations in interest rates. The asset and
liability values presented in Table II may not necessarily be indicative of
our interest rate sensitivity over an extended period of time.
We expect rising rates to have a favorable impact on the net interest margin,
subject to the magnitude and timeframe over which the rate changes occur.
However, as general interest rates rise or fall, other factors such as
current market conditions and competition may impact how we respond to
changing rates and thus impact the magnitude of change in net interest
income. Non-maturity deposits offer management greater discretion as to the
direction, timing, and magnitude of interest rate changes and can have a
material impact on our interest rate sensitivity. In addition, the relative
level of interest rates as compared to the current yields/rates of existing
assets/liabilities can impact both the direction and magnitude of the change
in net interest margin as rates rise and fall from one period to the next.
2931
Inflation
The impact of inflation on the banking industry differs significantly from
that of other industries in which a large portion of total resources are
invested in fixed assets such as property, plant and equipment.
Assets and liabilities of financial institutions are virtually all monetary
in nature, and therefore are primarily impacted by interest rates rather than
changing prices. While the general level of inflation underlies most
interest rates, interest rates react more to changes in the expected rate of
inflation and to changes in monetary and fiscal policy. Net interest income
and the interest rate spread are good measures of our ability to react to
changing interest rates and are discussed in further detail in the section
entitled "Results of Operations."
3032
TABLE II - FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
Other Than Trading Portfolio
Table II
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
(Other Than Trading Portfolio)
As of March 31,June 30, 2006
------------------------------------------------------------------------------ Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Loans:Loans
Fixed Rate $ 315,294 $157,171 $116,714 $53,606 $27,306 $23,075305,779 $155,784 $116,878 $55,001 $26,097 $20,923 $ 693,166680,463 $ 694,113679,515
Average Interest Rate 6.22% 7.37% 7.42% 7.26%6.30% 7.47% 7.53% 6.42% 6.82%7.27% 6.92% 6.04% 6.87%
Floating Rate(2) 1,101,611 137,255 105,029 6,549 5,196 5,850 1,361,490 1,361,4901,100,334 145,866 106,947 7,242 4,814 7,195 1,372,397 1,372,397
Average Interest Rate 6.54% 6.43% 6.97% 7.25% 7.34% 7.75% 6.57%6.78% 6.61% 7.21% 7.61% 7.69% 7.89% 6.81%
Investment Securities:(3)Securities(3)
Fixed Rate 62,354 53,474 31,814 2,898 9,712 18,589 178,841 178,84143,248 58,180 56,426 3,696 10,213 17,987 189,750 189,750
Average Interest Rate 3.06% 3.31% 3.83% 3.91%3.05% 3.74% 4.23% 4.38% 4.08% 5.52% 3.93% 4.49% 3.48%
Floating Rate 1,9191,482 - - - - - 1,919 1,9191,482 1,482
Average Interest Rate 4.75%5.09% - - - - - 4.75%5.09%
Other Earning Assets:Assets
Floating Rates 110,604Rate 126,211 - - - - - 110,604 110,604126,211 126,211
Average Interest Rate 4.55%Rates 4.82% - - - - - 4.55%4.82%
Total Financial Assets $1,591,782 $347,900 $253,557 $63,053 $42,214 $47,514 $2,346,020 $2,346,967$1,557,053 $359,830 $280,251 $65,939 $41,123 $46,105 $2,370,302 $2,367,387
Average Interest Rate 6.20% 6.37% 6.78% 7.10% 6.68% 5.83% 6.31%
Deposits:(4)Rates 6.43% 6.52% 6.74% 7.15% 6.30% 6.12% 6.49%
Deposits(4)
Fixed Rate Deposits $ 410,385419,299 $ 75,08661,548 $ 25,45621,558 $ 7,6157,976 $ 4,320 2533,045 $ 523,115257 $ 442,687513,682 $ 423,834
Average Interest Rate 3.23% 3.62% 3.61% 3.54% 4.09%Rates 3.53% 3.66% 3.83% 3.77% 4.11% 4.93% 3.32%3.56%
Floating Rate Deposits 1,023,9011,067,628 - - - - - 1,023,901 1,023,9011,067,628 1,067,628
Average Interest Rate 1.68%Rates 1.94% - - - - - 1.68%1.94%
Other Interest Bearing
Liabilities
Fixed Rate Debt 3,920 14,421 13,796 3,505 3,263 29,859 68,764 67,1303,981 14,545 13,610 3,509 3,281 24,097 63,022 61,025
Average Interest Rate 4.79%4.74% 4.43% 4.46% 4.62% 5.05% 5.04% 4.76%4.64% 5.06% 5.26% 4.82%
Floating Rate Debt 89,10577,571 - - 30,928 31,959 - 151,992 151,922140,458 140,458
Average Interest Rate 3.62%3.50% - - 5.71% 6.07% - 4.56%4.57%
Total Financial Liabilities $1,527,311$1,568,479 $ 89,50776,092 $ 39,252 $42,048 $39,542 $30,112 $1,767,772 $1,685,64035,169 $74,371 $ 6,325 $24,354 $1,784,790 $1,692,945
Average interest Rate 2.22% 3.75% 3.91% 5.23% 5.77% 5.04% 2.53%2.45% 3.80% 4.07% 5.61% 4.60% 5.25% 2.72%
(1) Based upon expected cash flows,cashflows, unless otherwise indicated.
