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:
June 30,2005
------------
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 requirement 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 Exchange Act). Yes [X] No [ ]
At July 29, 2005, 18,623,393 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
1
CAPITAL CITY BANK GROUP, INC.
FORM 10-Q INDEX
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 14
3. Quantitative and Qualitative Disclosures
About Market Risk 27
4. Controls and Procedures 29
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 30
5. Other Information Not Applicable
6. Exhibits 30
Signatures 31
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 PERIODS ENDED JUNE 30
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $32,105 $22,922 $60,947 $44,194
Investment Securities:
U.S. Treasury 121 224 257 452
U.S. Govt. Agencies and Corporations 834 462 1,654 791
States and Political Subdivisions 335 482 717 1,023
Other Securities 157 59 292 136
Funds Sold 358 116 517 339
------- ------- ------- -------
Total Interest Income 33,910 24,265 64,384 46,935
INTEREST EXPENSE
Deposits 4,618 2,385 8,927 4,779
Short-Term Borrowings 734 249 1,184 536
Subordinated Notes Payable 667 - 1,108 -
Other Long-Term Borrowings 769 587 1,489 1,084
------- ------- ------- -------
Total Interest Expense 6,788 3,221 12,708 6,399
------- ------- ------- -------
Net Interest Income 27,122 21,044 51,676 40,536
Provision for Loan Losses 388 580 798 1,541
------- ------- ------- -------
Net Interest Income After Provision
for Loan Losses 26,734 20,464 50,878 38,995
------- ------- ------- -------
NONINTEREST INCOME
Service Charges on Deposit Accounts 5,035 4,427 9,383 8,371
Data Processing 650 703 1,257 1,336
Asset Management Fees 1,013 950 2,125 1,691
Gain on Sale of Investment Securities - 19 - 19
Mortgage Banking Revenues 1,036 986 1,799 1,680
Other 4,307 3,946 8,537 7,815
------- ------- ------- -------
Total Noninterest Income 12,041 11,031 23,101 20,912
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and Associate Benefits 13,187 10,809 25,747 21,549
Occupancy, Net 2,035 1,749 3,972 3,366
Furniture and Equipment 2,192 1,977 4,304 4,040
Intangible Amortization 1,296 927 2,492 1,752
Merger Expense 234 4 234 46
Other 7,652 6,135 15,114 11,923
------- ------- ------- -------
Total Noninterest Expense 26,596 21,601 51,863 42,676
------- ------- ------- -------
Income Before Income Taxes 12,179 9,894 22,116 17,231
Income Taxes 4,311 3,451 7,871 5,941
------- ------- ------- -------
NET INCOME $ 7,868 $ 6,443 $14,245 $11,290
======= ======= ======= =======
BASIC NET INCOME PER SHARE $ .44 $ .38 $ .80 $ .68
======= ======= ======= =======
DILUTED NET INCOME PER SHARE $ .44 $ .38 $ .80 $ .68
======= ======= ======= =======
Average Basic Shares Outstanding 18,094,256 16,592,894 17,898,253 16,585,340
========== ========== ========== ==========
Average Diluted Shares Outstanding 18,102,200 16,596,333 17,908,580 16,588,863
========== ========== ========== ==========
(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.
3
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2005 AND DECEMBER 31, 2004
(Unaudited)
June 30, December 31,
(Dollars In Thousands, Except Share Data)(1) 2005 2004
- ------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 117,921 $ 87,039
Funds Sold and Interest Bearing Deposits 59,062 74,506
---------- ----------
Total Cash and Cash Equivalents 176,983 161,545
Investment Securities, Available-for-Sale 195,860 210,240
Loans, Net of Unearned Interest 2,046,774 1,828,825
Allowance for Loan Losses (17,451) (16,037)
---------- ----------
Loans, Net 2,029,323 1,812,788
Premises and Equipment, Net 69,294 58,963
Goodwill 84,511 54,341
Other Intangible Assets 28,570 25,964
Other Assets 45,344 40,172
---------- ----------
Total Assets $2,629,885 $2,364,013
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 598,602 $ 566,991
Interest Bearing Deposits 1,502,027 1,327,895
---------- ----------
Total Deposits 2,100,629 1,894,886
Short-Term Borrowings 71,148 96,014
Subordinated Notes Payable 62,887 30,928
Other Long-Term Borrowings 73,144 68,453
Other Liabilities 26,655 16,932
---------- ----------
Total Liabilities 2,334,463 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; 18,614,482 shares outstanding
at June 30, 2005 and 17,694,139 outstanding at
December 31, 2004 186 177
Additional Paid-In Capital 82,582 52,328
Retained Earnings 213,352 204,648
Accumulated Other Comprehensive Loss, Net of Tax (698) (353)
---------- ----------
Total Shareowners' Equity 295,422 256,800
---------- ----------
Total Liabilities and Shareowners' Equity $2,629,885 $2,364,013
========== ==========
(1) All share, per share, and shareowners' equity 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
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Thousands, Except Per Share Data)(1)
Additional Accumulated Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Loss, Net of Taxes Total
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $177 $52,328 $204,648 $(353) $256,800
Comprehensive Income:
Net Income - - 14,245
Net Change in Unrealized Loss
On Available-for-Sale Securities - - - (345)
Total Comprehensive Income - - - - 13,900
Cash Dividends ($.304 per share) - - (5,541) - (5,541)
Stock Performance Plan Compensation - 765 - - 765
Issuance of Common Stock 9 29,489 - - 29,498
---- ------- -------- ----- --------
Balance, June 30, 2005 $186 $82,582 $213,352 $(698) $295,422
==== ======= ======== ===== ========
(1) All share, per share, and shareowners' equity 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.
