UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-13358
CAPITAL CITY BANK GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 0-13358 59-2273542
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(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
217 North Monroe Street, Tallahassee, Florida 32301
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(Address of principal executive office) (Zip Code)
(850) 671-0300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2005, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $304,987,131 based on the
closing sale price as reported on the National Association of Securities
Dealers Automated Quotation System National Market System.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 28, 2006
- --------------------------------------- -----------------------------------
Common Stock, $0.01 par value per share 18,662,689 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the Annual Meeting of Shareowners to be
held on April 25, 2006, are incorporated by reference in Part III.
2
CAPITAL CITY BANK GROUP, INC.
ANNUAL REPORT FOR 2005 ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
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Item 1. Business 5
Item 1A. Risk Factors 17
Item 1B. Unresolved Staff Comments 22
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
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Item 5. Market for the Registrant's Common Equity, Related Shareowner
Matters, and Issuer Purchases of Equity Securities 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 52
Item 8. Financial Statements and Supplementary Data 55
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 91
Item 9A. Controls and Procedures 91
Item 9B. Other Information 94
PART III
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Item 10. Directors and Executive Officers of the Registrant 94
Item 11. Executive Compensation 94
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareowners Matters 95
Item 13. Certain Relationships and Related Transactions 95
Item 14. Principal Accountant Fees and Services 95
PART IV
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Item 15. Exhibits and Financial Statement Schedules 96
Signatures 98
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INTRODUCTORY NOTE
This Annual Report on Form 10-K contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, statements about our
beliefs, plans, objectives, goals, expectations, estimates and intentions
that are subject to significant risks and uncertainties and are subject to
change based on various factors, many of which are beyond our control. The
words "may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan," "target," "goal," and similar expressions are
intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those
set forth in our forward-looking statements.
In addition to those risks discussed in this Annual Report under Item 1A Risk
Factors, factors that could cause our actual results to differ materially
from those in the forward-looking statements, include, without limitation:
* our ability to integrate the business and operations of companies and
banks that we have acquired, and those we may acquire in the future;
* our need and our ability to incur additional debt or equity financing;
* the strength of the United States economy in general and the strength
of the local economies in which we conduct operations;
* the accuracy of our financial statement estimates and assumptions;
* the effects of harsh weather conditions, including hurricanes;
* inflation, interest rate, market and monetary fluctuations;
* the effects of our lack of a diversified loan portfolio, including the
risks of geographic and industry concentrations;
* the frequency and magnitude of foreclosure of our loans;
* effect of changes in the stock market and other capital markets;
* legislative or regulatory changes;
* the willingness of customers to accept third-party products and
services rather than our products and services and vice versa;
* changes in the securities and real estate markets;
* increased competition and its effect on pricing;
* technological changes;
* changes in monetary and fiscal policies of the U.S. Government;
* changes in consumer spending and saving habits;
* growth and profitability of our noninterest income;
* changes in accounting principles, policies, practices or guidelines;
* the limited trading activity of our common stock;
* the concentration of ownership of our common stock;
* anti-takeover provisions under Federal and state law as well as our
Articles of Incorporation and our bylaws;
* other risks described from time to time in our filings with the
Securities and Exchange Commission; and
* our ability to manage the risks involved in the foregoing.
However, other factors besides those listed in Item 1A Risk Factors or
discussed in this Annual Report also could adversely affect our results, and
you should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. Any forward-looking statements made by us
or on our behalf speak only as of the date they are made. We do not
undertake to update any forward-looking statement, except as required by
applicable law.
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PART I
Item 1. Business
General
Capital City Bank Group, Inc. ("CCBG") is a financial holding company
registered under the Gramm-Leach-Bliley Act of 1999 ("Gramm-Leach-Bliley
Act") and is subject to the Bank Holding Company Act of 1956. CCBG was
incorporated under Florida law on December 13, 1982, to acquire five national
banks and one state bank that all subsequently became part of CCBG's bank
subsidiary, Capital City Bank ("CCB" or the "Bank"). In this report, the
terms "Company", "we", "us", or "our" mean CCBG and all subsidiaries included
in our consolidated financial statements.
We provide traditional deposit and credit services, asset management, trust,
mortgage banking, bank cards, data processing, and securities services
through 69 full-service banking locations in Florida, Georgia, and Alabama.
CCB operates these banking locations.
At December 31, 2005, our consolidated total assets were $2.6 billion and
shareowners' equity was $305.8 million. CCBG's principal asset is the
capital stock of the Bank. CCB accounted for approximately 100% of
consolidated assets at December 31, 2005, and approximately 100% of
consolidated net income for the year ended December 31, 2005. In addition to
our banking subsidiary, we have seven indirect subsidiaries, Capital City
Trust Company, Capital City Mortgage Company (inactive), Capital City
Securities, Inc., Capital City Services Company, First Insurance Agency of
Grady County, Inc., Southern Oaks, Inc., and FNB Financial Services, Inc.,
all of which are wholly-owned subsidiaries of Capital City Bank, and two
direct subsidiaries CCBG Capital Trust I and CCBG Capital Trust II, both
wholly-owned subsidiaries of CCBG.
Dividends and management fees received from the Bank are our only source of
income. Dividend payments by the Bank to CCBG depend on the capitalization,
earnings and projected growth of the Bank, and are limited by various
regulatory restrictions. See the section entitled "Regulatory
Considerations" in this Item 1 and Note 15 in the Notes to Consolidated
Financial Statements for additional information. We had a total of 1,013
(full-time equivalent) associates at February 28, 2006. Page 24 contains
other financial and statistical information about us.
