UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended:
March 31, 2005
--------------
Commission File Number 0-13358
CAPITAL CITY BANK GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2273542
------- ----------
(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 offices)
(850) 671-0300
--------------
Registrant's telephone number, including area 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 an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of April 29, 2005, there were issued and outstanding 14,162,109 shares of
the registrant's common stock.
1
CAPITAL CITY BANK GROUP, INC.
FORM 10-Q I N D E X
ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER
- ---- ----------------------------- -----------
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
3. Qualitative and Quantitative Disclosure
About Market Risk 25
4. Controls and Procedures 28
ITEM PART II. OTHER INFORMATION
1. Legal Proceedings Not Applicable
2. Unregistered Sales of Equity Securities and
Use of Proceeds Not Applicable
3. Defaults Upon Senior Securities Not Applicable
4. Submission of Matters to a Vote of
Security Holders Not Applicable
5. Other Information 29
6. Exhibits 29
Signatures 29
INTRODUCTORY NOTE
This Report and other Company communications and statements may contain
"forward-looking statements," including statements about our beliefs, plans,
objectives, goals, expectations, estimates and intentions. These statements
are subject to significant risks and uncertainties and are subject to change
based on various factors, many of which are beyond our control. 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 the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2004 and the Company's other filings with the Securities
and Exchange Commission.
2
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
(Unaudited)
(Dollars In Thousands, Except Per Share Data) 2005 2004
- ------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $ 28,842 $ 21,272
Investment Securities:
U.S. Treasury 136 229
U.S. Government Agencies and Corporations 820 329
States and Political Subdivisions 382 541
Other Securities 135 77
Funds Sold 159 222
---------- ----------
Total Interest Income 30,474 22,670
---------- ----------
INTEREST EXPENSE
Deposits 4,309 2,394
Short-Term Borrowings 450 287
Subordinated Note Payable 441 -
Other Long-Term Borrowings 720 497
---------- ----------
Total Interest Expense 5,920 3,178
---------- ----------
Net Interest Income 24,554 19,492
Provision for Loan Losses 410 961
---------- ----------
Net Interest Income After
Provision for Loan Losses 24,144 18,531
---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 4,348 3,944
Data Processing 607 633
Asset Management Fees 1,112 741
Mortgage Banking Revenues 763 694
Other 4,230 3,869
---------- ----------
Total Noninterest Income 11,060 9,881
---------- ----------
NONINTEREST EXPENSE
Salaries and Associate Benefits 12,560 10,740
Occupancy, Net 1,937 1,617
Furniture and Equipment 2,112 2,063
Merger Expense - 42
Other 8,658 6,613
---------- ----------
Total Noninterest Expense 25,267 21,075
---------- ----------
Income Before Income Taxes 9,937 7,337
Income Taxes 3,560 2,490
---------- ----------
NET INCOME $ 6,377 $ 4,847
========== ==========
BASIC NET INCOME PER SHARE $ .45 $ .37
========== ==========
DILUTED NET INCOME PER SHARE $ .45 $ .37
========== ==========
Average Basic Shares Outstanding 14,160,057 13,262,094
========== ==========
Average Diluted Shares Outstanding 14,165,572 13,285,579
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
3
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
(Unaudited)
March 31, December 31,
(Dollars In Thousands, Except Per Share Data) 2005 2004
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 92,868 $ 87,039
Funds Sold and Interest Bearing Deposits 57,115 74,506
---------- ----------
Total Cash and Cash Equivalents 149,983 161,545
Investment Securities, Available-for-Sale 190,945 210,240
Loans, Net of Unearned Interest 1,843,803 1,828,825
Allowance for Loan Losses (16,040) (16,037)
---------- ----------
Loans, Net 1,827,763 1,812,788
Premises and Equipment, Net 60,443 58,963
Goodwill 54,371 54,341
Other Intangible Assets 24,768 25,964
Other Assets 40,819 40,172
---------- ----------
Total Assets $2,349,092 $2,364,013
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 555,758 $ 566,991
Interest Bearing Deposits 1,333,600 1,327,895
---------- ----------
Total Deposits 1,889,358 1,894,886
Short-Term Borrowings 78,593 96,014
Subordinated Note Payable 30,928 30,928
Other Long-Term Borrowings 67,879 68,453
Other Liabilities 22,236 16,932
---------- ----------
Total Liabilities 2,088,994 2,107,213
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value, 3,000,000
shares authorized; no shares outstanding - -
Common Stock, $.01 par value; 90,000,000 shares
authorized; 14,162,106 and 14,155,312 shares
issued and outstanding at March 31, 2005 and
December 31, 2004, respectively 142 142
Additional Paid-In Capital 52,772 52,363
Retained Earnings 208,334 204,648
Accumulated Other Comprehensive (Loss) Income,
Net of Tax (1,150) (353)
---------- ----------
Total Shareowners' Equity 260,098 256,800
---------- ----------
Total Liabilities and Shareowners' Equity $2,349,092 $2,364,013
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
4
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
(Dollars in Thousands) 2005 2004
- -------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 6,377 $ 4,847
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 410 961
Depreciation 1,360 1,284
Net Securities Amortization 414 651
Amortization of Intangible Assets 1,196 826
Non-Cash Compensation 338 1,588
Net (Increase) Decrease in Other Assets (163) 2,751
Net Increase in Other Liabilities 5,304 1,600
-------- --------
Net Cash Provided by Operating Activities 15,236 14,508
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Payments/Maturities/Sales of
Investment Securities Available-for-Sale 17,632 47,347
Purchase of Investment Securities Available-for-Sale - (38,829)
Net Increase in Loans (15,444) (35,324)
Net Cash Used in Acquisitions - (18,055)
Purchase of Premises & Equipment (2,846) (1,682)
Proceeds From Sales of Premises & Equipment 5 25
-------- --------
Net Cash Used In Investing Activities (653) (46,518)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits (5,528) (4,973)
Net (Decrease) Increase in Short-Term Borrowings (17,465) 4,158
Increase in Other Long-Term Borrowings - 737
Repayment of Other Long-Term Borrowings (531) (261)
Dividends Paid (2,691) (2,389)
Issuance of Common Stock 70 43
-------- --------
Net Cash Used In Financing Activities (26,145) (2,685)
-------- --------
Net Decrease in Cash and Cash Equivalents (11,562) (34,695)
Cash and Cash Equivalents at Beginning of Period 161,545 218,592
-------- --------
Cash and Cash Equivalents at End of Period $149,983 $183,897
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 4,372 $ 2,308
======== ========
Interest Paid on Debt $ 1,606 $ 823
======== ========
Taxes Paid $ 22 $ 27
======== ========
Transfer of Loans to Other Real Estate $ 59 $ 210
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 338 $ 1,588
======== ========
Transfer of Current Portion of Long-Term Borrowings
to Short-Term Borrowings $ 43 $ -
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
5
CAPITAL CITY BANK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT 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, 2005 and December 31, 2004, the results of operations for the three month
periods ended March 31, 2005 and 2004, and cash flows for the three month
periods ended March 31, 2005 and 2004.
