UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended
September 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 office) (Zip Code)
(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 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 Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At October 28, 2005, 18,623,782 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
1
CAPITAL CITY BANK GROUP, INC.
FORM 10-Q I N D E X
ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER
- ---- ----------------------------- -----------
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
3. Quantitative and Qualitative Disclosures
About Market Risk 29
4. Controls and Procedures 31
ITEM PART II. OTHER INFORMATION
- ---- --------------------------
1. Legal Proceedings Not Applicable
2. Unregistered Sales of Equity Securities and
Use of Proceeds Not Applicable
3. Defaults Upon Senior Securities Not Applicable
4. Submission of Matters to a Vote of
Security Holders Not Applicable
5. Other Information Not Applicable
6. Exhibits 32
Signatures 32
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 SEPTEMBER 30
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $35,331 $23,316 $96,278 $67,510
Investment Securities:
U.S. Treasury 89 167 347 619
U.S. Govt. Agencies and Corporations 788 507 2,442 1,298
States and Political Subdivisions 416 468 1,132 1,491
Other Securities 144 55 436 191
Funds Sold 121 147 638 486
------- ------- -------- -------
Total Interest Income 36,889 24,660 101,273 71,595
INTEREST EXPENSE
Deposits 5,480 2,434 14,407 7,213
Short-Term Borrowings 691 332 1,875 868
Subordinated Notes Payable 931 - 2,039 -
Other Long-Term Borrowings 783 642 2,272 1,726
------- ------- -------- -------
Total Interest Expense 7,885 3,408 20,593 9,807
------- ------- -------- -------
Net Interest Income 29,004 21,252 80,680 61,788
Provision for Loan Losses 376 300 1,174 1,841
------- ------- -------- -------
Net Interest Income After
Provision for Loan Losses 28,628 20,952 79,506 59,947
NONINTEREST INCOME
Service Charges on Deposit Accounts 5,635 4,487 15,018 12,858
Data Processing 660 652 1,917 1,988
Asset Management Fees 1,050 1,035 3,175 2,726
Gain (Loss) on Sale of
Investment Securities 9 (13) 9 7
Mortgage Banking Revenues 1,317 806 3,116 2,486
Gain on Sale of Credit Card Portfolio - 6,857 - 6,857
Other 4,452 3,897 12,989 11,711
------- ------- -------- -------
Total Noninterest Income 13,123 17,721 36,224 38,633
------- ------- -------- -------
NONINTEREST EXPENSE
Salaries and Associate Benefits 14,046 10,966 39,793 32,515
Occupancy, Net 2,119 1,828 6,091 5,194
Furniture and Equipment 2,285 2,174 6,589 6,214
Intangible Amortization 1,430 921 3,922 2,673
Merger Expense 180 68 414 114
Other 8,549 5,676 23,663 17,599
------- ------- -------- -------
Total Noninterest Expense 28,609 21,633 80,472 64,309
------- ------- -------- -------
Income Before Income Taxes 13,142 17,040 35,258 34,271
Income Taxes 4,565 6,221 12,436 12,162
------- ------- -------- -------
NET INCOME $ 8,577 $10,819 $22,822 $22,109
======= ======= ======== =======
BASIC NET INCOME PER SHARE $ .46 $ .66 $ 1.26 $ 1.34
======= ======= ======== =======
DILUTED NET INCOME PER SHARE $ .46 $ .66 $ 1.26 $ 1.34
======= ======= ======== =======
Average Basic Shares Outstanding 18,623,037 16,603,681 18,142,502 16,591,499
========== ========== ========== ==========
Average Diluted Shares Outstanding 18,648,504 16,608,681 18,156,764 16,594,847
========== ========== ========== ==========
(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 SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(Unaudited)
September 30, December 31,
(Dollars In Thousands, Except Share Data)(1) 2005 2004
- --------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 109,847 $ 87,039
Funds Sold and Interest Bearing Deposits 16,382 74,506
---------- ----------
Total Cash and Cash Equivalents 126,229 161,545
Investment Securities, Available-for-Sale 192,435 210,240
Loans, Net of Unearned Interest 2,052,892 1,828,825
Allowance for Loan Losses (17,424) (16,037)
---------- ----------
Loans, Net 2,035,468 1,812,788
Premises and Equipment 71,044 58,963
Goodwill 84,710 54,341
Other Intangible Assets 27,141 25,964
Other Assets 46,475 40,172
---------- ----------
Total Assets $2,583,502 $2,364,013
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 571,880 $ 566,991
Interest Bearing Deposits 1,453,608 1,327,895
---------- ----------
Total Deposits 2,025,488 1,894,886
Short-Term Borrowings 92,746 96,014
Subordinated Notes Payable 62,887 30,928
Other Long-Term Borrowings 71,526 68,453
Other Liabilities 29,278 16,932
---------- ----------
Total Liabilities 2,281,925 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; 18,623,778 shares outstanding
at September 30, 2005 and 17,694,139
shares outstanding at December 31, 2004 186 177
Additional Paid-In Capital 83,185 53,328
Retained Earnings 219,099 204,648
Accumulated Other Comprehensive Loss, Net of Tax (893) (353)
---------- ----------
Total Shareowners' Equity 301,577 256,800
---------- ----------
Total Liabilities and Shareowners' Equity $2,583,502 $2,364,013
========== ==========
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock
split effective July 1, 2005.
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
Additional Accumulated Other
Common Paid-In Retained Comprehensive
(Dollars in Thousands, Except Per Share Data)(1) Stock Capital Earnings Loss, Net of Taxes Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $177 $52,328 $204,648 $(353) $256,800
Comprehensive Income:
Net Income - - 22,822
Net Change in Unrealized Loss
On Available-for-Sale Securities - - - (540)
Total Comprehensive Income - - - - 22,282
Cash Dividends ($.456 per share) - - (8,371) - (8,371)
Stock Performance Plan Compensation - 1,077 - - 1,077
Issuance of Common Stock 9 29,780 - - 29,789
Balance, September 30, 2005 $186 $83,185 $219,099 $(893) $301,577
(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 NINE MONTH PERIODS ENDED SEPTEMBER 30
(Unaudited)
(Dollars in Thousands) 2005 2004
- -----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 22,822 $ 22,109
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 1,174 1,841
Depreciation 4,324 3,877
Net Securities Amortization 1,133 1,673
Amortization of Intangible Assets 3,922 2,673
Gain on Sale of Investment Securities (9) (7)
Non-Cash Compensation 1,083 1,686
Net (Increase) Decrease in Other Assets (4,463) 5,762
Net Increase in Other Liabilities 13,371 8,263
-------- --------
Net Cash Provided by Operating Activities 43,357 47,877
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Payments/Maturities/Sales of
Investment Securities Available-for-Sale 94,587 119,650
Purchase of Investment Securities Available-for-Sale (43,920) (81,594)
Net Increase in Loans (106,858) (113,296)
Net Cash Acquired (Used) in Acquisitions 37,412 (18,079)
Purchase of Premises & Equipment (13,264) (5,145)
Proceeds from Sales of Premises & Equipment 175 1,010
-------- --------
Net Cash Used in Investing Activities (31,868) (97,454)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits (70,983) (6,093)
Net Decrease in Short-Term Borrowings (88,311) (46,968)
Proceeds from Subordinated Note Payable 31,959 -
Increase in Other Long-Term Borrowings 88,116 28,456
Dividends Paid (8,371) (7,169)
Issuance of Common Stock 785 569
-------- --------
Net Cash Used in Financing Activities (46,805) (31,205)
-------- --------
Net Decrease in Cash and Cash Equivalents (35,316) (80,782)
Cash and Cash Equivalents at Beginning of Period 161,545 218,592
-------- --------
Cash and Cash Equivalents at End of Period $126,229 $137,810
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 13,685 $ 7,263
======== ========
Interest Paid on Debt $ 6,034 $ 2,616
======== ========
Taxes Paid $ 11,129 $ 6,786
======== ========
Transfer of Loans to Other Real Estate $ 2,391 $ 1,063
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 339 $ 1,686
======== ========
Transfer of Current Portion of Long-Term Borrowings
to Short-Term Borrowings $ 42,649 $ 15,000
======== ========
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
September 30, 2005 and December 31, 2004, the results of operations for the
three and nine month periods ended September 30, 2005 and 2004, and cash flows
for the nine month periods ended September 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 the stock split.