We have one reportable segment with the following principal services:
Banking Services, Data Processing Services, Trust and Asset Management
Services, and Brokerage Services.
Banking Services
CCB is a Florida chartered full-service bank engaged in the commercial and
retail banking business. Significant services offered by the Bank include:
* Business Banking - The Bank provides banking services to corporations
and other business clients. Credit products are available for a wide
variety of general business purposes, including financing for
commercial business properties, equipment, inventories and accounts
receivable, as well as commercial leasing and letters of credit.
Treasury management services and merchant credit card transaction
processing services are also offered.
* Commercial Real Estate Lending - The Bank provides a wide range of
products to meet the financing needs of commercial developers and
investors, residential builders and developers, and community
development.
* Residential Real Estate Lending - The Bank provides products to help
meet the home financing needs of consumers, including conventional
permanent and construction/ permanent (fixed or adjustable rate)
financing arrangements, and
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FHA/VA loan products. The bank offers both fixed-rate and adjustable
rate mortgages ("ARM") loans. Approximately 32% of the Bank's loan
portfolio consists of ARM loans.
* The Bank offers these products through its existing network of branch
offices. Geographical expansion of the delivery of this product line
has occurred over the past three years through the opening of mortgage
lending offices in Gainesville (Alachua County), Panacea (Wakulla
County), Steinhatchee (Taylor County), and Thomasville, Georgia (Thomas
County).
* Retail Credit - The Bank provides a full range of loan products to meet
the needs of consumers, including personal loans, automobile loans,
boat/RV loans, home equity loans, and credit card programs.
* Institutional Banking - The Bank provides banking services to meet the
needs of state and local governments, public schools and colleges,
charities, membership and not-for-profit associations including
customized checking and savings accounts, cash management systems, tax-
exempt loans, lines of credit, and term loans.
* Retail Banking - The Bank provides a full range of consumer banking
services, including checking accounts, savings programs, automated
teller machines ("ATMs"), debit/credit cards, night deposit services,
safe deposit facilities, and PC/Internet banking. Clients can use the
"Star-Line" system to gain 24-hour access to their deposit and loan
account information, and transfer funds between linked accounts. The
Bank is a member of the "Star" ATM Network that permits banking clients
to access cash at ATMs or point of sale merchants.
Data Processing Services
Capital City Services Company provides data processing services to financial
institutions (including CCB), government agencies and commercial clients
located throughout North Florida and South Georgia. As of February 28, 2006,
the Services Company is providing computer services to seven correspondent
banks, which have relationships with CCB.
Trust Services and Asset Management
Capital City Trust Company is the investment management arm of CCB. The Trust
Company provides asset management for individuals through agency, personal
trust, IRAs and personal investment management accounts.
Administration of pension, profit sharing and 401(k) plans is a significant
product line. Associations, endowments and other non-profit entities hire the
Trust Company to manage their investment portfolios. A staff of well-trained
professionals serves individuals requiring the services of a trustee,
personal representative or a guardian. The market value of trust assets under
discretionary management exceeded $693.0 million as of December 31, 2005,
with total assets under administration exceeding $762.0 million.
Brokerage Services
We offer access to retail investment products through Capital City
Securities, Inc., a wholly-owned subsidiary of CCB. These products are
offered through INVEST Financial Corporation, a member of NASD and SIPC. Non-
deposit investment and insurance products are: (1) not FDIC insured; (2) not
deposits, obligations, or guaranteed by any bank; and (3) subject to
investment risk, including the possible loss of principal amount invested.
Capital City Securities, Inc. offers a full line of retail securities
products, including U.S. Government bonds, tax-free municipal bonds, stocks,
mutual funds, unit investment trusts, annuities, life insurance and long-term
health care. We are not affiliated with INVEST Financial Corporation.
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Expansion of Business
Since 1984, we have completed 15 acquisitions totaling $1.6 billion in
deposits within existing and new markets. In addition, over the past three
years, we opened six new offices - two in Tallahassee and one each in
Crawfordville, Palatka (replacement office), Spring Hill and Starke
(replacement office) - to improve service and product delivery within these
Florida markets. Plans are currently being developed for new office sites in
Macon, Georgia, Keystone Heights, Florida, Spring Hill, Florida, and
Brooksville, Florida.
Pursuant to our "Project 2010" strategy, we plan to continue our expansion,
emphasizing a combination of growth in existing markets and acquisitions.
Acquisitions will 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. We will 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. We
anticipate that roughly half of our future earnings growth will be generated
through growth in existing markets and half through acquisitions.
Recent Acquisitions. On May 20, 2005, we completed our acquisition of First
Alachua Banking Corporation ("FABC"), headquartered in Alachua, Florida.
FABC's wholly-owned subsidiary, First National Bank of Alachua ("FNBA") had
$228.3 million in assets, seven offices located in Alachua County --
Gainesville (three), Alachua, High Springs, Jonesville, Newberry -- and an
eighth office in Hastings, Florida, which is located in St. Johns County.
FABC also had a mortgage lending office in Gainesville and a financial
services division. We issued 88.9456 shares of CCBG Common Stock and
$2,847.04 in cash for each of the 10,186 shares of FABC, resulting in the
issuance of 906,000 shares of CCBG Common Stock and the payment of $29.0
million in cash for a total purchase price of approximately $58.0 million.
On October 15, 2004, we completed our acquisition of Farmers and Merchants
Bank in Dublin, Georgia, a $395 million asset institution with three offices
in Laurens County. We issued 21.35 shares of CCBG Common Stock 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 CCBG Common Stock and the
payment of $33.3 million in cash for a total purchase price of approximately
$66.7 million.