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 Notes to
Consolidated Financial Statements which are included in the Company's 2004
Annual Report on Form 10-K.
Stock Based Compensation
- ------------------------
As of March 31, 2005, the Company had three stock-based compensation plans,
consisting of the Associate Incentive Plan ("AIP"), the Associate Stock
Purchase Plan and the Director Stock Purchase Plan. Under the AIP,
performance shares are awarded to participants based on performance goals
being achieved. In addition, pursuant to the AIP, the Company executed
incentive stock option arrangements for 2005, 2004, and 2003 for a key
executive officer (William G. Smith, Jr.). As a result of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," the
Company adopted the fair value recognition provisions of SFAS No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," prospectively to all awards
granted, modified, or settled on or after January 1, 2003. Awards under the
Company's plans vest over periods ranging from six months to four years. The
cost related to all stock-based associate compensation included in net income
is accounted for under the fair value based method during 2004 and 2005 as
all awards have grant dates after January 1, 2003.
6
(2) INVESTMENT SECURITIES
The amortized cost and related market value of investment securities
available-for-sale at March 31, 2005 and December 31, 2004 were as follows:
March 31, 2005
------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------
U.S. Treasury $ 30,867 $ - $ 268 $ 30,599
U.S. Government Agencies and Corporations 84,939 - 1,376 83,563
States and Political Subdivisions 41,261 223 202 41,282
Mortgage-Backed Securities 24,178 94 276 23,996
Other Securities(1) 11,505 - - 11,505
-------- ---- ------ --------
Total Investment Securities $192,750 $317 $2,122 $190,945
======== ==== ====== ========
December 31, 2004
-------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------
U.S. Treasury $ 31,027 $ - $ 244 $ 30,783
U.S. Government Agencies and Corporations 92,073 5 741 91,337
States and Political Subdivisions 49,889 409 92 50,206
Mortgage-Backed Securities 26,293 187 80 26,400
Other Securities(1) 11,514 - - 11,514
-------- ---- ------ --------
Total Investment Securities $210,796 $601 $1,157 $210,240
======== ==== ====== ========
(1) FHLB and FRB stock recorded at cost.
(3) LOANS
The composition of the Company's loan portfolio at March 31, 2005 and
December 31, 2004 was as follows:
(Dollars in Thousands) March 31, 2005 December 31, 2004
- -----------------------------------------------------------------------------
Commercial, Financial and Agricultural $ 196,632 $ 206,474
Real Estate - Construction 151,143 140,190
Real Estate - Commercial Mortgage 639,637 655,426
Real Estate - Residential 470,685 438,484
Real Estate - Home Equity 151,464 150,061
Real Estate - Loans Held-for-Sale 8,881 11,830
Consumer 225,361 226,360
---------- ----------
Loans, Net of Unearned Interest $1,843,803 $1,828,825
========== ==========
(4) ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the three-
month periods ended March 31, 2005 and 2004, was as follows:
March 31,
---------------------------
(Dollars in Thousands) 2005 2004
- -----------------------------------------------------------------------------
Balance, Beginning of Period $16,037 $12,429
Acquired Reserves - 1,307
Provision for Loan Losses 410 961
Recoveries on Loans Previously Charged-Off 428 359
Loans Charged-Off (835) (1,336)
------- -------
Balance, End of Period $16,040 $13,720
======= =======
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
7
Impairment of a Loan." Selected information pertaining to impaired loans is
depicted in the table below:
March 31,
------------------------------------------------
2005 2004
-------------------- ---------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- --------------------------------------------------------------------------------------
Impaired Loans:
With Related Valuation Allowance $1,352 $621 $1,066 $350
Without Related Valuation Allowance 2,355 - 437 -
March 31,
---------------------------
(Dollars in Thousands) 2005 2004
- ------------------------------------------------------------------------------
Average Recorded Investment in Impaired Loans $4,063 $5,080
Interest Income on Impaired Loans:
Recognized 57 107
Collected in Cash 57 107
(5) DEPOSITS
The composition of the Company's interest-bearing deposits at March 31, 2005
and December 31, 2004 was as follows:
(Dollars in Thousands) March 31, 2005 December 31, 2004
- ------------------------------------------------------------------------
NOW Accounts $ 400,816 $ 338,932
Money Market Accounts 250,433 270,095
Savings Deposits 148,578 147,348
Time Deposits 533,773 571,520
---------- ----------
Total Interest Bearing Deposits $1,333,600 $1,327,895
========== ==========
(6) INTANGIBLE ASSETS
The Company had intangible assets of $79.1 million and $80.3 million at March
31, 2005 and December 31, 2004, respectively. Intangible assets were as
follows:
March 31, 2005 December 31, 2004
----------------------- -----------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- ----------------------------------------------------------------------------------------
Core Deposit Intangibles $ 42,078 $19,389 $ 42,078 $18,300
Goodwill 58,157 3,786 58,127 3,786
Customer Relationship Intangible 1,867 162 1,867 114
Non-Compete Agreement 483 109 483 50
-------- ------- -------- -------
Total Intangible Assets $102,585 $23,446 $102,555 $22,250
Net Core Deposit Intangibles: As of March 31, 2005 and December 31, 2004,
the Company had net core deposit intangibles of $22.7 million and $23.8
million, respectively. Amortization expense for the first three months of
2005 and 2004 was $1.1 million and $822,000, respectively. Estimated annual
amortization expense is $4.4 million.
Goodwill: As of March 31, 2005 and December 31, 2004, the Company had
goodwill, net of accumulated amortization, of $54.4 million and $54.3
million, respectively. 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."
8
Other: As of March 31, 2005 and December 31, 2004, the Company had a
customer relationship intangible, net of accumulated amortization, of $1.7
million and $1.8 million, respectively. This intangible was recorded as a
result of the March 2004 acquisition of trust customer relationships from
Synovus Trust Company. Amortization expense for the first three months of
2005 and 2004 was $47,000 and $4,000, respectively. Estimated annual
amortization expense is $191,000 based on use of a 10 year useful life. As
of March 31, 2005 and December 31, 2004, the Company also had a non-compete
intangible, net of accumulated amortization, of $374,000 and $433,000,
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 three months of 2005 was $59,000. Estimated annual
amortization expense is $242,000 based on a 2-year useful life.