Stock-based Compensation
- ------------------------
As of September 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 nine
months ended September 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004(3) 2005 2004(3)
- -----------------------------------------------------------------------------------------------
Interest Income $36,889 $27,425 $105,661 $79,900
Interest Expense 7,885 4,563 22,418 13,285
Net Interest Income 29,004 22,862 83,243 66,615
Provision for Loan Losses 376 300 1,174 1,841
Net Interest Income After
Provision for Loan Losses 28,628 22,562 82,069 64,774
Noninterest Income 13,123 18,178 37,043 40,079
Noninterest Expense(2) 28,609 23,425 84,467 69,879
Income Before Income Taxes 13,142 17,315 34,645 34,974
Income Taxes 4,565 6,326 12,446 12,429
Net Income $ 8,577 $10,989 $ 22,199 $22,545
Basic Net Income Per Share $ 0.46 $ 0.63 $ 1.22 $ 1.29
Diluted Net Income Per Share $ 0.46 $ 0.63 $ 1.22 $ 1.29
(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 CCBG in the third quarter of 2005 totaling
approximately $180,000, and year-to-date 2005 at FNBA and CCBG totaling approximately $1.3 million.
(3) Includes $6.9 million ($4.2 million after-tax) one-time gain on sale of credit card portfolio.
8
(3) INVESTMENT SECURITIES
The carrying value and related market value of investment securities at
September 30, 2005 and December 31, 2004 were as follows:
September 30, 2005
-------------------------------------------
Amortized Unrealized Unrealized Market
- ----------------------------------------------------------------------------------------
(Dollars in Thousands) Cost Gains Losses Value
U.S. Treasury $ 15,642 $ - $ 114 $ 15,528
U.S. Government Agencies and Corporations 83,789 - 880 82,909
States and Political Subdivisions 57,363 100 341 57,122
Mortgage-Backed Securities 22,942 67 229 22,780
Other Securities(1) 14,096 - - 14,096
-------- ---- ------ --------
Total Investment Securities $193,832 $167 $1,564 $192,435
======== ==== ====== ========
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 September 30, 2005 and
December 31, 2004 was as follows:
(Dollars in Thousands) September 30, 2005 December 31, 2004
- -------------------------------------------------------------------------------
Commercial, Financial and Agricultural $ 216,695 $ 206,474
Real Estate - Construction 152,042 140,190
Real Estate - Commercial Mortgage 712,682 655,426
Real Estate - Residential 555,526 438,484
Real Estate - Home Equity 162,309 150,061
Real Estate - Loans Held-for-Sale 4,866 11,830
Consumer 248,772 226,360
---------- ----------
Loans, Net of Unearned Interest $2,052,892 $1,828,825
========== ==========
(5) ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the nine month
periods ended September 30, 2005 and 2004, is as follows:
(Dollars in Thousands) September 30, 2005 September 30, 2004
- -------------------------------------------------------------------------------------
Balance, Beginning of the Period $16,037 $12,429
Acquired Reserves 1,385 1,313
Provision for Loan Losses 1,174 1,841
Recoveries on Loans Previously Charged-Off 1,361 1,267
Loans Charged-Off (2,533) (3,722)
Reserves Reversal - Credit Card Portfolio Sale - (800)
------- -------
Balance, End of Period $17,424 $12,328
======= =======
Impaired loans are primarily defined as all nonaccruing loans for the loan
categories which are included within the scope of SFAS 114, "Accounting by
Creditors for Impairment of a Loan." Selected information pertaining to
impaired loans is depicted in the table below:
9
September 30, 2005 December 31, 2004
-------------------- ---------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- -----------------------------------------------------------------------------------------
Impaired Loans:
With Related Valuation Allowance $6,189 $3,232 $ 578 $313
Without Related Valuation Allowance 1,412 - 3,150 -
(Dollars in Thousands) September 30, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------
Average Recorded Investment in Impaired Loans $9,472 $5,382
Interest Income on Impaired Loans:
Recognized 168 140
Collected in Cash 168 120
(6) DEPOSITS
The composition of the Company's interest bearing deposits at September 30,
2005 and December 31, 2004 was as follows:
(Dollars in Thousands) September 30, 2005 December 31, 2004
- ----------------------------------------------------------------------------------
NOW Accounts $ 481,767 $ 338,932
Money Market Accounts 267,074 270,095
Savings Deposits 155,471 147,348
Other Time Deposits 549,296 571,520
---------- ----------
Total Interest Bearing Deposits $1,453,608 $1,327,895
(7) INTANGIBLE ASSETS
The Company had intangible assets of $111.9 million and $80.3 million at
September 30, 2005 and December 31, 2004, respectively. Intangible
assets were as follows:
September 30, 2005 December 31, 2004
------------------------ -------------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------------
Core Deposits Intangibles $ 47,176 $21,901 $ 42,078 $18,300
Goodwill 88,497 3,786 58,127 3,786
Customer Relationship Intangible 1,867 257 1,867 114
Other 483 228 483 50
-------- ------- -------- -------
Total Intangible Assets $138,023 $26,172 $102,555 $22,250
======== ======= ======== =======
Net Core Deposit Intangibles: As of September 30, 2005 and December 31, 2004,
the Company had core deposit intangibles (net of accumulated amortization) of
$25.3 million and $23.8 million, respectively. Amortization expense for the
first nine months of 2005 and 2004 was $3.6 million and $2.6 million,
respectively. Estimated annual amortization expense is $5.3 million.
Goodwill: As of September 30, 2005 and December 31, 2004 the Company had
goodwill, net of accumulated amortization, of $84.7 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."