On March 19, 2004, our subsidiary, Capital City Bank, completed its merger
with Quincy State Bank, a former subsidiary of Synovus Financial Corp.
Quincy State Bank had $116.6 million in assets with one office in Quincy,
Florida and one office in Havana, Florida. Both markets adjoin Leon County,
home to our Tallahassee headquarters. In addition, we acquired $208 million
in trust and other fiduciary assets of Synovus Trust Company, an affiliate of
Quincy State Bank. The purchase price was $28.1 million in cash.
Competition
The banking business is rapidly changing. We operate in a highly competitive
environment, especially with respect to services and pricing. The on-going
consolidation of the banking industry has altered and continues to
significantly alter the competitive environment within the Florida, Georgia,
and Alabama markets. We believe this consolidation further enhances our
competitive position and opportunities in many of our markets. Our primary
market area is 19 counties in Florida, five counties in Georgia and one
county in Alabama. In these markets, the Bank competes against a wide range
of banking and nonbanking institutions including savings and loan
associations, credit unions, money market funds, mutual fund advisory
companies, mortgage banking companies, investment banking companies, finance
companies and other types of financial institutions.
7
All of Florida's major banking concerns have a presence in Leon County.
CCB's Leon County deposits totaled $669.7 million, or 32.2%, of our
consolidated deposits at December 31, 2005.
Market Share as of June 30,(1)
-----------------------------------
2005 2004 2003
- ----------------------------------------------------------------------
Florida(2)
Alachua County(3) 6.3% -- --
Bradford County 42.6% 37.1% 36.8%
Citrus County 3.5% 3.6% 3.4%
Clay County 2.2% 2.4% 2.8%
Dixie County 17.3% 16.9% 15.8%
Gadsden County(4) 68.0% 77.7% 29.9%
Gilchrist County 49.5% 49.4% 46.4%
Gulf County 19.8% 22.1% 23.3%
Hernando County 1.4% 1.3% 1.1%
Jefferson County 24.4% 24.0% 25.1%
Leon County 17.5% 17.2% 19.3%
Levy County 33.8% 34.1% 33.9%
Madison County 15.1% 17.8% 19.0%
Pasco County 0.3% 0.4% 0.4%
St. Johns County(3) 2.0% -- --
Putnam County 12.3% 12.5% 13.2%
Suwannee County 7.5% 7.7% 8.4%
Taylor County 27.9% 27.4% 27.7%
Washington County 20.3% 20.0% 21.1%
Georgia(5)
Bibb County 2.8% 2.8% 3.1%
Burke County 9.3% 10.3% 11.0%
Grady County 19.7% 23.6% 24.5%
Laurens County(6) 33.1% 41.8% --
Troup County 7.5% 8.2% 10.0%
Alabama:
Chambers County 3.9% 4.4% 4.1%
(1) Obtained from the June 30 FDIC/OTS Summary of Deposits Report.
(2) Does not include Marion, Polk and Wakulla counties where Capital City
Bank maintains residential mortgage lending offices only.
(3) CCB entered market in May 2005.
(4) Acquired Quincy State Bank (March 19, 2004) which was located in an
existing CCB market.
(5) Does not include Thomas county where Capital City Bank maintains a
residential mortgage lending office only.
(6) CCB entered market in October 2004.
8
The following table sets forth the number of commercial banks and offices,
including our offices and our competitors' offices, within each of the
respective counties.
Number of Number of Commercial
County Commercial Banks Bank Offices
- --------------------------------------------------------------
Florida:
Alachua 14 60
Bradford 3 3
Citrus 15 44
Clay 12 28
Dixie 3 4
Gadsden 4 6
Gilchrist 3 5
Gulf 5 7
Hernando 13 36
Jefferson 2 2
Leon 14 80
Levy 3 13
Madison 5 5
Pasco 22 109
Putnam 6 16
St. Johns 19 62
Suwannee 5 9
Taylor 3 4
Washington 4 4
Georgia:
Bibb 12 55
Burke 5 10
Grady 5 8
Laurens 8 18
Troup 9 21
Alabama:
Chambers 5 10
Data obtained from the June 30, 2005 FDIC/OTS Summary of Deposits Report.
REGULATORY CONSIDERATIONS
We must comply with state and federal banking laws and regulations that
control virtually all aspects of our operations. These laws and regulations
generally aim to protect our depositors, not our shareowners or our
creditors. Any changes in applicable laws or regulations may materially
affect our business and prospects. Such legislative or regulatory changes
may also affect our operations. The following description summarizes some of
the laws and regulations to which we are subject. References to applicable
statutes and regulations are brief summaries, do not purport to be complete,
and are qualified in their entirety by reference to such statutes and
regulations.
The Company
CCBG is registered with the Board of Governors of the Federal Reserve System
(the "Federal Reserve") as a financial holding company under the Gramm-Leach-
Bliley Act and is registered with the Federal Reserve as a bank holding
company under the Bank Holding Company Act of 1956 ("BHCA"). As a result, we
are subject to supervisory regulation and examination by the Federal Reserve.
The Gramm-Leach-Bliley Act, the BHCA, and other federal laws subject
financial holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations.
9
Permitted Activities. The Gramm-Leach-Bliley Act, enacted on November 12,
1999, amended the BHCA by (i) allowing bank holding companies that qualify as
"financial holding companies" to engage in a broad range of financial and
related activities; (ii) allowing insurers and other financial service
companies to acquire banks; (iii) removing restrictions that applied to bank
holding company ownership of securities firms and mutual fund advisory
companies; and (iv) establishing the overall regulatory scheme applicable to
bank holding companies that also engage in insurance and securities
operations. The general effect of the law was to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers. Activities that are
financial in nature are broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and
additional activities that the Federal Reserve, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental
to such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or
the financial system generally.