(7) 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 SERP
------------------ ------------------
(Dollars in Thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------
Discount rate 6.00% 6.25% 6.00% 6.25%
Long-term rate of return on assets 8.00% 8.00% N/A N/A
Service cost $1,040 $ 925 $ 35 $24
Interest cost 800 700 54 32
Expected return on plan assets (798) (650) N/A N/A
Prior service cost amortization 55 50 15 15
Net loss/(gain) amortization 295 300 21 (9)
------ ------ ---- ---
Net periodic benefit cost $1,392 $1,325 $125 $62
====== ====== ==== ===
(8) 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 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, 2005, the amounts associated with the Company's
off-balance sheet obligations were as follows:
(Dollars in Thousands) Amount
- ----------------------------------------------
Commitments to Extend Credit(1) $427,735
Standby Letters of Credit $ 18,381
(1) Commitments include unfunded loans, revolving lines of credit, and other
unused commitments.
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.
9
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities. In general, management does not
anticipate any material losses as a result of participating in these types of
transactions. However, any potential losses arising from such transactions
are reserved for in the same manner as management reserves for its other
credit facilities.
For both on- and off-balance sheet financial instruments, the Company
requires collateral to support such instruments when it is deemed necessary.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained upon extension of credit is based
on management's credit evaluation of the counterparty. Collateral held
varies, but may include deposits held in financial institutions; U.S.
Treasury securities; other marketable securities; real estate; accounts
receivable; property, plant and equipment; and inventory.
Other Commitments. In the normal course of business, the Company enters into
lease commitments. Minimum lease payments under leases classified as
operating leases due in each of the five years subsequent to March 31, 2005,
are as follows (in millions): 2005 (remaining), $1.0; 2006, $1.2; 2007, $1.1;
2008, $1.1; and 2009, $1.1.
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.
(9) 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). The Company's comprehensive
income (loss) consists of net income (loss) 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 are reported as other
comprehensive income (loss) and totaled $(797,000) and $30,000 for the three
months ended March 31, 2005 and 2004, respectively. Reclassification
adjustments consist only of realized gains on sales of investment securities
and were not material for the three months ended March 31, 2005 and 2004.
10
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
2005 2004 2003
---------- --------------------------------------------- -----------------------------------
First Fourth Third Second First Fourth Third Second
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 30,474 $ 29,930 $ 24,660 $ 24,265 $ 22,670 $ 23,022 $ 23,484 $ 23,997
Interest Expense 5,920 5,634 3,408 3,221 3,178 3,339 3,506 3,894
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 24,554 24,296 21,252 21,044 19,492 19,683 19,978 20,103
Provision for
Loan Losses 410 300 300 580 961 850 921 886
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 24,144 23,996 20,952 20,464 18,531 18,833 19,057 19,217
Gain on Sale of Credit
Card Portfolio - 324 6,857 - - - - -
Noninterest Income 11,060 11,596 10,864 11,031 9,881 10,614 10,952 10,428
Conversion/
Merger Expense - 436 68 4 42 - - -
Noninterest Expense 25,267 24,481 21,565 21,597 21,033 20,593 20,184 19,516
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 9,937 10,999 17,040 9,894 7,337 8,854 9,825 10,129
Provision for
Income Taxes 3,560 3,737 6,221 3,451 2,490 2,758 3,529 3,689
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 6,377 $ 7,262 $ 10,819 $ 6,443 $ 4,847 $ 6,096 $ 6,296 $ 6,440
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 24,835 $ 24,619 $ 21,528 $ 21,333 $ 19,811 $ 20,020 $ 20,332 $ 20,456
Per Common Share:
Net Income Basic $ .45 $ .51 $ .82 $ .48 $ .37 $ .47 $ .47 $ .49
Net Income Diluted .45 .51 .82 .48 .37 .46 .47 .49
Dividends Declared .19 .19 .18 .18 .18 .18 .17 .17
Diluted Book Value 18.36 18.13 16.48 15.80 15.54 15.27 15.00 14.73
Market Price:
High 42.00 45.98 41.20 43.15 45.55 46.83 40.93 36.43
Low 36.63 37.71 33.33 35.50 39.05 36.62 35.00 29.74
Close 40.51 41.80 38.71 39.59 41.25 45.99 38.16 36.08
Selected Average
Balances:
Loans $1,827,327 $1,779,736 $1,524,401 $1,491,142 $1,357,206 $1,329,673 $1,336,139 $1,316,705
Earning Assets 2,047,049 2,066,111 1,734,708 1,721,655 1,634,468 1,636,269 1,634,689 1,612,133
Assets 2,306,807 2,322,870 1,941,372 1,929,485 1,830,496 1,819,552 1,816,005 1,786,991
Deposits 1,847,378 1,853,588 1,545,224 1,538,630 1,457,160 1,451,095 1,451,879 1,415,798
Shareowners' Equity 260,946 248,773 217,273 210,211 206,395 201,939 199,060 194,781
Common Equivalent
Average Shares:
Basic 14,160 13,955 13,283 13,274 13,262 13,223 13,221 13,209
Diluted 14,166 13,961 13,287 13,277 13,286 13,265 13,260 13,255
Ratios:
ROA 1.12% 1.24% 2.22% 1.34% 1.06% 1.33% 1.38% 1.45%
ROE 9.91% 11.61% 19.81% 12.33% 9.45% 11.98% 12.55% 13.26%
Net Interest
Margin (FTE) 4.92% 4.75% 4.94% 4.99% 4.88% 4.85% 4.94% 5.09%
Efficiency Ratio 67.06% 63.85% 52.60%(1) 63.87% 68.06% 64.58% 61.93% 60.57%
(1) Includes $4.2 million (after-tax) one-time gain on sale of credit card portfolio.
11
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 the
Company's 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 "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 the Company's earnings performance and financial
condition, and how the Company's performance during 2005 compares with prior
years. Throughout this section, Capital City Bank Group, Inc., and its
subsidiary, collectively, are referred to as "CCBG" or the "Company."
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 on page 24 for average balances and interest
rates presented on a quarterly basis.
This report including the MD&A section, and other Company written and oral
communications and statements may contain "forward-looking statements."