Other: As of September 30, 2005, the Company had a customer relationship
intangible, net of accumulated amortization, of $1.6 million. This intangible
was booked as a result of the March 2004 acquisition of trust customer
relationships from Synovus Trust Company. Amortization expense for the first
nine months of 2005 was $143,000. Estimated annual amortization expense is
$191,000 based on use of a 10 year useful life.
As of September 30, 2005 and December 31, 2004, the Company also had a non-
compete intangible, net of accumulated amortization, of $255,000 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 nine months of 2005 was $178,000. Estimated annual
amortization expense is $236,000 based on a 2-year useful life.
10
(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 Nine Months Ended
September 30, September 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 $1,183 $ 950 $3,263 $2,850
Interest cost 838 725 2,438 2,175
Expected return on plan assets (782) (675) (2,378) (2,025)
Prior service cost amortization 55 50 165 150
Net loss amortization 400 300 990 900
------ ------ ------ ------
Net periodic benefit cost $1,694 $1,350 $4,478 $4,050
====== ====== ====== ======
The components of the net periodic benefit costs for the Company's Supplemental
Executive Retirement Plan ("SERP") were as follows:
Three Months Ended Nine Months Ended
September 30, September 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 $105 $144
Interest cost 54 65 162 195
Expected return on plan assets N/A N/A N/A N/A
Prior service cost amortization 15 30 45 90
Net loss amortization 21 (18) 63 (54)
---- ---- ---- ----
Net periodic benefit cost $125 $125 $375 $375
==== ==== ==== ====
(9) COMMITMENTS AND CONTINGENCIES
Lending Commitments. The Company is a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the financing
needs of its clients. 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 September 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) $480.7
Standby Letters of Credit $ 20.6
(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.
11
(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
$8.4 million and $22.3 million, respectively, for the three and nine months
ended September 30, 2005 and $11.3 million and $21.2 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 $(195,000) and $(540,000),
respectively, for the three and nine months ended September 30, 2005, and
$431,000 and $(934,000), respectively, for the three and nine months ended
September 30, 2004. Reclassification adjustments consist only of realized
gains on sales of investment securities and were not material for the three
and nine months ended September 30, 2005 and 2004.
12
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)(1)
2005 2004 2003
---------------------------------- ---------------------------------------------- ----------
Third Second First Fourth Third Second First Fourth
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 36,889 $ 33,910 $ 30,474 $ 29,930 $ 24,660 $ 24,265 $ 22,670 $ 23,022
Interest Expense 7,885 6,788 5,920 5,634 3,408 3,221 3,178 3,339
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 29,004 27,122 24,554 24,296 21,252 21,044 19,492 19,683
Provision for
Loan Losses 376 388 410 300 300 580 961 850
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 28,628 26,734 24,144 23,996 20,952 20,464 18,531 18,833
Gain on Sale of Credit
Card Portfolio - - - 324 6,857 - - -
Noninterest Income 13,123 12,041 11,060 11,596 10,864 11,031 9,881 10,614
Merger Expense 180 234 - 436 68 4 42 -
Noninterest Expense 28,429 26,362 25,267 24,481 21,565 21,597 21,033 20,593
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 13,142 12,179 9,937 10,999 17,040 9,894 7,337 8,854
Provision for
Income Taxes 4,565 4,311 3,560 3,737 6,221 3,451 2,490 2,758
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 8,577 $ 7,868 $ 6,377 $ 7,262 $ 10,819 $ 6,443 $ 4,847 $ 6,096
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 29,329 $ 27,396 $ 24,835 $ 24,619 $ 21,528 $ 21,333 $ 19,811 $ 20,020
Per Common Share:
Net Income Basic $ .46 $ .44 $ .36 $ .40 $ .66 $ .38 $ .30 $ .38
Net Income Diluted .46 .44 .36 .40 .66 .38 .30 .37
Dividends Declared .152 .152 .152 .152 .144 .144 .144 .144
Diluted Book Value 16.17 15.87 14.69 14.51 13.19 12.64 12.43 12.22
Market Price:
High 38.72 33.46 33.60 36.78 32.96 34.52 36.44 37.46
Low 31.78 28.02 29.30 30.17 26.66 28.40 31.24 29.30
Close 37.71 32.32 32.41 33.44 30.97 31.67 33.00 36.79
Selected Average
Balances:
Loans $2,046,968 $1,932,637 $1,827,327 $1,779,736 $1,524,401 $1,491,142 $1,357,206 $1,329,673
Earning Assets 2,250,902 2,170,483 2,047,049 2,066,111 1,734,708 1,721,655 1,634,468 1,636,269
Assets 2,569,524 2,458,788 2,306,807 2,322,870 1,941,372 1,929,485 1,830,496 1,819,552
Deposits 2,013,427 1,932,144 1,847,378 1,853,588 1,545,224 1,538,630 1,457,160 1,451,095
Shareowners' Equity 300,931 278,107 260,946 248,773 217,273 210,211 206,395 201,939
Common Equivalent
Average Shares:
Basic 18,623 18,094 17,700 17,444 16,604 16,593 16,578 16,528
Diluted 18,649 18,102 17,708 17,451 16,609 16,596 16,607 16,581
Ratios:
ROA 1.32% 1.28% 1.12% 1.24% 2.22%(2) 1.34% 1.06% 1.33%
ROE 11.31% 11.35% 9.91% 11.61% 19.81%(2) 12.33% 9.45% 11.98%
Net Interest
Margin (FTE) 5.17% 5.07% 4.92% 4.75% 4.94% 4.99% 4.88% 4.85%
Efficiency Ratio 63.60% 63.56% 67.06% 63.85% 52.60%(2) 63.87% 68.06% 64.58%
(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 "Business Overview," "Financial
Overview," "Results of Operations," "Financial Condition," "Liquidity and
Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting
Policies." Information therein should facilitate a better understanding of
the major factors and trends that affect 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 28 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 the
Company's 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 the
Company's 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 the Company's
financial performance to differ materially from what is contemplated in those
forward-looking statements.
* The Company's ability to integrate the business and operations of
companies and banks that it has acquired and that it may acquire in the
future. For example, the Company may fail to realize the growth
opportunities and cost savings anticipated to be derived from its
acquisitions. In addition, it is possible that during the integration
process of its acquisitions, the Company could lose key associates or
the ability to maintain relationships with clients.
* The strength of the United States economy in general and the strength of
the local economies in which the Company conducts 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 its loan portfolio and allowance for
loan losses;
* Worldwide political and social unrest, including acts of war and
terrorism;
* The effects of harsh weather conditions, including hurricanes;
* The effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the
Federal Reserve System;
14
* Inflation, interest rate, market and monetary fluctuations;
* Adverse conditions in the stock market and other capital markets and the
impact of those conditions on the Company's capital markets and capital
management activities, including its 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 the
Company and the acceptance of those products and services by new and
existing customers;
* The willingness of customers to accept third-party products marketed by
the Company;
* The willingness of customers to substitute competitors' products and
services for the Company's 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 the
Company's borrowers, which could impact the repayment of those
borrowers' outstanding loans; and
* The Company's success at managing the risks involved in the foregoing.