5
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30
(Unaudited)
(Dollars in Thousands) 2005 2004
- ----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 14,245 $ 11,290
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 798 1,541
Depreciation 2,769 2,584
Net Securities Amortization 783 1,229
Amortization of Intangible Assets 2,492 1,729
Gains on Sale of Investment Securities - (19)
Non-Cash Compensation 339 1,625
Net (Increase) Decrease in Other Assets (5,534) 4,940
Net Increase in Other Liabilities 10,749 4,167
-------- --------
Net Cash Provided By Operating Activities 26,641 29,086
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Payments/Maturities/Sales of
Investment Securities Available-for-Sale 77,357 87,296
Purchase of Investment Securities Available-for-Sale (29,468) (76,484)
Net Increase in Loans (98,045) (92,296)
Net Cash Acquired (Used) In Acquisitions 37,412 (18,055)
Purchase of Premises & Equipment (9,918) (3,686)
Proceeds From Sales of Premises & Equipment 134 861
-------- --------
Net Cash Used In Investing Activities (22,528) (102,364)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits 4,157 36,097
Net (Decrease) Increase in Short-Term Borrowings (74,909) 18,828
Proceeds from Subordinated Note Payable 31,959 -
Increase in Other Long-Term Borrowings 3,600 9,737
Repayment of Other Long-Term Borrowings 51,134 (785)
Dividends Paid (5,541) (4,779)
Issuance of Common Stock 925 141
-------- --------
Net Cash Provided By Financing Activities 11,325 59,239
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 15,438 (14,039)
Cash and Cash Equivalents at Beginning of Period 161,545 218,592
-------- --------
Cash and Cash Equivalents at End of Period $176,983 $204,553
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 8,210 $ 4,815
======== ========
Interest Paid on Debt $ 3,525 $ 1,615
======== ========
Taxes Paid $ 6,468 $ 2,148
======== ========
Transfer of Loans to Other Real Estate $ 99 $ 846
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 339 $ 1,625
======== ========
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.
6
CAPITAL 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 June
30, 2005 and December 31, 2004, the results of operations for the three and
six month periods ended June 30, 2005 and 2004, and cash flows for the six
month periods ended June 30, 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.
On July 1, 2005, the Company executed a five-for-four stock split in the
form of a 25% stock dividend, payable to shareowners of record as of close
of business on June 17, 2005. All share, per share, and shareowners' equity
data have been adjusted to reflect stock split.
Stock-based Compensation
- ------------------------
As of June 30, 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 share units are awarded to participants based on performance
goals being achieved. In addition, pursuant to the AIP, the Company executed
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, "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.
(2) ACQUISITIONS
On May 20, 2005, the Company completed its merger with First Alachua Banking
Corporation ("FABC"), headquartered in Alachua, Florida. The Company 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. Results of FABC
operations have been included in the Company's consolidated financial
statements since May 21, 2005. FABC's wholly-owned subsidiary, First
National Bank of Alachua ("FNBA") 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. The transaction was accounted for as
a purchase and resulted in approximately $35.6 million of intangible assets,
including approximately $30.5 million in goodwill and a core deposit
intangible of $5.1 million. The core deposit intangible is being amortized
over a 5.5 year period.
7
On May 20, 2005, the Company issued a $32.0 million junior subordinated
deferrable interest note to a wholly owned Delaware statutory trust, Capital
City Bank Group Capital Trust II ("CCBG Capital Trust II") to facilitate the
cash portion of the consideration paid to FABC shareowners. Interest
payments on this note are due quarterly at a fixed rate of 6.07% for five
years, then adjustable annually to three month LIBOR plus a margin of 1.80%.
The note matures on June 15, 2035. The general terms and conditions of the
Company's transaction with CCBG Capital Trust II are consistent with those
enumerated for CCBG Capital Trust I which are described in Note 10 in the
Company's 2004 Annual Report on Form 10-K.
The information below lists the consolidated assets and liabilities of FNBA
as of May 20, 2005, along with the consideration paid:
First National Bank
(Dollars in Thousands) of Alachua
- ------------------------------------------------------------------
Cash and Due From Banks $ 9,082
Funds Sold 58,312
--------
Total Cash and Cash Equivalents 67,394
Investment Securities, Available-for-Sale 35,181
Loans, Net of Unearned Interest 119,262
Intangible Assets 35,623
Other Assets 3,282
--------
Total Assets Acquired $260,742
Total Deposits $201,748
Long-Term Borrowings -
Other Liabilities 994
--------
Total Liabilities Assumed $202,742
Consideration Paid to FABC Shareowners $ 58,000
========
The following unaudited pro forma financial information for the three and six
months ended June 30, 2005 and 2004, presents the consolidated operations of
the Company as if the FNBA acquisition had been made on January 1, 2004. The
unaudited pro forma financial information is provided for informational
purposes only, should not be construed to be indicative of the Company's
consolidated results of operations had the acquisition of FNBA been
consummated on this earlier date, and do not project the Company's results of
operations for any future period:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------
Interest Income $35,442 $27,012 $68,772 $52,475
Interest Expense 7,451 4,371 14,533 8,722
------- ------- ------- -------
Net Interest Income 27,991 22,641 54,239 43,753
Provision for Loan Losses 388 580 798 1,541
------- ------- ------- -------
Net Interest Income After
Provision for Loan Losses 27,603 22,061 53,441 42,212
Noninterest Income 12,492 11,491 23,920 21,901
Noninterest Expense(2) 28,554 22,966 55,858 45,983
------- ------- ------- -------
Income Before Income Taxes 11,541 10,586 21,503 18,130
Income Taxes 4,311 3,714 7,881 6,283
------- ------- ------- -------
Net Income $ 7,230 $ 6,872 $13,622 $11,847
======= ======= ======= =======
Basic Net Income Per Share $ .40 $ .41 $ .76 $ .70
======= ======= ======= =======
Diluted Net Income Per Share $ .40 $ .41 $ .76 $ .70
======= ======= ======= =======
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective July 1, 2005.
(2) Includes non-recurring merger related expenses at FNBA and CCBG in the second quarter
of 2005 totaling approximately $959,000, and year-to-date 2005 totaling approximately
$1.1 million.
8
(3) INVESTMENT SECURITIES
The amortized cost and related market value of investment securities
available-for-sale at June 30, 2005 and December 31, 2004 were as follows:
June 30, 2005
-------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
U.S. Treasury $ 23,235 $ - $ 169 $ 23,066
U.S. Government Agencies and Corporations 86,354 20 814 85,560
States and Political Subdivisions 51,736 148 208 51,676
Mortgage-Backed Securities 22,131 100 170 22,061
Other Securities(1) 13,497 - - 13,497
-------- ---- ------ --------
Total Investment Securities $196,953 $268 $1,361 $195,860
======== ==== ====== ========
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.