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" and similar expressions are intended to identify
forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. The Company's actual future results may differ materially
from those set forth in its forward-looking statements. Factors that might
cause the future financial performance to vary from that described in its
forward-looking statements include the credit, market, operational,
liquidity, interest rate and other risks discussed in the MD&A section of
this report and in other periodic reports filed with the SEC. In addition,
the following discussion sets forth certain risks and uncertainties that the
Company believes could cause its actual future results to differ materially
from expected results. However, other factors besides those listed below or
discussed in the Company's reports to the SEC also could adversely affect the
Company's results, and the reader should not consider any such list of
factors to be a complete set of all potential risks or uncertainties. This
discussion is provided as permitted by the Private Securities Litigation
Reform Act of 1995. The following factors, among others, could cause our
financial performance to differ materially from what is contemplated in those
forward-looking statements.
* Our ability to integrate the business and operations of companies and
banks that we have acquired and that we may acquire in the future. For
example, the Company may fail to realize the growth opportunities and
cost savings anticipated to be derived from our acquisitions. In
addition, it is possible that during the integration process of our
acquisitions, the Company could lose key employees or the ability to
maintain relationships with customers.
* The strength of the United States economy in general and the strength of
the local economies in which we conduct operations may be different than
expected resulting in, among other things, a deterioration in credit
quality or a reduced demand for credit, including the resultant effect
on our loan portfolio and allowance for loan losses;
12
* Worldwide political and social unrest, including acts of war and
terrorism;
* The effects of harsh weather conditions, including hurricanes;
* The effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the
Federal Reserve System;
* Inflation, interest rate, market and monetary fluctuations;
* Adverse conditions in the stock market and other capital markets and the
impact of those conditions on our capital markets and capital management
activities, including our investment and wealth management advisory
businesses and brokerage activities;
* Changes in U.S. foreign or military policy;
* The timely development of competitive new products and services by us
and the acceptance of those products and services by new and existing
customers;
* The willingness of customers to accept third-party products marketed by
us;
* The willingness of customers to substitute competitors' products and
services for our products and services and vice versa;
* The impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance);
* Technological changes;
* Changes in consumer spending and saving habits;
* Unanticipated regulatory or judicial proceedings;
* The impact of changes in accounting policies by the Securities and
Exchange Commission;
* Adverse changes in the financial performance and/or condition of our
borrowers, which could impact the repayment of those borrowers'
outstanding loans; and
* Our success at managing the risks involved in the foregoing.
We caution that the foregoing list of important factors is not exhaustive. Any
forward-looking statements made by or on behalf of the Company speak only as of
the date they are made. We do not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by us or
on our behalf. The Company may make further disclosures of a forward-looking
nature in its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q
and its current report on Form 8-K.
The Company is headquartered in Tallahassee, Florida and as of March 31, 2005
had 60 banking offices, five mortgage lending offices, 74 ATMs and 11 Bank'N
Shop locations in Florida, Georgia and Alabama.
13
RESULTS OF OPERATIONS
Net Income
- ----------
Earnings were $6.4 million, or $.45 per diluted share, for the first quarter
of 2005. This compares to $4.8 million, or $.37 per diluted share for the
first quarter of 2004, an increase of 31.6% and 21.6%, respectively. Results
include the impact of the acquisitions of Quincy State Bank on March 19,
2004, and Farmers and Merchants Bank on October 15, 2004.
The increase in earnings was primarily attributable to an increase in
operating revenue (defined as net interest income plus noninterest income) of
$6.2 million, or 21.3%, and a $551,000, or 57.3%, decrease in the loan loss
provision, partially offset by an increase in noninterest expense of $4.2
million, or 19.9%. The increase in operating revenues reflects a 26.0%
increase in net interest income and an 11.9% increase in noninterest income.
The increase in net interest income is attributable to loan growth and an
improving net interest margin. The increase in noninterest income is
reflective of higher deposit service charge fees, asset management fees, and
interchange fees. The lower loan loss provision reflects continued strong
credit quality. Higher expense for compensation, occupancy, and advertising
drove the increase in noninterest expense.
A condensed earnings summary is presented below:
For the Three Months
Ended March 31,
----------------------------
(Dollars in Thousands) 2005 2004
- -----------------------------------------------------------------
Interest Income $30,474 $22,670
Taxable Equivalent Adjustment(1) 281 319
------- -------
Interest Income (FTE) 30,755 22,989
Interest Expense 5,920 3,178
------- -------
Net Interest Income (FTE) 24,835 19,811
Provision for Loan Losses 410 961
Taxable Equivalent Adjustment 281 319
------- -------
Net Int. Inc. After Provision 24,144 18,531
Noninterest Income 11,060 9,881
Merger Expense - 42
Noninterest Expense 25,267 21,033
------- -------
Income Before Income Taxes 9,937 7,337
Income Taxes 3,560 2,490
------- -------
Net Income $ 6,377 $ 4,874
======= =======
Percent Change 30.84% (23.80)%
Return on Average Assets(2) 1.12% 1.06%
Return on Average Equity(2) 9.91% 9.45%
(1) Computed using a statutory tax rate of 35%
(2) Annualized
Net Interest Income
- -------------------
Net interest income represents the 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. First quarter taxable-
equivalent net interest income increased $5.0 million, or 25.4%, over the
comparable quarter in 2004. This increase was caused by the effect of two
acquisitions in 2004, an improved earning asset mix and higher yields,
partially offset by higher funding costs resulting from the higher interest
rate environment. The favorable factors noted above resulted in a four basis
point improvement in the margin as compared to the first quarter of
14
2004. Table I on page 24 provides a comparative analysis of the Company's
average balances and interest rates.
For the first quarter of 2005, taxable-equivalent interest income increased
$7.8 million, or 33.8% from the comparable quarter in 2004. The increase was
attributable to growth resulting from strong loan demand, higher yields on
earning assets and acquisitions. Earning asset yields improved to 6.09% in
the first quarter of 2005 from 5.83% in the fourth quarter of 2004 and 5.66%
in the first quarter of 2004, primarily attributable to the higher interest
rate environment. Income on earning assets is anticipated to expand during
the second quarter due to the continued improvement in the earning asset mix
and the higher rate environment.
Interest expense for the first quarter increased $2.7 million, or 86.3%, from
the comparable prior-year period. The unfavorable variance is attributable
to higher rates, acquired deposits and an unfavorable shift in mix, as
certificates of deposit, generally a higher cost deposit product, increased
relative to total deposits. Certificates of deposit, as a percent of year-
to-date average deposits, increased from 28.9% in first quarter 2004 to 29.9%
in 2005. The average rate paid on interest bearing liabilities of 1.61% in
the first quarter of 2005 represents an increase of 11 and 52 basis points,
respectively, over the fourth and first quarters of 2004. Interest expense
is anticipated to continue to increase in the second quarter as a result of
the higher rate environment and increased competition.