The Company cautions 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. The Company does not
undertake to update any forward-looking statement, whether written or oral,
that may be made from time to time by the Company or on its 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.
BUSINESS OVERVIEW
The Company is a financial holding company headquartered in Tallahassee,
Florida and is the parent of its wholly-owned subsidiary, Capital City Bank.
The Bank offers a broad array of products and services through a total of 68
full-service offices located in Florida, Georgia, and Alabama. The Bank also
has mortgage lending offices in five additional Florida communities, and one
Georgia community. The Bank offers commercial and retail banking services, as
well as trust and asset management, brokerage, and data processing services.
From an industry and national perspective, the Company's profitability, like
most financial institutions, is dependent to a large extent upon net interest
income, which is the difference between the interest received on earning
assets, such as loans and securities, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings. Results of operations are
also affected by the provision for loan losses, operating expenses such as
salaries and employee benefits, occupancy and other operating expenses,
including income taxes, and, non-interest income such as service charges on
deposit accounts, trust service fees, mortgage banking revenues, and data
processing revenues.
15
The Company philosophy is to grow and prosper, building long-term relationships
based on quality service, high ethical standards, and safe and sound banking
practices. The Company is a super-community bank in the relationship banking
business with a locally oriented, community-based focus, which is augmented by
experienced, centralized support in select specialized areas. The Company's
local market orientation is reflected in its network of banking office
locations, experienced community executives, and community advisory boards
which support the Company's focus of responding to local banking needs. The
Company strives to offer a broad array of sophisticated products and to provide
quality service by empowering associates to make decisions in their local
markets.
Pursuant to the Company's long-term strategic initiative "Project 2010", the
Company has continued its expansion, emphasizing a combination of growth in
existing markets and acquisitions. Acquisitions will continue to be focused
on a three state area including Florida, Georgia, and Alabama with a
particular focus on acquiring banks and banking offices, which are $100
million to $400 million in asset size, located on the outskirts of major
metropolitan areas. The Company continues to evaluate de novo expansion
opportunities in attractive new markets in the event that acquisition
opportunities are not feasible. Other expansion opportunities that will be
evaluated include asset management, insurance, and mortgage banking.
Recent Acquisitions. On October 15, 2004, the Company completed its
acquisition of Farmers and Merchants Bank ("FMB) in Dublin, Georgia, a $395
million asset institution with three offices in Laurens County. The Company
issued 21.35 shares and $666.50 in cash for each of the 50,000 shares of
Farmers and Merchants Bank, resulting in the issuance of 1,067,500 shares of
Company common stock and the payment of $33.3 million in cash for a total
purchase price of approximately $66.7 million.
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. 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.
Throughout this section, the Company refers to the acquisitions of FMB, FABC,
and Quincy State Bank, which was acquired in March 2004, as the "Recent
Acquisitions."
FINANCIAL OVERVIEW
A summary overview of financial performance for 2005 is provided below. For
comparison purposes, the below mentioned performance factors exclude the
impact of a one-time gain on sale of the bank's credit card portfolio in the
third quarter 2004.
2005 Highlights -
* Earnings of $8.6 million, up 29.8% and $22.8 million, up 27.5% for the
three and nine months ended September 30, 2005 as compared to the same
periods in 2004.
* Diluted earnings per share of $0.46, up 15.0% and $1.26, up 17.1% for
the three and nine months ended September 30, 2005 as compared to the
same periods in 2004.
* Growth in earnings was attributable to improvement in operating revenues
of 31.2% and 24.9% for the three and nine month periods, respectively,
driven by a higher net interest income and noninterest income.
* Taxable equivalent net interest income grew 36.3% and 30.1% for the
three and nine month periods, respectively, due to earning asset growth
and an improved net interest margin.
* Average earning assets grew 29.8% and 27.1% for the three and nine month
periods, respectively, due to Recent Acquisitions and loan growth in
existing markets.
* Net interest margin percentage improved 23 basis points and 12 basis
points for the three and nine month periods, respectively, driven by an
improved earning asset mix and higher earning asset yields.
16
* Noninterest income grew 20.8% and 14.0% for the three and nine month
periods, respectively, due primarily to higher deposit service charge
fees and merchant card processing fees.
* Lower loan loss provision for the year is reflective of continued strong
credit quality and lower inherent risk in the loan portfolio due to the
sale of the credit card portfolio. Net charge-offs totaled $1.2 million,
or .08% (annualized) of average loans for the nine months in 2005
compared to $2.5 million, or .22% (annualized) for the same period in
2004. At quarter-end the allowance for loan losses was .85% of
outstanding loans and provided coverage of 343% of nonperforming loans.
* Credit quality remains strong and a key driver in bank performance and
growth. Nonperforming assets totaled $7.4 million, or .36% of total
loans and other real estate at quarter-end compared to .36% and .29%,
respectively, for the third and fourth quarters of 2004.
* Average deposits grew 30.3% and 27.6% for the three and nine month
periods, respectively, due to Recent Acquisitions and the Company's free
checking campaign initiated in early 2005.
* The company remains well capitalized with a risk based capital ratio of
12.35%.
RESULTS OF OPERATIONS
Net Income
- ----------
Earnings for the three and nine months ended September 30, 2005 were $8.6
million, or $0.46 per diluted share, and $22.8 million, or $1.26 per diluted
share, respectively. This compares to $10.8 million, or $0.66 per diluted
share, and $22.1 million, or $1.34 per diluted share in 2004. The Company
sold its credit card portfolio during the third quarter of 2004 which
resulted in a one-time after-tax gain of $4.2 million, or $.26 per diluted
share. Core earnings (reported earnings excluding the after-tax gain) for
the three and nine months ended September 30, 2004 were $6.6 million, or
$.40 per diluted share, and $17.9 million, or $1.08 per diluted share,
respectively.
Growth in core earnings for the third quarter of $2.0 million, or 29.8%, was
attributable to an increase in operating revenue (defined as net interest
income plus noninterest income less the pre-tax gain) of $10.0 million, or
31.2%, partially offset by an increase in noninterest expense of $7.0 million,
or 32.2%, and a higher income tax provision of $1.0 million, or 27.6%. Growth
in operating revenues is reflective of higher net interest income and
noninterest income.
Growth in core earnings for the nine month period of $4.9 million, or 27.5%,
was attributable to an increase in operating revenue (defined as net interest
income plus noninterest income less the pre-tax gain) of $23.3 million, or
24.9%, and a reduction in the loan loss provision of $667,000, or 36.2%,
partially offset by an increase in noninterest expense of $16.2 million, or
25.1%, and a higher income tax provision of $2.9 million, or 30.7%.