(4) LOANS
The composition of the Company's loan portfolio at June 30, 2005 and
December 31, 2004 was as follows:
(Dollars in Thousands) June 30, 2005 December 31, 2004
- -------------------------------------------------------------------------------
Commercial, Financial and Agricultural $ 214,983 $ 206,474
Real Estate-Construction 148,462 140,190
Real Estate-Commercial Mortgage 713,619 655,426
Real Estate-Residential 553,034 438,484
Real Estate-Home Equity 160,767 150,061
Real Estate-Loans Held-for-Sale 9,624 11,830
Consumer 246,285 226,360
---------- ----------
Loans, Net of Unearned Interest $2,046,774 $1,828,825
(5) ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the six month
periods ended June 30, 2005 and 2004, is as follows:
(Dollars in Thousands) June 30, 2005 June 30, 2004
- --------------------------------------------------------------------------------
Balance, Beginning of Period $16,037 $12,429
Acquired Reserves 1,385 1,313
Provision for Loan Losses 798 1,541
Recoveries on Loans Previously Charged-Off 943 892
Loans Charged-Off (1,712) (2,518)
------- -------
Balance, End of Period $17,451 $13,657
======= =======
9
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:
June 30, 2005 December 31, 2004
-------------------- ---------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- -----------------------------------------------------------------------------------------
Impaired Loans:
With Related Valuation Allowance $5,672 $2,910 $ 578 $313
Without Related Valuation Allowance 3,346 - 3,150 -
(Dollars in Thousands) June 30, 2005 December 31, 2004
- -------------------------------------------------------------------------------------
Average Recorded Investment in Impaired Loans $9,724 $5,382
Interest Income on Impaired Loans:
Recognized 62 140
Collected in Cash 62 120
(6) DEPOSITS
The composition of the Company's interest bearing deposits at June 30, 2005
and December 31, 2004 was as follows:
(Dollars in Thousands) June 30, 2005 December 31, 2004
- -------------------------------------------------------------------------
NOW Accounts $ 475,687 $ 338,932
Money Market Accounts 287,601 270,095
Savings Deposits 162,665 147,348
Other Time Deposits 576,074 571,520
---------- ----------
Total Interest Bearing Deposits $1,502,027 $1,327,895
========== ==========
(7) INTANGIBLE ASSETS
The Company had intangible assets of $113.1 million and $80.3 million at
June 30, 2005 and December 31, 2004, respectively. Intangible assets were as
follows:
June 30, 2005 December 31, 2004
------------------------ ------------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- ----------------------------------------------------------------------------------------
Core Deposit Intangibles $ 47,176 $20,578 $ 42,078 $18,300
Goodwill 88,297 3,786 58,127 3,786
Customer Relationship Intangible 1,867 210 1,867 114
Other 483 168 483 50
-------- ------- -------- -------
Total Intangible Assets $137,823 $24,742 $102,555 $22,250
======== ======= ======== =======
Net Core Deposit Intangibles: As of June 30, 2005 and December 31, 2004, the
Company had net core deposit intangibles of $26.6 million and $23.8 million,
respectively. Amortization expense for the first half of 2005 and 2004 was
$2.3 million and $1.7 million, respectively. Estimated annual amortization
expense is $5.3 million.
Goodwill: As of June 30, 2005 and December 31, 2004, the Company had
goodwill, net of accumulated amortization, of $84.5 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."
10
Other: As of June 30, 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 client relationships from Synovus Trust
Company. Amortization expense for the first six months of 2005 and 2004 was
$96,000 and $34,000, respectively. Estimated annual amortization expense is
$191,000 based on a 10 year useful life.
As of June 30, 2005 and December 31, 2004, the Company also had a non-compete
intangible, net of accumulated amortization, of $315,000 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 six months of 2005 was $118,000. Estimated annual
amortization expense is $236,000 based on a 2-year useful life.
(8) EMPLOYEE BENEFIT PLANS
The components of the net periodic benefit costs for the Company's qualified
benefit pension plan were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(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% 8.00% 8.00%
Service cost $1,040 $ 950 $2,080 $1,900
Interest cost 800 725 1,600 1,450
Expected return on plan assets (798) (675) (1,596) (1,350)
Prior service cost amortization 55 50 110 100
Net loss amortization 295 300 590 600
------ ------ ------ ------
Net periodic benefit cost $1,392 $1,350 $2,784 $2,700
====== ====== ====== ======
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) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------
Discount rate 6.00% 6.25% 6.00% 6.25%
Long-term rate of return on assets N/A N/A N/A N/A
Service cost $ 35 $ 48 $ 70 $ 96
Interest cost 54 65 108 129
Expected return on plan assets N/A N/A N/A N/A
Prior service cost amortization 15 30 30 61
Net loss/(gain) amortization 21 (18) 42 (36)
---- ---- ---- ----
Net periodic benefit cost $125 $125 $250 $250
==== ==== ==== ====
11
(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 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 June 30, 2005, the amounts associated with the Company's
off-balance sheet obligations were as follows:
(Dollars in Millions) Amount
- ----------------------------------------------
Commitments to Extend Credit(1) $471.1
Standby Letters of Credit $ 21.0
(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.
(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 $8.3 million and $13.9 million, respectively, for the three and six
months ended June 30, 2005 and $5.0 million and $9.9 million, respectively,
for the comparable periods in 2004. 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 $452,000 and $(345,000),
respectively, for the three and six months ended June 30, 2005, and $(1.4
million) for both the three and six months ended June 30, 2004.
Reclassification adjustments consist only of realized gains on sales of
investment securities and were not material for the six months ended June 30,
2005 and 2004.