The Company's interest rate spread (defined as the average federal taxable-
equivalent yield on earning assets less the average rate paid on interest
bearing liabilities) decreased from 4.57% in the first quarter of 2004 to
4.48% in the comparable period of 2005, reflecting the higher cost of funds.
The Company's net yield on earning assets (defined as federal taxable-
equivalent net interest income divided by average earning assets) was 4.92%
in the first three months of 2005, versus 4.88% in the first three months of
2004. The increase in margin reflects higher asset yields driven by rising
interest rates. If interest rates continue to rise at a measured pace, the
net yield on earning assets is anticipated to improve during the second
quarter of 2005 as higher yields will only be partially offset by the rising
costs of funds. Net interest income is expected to expand during the second
quarter attributable to anticipated higher net yield on earning assets,
favorable shift in mix of earning assets and other factors noted above.
Provisions for Loan Losses
- --------------------------
The provision for loan losses of $410,000 for the quarter was lower than the
first quarter of 2004 due to a lower level of net charge-offs. Net charge-
offs totaled $407,000, or .09% of average loans for the quarter compared to
$977,000, or .29% for the first quarter of 2004. At quarter-end the
allowance for loan losses was .87% of outstanding loans and provided coverage
of 302% of nonperforming loans.
15
Charge-off activity for the respective periods is set forth below:
Three Months Ended
March 31,
--------------------
(Dollars in Thousands) 2005 2004
- ------------------------------------------------------------------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 88 $ 167
Real Estate - Construction - -
Real Estate - Commercial Mortgage 4 39
Real Estate - Residential 25 83
Consumer 718 1,047
------ ------
Total Charge-offs 835 1,336
------ ------
RECOVERIES
Commercial, Financial and Agricultural 9 12
Real Estate - Construction - -
Real Estate - Commercial Mortgage - -
Real Estate - Residential 2 -
Consumer 417 347
------ ------
Total Recoveries 428 359
------ ------
Net Charge-offs $ 407 $ 977
====== ======
Net Charge-Offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .09% .29%
====== ======
Noninterest Income
- ------------------
Noninterest income increased $1.2 million, or 11.9%, from the first quarter
of 2004 primarily due to higher deposit service charge fees, asset management
fees, and interchange fees. Noninterest income represented 31.1% of
operating revenue in the first quarter of 2005, compared to 33.6% for the
first quarter of 2004. The decrease is due to the higher level of net
interest income realized in the first quarter of 2005.
Service charges on deposit accounts increased $404,000, or 10.2%, from the
comparable period in 2004. The increase is due to the growth in deposit
accounts reflective of the two acquisitions, a fee structure change
implemented in mid 2004, and an increase in NSF/OD fees due to assessment
changes implemented in the fourth quarter.
Data processing revenues of $607,000 for the first quarter of 2005 reflect a
decrease of $26,000, or 4.1%, over the comparable period in 2004. The
decline is due to slightly lower revenues from one processing contract with a
state agency. The Company currently provides data processing services for
six financial clients and contract processing services for four non-financial
clients. For the first quarter of 2005, processing revenues for financial
clients represented 68.4% of total processing revenues, compared to 63.0% for
the comparable period in 2004.
Income from asset management activities increased $371,000, or 50.1%, over
the comparable quarter in 2004. The improvement is due to an increase in
trust assets under management reflective of assets acquired late in the first
quarter of 2004 and growth in new business within existing markets. At March
31, 2005, assets under management totaled $651.2 million, representing an
increase of $19.7 million, or 3.1% from the comparable period in 2004.
Mortgage banking revenues increased $69,000, or 9.9%, over the comparable
quarter in 2004, which is consistent with higher mortgage production that was
up 42.5% over the first quarter of 2004. Due to the increasing rate
environment, a larger percentage of production is being retained in the loan
portfolio (ARM product) versus being sold into the secondary market. Loans
sold in the secondary market during the first quarter of 2005 increased 20.3%
over the first quarter of 2004 to a level of $43.7 million.
16
Other income increased $361,000 or 9.3%, over the comparable quarter of 2004
driven primarily by a $290,000 increase in fees generated from growth in card
processing volume.
Noninterest income as a percent of average assets (annualized) was 1.94% for
the first quarter of 2005, compared to 2.17% for the first quarter of 2004.
Noninterest Expense
- -------------------
Noninterest expense in the first quarter of 2005 increased $4.2 million, or
19.9%, over the first quarter of 2004. Factors impacting the Company's
noninterest expense during the first quarter of 2005 are discussed below.
Compensation expense increased $1.8 million, or 17.0%, over the first quarter
of 2004. This increase is due primarily to higher associate salaries of $1.3
million and higher performance based compensation of $451,000 (cash incentive
and stock based payments). The increase in associate salaries primarily
reflects the addition of associates from the two acquisitions in 2004 and
annual merit/market based raises for associates. The increase in performance
based compensation reflects an increase in the number of participants in the
Company's stock compensation plans and a higher level of performance.
Occupancy expense, including premises, furniture, fixtures and equipment
increased $369,000, or 10.0%, over the first quarter of 2004. The Company
experienced increases in depreciation of $76,000, maintenance and repairs of
$129,000, utilities of $48,000, and property taxes of $98,000 from the
comparable period in 2004. The increase in all of the aforementioned expense
categories is primarily reflective of the increase in the number of banking
offices.
Other noninterest expense increased $2.0 million, or 30.9%, over the first
quarter of 2004. The increase was primarily the result of higher expense for
processing services of $135,000, advertising of $889,000, intangible
amortization of $370,000, interchange fees of $217,000, and miscellaneous
expense of $282,000. The increase in processing services reflects higher
expense for version upgrades and custom programming for the Company's core
processing system software. The increase in advertising expense reflects the
marketing cost to support the new free checking product introduced in the
first quarter of 2005. The increase in intangible amortization reflects the
two acquisitions in 2004. The higher expense for interchange fees is due to
increased card processing volume. The increase in miscellaneous expense is
due to higher expense for printing, postage, and other losses.
Net noninterest expense (noninterest income minus noninterest expense,
excluding intangible amortization) as a percent of average assets was 2.29%
in the first quarter of 2005 compared to 2.27% in 2004. The Company's
efficiency ratio (noninterest expense, excluding intangible amortization,
expressed as a percent of the sum of taxable-equivalent net interest income
plus noninterest income) was 67.06% in the first quarter 2005 compared to
68.06% for the comparable quarter in 2004. The improvement in the efficiency
ratio is due to the higher level of operating revenue.