17
A condensed earnings summary is presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
(Dollars in Thousands) 2005 2004(4) 2005 2004(4)
- -----------------------------------------------------------------------------------
Interest and Dividend Income $36,889 $24,660 $101,273 $71,595
Taxable-Equivalent Adjustment(1) 325 276 879 884
------- ------- -------- -------
Interest Income (FTE) 37,214 24,936 102,152 72,479
Interest Expense 7,885 3,408 20,593 9,807
------- ------- -------- -------
Net Interest Income (FTE) 29,329 21,528 81,559 62,672
Provision for Loan Losses 376 300 1,174 1,841
Taxable-Equivalent Adjustment 325 276 879 884
------- ------- -------- -------
Net Interest Income After
Provision for Loan Losses 28,628 20,952 79,506 59,947
Noninterest Income 13,123 17,721 36,224 38,633
Merger/Conversion Expense 180 68 414 114
Noninterest Expense 28,429 21,565 80,058 64,195
------- ------- -------- -------
Income Before Income Taxes 13,142 17,040 35,258 34,271
Income Taxes 4,565 6,221 12,436 12,162
------- ------- -------- -------
Net Income $ 8,577 $10,819 $ 22,822 $22,109
======= ======= ======== =======
Percent Change(2) (20.72)% 71.82% 3.22% 15.77%
Return on Average Assets(3) 1.32% 2.22% 1.25% 1.55%
Return on Average Equity(3) 11.31% 19.81% 10.89% 13.98%
(1) Computed using a federal statutory tax rate of 35%
(2) From prior comparable period
(3) Annualized
(4) Includes a one-time, after-tax gain of $4.2 million on sale of credit card portfolio
in third quarter 2004.
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. Third
quarter of 2005 taxable-equivalent net interest income increased $7.8
million, or 36.3%, over the comparable quarter in 2004. During the first
nine months of 2005, taxable-equivalent net interest income increased $18.9
million, or 30.1%, respectively, over the first nine months of 2004. This
favorable variance was caused by organic loan growth in existing markets and
growth in loans from the Company's Recent Acquisitions, 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 28
provides a comparative analysis of the Company's average balances and
interest rates.
For the three month period ended September 30, 2005, taxable-equivalent
interest income increased $12.3 million or 49.2%, over the comparable period
in 2004. During the first nine months of 2005, taxable-equivalent interest
income improved $29.7 million, or 40.9%, respectively, over the comparable
period in 2004. During the third quarter of 2005, growth in interest income
resulted from growth in average earning assets (including the impact of
acquisitions), and higher earning asset yields attributable to the rising
rate environment. New loan production and repricing of existing earning
assets produced an 84 basis point improvement in the yield on earning assets,
which increased from 5.72% for the third quarter in 2004 to 6.56% for the
same period in 2005. The Federal Reserve again increased interest rates
during the third quarter of 2005, which continues to impact new production
and repricing. Income generated on earning assets is anticipated to expand
in the fourth quarter due to the improved earning asset mix and the higher
rate environment.
Interest expense for the three and nine month periods ended September 30,
2005 increased $4.5 million, or 131.4% and $10.8 million, or 110.0%,
respectively, from the comparable prior year periods. The unfavorable
variance is attributable to acquired deposits, the higher rate environment
and the cost of funding acquisitions. The average rate paid on interest
bearing liabilities in 2005 increased 74 basis points over the third quarter
of 2004, to a level of 1.86%. Interest expense is anticipated to increase in
the fourth quarter as a result of the higher rate environment and increased
competition for funding sources.
18
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) was stable at 4.60% for the first nine months of 2005
compared to 4.61% for the comparable period in 2004.
The Company's net interest margin (defined as taxable-equivalent net interest
income divided by average earning assets) was 5.17% and 5.05%, respectively,
for the three and nine month periods of 2005, versus 4.94% 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.
Provision for Loan Losses
- -------------------------
The provisions for loan loss were $376,000 and $1.2 million, respectively, for
the three and nine month periods ended September 30, 2005, compared to
$300,000 and $1.8 million for the same periods in 2004. The lower loan loss
provision for the nine month period reflects a decline in charge-offs due to
the sale of the Bank's credit card portfolio in August 2004.
Similarly, the sale of the portfolio affected net charge-offs. Net charge-
offs totaled $403,000, or .08% of average loans for the third quarter of 2005
compared to $829,000, or .22% for the third quarter of 2004. At quarter-end,
the allowance for loan losses was .85% of outstanding loans and provided
coverage of 343% of nonperforming loans.
Charge-off activity for the respective periods is set forth below:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
(Dollars in Thousands) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 151 $ 187 $ 541 $ 640
Real Estate - Construction - - - -
Real Estate - Commercial Mortgage 4 - 10 39
Real Estate - Residential 115 19 177 113
Consumer 551 998 1,805 2,930
------ ------ ------ ------
Total Charge-offs 821 1,204 2,533 3,722
------ ------ ------ ------
RECOVERIES
Commercial, Financial and Agricultural 43 10 150 47
Real Estate - Construction - - - -
Real Estate - Commercial Mortgage 1 14 1 14
Real Estate - Residential 20 1 36 176
Consumer 354 350 1,174 1,030
------ ------ ------ ------
Total Recoveries 418 375 1,361 1,267
------ ------ ------ ------
Net Charge-offs $ 403 $ 829 $1,172 $2,455
====== ====== ====== ======
Net Charge-offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .08% .22% .08% .22%
====== ====== ====== ======
19
Noninterest Income
- ------------------
Noninterest income (excluding the 2004 pre-tax gain on the sale of the credit
card portfolio) increased $2.3 million, or 20.8%, and $4.4 million, or 14.0%,
respectively, over the comparable three and nine month periods in 2004. The
increase for the third quarter was primarily due to higher deposit service
charge fees, mortgage banking fees and merchant fees. The increase for the
nine month period was driven by higher deposit service charge fees, asset
management fees, and merchant fees. Excluding the one-time gain on the sale
of the credit card portfolio, noninterest income represented 31.2% and 31.0%
of operating revenue for the three and nine month periods of 2005 compared to
33.8% and 34.0% for the same periods in 2004. The table below reflects the
major components of noninterest income.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Dollars in Thousands) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------
Noninterest Income:
Service Charges $ 5,635 $ 4,487 $15,018 $12,858
Data Processing 660 652 1,917 1,988
Fees for Trust Services 1,050 1,035 3,175 2,726
Retail Brokerage Fees 305 316 917 1,075
Invest Sec Gain (Losses) 9 (13) 9 7
Mortgage Banking Fees 1,317 806 3,116 2,486
Merchant Fees 1,556 1,230 4,652 3,756
Interchange Fees 582 537 1,608 1,771
Gain on Sale of Credit Card - 6,857 - 6,857
ATM/Debit Card Fees 550 494 1,624 1,458
Other Income 1,459 1,320 4,188 3,651
------- ------- ------- -------
Total Noninterest Income $13,123 $17,721 $36,224 $38,633
======= ======= ======= =======
Major factors impacting the Company's noninterest income are discussed below.