12
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)(1)
2005 2004 2003
Second First Fourth Third Second First Fourth Third
---------------------- ---------------------------------------------- ----------------------
Summary of Operations:
Interest Income $ 33,910 $ 30,474 $ 29,930 $ 24,660 $ 24,265 $ 22,670 $ 23,022 $ 23,484
Interest Expense 6,788 5,920 5,634 3,408 3,221 3,178 3,339 3,506
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 27,122 24,554 24,296 21,252 21,044 19,492 19,683 19,978
Provision for
Loan Losses 388 410 300 300 580 961 850 921
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 26,734 24,144 23,996 20,952 20,464 18,531 18,833 19,057
Gain on Sale of Credit
Card Portfolio - - 324 6,857 - - - -
Noninterest Income 12,041 11,060 11,596 10,864 11,031 9,881 10,614 10,952
Merger Expense 234 - 436 68 4 42 - -
Noninterest Expense 26,362 25,267 24,481 21,565 21,597 21,033 20,593 20,184
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 12,179 9,937 10,999 17,040 9,894 7,337 8,854 9,825
Provision for
Income Taxes 4,311 3,560 3,737 6,221 3,451 2,490 2,758 3,529
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 7,868 $ 6,377 $ 7,262 $ 10,819 $ 6,443 $ 4,847 $ 6,096 $ 6,296
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 27,396 $ 24,835 $ 24,619 $ 21,528 $ 21,333 $ 19,811 $ 20,020 $ 20,332
Per Common Share:
Net Income Basic $ .44 $ .36 $ .40 $ .66 $ .38 $ .30 $ .38 $ .38
Net Income Diluted .44 .36 .40 .66 .38 .30 .37 .38
Dividends Declared .152 .152 .152 .144 .144 .144 .144 .136
Diluted Book Value 15.87 14.69 14.51 13.19 12.64 12.43 12.22 12.00
Market Price:
High 33.46 33.60 36.78 32.96 34.52 36.44 37.46 32.74
Low 28.02 29.30 30.17 26.66 28.40 31.24 29.30 28.00
Close 32.32 32.41 33.44 30.97 31.67 33.00 36.79 30.53
Selected Average
Balances:
Loans $1,932,637 $1,827,327 $1,779,736 $1,524,401 $1,491,142 $1,357,206 $1,329,673 $1,336,139
Earning Assets 2,170,483 2,047,049 2,066,111 1,734,708 1,721,655 1,634,468 1,636,269 1,634,689
Assets 2,458,788 2,306,807 2,322,870 1,941,372 1,929,485 1,830,496 1,819,552 1,816,005
Deposits 1,932,144 1,847,378 1,853,588 1,545,224 1,538,630 1,457,160 1,451,095 1,451,879
Shareowners' Equity 278,107 260,946 248,773 217,273 210,211 206,395 201,939 199,060
Common Equivalent
Average Shares:
Basic 18,094 17,700 17,444 16,604 16,593 16,578 16,528 16,527
Diluted 18,102 17,708 17,451 16,609 16,596 16,607 16,581 16,575
Ratios:
ROA 1.28% 1.12% 1.24% 2.22%(2) 1.34% 1.06% 1.33% 1.38%
ROE 11.35% 9.91% 11.61% 19.81%(2) 12.33% 9.45% 11.98% 12.55%
Net Interest
Margin (FTE) 5.07% 4.92% 4.75% 4.94% 4.99% 4.88% 4.85% 4.94%
Efficiency Ratio 63.56% 67.06% 63.85% 52.60%(2) 63.87% 68.06% 64.58% 61.93%
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005.
(2) Includes $4.2 million (after-tax) one-time gain on sale of credit card portfolio.
13
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 26 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;
* Worldwide political and social unrest, including acts of war and
terrorism;
14
* 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 June 30, 2005
had 68 banking offices, six mortgage lending offices, 79 ATMs and 11 Bank'N
Shop locations in Florida, Georgia and Alabama.
15
RESULTS OF OPERATIONS
Net Income
- ----------
Earnings for the three and six months ended June 30, 2005 were $7.9 million,
or $0.44 per diluted share, and $14.2 million, or $0.80 per diluted share,
respectively. This compares to $6.4 million, or $0.38 per diluted share,
and $11.3 million, or $0.68 per diluted share in 2004.
The growth in earnings for the three and six month periods was driven by an
increase in operating revenues and a decrease in the loan loss provision.
Operating revenues (defined as net interest income plus noninterest income)
increased 22.1% and 21.7% over the comparable three and six month periods in
2004. Growth in operating revenues is reflective of higher net interest
income and noninterest income. Net interest income increased 28.9% and
27.5%, respectively, on a dollar basis, for the three and six month periods
due to strong earning asset growth and an improved net interest margin. The
increase in noninterest income is due to higher deposit service charge fees,
asset management fees, and merchant fees. The loan loss provision declined
33.1% and 48.2% over the same periods in 2004. The lower loan loss provision
reflects continued strong credit quality.
A condensed earnings summary is presented below.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in Thousands) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------
Interest Income $33,910 $24,265 $64,384 $46,935
Taxable Equivalent Adjustment(1) 274 289 555 608
------- ------- ------- -------
Interest Income (FTE) 34,184 24,554 64,939 47,543
Interest Expense 6,788 3,221 12,708 6,399
------- ------- ------- -------
Net Interest Income (FTE) 27,396 21,333 52,231 41,144
Provision for Loan Losses 388 580 798 1,541
Taxable Equivalent Adjustment 274 289 555 608
------- ------- ------- -------
Net Interest Income After Provision 26,734 20,464 50,878 38,995
Noninterest Income 12,041 11,031 23,101 20,912
Merger Expense 234 4 234 46
Noninterest Expense 26,362 21,597 51,629 42,630
------- ------- ------- -------
Income Before Income Taxes 12,179 9,894 22,116 17,231
Income Taxes 4,311 3,451 7,871 5,941
------- ------- ------- -------
Net Income $ 7,868 $ 6,443 $14,245 $11,290
======= ======= ======= =======
Percent Change 22.12% .05% 26.17% (11.80)%
Return on Average Assets(2) 1.28% 1.34% 1.21% 1.21%
Return on Average Equity(2) 11.35% 12.33% 10.66% 10.90%
(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. Second
quarter of 2005 taxable-equivalent net interest income increased $6.1
million, or 28.4%, over the comparable quarter in 2004. During the first
half of 2005, taxable-equivalent net interest income increased $11.1
million, or 26.9%, respectively, over the first half of 2004. This
favorable impact was caused by the effect of three acquisitions (two in 2004
and one in 2005), an improved earning asset mix and higher yields; partially
offset by increased funding costs resulting from the higher interest rate
environment. Table I on page 26 provides a comparative analysis of the
Company's average balances and interest rates.
16
For the three month period ended June 30, 2005, taxable-equivalent interest
income increased $9.6 million or 39.2%, over the comparable period in 2004.
During the first half of 2005, taxable-equivalent interest income improved
$17.4 million, or 36.6%, respectively, over the comparable period in 2004.
During the second quarter of 2005, growth in interest income resulted from
strong loan demand, the recent acquisition of the First National Bank of
Alachua ("FNBA"), and higher earning asset yields attributable to the rising
rate environment. New loan production and repricing of existing earning
assets produced a 58 basis point improvement in the yield on earning assets,
which increased from 5.74% for the second quarter in 2004 to 6.32% for the
same period in 2005. The Federal Reserve increased interest rates during the
second quarter of 2005, which continue to impact new production and
repricing. Income generated on earning assets is anticipated to expand in
the third quarter due to the improved earning asset mix and the higher rate
environment.
Interest expense for the three and six month periods ended June 30, 2005
increased $3.6 million, or 110.7% and $6.3 million, or 98.6%, respectively,
from the comparable prior year periods. 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. The average rate paid on interest
bearing liabilities in 2005 increased 63 basis points over the second
quarter of 2004, to a level of 1.69%.
Interest expense is anticipated to increase in the third quarter as a result
of the higher rate environment and increased competition for funding sources.
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 4.63% in the first half of 2004 to 4.56%
in the comparable period of 2005, reflecting the higher cost of funds.