In contrast to financial holding companies, bank holding companies are
limited to managing or controlling banks, furnishing services to or
performing services for its subsidiaries, and engaging in other activities
that the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Except for
the activities relating to financial holding companies permissible under the
Gramm-Leach-Bliley Act, these restrictions will apply to us. In determining
whether a particular activity is permissible, the Federal Reserve must
consider whether the performance of such an activity reasonably can be
expected to produce benefits to the public that outweigh possible adverse
effects. Possible benefits include greater convenience, increased
competition, and gains in efficiency. Possible adverse effects include undue
concentration of resources, decreased or unfair competition, conflicts of
interest, and unsound banking practices. Despite prior approval, the Federal
Reserve may order a bank holding company or its subsidiaries to terminate any
activity or to terminate ownership or control of any subsidiary when the
Federal Reserve has reasonable cause to believe that a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that bank
holding company may result from such an activity.
Changes in Control. Subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank or
bank holding company. A conclusive presumption of control exists if an
individual or company acquires the power, directly or indirectly, to direct
the management or policies of an insured depository institution or to vote
25% or more of any class of voting securities of any insured depository
institution. A rebuttable presumption of control exists if a person or
company acquires 10% or more but less than 25% of any class of voting
securities of an insured depository institution and either the institution
has registered securities under Section 12 of the Securities Exchange Act of
1934 (the "Exchange Act"), or no other person will own a greater percentage
of that class of voting securities immediately after the acquisition.
As a bank holding company, we are required to obtain prior approval from the
Federal Reserve before (i) acquiring all or substantially all of the assets
of a bank or bank holding company, (ii) acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any
bank or bank holding company (unless we own a majority of such bank's voting
shares), or (iii) merging or consolidating with any other bank or bank
holding company. In determining whether to approve a proposed bank
acquisition, federal bank regulators will consider, among other factors, the
effect of the acquisition on competition, the public benefits expected to be
received from the acquisition, the projected capital ratios and levels on a
post-acquisition basis, and the acquiring institution's record of addressing
the credit needs of the communities it serves, including the needs of low and
moderate income neighborhoods, consistent with the safe and sound operation
of the bank, under the Community Reinvestment Act of 1977 ("CRA").
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Under Florida law, a person or entity proposing to directly or indirectly
acquire control of a Florida bank must first obtain permission from the
Florida Department of Financial Services (the "Florida Department"). Florida
statutes define "control" as either (a) indirectly or directly owning,
controlling or having power to vote 25% or more of the voting securities of a
bank; (b) controlling the election of a majority of directors of a bank; (c)
owning, controlling, or having power to vote 10% or more of the voting
securities as well as directly or indirectly exercising a controlling
influence over management or policies of a bank; or (d) as determined by the
Florida Department. These requirements will affect us because the Bank is
chartered under Florida law and changes in control of us are indirect changes
in control of the Bank.
Tying. Financial holding companies and their affiliates are prohibited from
tying the provision of certain services, such as extending credit, to other
services offered by the holding company or its affiliates.
Capital; Dividends; Source of Strength. The Federal Reserve imposes certain
capital requirements on us under the BHCA, including a minimum leverage ratio
and a minimum ratio of "qualifying" capital to risk-weighted assets. These
requirements are described below under "Capital Regulations." Subject to its
capital requirements and certain other restrictions, we are able to borrow
money to make a capital contribution to the Bank, and such loans may be
repaid from dividends paid from the Bank to us.
The ability of the Bank to pay dividends, however, will be subject to
regulatory restrictions which are described below under "Dividends." We are
also able to raise capital for contributions to the Bank by issuing
securities without having to receive regulatory approval, subject to
compliance with federal and state securities laws.
In accordance with Federal Reserve policy, we are expected to act as a source
of financial strength to the Bank and to commit resources to support the Bank
in circumstances in which we might not otherwise do so. In furtherance of
this policy, the Federal Reserve may require a financial holding company to
terminate any activity or relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness or stability of any subsidiary depository institution of the
financial holding company. Further, federal bank regulatory authorities have
additional discretion to require a financial holding company to divest itself
of any bank or nonbank subsidiary if the agency determines that divestiture
may aid the depository institution's financial condition.
Capital City Bank
CCB is a banking institution that is chartered by and headquartered in the
State of Florida, and it is subject to supervision and regulation by the
Florida Department. The Florida Department supervises and regulates all
areas of the Bank's operations including, without limitation, the making of
loans, the issuance of securities, the conduct of the Bank's corporate
affairs, the satisfaction of capital adequacy requirements, the payment of
dividends, and the establishment or closing of branches. The Bank is also a
member bank of the Federal Reserve System, which makes the Bank's operations
subject to broad federal regulation and oversight by the Federal Reserve. In
addition, the Bank's deposit accounts are insured by the FDIC to the maximum
extent permitted by law, and the FDIC has certain enforcement powers over the
Bank.
As a state chartered banking institution in the State of Florida, the Bank is
empowered by statute, subject to the limitations contained in those statutes,
to take and pay interest on savings and time deposits, to accept demand
deposits, to make loans on residential and other real estate, to make
consumer and commercial loans, to invest, with certain limitations, in equity
securities and in debt obligations of banks and corporations and to provide
various other banking services on behalf of the Bank's clients. Various
consumer laws and regulations also affect the operations of the Bank,
including state usury laws, laws relating to fiduciaries, consumer credit and
equal
11
credit opportunity laws, and fair credit reporting. In addition, the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") prohibits
insured state chartered institutions from conducting activities as principal
that are not permitted for national banks. A bank, however, may engage in an
otherwise prohibited activity if it meets its minimum capital requirements
and the FDIC determines that the activity does not present a significant risk
to the deposit insurance funds.