Deposit service charge fees increased $1.1 million, or 25.6%, and $2.2
million, or 16.8%, respectively, over the comparable three and nine month
periods in 2004. The increase is primarily reflective of higher nonsufficient
funds fees due to growth in deposit accounts attributable to Recent
Acquisitions and "Absolutely Free Checking," which was launched in early 2005.
Income from asset management activities increased $15,000, or 1.5%, and
$449,000, or 16.5%, respectively, over the comparable three and nine month
periods in 2004. The increase for the nine month period reflects trust assets
acquired late in the first quarter of 2004. At September 30, 2005, assets
under management totaled $680.9 million, representing an increase of $69.2
million, or 11.3% from the comparable period in 2004.
Mortgage banking revenues increased $511,000, or 63.4%, and $630,000, or
25.3%, respectively, over the comparable three and nine month periods in 2004.
The improvement is due to a lower than normal level of production for the
third quarter of 2004 due to a general slow-down in the residential lending
market. Lending activity picked up momentum early in the second quarter of
2005 resulting in improved performance for both the three and nine month
period. The residential pipeline is expected to slow slightly during the
fourth quarter as compared to the prior quarter, but revenues are expected to
come in higher than the fourth quarter of 2004.
Merchant fees increased $326,000, or 26.5%, and $896,000, or 23.9%,
respectively, over the comparable three and nine month periods in 2004. The
improvement is directly related to growth in merchant card processing volume.
Other income increased $139,000, or 10.5%, and $537,000, or 14.7%,
respectively, over the comparable three and nine month periods in 2004. The
increase for both periods is primarily due to growth in credit life commission
fees, ATM and debit card processing fees, and proof/bookkeeping fees.
20
Noninterest Expense
Noninterest expense increased $7.0 million, or 32.2%, and $16.2 million,
or 25.1%, respectively, over the comparable three and nine month periods
in 2004. The table below reflects the major components of noninterest expense.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
(Dollars in Thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------
Noninterest Expense:
Salaries $10,662 $ 8,512 $30,300 $25,041
Associate Benefits 3,384 2,454 9,493 7,474
------- ------- ------- -------
Total Personnel Expense 14,046 10,966 39,793 32,515
Premises 2,119 1,828 6,091 5,194
Equipment 2,285 2,174 6,589 6,214
------- ------- ------- -------
Total Premises and Equipment 4,404 4,002 12,680 11,408
Legal Fees 546 245 1,358 867
Professional Fees 903 571 2,477 1,807
Processing Services 352 252 1,100 755
Advertising 1,131 297 3,079 1,351
Travel and Entertainment 346 281 950 750
Printing and Supplies 673 414 1,790 1,333
Telephone 693 479 1,771 1,525
Postage 279 262 895 759
Intangible Amortization 1,430 921 3,922 2,673
Merger Expense 180 68 414 114
Interchange Fees 1,367 1,171 4,057 3,470
Courier Service 355 282 997 827
Miscellaneous Expense 1,904 1,422 5,189 4,155
------- ------- ------- -------
Total Other Expense $28,609 $21,633 $80,472 $64,309
======= ======= ======= =======
Major factors impacting the Company's noninterest expense are discussed below.
Salaries and associate benefits expense increased $3.1 million, or 28.1%, and
$7.3 million, or 22.4% over the comparable three and nine month periods in
2004. For both periods, the Company experienced increases in associate
salaries, payroll tax expense, pension plan expense, associate insurance
expense, and stock-based compensation. The increase in associate salaries and
payroll tax reflects the addition of associates from Recent Acquisitions and
annual merit/market based raises for associates. Pension expense increased
due to a lower discount rate used for the 2005 expense projection and an
increase in the number of plan participants. 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 $402,000, or 10.0%, and $1.3 million, or 11.2%, respectively, over
the comparable three and nine month periods in 2004. For both periods, the
Company experienced increases in depreciation, maintenance and repairs
(building), and property taxes, which reflects an increase in banking offices
from Recent Acquisitions and recent banking office expansion.
Other noninterest expense increased $3.5 million, or 52.4%, and $7.6 million,
or 37.3%, respectively, over the comparable three and nine month periods in
2004. For both periods, the increase was primarily attributable to higher
expense for legal fees, professional fees, processing services, advertising,
printing and supplies, telephone, intangible amortization, and interchange
fees. Legal fees have increased due to corporate governance initiatives and a
general increase in legal services tied to corporate activities. Higher
external audit fees have driven the increase in professional 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 costs to support the "Absolutely Free Checking"
campaign introduced in the first quarter of 2005. The higher expense for
printing and supplies, and telephone is driven by the Recent Acquisitions.
The increase in intangible amortization reflects core deposit
21
amortization from Recent Acquisitions. The increase in interchange fees is
due to increased merchant card processing volume.
Annualized net noninterest expense (noninterest income minus noninterest
expense, excluding intangible amortization and one-time merger expenses) as a
percent of average assets was 2.18% for the first nine months of 2005 compared
to 2.09% 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 64.64% for the first nine months of 2005 compared to 65.14% for
the same period in 2004. The aforementioned metrics for 2004 exclude the
impact of the one-time gain on the sale of credit card portfolio.
Income Taxes
- ------------
The provision for income taxes decreased $1.7 million, or 26.6%, from the
third quarter 2004 due to lower taxable income. The lower level of taxable
income for the current quarter was due to the one-time $6.9 million gain
realized on the sale of the bank's credit card portfolio in the third quarter
of 2004. The tax accrual related to the sale accounted for approximately $2.6
million of the third quarter 2004 tax provision. The provision for income
taxes increased $274,000, or 2.3% for the first nine months of the year due to
slightly higher taxable income. The Company's effective tax rate for the
first nine months of 2005 was 35.3% compared to 35.5% for the same period in
2004. The slightly lower effective tax rate is primarily attributable to a
higher level of tax-free loan income.
FINANCIAL CONDITION
Asset and liability balances include the integration of FMB on October 15,
2004, and FNBA on May 20, 2005.
The Company's average assets increased $246.7 million, or 10.6%, to $2.57
billion for the quarter-ended September 30, 2005 from $2.32 billion in the
fourth quarter of 2004. Average earning assets of $2.25 billion increased
$184.8 million, or 8.9%, from the fourth quarter of 2004 driven by a $267.2
million, or 15.0%, increase in average loans, partially offset by a decline in
funds sold of $72.8 million, or 88.0%.
The Company ended the third quarter with approximately $21.9 million in
average net overnight funds purchased as compared to $60.6 million in net
overnight funds sold in the fourth quarter of 2004. The decline primarily
reflects the funding 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 September 30, 2005, the average investment
portfolio decreased $9.7 million, or 4.8%, from the fourth quarter of 2004.
Cash from portfolio run-off for the first nine months of the year has been
used to fund loan growth. Management will continue to evaluate the need to
purchase securities for the investment portfolio for the remainder of 2005,
taking into consideration liquidity needed to fund loan growth, acquisitions,
and meeting 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 September 30, 2005
and December 31, 2004, shareowners' equity included a net unrealized loss of
$0.9 million and $0.4 million, respectively.