The Company's net yield on earning assets (defined as taxable-equivalent net
interest income divided by average earning assets) was 5.07% and 4.99%,
respectively, for the three and six month periods of 2005, versus 4.99% and
4.93%, respectively, for the comparable periods in 2004. The increase in
margin reflects higher asset yields driven by rising interest rates,
partially offset by higher cost of funds.
If interest rates continue to rise at a measured pace, the net yield on
earning assets is anticipated to increase slightly during the third quarter
of 2005. Net interest income is expected to expand during the third quarter
attributable to anticipated higher yield on earning assets, a favorable shift
in mix of earning assets, and other factors noted above.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $388,000 and $798,000, respectively, for
the three and six month periods ended June 30, 2005, compared to $580,000 and
$1.5 million for the same periods in 2004. The decrease in the provision for
the first half of 2005 reflects a lower level of net charge-offs between
comparable periods.
Net charge-offs totaled $362,000, or .08% of average loans for the second
quarter of 2005 compared to $631,000, or .18% for the second quarter of 2004.
The primary reason for the decrease in net charge-offs is attributable to a
lower level of credit card charge-offs due to the sale of the portfolio. At
quarter-end the allowance for loan losses was .85% of outstanding loans and
provided coverage of 289% of nonperforming loans.
17
Charge-off activity for the respective periods is set forth below:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(Dollars in Thousands) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 302 $ 286 $ 390 $ 453
Real Estate - Construction - - - -
Real Estate - Commercial Mortgage 2 - 6 39
Real Estate - Residential 37 11 62 94
Consumer 536 885 1,254 1,932
------ ------ ------ ------
Total Charge-offs 877 1,182 1,712 2,518
------ ------ ------ ------
RECOVERIES
Commercial, Financial and Agricultural 98 24 107 36
Real Estate - Construction - - - -
Real Estate - Commercial Mortgage - - - -
Real Estate - Residential 14 176 16 176
Consumer 403 333 820 680
------ ------ ------ ------
Total Recoveries 515 533 943 892
------ ------ ------ ------
Net Charge-offs $ 362 $ 649 $ 769 $1,626
====== ====== ====== ======
Net Charge-offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .08% .18% .08% .23%
====== ====== ====== ======
Noninterest Income
- ------------------
Noninterest income increased $1.0 million, or 9.2%, and $2.2 million, or
10.5%, respectively, over the comparable three and six month periods in 2004,
primarily due to higher deposit service charge fees, asset management fees,
and merchant fees. Noninterest income represented 30.7% and 30.9% of
operating revenue for the three and six month periods of 2005 compared to
34.4% and 34.0% for the same periods in 2004. The decrease is due to strong
growth in net interest income during 2005.
Service charges on deposit accounts increased $608,000, or 13.7% and $1.0
million, or 12.1%, respectively, over the comparable three and six month
periods in 2004. The increase is due to the growth in deposit accounts,
partially attributable to acquisitions, a fee structure change implemented in
mid-2004, and an increase in non-sufficient funds (NSF) and overdraft fees
due to increased NSF activity.
Data processing revenues of $650,000 and $1.3 million for the three and six
month periods ended June 30, 2005 reflect a decrease of 7.5% and 5.9%,
respectively, from the comparable periods 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 six non-financial clients. For
the first half of 2005 and 2004, processing revenues for financial clients
represented 67.6% and 64.4% of total processing revenues, respectively.
Management anticipates that revenues for the remainder of 2005 will remain
consistent with the first half of the year.
Income from asset management activities increased $63,000, or 6.6%, and
$434,000, or 25.7%, respectively, over the comparable three and six month
periods in 2004. The improvement for the three-month period is due primarily
to growth in new business within existing markets. The increase for the
first half of 2005 reflects trust assets acquired late in the first quarter
of 2004. At June 30, 2005, assets under management totaled $651.0 million,
representing an increase of $18.6 million, or 2.9% from the comparable period
in 2004. Management anticipates that revenues for the remainder of 2005 will
remain consistent with the first half of the year.
18
Mortgage banking revenues increased $50,000, or 5.1%, and $119,000, or 7.1%,
respectively, over the comparable three and six month periods in 2004. The
improvement is due to an increase in mortgage production, which is up 24.0%
over the first half of 2004, reflecting growth in both portfolio loans (ARM
product) and loans sold in the secondary market. Due to the increasing rate
environment, a larger percentage of total production is being retained in the
loan portfolio. Loans sold in the secondary market during the first half of
2005 increased 9.5% over the first half of 2004 to a level of $101.4 million.
The residential loan pipeline at the end of the second quarter of 2005
reflects an increase of 27.2% over the pipeline at the end of the first
quarter of 2005.
Other income increased $361,000, or 9.1%, and $722,000, or 9.2%,
respectively, over the comparable three and six month periods in 2004. The
increase for both periods is primarily due to growth in card processing fees
and miscellaneous loan fees.
Noninterest income as a percent of average assets was 1.95% and 2.24%,
respectively, for the first half of 2005 and 2004.
Noninterest Expense
- -------------------
Noninterest expense increased $5.0 million, or 23.1%, and $9.2 million, or
21.5%, respectively, over the comparable three and six month periods in 2004.
Factors impacting the Company's noninterest expense for the first six months
of 2005 are discussed below.
Salaries and associate benefits expense increased $2.4 million, or 22.0%, and
$4.2 million, or 19.5% over the comparable three and six month periods in
2004. For the first half of the year, the Company experienced increases in
associate salaries of $2.9 million, payroll tax expense of $328,000, pension
plan expense of $154,000, associate insurance expense of $328,000, and stock-
based compensation of $523,000. The increases in associate salaries and
payroll tax reflects the addition of associates from acquisitions in 2004 and
2005 and annual merit/market based raises for associates. The higher pension
expense is due primarily to a lower discount rate used for the 2005 expense
projection. The increase in associate insurance expense is primarily
attributable to additional participants and higher healthcare insurance
premiums. The increase in stock-based compensation reflects an increase in
the number of participants in the Company's stock compensation plans and a
higher level of projected performance.
Occupancy expense, including premises, furniture, fixtures and equipment
increased $501,000, or 13.4%, and $870,000, or 11.7%, respectively, over the
comparable three and six month periods in 2004. For the first half of the
year, the Company experienced increases in depreciation of $185,000,
maintenance and repairs (building) of $261,000, utilities of $66,000,
property taxes of $191,000, tangible tax of $96,000, and maintenance
agreements of $218,000 from the comparable period in 2004. The increase in
the aforementioned expense categories is primarily reflective of incremental
expense incurred with the addition of 12 new banking offices since the second
quarter of 2004.