Reserves. The Federal Reserve requires all depository institutions to
maintain reserves against some transaction accounts (primarily NOW and Super
NOW checking accounts). The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy liquidity
requirements. An institution may borrow from the Federal Reserve Bank
"discount window" as a secondary source of funds, provided that the
institution meets the Federal Reserve Bank's credit standards.
Dividends. The Bank is subject to legal limitations on the frequency and
amount of dividends that can be paid to us. The Federal Reserve may restrict
the ability of the Bank to pay dividends if such payments would constitute an
unsafe or unsound banking practice. These regulations and restrictions may
limit our ability to obtain funds from the Bank for our cash needs, including
funds for acquisitions and the payment of dividends, interest, and operating
expenses.
In addition, Florida law also places certain restrictions on the declaration
of dividends from state chartered banks to their holding companies. Pursuant
to Section 658.37 of the Florida Banking Code, the board of directors of
state chartered banks, after charging off bad debts, depreciation and other
worthless assets, if any, and making provisions for reasonably anticipated
future losses on loans and other assets, may quarterly, semi-annually or
annually declare a dividend of up to the aggregate net profits of that period
combined with the bank's retained net profits for the preceding two years
and, with the approval of the Florida Department, declare a dividend from
retained net profits which accrued prior to the preceding two years. Before
declaring such dividends, 20% of the net profits for the preceding period as
is covered by the dividend must be transferred to the surplus fund of the
bank until this fund becomes equal to the amount of the bank's common stock
then issued and outstanding. A state chartered bank may not declare any
dividend if (i) its net income from the current year combined with the
retained net income for the preceding two years is a loss or (ii) the payment
of such dividend would cause the capital account of the bank to fall below
the minimum amount required by law, regulation, order or any written
agreement with the Florida Department or a federal regulatory agency.
Insurance of Accounts and Other Assessments. The deposit accounts of the
Bank are currently insured by the Bank Insurance Fund of the FDIC generally
up to a maximum of $100,000 per separately insured depositor, and the Bank is
subject to FDIC deposit insurance assessments. In February 2006, Congress
passed and the President signed the Federal Deposit Insurance Reform Act of
2005 ("FDIRA"). Under FDIRA, the Bank Insurance Fund will be merged with the
Savings Association Insurance Fund to create the Deposit Insurance Fund
("DIF"). FDIRA increases insurance coverage for retirement accounts to
$250,000. Insurance limits will be indexed for inflation once very five
years with the first limit adjustment scheduled to occur on April 1, 2010.
In addition, FDIRA eliminates the 23 basis point premium "rate cliff" which
occurs when the reserve ratio of deposits insured to premiums held falls
beneath 1.25% for more than one year. Federal banking agencies may prohibit
any insured institution from engaging in any activity they determine by
regulation or order poses a serious threat to the insurance fund. The FDIC
adopted a risk-based system for determining deposit insurance assessments
under which all insured institutions were placed into one of nine categories
and assessed insurance premiums, ranging from 0.0% to 0.27% of insured
deposits, based upon their level of capital and supervisory evaluation.
Because the FDIC sets the assessment rates based upon the level of assets in
the insurance fund, premium rates rise and fall as the number and size of
bank failures increase and decrease, respectively. Under the system,
institutions are assigned to one of three capital categories based solely on
the level of an institution's capital, "well capitalized," "adequately
capitalized", and "undercapitalized." These three groups are
12
then divided into three subgroups that reflect varying levels of supervisory
concern, from those that are considered to be healthy to those that are
considered to be of substantial supervisory concern.
Transactions With Affiliates. Pursuant to Sections 23A and 23B of the
Federal Reserve Act ("FRA") and Regulation W, the authority of the Bank to
engage in transactions with related parties or "affiliates" or to make loans
to insiders is limited. Loan transactions with an "affiliate" generally must
be collateralized and certain transactions between the Bank and its
"affiliates", including the sale of assets, the payment of money or the
provision of services, must be on terms and conditions that are substantially
the same, or at least as favorable to the Bank, as those prevailing for
comparable nonaffiliated transactions. In addition, the Bank generally may
not purchase securities issued or underwritten by affiliates.
Loans to executive officers, directors or to any person who directly or
indirectly, or acting through or in concert with one or more persons, owns,
controls or has the power to vote more than 10% of any class of voting
securities of a bank ("10% Shareholders"), or to any political or campaign
committee the funds or services of which will benefit such executive
officers, directors, or 10% Shareholders or which is controlled by such
executive officers, directors or 10% Shareholders, are subject to Sections
22(g) and 22(h) of the FRA and the regulations promulgated thereunder
(Regulation O) and Section 13(k) of the Exchange Act relating to the
prohibition on personal loans to executives which exempts financial
institutions in compliance with the insider lending restrictions of Section
22(h) of the FRA. Among other things, these loans must be made on terms
substantially the same as those prevailing on transactions made to
unaffiliated individuals and certain extensions of credit to such persons
must first be approved in advance by a disinterested majority of the entire
board of directors. Section 22(h) of the FRA prohibits loans to any such
individuals where the aggregate amount exceeds an amount equal to 15% of an
institution's unimpaired capital and surplus plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully secured by
readily marketable collateral, or when the aggregate amount on all such
extensions of credit outstanding to all such persons would exceed the bank's
unimpaired capital and unimpaired surplus. Section 22(g) identifies limited
circumstances in which the Bank is permitted to extend credit to executive
officers.