(2) Based upon a combination of expected maturities and repricing opportunities.
(3) Based upon contractual maturity, except for callable and floating rate securities, which are based on expected
maturity and weighted average life, respectively.
(4) Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as
floating ratesrate deposits in Year 1. Other time deposit balances are classified according to maturity.
3133
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31,June 30, 2006, the end of the period covered by this Form 10-Q, our
management, including our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer each concluded that as of March 31,June 30, 2006, the end of the
period covered by this Form 10-Q, we maintained effective disclosure controls
and procedures.
Changes in Internal Control over Financial Reporting
Our management, including the Chief Executive Officer and Chief Financial
Officer, has reviewed our internal control. There have been no significant
changes in our internal control during our most recently completed fiscal
quarter, nor subsequent to the date of their evaluation, that could
significantly affect our internal control over financial reporting.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are party to lawsuits and claims arising out of the normal course of
business. In management's opinion, there are no known pending claims or
litigation, the outcome of which would, individually or in the aggregate,
have a material effect on our consolidated results of operations, financial
position, or cash flows.
Item 1.A. Risk Factors
In addition to the other information set forth in this Quarterly Report on
Form 10-Q, you should carefully consider the factors discussed in Part I,
"Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2005, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form
10-K are not the only risks we face. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or
operating results.
Item 2. Unregistered Sales of equityEquity Securities and Use of Proceeds
None.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table contains information about all purchases made by or on
behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3)
under the Exchange Act) of shares or other units of any class of our equity
securities that is registered pursuant to Section 12 of the Exchange Act.
34
Maximum Number
of shares that
may yet be
Total Total number of purchased
number Average shares purchased as under our share
of shares price paid part of our share repurchase
Period purchased per share repurchase program(1) program
- -----------------------------------------------------------------------------------------------
April 1, 2006 to - - - 455,991
April 30, 2006
May 1, 2006 to 47,300 $32.71 763,184 408,691
May 31, 2006
June 1, 2006 to 101,576 32.27 864,760 307,115
June 30, 2006
-------- ------- -------- --------
Total 148,876 $32.41 864,760 307,115
======== ======= ======== ========
(1) This balance represents the number of shares that were repurchased through the Capital City
Bank Group, Inc. Share Repurchase Program, which was approved on March 30, 2000, and modified by our
Board on January 24, 2002 (the "Program") under which we were authorized to repurchase up to 1,171,875
shares of our common stock. The Program is flexible and shares are acquired with free cash flow
from the public markets and other sources. There is no predetermined expiration date for the Program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.The Annual Meeting of Shareholders of Capital City Bank Group, Inc. was held
on April 25, 2006. Proxies for the meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, and there was no
solicitation in opposition to management's solicitations. The following
summarizes all matters voted upon at this meeting.
1. The following directors were elected for terms expiring as noted. These
individuals served on the Board of Directors prior to the Annual Meeting.
The number of votes cast were as follows:
For terms to expire at Against
the 2009 annual meeting: For Withheld
----------------------------------------------------
DuBose Ausley 15,635,678 149,636
Frederick Carroll, III 15,768,143 17,171
John K. Humphress 15,767,211 18,103
Henry Lewis III 15,744,434 40,880
35
2. The shareowners ratified the selection of KPMG LLP as the Company's
independent auditors for the fiscal year ending December 31, 2006. The
number of votes cast were as follows:
Against/ Abstentions/
For Withheld Broker Non-Vote
---------------------------------------------
15,761,858 11,506 11,950
Item 5. Other Information
None.
Item 6. Exhibits
(A) Exhibits
10.1 2006 Stock OptionForm of Participant Agreement by and betweenfor the Capital City Bank Group, Inc.
and William G. Smith, Jr., dated March 23, 2006 - incorporated
herein by reference to Exhibit 10.1 of the Registrants Form 8-K (filed
3/29/06)(No. 0-13358).
10.2 Capital City Bank Group, Inc. Non-Employee Director Compensation Plan,
as amended - incorporated herein by reference to Exhibit 10.2 of the
Registrant's Form 8-K (filed 3/29/06)(No. 0-13358).Long-Term Incentive Plan.
31.1 Certification of William G. Smith, Jr., Chairman, President and Chief
Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief
Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32.1 Certification of William G. Smith, Jr., Chairman, President and Chief
Executive Officer of Capital City Bank Group, Inc., Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief
Financial Officer of Capital City Bank Group, Inc., Pursuant to 18
U.S.C. Section 1350.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned Chief Financial Officer hereunto duly authorized.
CAPITAL CITY BANK GROUP, INC.
(Registrant)
/s/ William G. Smith, Jr.J. Kimbrough Davis
- ----------------------------------
William G. Smith, Jr.
Chairman,-----------------------------
J. Kimbrough Davis
Executive Vice President and
Chief ExecutiveFinancial Officer
Date: May 10,August 9, 2006
qtr110q2006 1