Other noninterest expense increased $1.5 million, or 24.7%, and $3.1 million,
or 26.8%, respectively, over the comparable three and six month periods in
2004. For the first half of the year, the increase was primarily
attributable to higher expense for the following categories: 1) legal -
$190,000; 2) professional fees - $339,000; 3) processing services - $244,000;
4) advertising - $894,000; 5) printing and supplies - $197,000; 6) travel and
entertainment - $136,000; and 7) interchange service fees - $391,000. The
increase in legal fees is reflective of increased corporate governance
initiatives and a general increase in legal services tied to corporate
activities. The increase in professional fees is due to higher expense for
external audit fees. The higher expense for processing fees is attributable
to the cost of integrating recent acquisitions and core processing system
upgrades. The increase in advertising expense reflects the marketing cost to
support the new free checking product introduced in the first quarter of
2005. The higher expense for printing and supplies and travel and
entertainment is driven by the recent acquisitions. The increase in
interchange fees is due to increased card processing volume.
19
Net noninterest expense (noninterest income minus noninterest expense,
excluding intangible amortization and one-time merger expenses) as a percent
of average assets was 2.20% for the first half of 2005 compared to 2.14% in
2004. The Company's efficiency ratio (noninterest expense, excluding
intangible amortization and one-time merger expense, expressed as a percent
of the sum of taxable-equivalent net interest income plus noninterest income)
was 65.23% for the first half of 2005 compared to 65.87% for the first half
of 2004.
Income Taxes
- ------------
Relative to the prior year periods, the provision for income taxes increased
$860,000, or 24.9%, during the second quarter and $1.9 million, or 32.5%,
during the first six months of 2005, reflecting higher taxable income. The
Company's effective tax rate for the first half of 2005 was 35.6% compared to
34.5% for the same period in 2004. The increase in the effective tax rate is
primarily attributable to a lower level of tax-free loan and security income.
FINANCIAL CONDITION
Asset and liability balances include the integration of Farmers and Merchants
Bank of Dublin on October 15, 2004, and First National Bank of Alachua on
May 20, 2005.
The Company's average assets increased $136.0 million, or 5.9%, to $2.46
billion for the quarter-ended June 30, 2005 from $2.32 billion in the fourth
quarter of 2004. Average earning assets of $2.17 billion increased $104.4
million, or 5.1%, from the fourth quarter of 2004 driven by a $152.9 million,
or 8.6%, increase in average loans. The growth in loans reflects the recent
FNBA acquisition and strong organic loan growth.
The Company ended the second quarter with approximately $13.0 million in
average net overnight funds sold as compared to $60.6 million in net
overnight funds sold in the fourth quarter of 2004. The decline is primarily
reflective of the Company's 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 June 30, 2005, the average investment
portfolio decreased $12.5 million, or 6.1%, from the fourth quarter of 2004.
Cash from portfolio run-off for the first half of the year has been used to
fund loan growth. Management will continue to evaluate the need to purchase
securities for the investment portfolio throughout 2005, taking into
consideration liquidity needed to fund loan growth, acquisitions, and 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 June 30, 2005
and December 31, 2004, shareowners' equity included a net unrealized loss of
$0.7 million and $0.4 million, respectively.
Average loans increased $152.9 million, or 8.6%, from the fourth quarter of
2004. The increase was driven by gains in all loan categories reflective of
loans integrated from the FNBA acquisition and from organic loan growth for
the first half of the year. Exclusive of the FNBA acquisition, period end
loans increased $97.5 million, or 5.3% over the fourth quarter of 2004. Loan
activity in all markets remains moderate to strong.
The Company's nonperforming loans were $6.2 million at June 30, 2005, versus
$4.6 at December 31, 2004. The increase is attributable to the addition of
one large commercial real estate loan relationship for which the bank
recently received a deed in lieu of foreclosure. Management expects no
significant loss upon the disposition of this asset. As a percent of
nonperforming loans, the allowance for loan losses represented 289% at June
30, 2005 versus 345% at December 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 $0.2 million at
20
June 30, 2005, versus $0.6 million at December 31, 2004. The ratio of
nonperforming assets as a percent of loans plus other real estate was .30% at
June 30, 2005 compared to .29% at December 31, 2004.
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, 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 June 30, 2005 was $17.5 million, compared to
$16.0 million at year-end 2004. The increase from year-end primarily
reflects the integration of acquired loan reserves from FNBA in the second
quarter of 2005. At quarter-end 2005, the allowance represented 0.85% 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 June 30, 2005 is adequate to absorb losses
inherent in the loan portfolio at quarter-end.
Average total deposits increased $78.6 million, or 4.2% from the fourth
quarter of 2004 driven by a $84.1 million increase in nonmaturity deposits.
This increase primarily reflects accounts added from the FNBA acquisition and
new accounts gained from the Company's free-checking campaign initiated early
in the first quarter of 2005.
The ratio of average noninterest bearing deposits to total deposits was 28.2%
for the second quarter of 2005 compared to 29.9% for the fourth quarter of
2004. For the same periods, the ratio of average interest bearing
liabilities to average earning assets was 74.2%, and 72.1%, 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 ("FHLB")
advances.
Borrowings. The Company maintains a $25.0 million revolving line of credit.
As of June 30, 2005, the Company had no borrowings under the revolving line
of credit. For the first six months of the year, the Bank has made scheduled
FHLB advance payments totaling $51.1 million and obtained $53.8 million in
new FHLB advances. The aforementioned borrowing activity for the year
includes a new short-term advance for $50.0 million that was obtained in May
and repaid in June.
21
The Company 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 five years, then adjustable
annually to three month LIBOR plus a margin of 1.80%. The note matures on
June 15, 2035. The proceeds of the borrowing were used to partially fund the
First National Bank of Alachua acquisition.
The Company ended the second quarter of 2005 with approximately $13.0 million
in average net overnight funds sold as compared to $60.6 million net
overnight funds sold in the fourth quarter of 2004. The decline reflects
cash used to fund loan growth. If loan growth continues at its current pace,
the Company expects to be a net purchaser of funds in the third quarter.