Community Reinvestment Act. The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their
service area, including low and moderate income neighborhoods, consistent
with the safe and sound operations of the banks. These regulations provide
for regulatory assessment of a bank's record in meeting the needs of its
service area. Federal banking agencies are required to make public a rating
of a bank's performance under the CRA. The Federal Reserve considers a bank's
CRA when the bank submits an application to establish branches, merge, or
acquire the assets and assume the liabilities of another bank. In the case of
a financial holding company, the CRA performance record of all banks involved
in the merger or acquisition are reviewed in connection with the filing of an
application to acquire ownership or control of shares or assets of a bank or
to merge with any other financial holding company. An unsatisfactory record
can substantially delay or block the transaction.
Capital Regulations. The Federal Reserve has adopted risk-based, capital
adequacy guidelines for financial holding companies and their subsidiary
state-chartered banks that are members of the Federal Reserve System. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
financial holding companies, to account for off-balance sheet exposure, to
minimize disincentives for holding liquid assets and to achieve greater
consistency in evaluating the capital adequacy of major banks throughout the
world. Under these guidelines assets and off-balance sheet items are assigned
to broad risk categories each with designated weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
13
The current guidelines require all financial holding companies and federally
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier I Capital. Tier I Capital, which
includes common stockholders' equity, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock and trust
preferred securities, less certain goodwill items and other intangible
assets, is required to equal at least 4% of risk-weighted assets. The
remainder ("Tier II Capital") may consist of (i) an allowance for loan losses
of up to 1.25% of risk-weighted assets, (ii) excess of qualifying perpetual
preferred stock, (iii) hybrid capital instruments, (iv) perpetual debt, (v)
mandatory convertible securities, and (vi) subordinated debt and
intermediate-term preferred stock up to 50% of Tier I Capital. Total capital
is the sum of Tier I and Tier II Capital less reciprocal holdings of other
banking organizations' capital instruments, investments in unconsolidated
subsidiaries and any other deductions as determined by the appropriate
regulator (determined on a case by case basis or as a matter of policy after
formal rule making).
In computing total risk-weighted assets, bank and financial holding company
assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain
off-balance sheet items are given similar credit conversion factors to
convert them to asset equivalent amounts to which an appropriate risk-weight
will apply. Most loans will be assigned to the 100% risk category, except for
performing first mortgage loans fully secured by 1- to 4-family and certain
multi-family residential property, which carry a 50% risk rating. Most
investment securities (including, primarily, general obligation claims on
states or other political subdivisions of the United States) will be assigned
to the 20% category, except for municipal or state revenue bonds, which have
a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations
backed by the full faith and credit of the U.S. Government, which have a 0%
risk-weight. In covering off-balance sheet items, direct credit substitutes,
including general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction-related
contingencies such as bid bonds, standby letters of credit backing non-
financial obligations, and undrawn commitments (including commercial credit
lines with an initial maturity of more than one year) have a 50% conversion
factor. Short-term commercial letters of credit are converted at 20% and
certain short-term unconditionally cancelable commitments have a 0% factor.
The federal bank regulatory authorities have also adopted regulations which
supplement the risk-based guideline. These regulations generally require
banks and financial holding companies to maintain a minimum level of Tier I
Capital to total assets less goodwill of 4% (the "leverage ratio"). The
Federal Reserve permits a bank to maintain a minimum 3% leverage ratio if the
bank achieves a 1 rating under the CAMELS rating system in its most recent
examination, as long as the bank is not experiencing or anticipating
significant growth. The CAMELS rating is a non-public system used by bank
regulators to rate the strength and weaknesses of financial institutions. The
CAMELS rating is comprised of six categories: capital adequacy, asset
quality, management, earnings, liquidity, and sensitivity to market risk.
Banking organizations experiencing or anticipating significant growth, as
well as those organizations which do not satisfy the criteria described
above, will be required to maintain a minimum leverage ratio ranging
generally from 4% to 5%. The bank regulators also continue to consider a
"tangible Tier I leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier I leverage ratio is the ratio of a banking
organization's Tier I Capital, less deductions for intangibles otherwise
includable in Tier I Capital, to total tangible assets.
Federal law and regulations establish a capital-based regulatory scheme
designed to promote early intervention for troubled banks and require the
FDIC to choose the least expensive resolution of bank failures. The capital-
based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well-capitalized"
institution, a bank must have a leverage ratio of no less than 5%, a Tier I
risk-based
14
ratio of no less than 6%, and a total risk-based capital ratio of no less
than 10%, and the bank must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific capital level.
Generally, a financial institution must be "well capitalized" before the
Federal Reserve will approve an application by a financial holding company to
acquire or merge with a bank or bank holding company.
Under the regulations, the applicable agency can treat an institution as if
it were in the next lower category if the agency determines (after notice and
an opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or a part of
their operations. Financial holding companies controlling financial
institutions can be called upon to boost the institutions' capital and to
partially guarantee the institutions' performance under their capital
restoration plans.
It should be noted that the minimum ratios referred to above are merely
guidelines and the bank regulators possess the discretionary authority to
require higher ratios.
We currently exceed the requirements contained in the applicable regulations,
policies and directives pertaining to capital adequacy, and are unaware of
any material violation or alleged violation of these regulations, policies or
directives.
Interstate Banking and Branching. The BHCA was amended in September 1994 by
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The Interstate Banking Act provides that
adequately capitalized and managed financial holding companies are permitted
to acquire banks in any state.