Income Taxes
- ------------
The provision for income taxes increased $1.1 million, or 43.0%, over the
first quarter of 2004, reflecting higher taxable income. The Company's
effective tax rate for the first quarter of 2005 was 35.8% compared to 33.9%
for the same quarter in 2004. The increase in the effective tax rate is
primarily attributable to a lower level of tax-free loan and security income.
17
FINANCIAL CONDITION
Asset and liability balances include the integration of Quincy State Bank on
March 19, 2004, and Farmers and Merchants Bank on October 15, 2004.
The Company's average assets increased $476.3 million, or 26.0%, to $2.31
billion for the quarter-ended March 31, 2005 from $1.83 billion in the
comparable quarter of 2004. Average earning assets of $2.05 billion
increased $412.6 million, or 25.2%, from the comparable quarter of 2004. The
increase in earning assets, includes increases in average investment
securities ($21.5 million) and average loans ($470.1 million), which is
attributable to the two acquisitions integrated in 2004. Strong loan growth
in existing markets throughout 2004 also contributed to the increase.
Partially offsetting the increase in average loans and investment securities
was a decrease in overnight funds sold of $79.0 million, or 78.0%. Table I
on page 24 presents average balances for the three-month periods ended March
31, 2005 and 2004.
The Company ended the first quarter with approximately $1.0 million in
average net overnight funds purchased as compared to $84.3 million net
overnight funds sold in the first quarter of 2004. The significant decline
primarily reflects cash used to fund loan growth. For a further discussion
on liquidity see the section "Liquidity and Capital Resources."
The investment portfolio is a significant component of the Company's
operations and, as such, it functions as a key element of liquidity and
asset/liability management. As of March 31, 2005, the average investment
portfolio increased $21.5 million, or 12.2%, from the first quarter of 2004.
The increase was driven by the integration of securities from the two
acquisitions in 2004. Management will continue to evaluate the need to
purchase securities for the investment portfolio throughout 2005, taking into
consideration liquidity needed to fund planned loan growth, acquisitions, and
meet pledging requirements.
Securities 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, 2005 and December 31, 2004,
shareowners' equity included a net unrealized loss of $1.2 million and $0.4
million, respectively.
Average loans increased $470.1 million, or 34.6%, from the first quarter of
2004. The increase was driven by strong gains in all loan categories
reflective of loans integrated from the two acquisitions in 2004 and from
loan growth in existing markets throughout 2004. Although total loans were
below projections at quarter-end, the Company experienced accelerated growth
in the latter part of the first quarter. Loan activity in all markets
remains moderate to strong and improvement in net loan growth is expected in
the second quarter.
The Company's nonperforming loans were $5.3 million at March 31, 2005, versus
$3.0 million for the same period in 2004. As a percent of nonperforming
loans, the allowance for loan losses represented 302% at March 31, 2005
versus 345% at December 31, 2004 and 717% at March 31, 2004. 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 $0.3 million at March 31, 2005, versus $0.6
million at December 31, 2004 and $1.1 million at March 31, 2004. The ratio
of nonperforming assets as a percent of loans plus other real estate was .31%
at March 31, 2005 compared to .29% at December 31, 2004 and .20% at March 31,
2004. The increase in the ratio over the first quarter of 2004 is primarily
attributable to the addition of one large commercial real estate loan that is
in the process of foreclosure. Management expects no significant loss upon
the disposition of this asset.
Management maintains the 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 the borrowers' ability and
willingness to repay, and from other risks inherent in the lending process,
including collateral risk,
18
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
balance can and will change based on changes in the assessment of the
portfolio's overall credit quality. Management evaluates the adequacy of the
allowance for loan losses on a quarterly basis.
The allowance for loan losses at March 31, 2005 was $16.0 million, compared
to $13.7 million at March 31, 2004 and $16.0 million at year-end 2004. The
increase from March 31, 2004 reflects the integration of acquired loan
reserves from Quincy State Bank and Farmers and Merchants Bank of Dublin
during 2004. At quarter-end 2005, the allowance represented 0.87% of total
loans. While there can be no assurance that the Company will not sustain
loan losses in a particular period that are substantial in relation to the
size of the allowance, management's assessment of the loan portfolio does not
indicate a likelihood of this occurrence. It is management's opinion that
the allowance at March 31, 2005 is adequate to absorb losses inherent in the
loan portfolio at quarter-end.
Average total deposits increased $390.2 million, or 26.8% from the first
quarter of 2004 driven by a $258.6 million increase in nonmaturity deposits
and a $131.6 million increase in certificates of deposits. These increases
primarily reflect the impact of the two acquisitions integrated in 2004.
The ratio of average noninterest bearing deposits to total deposits was 29.1%
for the first quarter of 2005 compared to 29.8% for the first quarter of
2004. For the same periods, the ratio of average interest bearing
liabilities to average earning assets was 72.8%, and 71.9%, 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 the Company's
financial position in an effort to ensure the Company has 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, bank lines of credit for the Company, approved lines
for the purchase of federal funds by CCB and Federal Home Loan Bank advances.
Borrowings. The Company maintains a $25.0 million revolving line of credit.
As of March 31, 2005, the Company had no borrowings under the revolving line
of credit. During the first quarter of 2005, the Bank made scheduled FHLB
advance payments totaling $777,000.
The Company ended the first quarter of 2005 with approximately $1.0 million
in average net overnight funds purchased as compared to $84.3 million net
overnight funds sold in the first quarter of 2004. The significant decline
reflects cash used to fund loan growth. The Company expects to be a net
purchaser of funds in the second quarter although the amount will be
significantly reduced by the upcoming Alachua acquisition.
19
Contractual Cash Obligations. The Company maintains certain debt and
operating lease commitments that require cash payments. The table below
details those future cash commitments as of March 31, 2005:
Payments Due After March 31, 2005
--------------------------------------------------------------
2005
(Dollars in Thousands) (Remaining) 2006 2007 2008 2009 Thereafter Total
- --------------------------------------------------------------------------------------
Federal Home Loan
Bank Advances $17,744 $32,577 $5,554 $4,536 $2,386 $31,156 $ 93,953
Subordinated Note
Payable - - - - - 30,928 30,928
Operating Lease
Obligations 995 1,171 1,101 1,095 1,104 7,129 12,596
------- ------- ------ ------ ------ ------- --------
Total Contractual
Cash Obligations $18,739 $33,748 $6,655 $5,631 $3,490 $69,213 $137,477
======= ======= ====== ====== ====== ======= ========
Capital
- -------
The Company's equity capital was $260.1 million as of March 31, 2005 compared
to $256.8 million as of December 31, 2004. Management continues to monitor
its capital position in relation to its level of assets with the objective of
maintaining a strong capital position. The leverage ratio was 9.03% at March
31, 2005 compared to 8.79% at December 31, 2004. Further, the Company's
risk-adjusted capital ratio of 11.52% at March 31, 2005 exceeds the 8.0%
minimum requirement under risk-based regulatory guidelines. As allowed by
Federal Reserve Board capital guidelines the trust preferred securities
issued by CCBG Capital Trust I are included as Tier 1 capital in the
Company's capital calculations previously noted. See Note 10 in the Notes to
Consolidated Financial Statements in the Company's 2004 Form 10-K for
additional information on the trust preferred security offering.