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 June 30, 2005:
Payments Due After June 30, 2005
- ---------------------------------------------------------------------------------------
2005
(Dollars in Thousands) (Remaining) 2006 2007 2008 2009 Thereafter Total
- ---------------------------------------------------------------------------------------
Federal Home Loan
Bank Advances $17,320 $22,843 $5,905 $4,905 $2,775 $ 33,124 $ 86,872
Subordinated Notes
Payable - - - - - 62,887 62,887
Operating Lease
Obligations 707 1,243 1,122 1,114 1,104 7,129 12,419
------- ------- ------ ------ ------ -------- --------
Total Contractual
Cash Obligations $18,027 $24,086 $7,027 $6,019 $3,879 $103,140 $162,178
======= ======= ====== ====== ====== ======== ========
Capital
- -------
The Company's equity capital was $295.4 million as of June 30, 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 9.28% at June
30, 2005 compared to 8.79% at December 31, 2004. Further, the Company's
risk-adjusted capital ratio of 11.96% at June 30, 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 and CCBG Capital Trust II are included as Tier
1 capital in the Company's capital calculations previously noted.
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 second quarter of 2005
totaled $.1520 per share compared to $.1440 per share for the second quarter
of 2004, an increase of 5.6%. The dividend payout ratios for the second
quarter ended 2005 and 2004 were 34.5% and 37.9%, 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 June 30, 2005, these regulations and covenants did
not impair the Company's (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 six months of 2005, shareowners' equity increased $38.6
million, or 30.0%, on an annualized basis. Growth in equity during the first
half of the year was positively impacted by net income of $14.2 million, the
issuance of common stock of $29.5 million, and stock-based compensation
accretion of $0.7 million. Equity was reduced by dividends paid during the
first half of the year by $5.5 million, or $.304 per share and
22
an increase in the net unrealized loss on available-for-sale securities of
$0.3 million. At June 30, 2005, the Company's common stock had a book value
of $15.87 per diluted share compared to $14.50 at December 31, 2004.
On July 1, 2005, the Company executed a five-for-four stock split in the form
of a 25% stock dividend, payable to shareowners of record as of close of
business on June 17, 2005. All share, per share, and shareowners' equity
data in this Form 10-Q have been adjusted to reflect the stock split.
On March 30, 2000, the Company's Board of Directors authorized the repurchase
of up to 781,250 shares of its outstanding common stock. On January 24,
2002, the Company's Board of Directors authorized the repurchase of an
additional 390,625 shares of its outstanding common stock. The purchases
will be made in the open market or in privately negotiated transactions. The
Company did not purchase any shares in the second quarter of 2005. From
March 30, 2000 through June 30, 2005, the Company repurchased 715,884 shares
at an average purchase price of $15.34 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 June 30, 2005, the Company had $471.1 million in commitments to extend
credit and $21.0 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.
23
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.
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 5.5-10 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 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 8 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.
24
Recent Accounting Pronouncements
- --------------------------------
SFAS No. 154, "Accounting Changes and Error Corrections, a Replacement of
APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of
explicit transition requirements specific to a newly adopted accounting
principle. Previously, most changes in accounting principle were recognized
by including the cumulative effect of changing to the new accounting
principle in net income of the period of the change. Under SFAS 154,
retrospective application requires (i) the cumulative effect of the change
to the new accounting principle on periods prior to those presented to be
reflected in the carrying amounts of assets and liabilities as of the
beginning of the first period presented, (ii) an offsetting adjustment, if
any, to be made to the opening balance of retained earnings (or other
appropriate components of equity) for that period, and (iii) financial
statements for each individual prior period presented to be adjusted to
reflect the direct period-specific effects of applying the new accounting
principle. Special retroactive application rules apply in situations where
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Indirect effects of a change in accounting
principle are required to be reported in the period in which the accounting
change is made. SFAS 154 carries forward the guidance in APB Opinion 20
"Accounting Changes," requiring justification of a change in accounting
principle on the basis of preferability. SFAS 154 also carries forward
without change the guidance contained in APB Opinion 20, for reporting the
correction of an error in previously issued financial statements and for a
change in accounting estimate. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Corporation does not expect SFAS 154 will significantly impact
its financial statements upon its adoption on January 1, 2006.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 03-3, "Accounting for
Certain Loans or Debt Securities Acquired in a Transfer." SOP No. 03-3
addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in
loans acquired in a transfer when 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 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. The Company
has adopted SOP 03-3 and application of its guidance for the recent FABC
acquisition did not have a significant impact on the Company's financial
statements. Loans acquired in future acquisitions will continue to be
accounted for under SOP 03-3.
25
TABLE I
AVERAGE BALANCES & INTEREST RATES
(Taxable Equivalent Basis - Dollars in Thousands)
FOR THREE MONTHS ENDED JUNE 30,
2005 2004
-------------------------- --------------------------
Balance Interest Rate Balance Interest Rate
---------- -------- ----- ---------- -------- -----
Loans, Net of Unearned Interest(1)(2) $1,932,637 $32,200 6.68% $1,491,142 $22,961 6.19%
Taxable Investment Securities 149,958 1,113 2.96% 134,634 745 2.21%
Tax-Exempt Investment Securities(2) 41,316 513 4.97% 50,191 732 5.83%
Funds Sold 46,572 358 3.04% 45,688 116 1.01%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,170,483 34,184 6.32% 1,721,655 24,554 5.74%
Cash & Due From Banks 104,336 89,921
Allowance for Loan Losses (16,998) (13,804)
Other Assets 200,967 131,713
---------- ----------
TOTAL ASSETS $2,458,788 $1,929,485
LIABILITIES
NOW Accounts $ 413,799 $ 560 0.54% $ 283,297 $ 121 0.17%
Money Market Accounts 270,195 830 1.23% 215,746 239 0.44%
Savings Accounts 155,286 75 0.19% 129,684 32 0.10%