State laws prohibiting interstate banking or discriminating against out-of-
state banks are preempted. States are not permitted to enact laws opting out
of this provision; however, states are allowed to adopt a minimum age
restriction requiring that target banks located within the state be in
existence for a period of years, up to a maximum of five years, before such
bank may be subject to the Interstate Banking Act. The Interstate Banking Act
establishes deposit caps which prohibit acquisitions that result in the
acquiring company controlling 30% or more of the deposits of insured banks
and thrift institutions held in the state in which the target maintains a
branch or 10% or more of the deposits nationwide. States have the authority
to waive the 30% deposit cap. State-level deposit caps are not preempted as
long as they do not discriminate against out-of-state companies, and the
federal deposit caps apply only to initial entry acquisitions.
The Interstate Banking Act also provides that adequately capitalized and
managed banks are able to engage in interstate branching by merging with
banks in different states. States were permitted to enact legislation
authorizing interstate mergers earlier than June 1, 1997, or, unlike the
interstate banking provision discussed above, states were permitted to opt
out of the application of the interstate merger provision by enacting
specific legislation before June 1, 1997.
Florida responded to the enactment of the Interstate Banking Act by enacting
the Florida Interstate Branching Act (the "Florida Branching Act"). The
purpose of the Florida Branching Act was to permit interstate branching
through merger transactions under the Interstate Banking Act. Under the
Florida Branching Act, with the prior approval of the Florida Department, a
Florida bank may establish, maintain and operate one or more branches in a
state other than the State of Florida pursuant to a merger transaction in
which the Florida bank is the resulting bank. In addition, the Florida
Branching Act provides that one or more Florida banks may enter into a merger
transaction with one or more out-of-state banks, and an out-of-state bank
resulting
15
from such transaction may maintain and operate the branches of the Florida
bank that participated in such merger. An out-of-state bank, however, is not
permitted to acquire a Florida bank in a merger transaction unless the
Florida bank has been in existence and continuously operated for more than
three years.
USA PATRIOT Act of 2001. On October 26, 2001, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the "Patriot Act") was enacted in response to the
terrorist attacks occurring on September 11, 2001. The Patriot Act is
intended to strengthen the U.S. law enforcement and intelligence communities'
ability to work together to combat terrorism. Title III of the Patriot Act,
the International Money Laundering Abatement and Anti-Terrorist Financing Act
of 2001, amended the Bank Secrecy Act and adopted additional provisions that
increased the obligations of financial institutions, including the Bank, to
identify their clients, watch for and report upon suspicious transactions,
respond to requests for information by federal banking and law enforcement
agencies, and share information with other financial institutions. In
addition, the collected client identification information must be verified
within a reasonable time after a new account is opened through documentary or
non-documentary methods. All new clients must be screened against any
Section 326 government lists of known or suspected terrorists within a
reasonable time after opening an account.
Privacy. Under the Gramm-Leach-Bliley Act, federal banking regulators
adopted rules limiting the ability of banks and other financial institutions
to disclose nonpublic information about consumers to nonaffiliated third
parties. The rules require disclosure of privacy policies to consumers and,
in some circumstances, allow consumers to prevent disclosure of certain
personal information to nonaffiliated third parties.
Consumer Laws and Regulations. The Check Clearing for the 21st Century Act,
or "Check 21" as it is commonly known, became effective October 28, 2004.
Check 21 facilitates check collection by creating a new negotiable instrument
called a "substitute check," which permits, but does not require, banks to
replace original checks with substitute checks or information from the
original check and process check information electronically. Banks that do
use substitute checks must comply with certain notice and recredit rights.
Check 21 is expected to cut the time and cost involved in physically
transporting paper items to reduce float (i.e., the time between the deposit
of a check in a bank and payment) especially in cases in which items were not
already being delivered same-day or overnight.
The Bank is also subject to other federal and state consumer laws and
regulations that are designed to protect consumers in transactions with
banks. While the list set forth below is not exhaustive, these laws and
regulations include the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Fair
Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Housing Act,
the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures
Act, among others. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must
deal with clients when taking deposits or making loans to such clients. The
Bank must comply with the applicable provisions of these consumer protection
laws and regulations as part of its ongoing client relations.
Future Legislative Developments
Various legislative acts, including proposals to modify the bank regulatory
system, expand the powers of banking institutions and financial holding
companies and limit the investments that a depository institution may make
with insured funds, are from time to time introduced in Congress and the
Florida legislature. Such legislation may change banking statutes and the
environment in which our banking subsidiary and we operate in substantial and
unpredictable ways. We cannot determine the ultimate effect that potential
legislation, if enacted, or implementing regulations with respect thereto,
would have upon our financial condition or results of operations or that of
our banking subsidiary.
16
Effect of Governmental Monetary Policies
The commercial banking business in which the Bank engages is affected not
only by general economic conditions, but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the "discount window," open market operations,
the imposition of changes in reserve requirements against member banks'
deposits and assets of foreign branches and the imposition of and changes in
reserve requirements against certain borrowings by banks and their affiliates
are some of the instruments of monetary policy available to the Federal
Reserve. These monetary policies are used in varying combinations to
influence overall growth and distributions of bank loans, investments and
deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve have had a significant
effect on the operating results of commercial banks and are expected to do so
in the future. The monetary policies of the Federal Reserve are influenced by
various factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and in the fiscal policies of the
U.S. Government. Future monetary policies and the effect of such policies on
the future business and earnings of the Bank cannot be predicted.
Income Taxes
We are subject to income taxes at the federal level and subject to state
taxation based on the laws of each state in which an entity operates. We
file a consolidated federal tax return with a fiscal year ending on December
31. We have filed tax returns for each state jurisdiction affected in 2004
and will do the same for 2005.