Adequate capital and financial strength is paramount to the stability of CCBG
and its subsidiary bank. Cash dividends declared and paid should not place
unnecessary strain on the Company's 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 the
Company is 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 first quarter of 2005
totaled $.19 per share compared to $.18 per share for the first quarter of
2004, an increase of 5.6%. The dividend payout ratios for the first quarter
end 2005 and 2004 were 41.6% and 48.4%, respectively.
State and federal regulations as well as the Company's long-term debt
agreements place certain restrictions on the payment of dividends by both the
Company and the Bank. At March 31, 2005, these regulations and covenants did
not impair the Company's (or its subsidiary's) ability to declare and pay
dividends or to meet other existing obligations in the normal course of
business.
During the first three months of 2005, shareowners' equity increased $3.3
million, or 5.1%, on an annualized basis. Growth in equity during the first
quarter was positively impacted by net income of $6.4 million and the
issuance of common stock of $0.4 million. Equity was reduced by dividends
paid during the first quarter of $2.7 million, or $.19 per share and an
increase in the net unrealized loss on available-for-sale securities of $0.8
million. At March 31, 2005, the Company's common stock had a book value of
$18.36 per diluted share compared to $18.13 at December 31, 2004.
On April 26, 2005, the Company announced a five-for-four stock split in the
form of a 25% stock dividend, payable as of July 1, 2005 to shareowners of
record as of close of business on June 17, 2005.
On March 30, 2000, the Company's Board of Directors authorized the repurchase
of up to 625,000 shares of its outstanding common stock. On January 24,
2002, the Company's Board of Directors authorized the repurchase of an
additional 312,500 shares of its outstanding common stock. The purchases
will be made in the open market or in
20
privately negotiated transactions. The Company did not purchase any shares
in the first quarter of 2005. From March 30, 2000 through March 31, 2005,
the Company repurchased 572,707 shares at an average purchase price of $19.18
per share.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not currently engage in the use of derivative instruments to
hedge interest rate risks. However, 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 customers.
At March 31, 2005, the Company had $427.7 million in commitments to extend
credit and $18.4 million in standby letters of credit. 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. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. The Company uses the same credit policies in establishing commitments
and issuing letters of credit as it does 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
Federal Home Loan Bank, investment security maturities and the Company's
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 the Company
to make various estimates and assumptions (see Note 1 in the Notes to
Consolidated Financial Statements). The Company believes that, of its
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 the Company 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 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 the Company's 2004 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. The Company performs an impairment review on an annual basis to
determine if there has been impairment of its goodwill. The Company has
determined that no impairment existed at December 31, 2004. 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 the Company's
reported results.
21
Core deposit assets represent the premium the Company paid for core deposits.
Core deposit intangibles are amortized on the straight-line method over
various periods ranging from 7-10 years. Generally, core deposits refer to
nonpublic, nonmaturing deposits including noninterest-bearing deposits, NOW,
money market and savings. The Company makes 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 customer bases acquired. If there is a reason to
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: The Company has a trusteed defined benefit pension plan
for the benefit of substantially all associates of the Company. The
Company's 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. The discount rate utilized for 2005 is 6.00%.
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). The weighted-average expected long-term
rate of return on plan assets utilized for 2005 is 8.0%.
The assumed rate of annual compensation increases of 5.50% in 2005 is based
on expected trends in salaries and the employee base. This assumption is not
expected to change materially in 2005.
Information on components of the Company's net periodic benefit cost is
provided in Note 7 of the Notes to Consolidated Financial Statements included
herein and Note 8 of the Notes to Consolidated Financial Statements in the
Company's 2004 10-K.
Recent Accounting Pronouncements
- --------------------------------
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") SOP No. 03-3, "Accounting for
Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses
accounting for differences between the contractual cash flows of certain
loans and debt securities and the cash flows expected to be collected when
loans or debt securities are acquired in a transfer and those cash flow
differences are attributable, at least in part, to credit quality. As such,
SOP 03-3 applies to loans and debt securities acquired individually, in pools
or as part of a business combination and does not apply to originated loans.
The application of SOP 03-3 limits the interest income, including accretion
of purchase price discounts, that may be recognized for certain loans and
debt securities. Additionally, SOP 03-3 does not allow the excess of
contractual cash flows over cash flows expected to be collected to be
recognized as an adjustment of yield, loss accrual or valuation allowance,
such as the allowance for loan losses. SOP 03-3 requires that increases in
expected cash flows subsequent to the initial
22
investment be recognized prospectively through adjustment of the yield on the
loan or debt security over its remaining life. Decreases in expected cash
flows should be recognized as impairment. In the case of loans acquired in a
business combination where the loans show signs of credit deterioration,
SOP 03-3 represents a significant change from current purchase accounting
practice whereby the acquiree's allowance for loan losses is typically added
to the acquirer's allowance for loan losses. SOP 03-3 is effective for loans
and debt securities acquired by the Company beginning January 1, 2005. Loans
acquired in future acquisitions will be impacted by the adoption of this
pronouncement.