Other Time Deposits 547,919 3,153 2.31% 433,514 1,993 1.85%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Deposits 1,387,199 4,618 1.34% 1,062,241 2,385 0.90%
Short-Term Borrowings 108,508 734 2.71% 109,723 249 0.91%
Subordinated Note Payable 45,681 667 5.86% - - -
Other Long-Term Borrowings 68,975 769 4.47% 53,752 587 4.39%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Liabilities 1,610,363 6,788 1.69% 1,225,716 3,221 1.06%
Noninterest Bearing Deposits 544,945 476,389
Other Liabilities 25,373 17,169
---------- ----------
TOTAL LIABILITIES 2,180,681 1,719,274
SHAREOWNERS' EQUITY
TOTAL SHAREOWNERS' EQUITY 278,107 210,211
---------- ----------
TOTAL LIABILITIES & EQUITY $2,458,788 $1,929,485
========== ==========
Interest Rate Spread 4.63% 4.68%
==== ====
Net Interest Income $27,396 $21,333
======= =======
Net Interest Margin(3) 5.07% 4.99%
==== ====
FOR SIX MONTHS ENDED JUNE 30,
2005 2004
-------------------------- --------------------------
Balance Interest Rate Balance Interest Rate
---------- -------- ----- ---------- -------- -----
ASSETS
Loans, Net of Unearned Interest(1)(2) $1,880,272 $61,120 6.56% $1,424,175 $44,271 6.25%
Taxable Investment Securities 151,740 2,203 2.91% 128,167 1,380 2.15%
Tax-Exempt Investment Securities(2) 42,615 1,099 5.16% 52,233 1,554 5.95%
Funds Sold 34,479 517 2.98% 73,487 338 0.91%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,109,106 64,939 6.21% 1,678,062 47,543 5.70%
Cash & Due From Banks 100,848 90,124
Allowance for Loan Losses (16,585) (13,264)
Other Assets 189,849 125,069
---------- ----------
TOTAL ASSETS $2,383,218 $1,879,991
LIABILITIES
NOW Accounts $ 386,626 $ 1,007 0.53% $ 277,588 $ 245 0.18%
Money Market Accounts 261,072 1,455 1.12% 215,412 478 0.45%
Savings Accounts 151,502 151 0.20% 122,835 60 0.10%
Other Time Deposits 549,983 6,314 2.31% 427,007 3,996 1.88%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Deposits 1,349,183 8,927 1.33% 1,042,842 4,779 0.92%
Short-Term Borrowings 94,125 1,184 2.54% 107,064 536 1.01%
Subordinated Note Payable 38,345 1,108 5.83% - - -
Other Long-Term Borrowings 68,590 1,489 4.38% 50,387 1,084 4.33%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Liabilities 1,550,243 12,708 1.65% 1,200,293 6,399 1.07%
Noninterest Bearing Deposits 540,812 455,053
Other Liabilities 22,589 16,342
---------- ----------
TOTAL LIABILITIES 2,113,644 1,671,688
SHAREOWNERS' EQUITY
TOTAL SHAREOWNERS' EQUITY 269,574 208,303
---------- ----------
TOTAL LIABILITIES & EQUITY $2,383,218 $1,879,991
========== ==========
Interest Rate Spread 4.56% 4.63%
==== ====
Net Interest Income $52,231 $41,144
======= =======
Net Interest Margin(3) 4.99% 4.93%
==== ====
(1) Average balances include nonaccrual loans. Interest income includes fees on loans of
approximately $820,478 and $1.3 million, for the three and six months ended June 30, 2005,
versus $528,000 and $873,000, for the comparable periods ended June 30, 2004.
(2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.
(3) Taxable equivalent net interest income divided by average earning assets.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 28. This table
presents the Company's consolidated interest rate sensitivity position as of
June 30, 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.
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."
27
Table II
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
(Other Than Trading Portfolio)
As of June 30, 2005
-------------------------------------------------------------------------------- Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- -------------------------------------------------------------------------------------------------------------------------
Loans
Fixed Rate $ 371,720 $174,391 $ 96,393 $61,712 $27,637 $25,534 $ 757,387 $ 745,841
Average Interest Rate 6.24% 7.01% 7.14% 6.81% 7.11% 6.18% 6.61%
Floating Rate(2) 1,018,582 152,998 97,721 8,172 5,270 6,645 1,289,388 1,289,946
Average Interest Rate 5.39% 6.13% 6.39% 7.08% 7.46% 7.62% 5.59%
Investment Securities(3)
Fixed Rate 105,989 31,496 21,997 5,281 1,395 27,248 193,406 193,406
Average Interest Rate 2.62% 3.14% 3.28% 3.45% 3.78% 4.28% 3.04%
Floating Rate 2,454 - - - - - 2,454 2,454
Average Interest Rate 4.51% - - - - - 4.51%
Other Earning Assets
Floating Rate 59,062 - - - - - 59,062 59,062
Average Interest Rates 3.10% - - - - - 3.10%
Total Financial Assets $1,557,807 $358,885 $216,111 $75,165 $34,302 $59,427 $2,301,697 $2,290,709
Average Interest Rates 5.32% 6.30% 6.41% 6.61% 7.03% 5.47% 5.64%
Deposits(4)
Fixed Rate Deposits $ 427,064 $ 90,030 $ 40,776 $11,585 $ 7,461 $ 258 $ 577,174 $ 555,784
Average Interest Rates 2.27% 2.96% 3.47% 3.37% 3.62% 4.88% 2.50%
Floating Rate Deposits 924,852 - - - - - 924,852 891,570
Average Interest Rates 0.75% - - - - - 0.75%
Other Interest Bearing
Liabilities
Fixed Rate Debt 3,275 26,418 3,881 3,914 3,846 31,811 73,145 73,981
Average Interest Rate 4.70% 3.17% 4.67% 3.72% 4.63% 5.08% 4.26%
Floating Rate Debt 71,148 - - - 62,887 - 134,035 134,268
Average Interest Rate 2.63% - - - 5.89% - 4.16%
Total Financial Liabilities $1,426,339 $116,448 $ 44,657 $15,499 $74,194 $32,069 $1,709,207 $1,655,603
Average interest Rate 1.31% 3.01% 3.58% 3.46% 5.60% 5.08% 1.76%
(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 rate deposits in Year 1. Other time deposit balances are classified according to maturity.
28
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company maintains disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) 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 Control over Financial Reporting
- ----------------------------------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has reviewed the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(l) under the
Securities Exchange Act of 1934). There have not been any changes in the
Company's internal controls over financial reporting during the Company's
most recently completed fiscal quarter that have materially affected, or that
are reasonably likely to materially affect, the Company's internal control
over financial reporting.
29
PART II. OTHER INFORMATION
ITEMS 1-3.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Capital City Bank Group, Inc. was held
on April 26, 2005. 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/ Abstentions/
the 2008 annual meeting: For Withheld Broker Non-Votes
------------------------ ------------ ---------- -------------------
Thomas A. Barron 11,149,980 13,609 -
J. Everitt Drew 11,148,011 15,578 -
Lina S. Knox 11,069,396 94,193 -
John R. Lewis 11,086,005 77,585 -
2. The shareowners ratified the selection of KPMG LLP as the Company's
independent auditors for the fiscal year ending December 31, 2005. The
number of votes cast were as follows:
Against/ Abstentions/
For Withheld Broker Non-Vote
------------ ---------- -----------------
11,140,536 13,908 9,145
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(A) Exhibits
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.
30
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)
By: /s/ J. Kimbrough Davis
-------------------------
J. Kimbrough Davis
Executive Vice President and
Chief Financial Officer
Date: August 9, 2005
31
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