Average loans increased $267.2 million, or 15.0%, 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 nine months of the year. Exclusive of the FNBA acquisition, period
end loans increased $103.6 million, or 5.7% over the fourth quarter of 2004.
Loan activity in all markets remains moderate to strong.
The Company's nonperforming loans were $5.1 million at September 30, 2005,
versus $4.6 at December 31, 2004. As a percent of nonperforming loans, the
allowance for loan losses represented 343% at September 30, 2005 versus 345%
at December 31, 2004. Nonperforming
22
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 $2.3 million at September 30, 2005, versus $0.6
million at December 31, 2004. The increase is attributable to the addition of
one large commercial real estate loan parcel for which management expects no
significant loss upon the disposition of the asset. The ratio of
nonperforming assets as a percent of loans plus other real estate was .36% at
September 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 September 30, 2005 was $17.4 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 September 30, 2005 is adequate to absorb losses inherent in
the loan portfolio at quarter-end.
Average total deposits increased $159.8 million, or 8.6% from the fourth
quarter of 2004 driven by a $149.7 million increase in nonmaturity deposits.
This increase primarily reflects accounts added from the FNBA acquisition and
new accounts gained from the "Absolutely Free Checking" campaign initiated
early in the first quarter of 2005.
The ratio of average noninterest bearing deposits to total deposits was 27.5%
for the third 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 74.8%, 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 September 30, 2005, the Company had no borrowings under the revolving
line of credit. For the first nine months of the year, the Bank has made
scheduled FHLB advance payments totaling approximately $68.2 million and
obtained $83.6 million in new FHLB advances. The borrowing activity included
a new short-term advance for $50.0 million that was obtained in May and repaid
in June. In addition, the net FHLB borrowings position increased by
approximately $15 million during the third quarter. In September, the Company
obtained an aggregate $30 million in three advances, which was partially
offset by the maturity of a $15 million advance.
23
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 the first five years, then adjustable
annually thereafter based on the three month LIBOR plus a margin of 1.80%.
The note matures on June 15, 2035. The proceeds of the borrowing were used to
fund the cash portion of the acquisition price of FNBA.
The Company ended the third quarter of 2005 with approximately $21.9 million
in average net overnight funds purchased as compared to $13.2 million net
overnight funds sold for the second quarter of 2005. The decline reflects
cash used to fund loan growth. The Company expects to continue to be a net
purchaser of funds in the fourth 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 September 30, 2005:
Payments Due After September 30, 2005
---------------------------------------------------------------
2005
(Dollars in Thousands) (Remaining) 2006 2007 2008 2009 Thereafter Total
- ----------------------------------------------------------------------------------------
Federal Home Loan
Bank Advances $1,599 $32,816 $15,876 $14,873 $2,740 $ 32,294 $100,198
Subordinated Notes
Payable - - - - - 62,887 62,887
Operating Lease
Obligations 356 1,259 1,138 1,125 1,104 7,129 12,111
------ ------- ------- ------- ------ -------- --------
Total Contractual
Cash Obligations $1,955 $34,075 $17,014 $15,998 $3,844 $102,310 $175,196
====== ======= ======= ======= ====== ======== ========
Capital
The Company's equity capital was $301.6 million as of September 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
10.20% at September 30, 2005 compared to 8.79% at December 31, 2004. Further,
the Company's risk-adjusted capital ratio of 12.35% at September 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 the 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 third quarter of 2005 totaled $.1520
per share compared to $.1440 per share for the third quarter of 2004, an
increase of 5.6%. The dividend payout ratios for the third quarter ended 2005
and 2004 were 33.3% and 21.9%, 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 September 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 nine months of 2005, shareowners' equity increased $44.8
million, or 23.3%, on an annualized basis. Growth in equity during the first
nine months of the year was positively impacted by net income of $22.8
million, the issuance of common stock of $29.8 million, and stock-based
compensation accretion of $1.1 million. Equity was reduced by dividends paid
during the first nine months of the year by $8.4 million, or $.456 per share
and an increase in the net unrealized loss on available-for-sale securities of
$0.5 million. At September 30, 2005, the Company's common stock had a book
value of $16.17 per diluted share compared to $14.51 at December 31, 2004.
24
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 third quarter of 2005. From March 30, 2000 through
September 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 September 30, 2005, the Company had $480.7 million in commitments to extend
credit and $20.6 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 FHLB,
investment security maturities and the Company's revolving credit facility
provide a sufficient source of funds to meet these commitments.
25
ACCOUNTING POLICIES
Critical Accounting Policies
- ----------------------------
The consolidated financial statements and accompanying Notes to Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require the Company
to make various estimates and assumptions (see Note 1 in the Notes to
Consolidated Financial Statements). The Company believes that, of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.
Allowance for Loan Losses: The allowance for loan losses is established
through a charge to the provision for loan losses. Provisions are made to
reserve for estimated losses in loan balances. The allowance for loan losses
is a significant estimate and is evaluated quarterly by the Company for
adequacy. The use of different estimates or assumptions could produce a
different required allowance, and thereby a larger or smaller provision
recognized as expense in any given reporting period. A further discussion of
the allowance for loan losses can be found in the section entitled "Allowance
for Loan Losses" and Note 1 in the Notes to Consolidated Financial Statements
in the Company's 2004 Annual Report on Form 10-K.
Intangible Assets: Intangible assets consist primarily of goodwill, core
deposit assets, and other identifiable intangibles that were recognized in
connection with various acquisitions. Goodwill represents the excess of the
cost of acquired businesses over the fair market value of their identifiable
net assets. The Company performs an impairment review on an annual basis to
determine if there has been impairment of its goodwill. The Company has
determined that no impairment existed at December 31, 2004. Impairment
testing requires management to make significant judgments and estimates
relating to the fair value of its identified reporting units. Significant
changes to these estimates may have a material impact on the Company's
reported results.
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%.
26
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.
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.