23
TABLE I
AVERAGE BALANCES & INTEREST RATES
For Three Months Ended March 31,
--------------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
Average Average Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Loans, Net of Unearned Interest(1)(2) $1,827,327 $28,920 6.42% $1,357,206 $21,310 6.32%
Taxable Investment Securities 153,543 1,090 2.85% 121,702 635 2.09%
Tax-Exempt Investment Securities(2) 43,928 586 5.33% 54,274 821 6.06%
Funds Sold 22,251 159 2.85% 101,286 222 0.87%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,047,049 30,755 6.09% 1,634,468 22,988 5.66%
Cash & Due From Banks 97,322 90,327
Allowance for Loan Losses (16,167) (12,725)
Other Assets 178,603 118,426
---------- ----------
TOTAL ASSETS $2,306,807 $1,830,496
========== ==========
LIABILITIES
NOW Accounts $ 359,151 $ 447 0.50% $ 271,878 $ 124 0.18%
Money Market Accounts 251,849 625 1.01% 215,078 239 0.45%
Savings Accounts 147,676 75 0.21% 115,985 28 0.10%
Other Time Deposits 552,069 3,162 2.32% 420,501 2,003 1.92%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Deposits 1,310,745 4,309 1.33% 1,023,442 2,394 0.94%
Short-Term Borrowings 79,582 450 2.29% 104,406 287 1.11%
Subordinated Note Payable 30,928 441 5.79% - - -
Other Long-Term Borrowings 68,200 720 4.28% 47,023 497 4.25%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Liabilities 1,489,455 5,920 1.61% 1,174,871 3,178 1.09%
Noninterest Bearing Deposits 536,633 433,718
Other Liabilities 19,773 15,512
---------- ----------
TOTAL LIABILITIES 2,045,861 1,624,101
SHAREOWNERS' EQUITY
Common Stock 141 133
Surplus 52,641 17,248
Other Comprehensive Income (489) 1,403
Retained Earnings 208,653 187,611
---------- ----------
TOTAL SHAREOWNERS' EQUITY 260,946 206,395
---------- ----------
TOTAL LIABILITIES & EQUITY $2,306,807 $1,830,496
========== ==========
Net Interest Rate Spread 4.48% 4.57%
==== ====
Net Interest Income $24,835 $19,810
======= =======
Net Interest Margin(3) 4.92% 4.88%
==== ====
(1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $479,000
and $346,000, for the three months ended March 31, 2005 and 2004, respectively.
(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.
(3) Taxable equivalent net interest income divided by average earning assets.
24
Item 3. Qualitative and Quantitative Disclosure for Market Risk
Overview
Market risk management arises from changes in interest rates, exchange rates,
commodity prices, and equity prices. The Company has risk management
policies to monitor and limit exposure to market risk and does 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 CCBG to interest rate risk.
Fluctuations in interest rates may result in changes in the fair market value
of the Company's financial instruments, cash flows and net interest income.
The Company seeks to avoid fluctuations in its net interest margin and to
maximize net interest income within acceptable levels of risk through periods
of changing interest rates. Accordingly, the Company's interest rate
sensitivity and liquidity are monitored on an ongoing basis by its 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.
The financial assets and liabilities of the Company are classified as other-
than-trading. An analysis of the other-than-trading financial components,
including the fair values, are presented in Table II on page 27. This table
presents the Company's consolidated interest rate sensitivity position as of
March 31, 2005 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 the Company's net interest income due to fluctuations in
interest rates. The asset and liability values presented in Table II may not
necessarily be indicative of the Company's interest rate sensitivity over an
extended period of time.
The Company expects 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 the
Company responds to changing rates and thus impact the magnitude of change in
net interest income. Nonmaturity deposits offer management greater
discretion as to the direction, timing, and magnitude of interest rate
changes and can have a material impact on the Company's 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.
25
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 the Company's ability to
react to changing interest rates and are discussed in further detail in the
section entitled "Results of Operations."
26
TABLE II - FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
Other Than Trading Portfolio
As of March 31, 2005
-------------------------------------------------------------------------------- Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- ------------------------------------------------------------------------------------------------------------------------
Loans:
Fixed Rate $ 313,157 $149,442 $ 81,790 $50,024 $28,774 $20,186 $ 643,373 $ 644,588
Average Interest Rate 5.98% 7.02% 7.09% 6.81% 6.79% 6.39% 6.47%
Floating Rate(2) 939,894 150,250 87,904 9,025 5,862 7,495 1,200,430 1,202,899
Average Interest Rate 5.21% 6.13% 6.26% 7.02% 7.26% 7.48% 5.44%
Investment Securities:(3)
Fixed Rate 86,553 52,296 14,699 12,852 1,604 20,432 188,436 188,436
Average Interest Rate 2.56% 2.95% 3.11% 3.59% 3.72% 4.37% 2.99%
Floating Rate 2,509 - - - - - 2,509 2,509
Average Interest Rate 4.36% - - - - - 4.36%
Other Earning Assets:
Floating Rates 57,115 - - - - - 57,115 57,115
Average Interest Rate 2.48% - - - - - 2.48%
Total Financial Assets $1,399,228 $351,988 $184,393 $71,901 $36,240 $48,113 $2,091,863 $2,095,547
Average Interest Rate 5.10% 6.03% 6.38% 6.26% 6.73% 5.71% 5.45%
Deposits:(4)
Fixed Rate Deposits $ 413,706 $ 67,197 $ 39,386 $ 9,193 $ 5,543 8 $ 535,034 $ 511,367
Average Interest Rate 1.95% 2.70% 3.39% 3.07% 3.20% 2.50% 2.18%
Floating Rate Deposits 798,565 - - - - - 798,565 763,226
Average Interest Rate 0.62% - - - - - 0.62%
Other Interest Bearing Liabilities
Fixed Rate Debt 2,876 26,011 3,094 2,858 2,417 30,624 67,880 67,471
Average Interest Rate 4.69% 3.15% 4.66% 4.70% 4.84% 5.09% 4.29%
Floating Rate Debt 76,371 - 350 838 1,034 30,928 109,521 109,635
Average Interest Rate 1.94% - 4.91% 3.05% 4.00% 5.71% 3.04%
Total Financial Liabilities $1,291,518 $ 93,208 $ 42,830 $12,889 $ 8,994 $61,560 $1,511,000 $1,451,699
Average interest Rate 1.13% 2.82% 3.49% 3.43% 3.73% 5.40% 1.51%
(1) Based upon expected 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 rates deposits in Year 1. Other time deposit balances are classified according to maturity.
27
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended, are recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that the information is accumulated and
communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognized that any
disclosure controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired objectives,
and management was required to apply its judgment in evaluating the cost-
benefit relationship of possible disclosure controls and procedures. The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures as
of the end of the period covered by this report. Based upon that evaluation
and subject to the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of the Company's
disclosure controls and procedures provided reasonable assurance that the
disclosure controls and procedures are effective to accomplish their
objectives.
Changes in Internal Controls
- ----------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has reviewed the Company's internal controls. There have
been no significant changes in the Company's internal controls during the
Company's most recently completed fiscal quarter, nor subsequent to the date
of their evaluation, that could significantly affect the Company's disclosure
controls and procedures.
28
PART II. OTHER INFORMATION
Items 1-5.
- ----------
Not applicable
Item 6. Exhibits
- -----------------
10.1 2005 Stock Option Agreement by and between Capital City Bank Group,
Inc. and William G. Smith, Jr., dated March 24, 2005 (filed 3/31/05)
(No. 0-13358).
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.
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/ J. Kimbrough Davis
- -----------------------------
J. Kimbrough Davis
Executive Vice President and
Chief Financial Officer
Date: May 10, 2005
29
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