27
TABLE I
AVERAGE BALANCES & INTEREST RATES
Taxable Equivalent Basis
FOR THREE MONTHS ENDED SEPTEMBER 30,
2005 2004
------------------------- --------------------------
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------
ASSETS
- ------
Loans, Net of Unearned Interest(1)(2) $2,046,968 $35,433 6.87% $1,524,401 $23,345 6.09%
Taxable Investment Securities 137,970 1,022 2.95% 118,903 729 2.45%
Tax-Exempt Investment Securities(2) 56,079 638 4.55% 51,768 716 5.53%
Funds Sold 9,885 121 4.79% 39,636 147 1.45%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,250,902 37,214 6.56% 1,734,708 24,937 5.72%
Cash & Due From Banks 106,638 90,010
Allowance for Loan Losses (17,570) (13,029)
Other Assets 229,554 129,683
---------- ----------
TOTAL ASSETS $2,569,524 $1,941,372
========== ==========
LIABILITIES
- -----------
NOW Accounts $ 463,936 $ 773 0.66% $ 280,630 $ 153 0.22%
Money Market Accounts 272,724 1,062 1.54% 212,426 245 0.46%
Savings Accounts 159,080 75 0.19% 130,330 32 0.10%
Other Time Deposits 563,595 3,570 2.51% 429,702 2,004 1.86%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Deposits 1,459,335 5,480 1.49% 1,053,088 2,434 0.92%
Short-Term Borrowings 89,483 691 3.07% 96,146 332 1.37%
Subordinated Note Payable 62,887 931 5.87 - - -
Other Long-Term Borrowings 72,408 783 4.29% 59,837 642 4.27%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Liabilities 1,684,113 7,885 1.86% 1,209,071 3,408 1.12%
Noninterest Bearing Deposits 554,092 ------- ---- 492,136 ------- ----
Other Liabilities 30,388 22,892
---------- ----------
TOTAL LIABILITIES 2,268,593 1,724,099
SHAREOWNERS' EQUITY
- -------------------
TOTAL SHAREOWNERS' EQUITY 300,931 217,273
---------- ----------
TOTAL LIABILITIES & EQUITY $2,569,524 $1,941,372
========== ==========
Interest Rate Spread 4.70% 4.60%
==== ====
Net Interest Income $29,329 $21,529
======= =======
Net Interest Margin(3) 5.17% 4.94%
==== ====
FOR NINE MONTHS ENDED SEPTEMBER 30,
2005 2004
------------------------- -------------------------
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------
ASSETS
- ------
Loans, Net of Unearned Interest(1)(2) $1,936,448 $96,553 6.67% $1,457,826 $67,616 6.20%
Taxable Investment Securities 147,099 3,225 2.92% 125,057 2,109 2.25%
Tax-Exempt Investment Securities(2) 47,153 1,737 4.91% 52,077 2,267 5.81%
Funds Sold 26,191 638 3.21% 62,121 486 1.03%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,156,891 102,153 6.33% 1,697,081 72,478 5.70%
Cash & Due From Banks 102,800 90,086
Allowance for Loan Losses (16,917) (13,185)
Other Assets 203,228 126,619
---------- ----------
TOTAL ASSETS $2,446,002 $1,900,601
========== ==========
LIABILITIES
- -----------
NOW Accounts $ 412,679 $ 1,780 0.58% $ 278,609 $ 398 0.19%
Money Market Accounts 264,999 2,517 1.27% 214,410 723 0.45%
Savings Accounts 154,056 225 0.20% 125,351 92 0.10%
Other Time Deposits 554,570 9,885 2.38% 427,913 6,000 1.87%
---------- ------- ---- ---------- ------- ----
Total Int. Bearing Deposits 1,386,304 14,407 1.39% 1,046,283 7,213 0.92%
Short-Term Borrowings 92,561 1,875 2.71% 103,398 868 1.12%
Subordinated Note Payable 46,616 2,039 5.85% - - -
Other Long-Term Borrowings 69,876 2,272 4.35% 53,560 1,726 4.30%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Liabilities 1,595,357 20,593 1.73% 1,203,241 9,807 1.09%
Noninterest Bearing Deposits 545,287 ------- ---- 467,504 ------- ----
Other Liabilities 25,217 18,541
---------- ----------
TOTAL LIABILITIES 2,165,861 1,689,286
SHAREOWNERS' EQUITY
- -------------------
TOTAL SHAREOWNERS' EQUITY 280,141 211,315
---------- ----------
TOTAL LIABILITIES & EQUITY $2,446,002 $1,900,601
========== ==========
Interest Rate Spread 4.60% 4.61%
==== ====
Net Interest Income $81,560 $62,671
======= =======
Net Interest Margin(3) 5.05% 4.93%
==== ====
(1) Average balances include nonaccrual loans. Interest income includes fees on loans of
approximately $897,676 and $2.2 million for the three and nine months ended September 30, 2005,
versus $336,000 and $1.2 million, for the comparable periods ended September 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.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 the Company 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 30. This table
presents the Company's consolidated interest rate sensitivity position as of
September 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."
29
Table II
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
(Other Than Trading Portfolio)
As of September 30, 2005
----------------------------------------------------------------------------------- Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- -------------------------------------------------------------------------------------------------------------------------------
Loans
Fixed Rate $ 361,605 $166,248 $102,977 $57,161 $34,078 $25,154 $ 747,223 $ 739,041
Average Interest Rate 6.17% 7.16% 7.15% 7.08% 7.16% 6.33% 6.65%
Floating Rate(2) 1,035,938 141,741 107,649 8,316 5,262 6,763 1,305,669 1,276,092
Average Interest Rate 5.80% 6.16% 6.55% 6.90% 7.22% 7.54% 5.92%
Investment Securities(3)
Fixed Rate 90,885 36,388 18,533 7,034 7,466 29,912 190,218 190,218
Average Interest Rate 2.55% 3.09% 3.49% 3.77% 3.82% 2.86% 2.89%
Floating Rate 2,218 - - - - - 2,218 2,218
Average Interest Rate 4.52% - - - - - 4.52%
Other Earning Assets
Floating Rates 16,382 - - - - - 16,382 16,382
Average Interest Rates 3.92% - - - - - 3.92%
Total Financial Assets $1,507,028 $344,377 $229,159 $72,511 $48,806 $61,829 $2,261,710 $2,223,951
Average Interest Rates 5.67% 6.32% 6.57% 6.74% 6.63% 4.42% 5.89%
Deposits(4)
Fixed Rate Deposits $ 423,125 $ 78,873 $ 32,436 $ 9,826 $ 5,805 $ 345 $ 550,410 $ 548,259
Average Interest Rates 2.56% 3.06% 3.40% 3.56% 3.66% 4.69% 2.71%
Floating Rate Deposits 903,198 - - - - - 903,198 832,644
Average Interest Rates 1.04% - - - - - 1.04%
Other Interest Bearing
Liabilities
Fixed Rate Debt 3,304 16,792 14,359 3,923 2,731 30,417 71,526 71,320
Average Interest Rate 4.69% 4.14% 4.41% 3.50% 4.87% 5.08% 4.61%
Floating Rate Debt 92,746 - - - 62,887 - 155,633 155,642
Average Interest Rate 2.85% - - - 5.89% - 4.08%
Total Financial Liabilities $1,422,373 $ 95,665 $ 46,795 $13,749 $71,423 $30,762 $1,680,767 $1,607,865
Average interest Rate 1.62% 3.25% 3.71% 3.54% 5.67% 5.07% 2.02%
(1) Based upon expected cash-flows, 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.
30
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.
31
PART II. OTHER INFORMATION
ITEMS 1-5.
Not applicable
Item 6. 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned Chief Financial Officer hereunto duly authorized.
CAPITAL CITY BANK GROUP, INC.
(Registrant)
/s/ J. Kimbrough Davis
- -----------------------------------
J. Kimbrough Davis
Executive Vice President and
Chief Financial Officer
Date: November 9, 2005
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