Website Access to Company's Reports
Our internet website is www.ccbg.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, including any
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the
Exchange Act are available free of charge through our website as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission. The information on our website
is not incorporated by reference into this report.
Item 1A. Risk Factors
You should consider carefully the following risk factors before deciding
whether to invest in our common stock. Our business, including our operating
results and financial condition, could be harmed by any of these risks.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our
business. The trading price of our common stock could decline due to any of
these risks, and you may lose all or part of your investment. In assessing
these risks you should also refer to the other information contained in our
filings with the SEC, including our financial statements and related notes.
We may not be able to successfully manage our growth or implement our growth
strategies, which may adversely affect our results of operations and
financial condition.
During the last five years, we have experienced significant growth, and a key
aspect of our business strategy is our continued growth and expansion. The
goal of our primary business strategy known as Project 2010 is to increase
our annual earnings to $50 million by 2010. Our ability to manage our growth
successfully will depend on whether we can maintain capital levels adequate
to support our growth, maintain cost controls and asset quality and
successfully integrate any businesses we acquire into our organization.
Our earnings growth relies, at least in part, on strategic acquisitions. Our
ability to grow through selective acquisitions of financial institutions or
branches will
17
depend on successfully identifying, acquiring and integrating those
institutions or branches. We cannot assure you that we will be able to
identify attractive acquisition candidates, make acquisitions on favorable
terms or successfully integrate any acquired institutions or branches. In
addition, we may fail to realize the growth opportunities and cost savings we
anticipate to be derived from our acquisitions. Finally, it is possible that
during the integration process of our acquisitions, we could lose key
associates or the ability to maintain relationships with clients.
As we continue to implement our growth strategy by opening new offices or
through strategic acquisitions, we expect to incur increased personnel,
occupancy and other operating expenses. In the case of new offices, we must
absorb those higher expenses while we begin to generate new deposits, and
there is a further time lag involved in redeploying new deposits into
attractively priced loans and other higher yielding earning assets.
We may need additional capital resources in the future and these capital
resources may not be available when needed or at all.
We may need to incur additional debt or equity financing in the future to
make strategic acquisitions or investments or for future growth. We cannot
assure you that such financing will be available to us on acceptable terms or
at all.
We may incur losses if we are unable to successfully manage interest rate
risk.
Our profitability depends to a large extent on the Bank's net interest
income, which is the difference between income on interest-earning assets
such as loans and investment securities, and expense on interest-bearing
liabilities such as deposits and our borrowings. We are unable to predict
changes in market interest rates, which are affected by many factors beyond
our control including inflation, recession, unemployment, money supply,
domestic and international events and changes in the United States and other
financial markets. Our net interest income may be reduced if: (i) more
interest-earning assets than interest-bearing liabilities reprice or mature
during a time when interest rates are declining or (ii) more interest-bearing
liabilities than interest-earning assets reprice or mature during a time when
interest rates are rising.
Changes in the difference between short- and long-term interest rates may
also harm our business. For example, short-term deposits may be used to fund
longer-term loans. When differences between short-term and long-term interest
rates shrink or disappear, the spread between rates paid on deposits and
received on loans could narrow significantly, decreasing our net interest
income.
If market interest rates rise rapidly, interest rate adjustment caps may
limit increases in the interest rates on adjustable rate loans, thus reducing
our net interest income because we will need to pay the higher rates on our
deposits and borrowings while being limited on the repricing of these loans
due to the interest rate caps.
An inadequate allowance for loan losses would reduce our earnings.
We are exposed to the risk that our clients will be unable to repay their
loans according to their terms and that any collateral securing the payment
of their loans will not be sufficient to assure full repayment. This will
result in credit losses which are inherent in the lending business. We
evaluate the collectibility of our loan portfolio and provide an allowance
for loan losses that we believe is adequate based upon such factors as:
* the risk characteristics of various classifications of loans;
* previous loan loss experience;
* specific loans that have loss potential;
18
* delinquency trends;
* estimated fair market value of the collateral;
* current economic conditions; and
* geographic and industry loan concentrations.
If our estimate of credit losses inherent in the loan portfolio is incorrect,
our earnings could be significantly and adversely affected. Therefore, we
cannot assure you that our allowance will be adequate to cover loan losses
inherent in our portfolio. Additionally, we may experience losses in our
loan portfolios or encounter adverse trends that require us to significantly
increase our allowance for loan losses in the future, which could also have
an adverse affect on our earnings.
Our loan portfolio includes loans with a higher risk of loss.
We originate commercial real estate loans, commercial loans, construction
loans, consumer loans, and residential mortgage loans primarily within our
market area. Commercial real estate, commercial, construction, and consumer
loans may expose a lender to greater credit risk than loans secured by
single-family residential real estate because the collateral securing these
loans may not be sold as easily as single-family residential real estate.
In addition, commercial real estate, commercial, construction, and consumer
loans tend to involve larger loan balances to a single borrower or groups of
related borrowers and are more susceptible to a risk of loss during a
downturn in the business cycle. These loans also have greater credit risk
than residential real estate for the following reasons:
* Commercial Real Estate Loans. Repayment is dependent on income being
generated in amounts sufficient to cover operating expenses and debt
service. These loans also involve greater risk because they are
generally not fully amortizing over a loan period, but rather have a
balloon payment due at maturity. A borrower's ability to make a
balloon payment typically will depend on being able to either refinance
the loan or timely sell the underlying property.
* Commercial Loans. Repayment is generally dependent upon the successful
operation of the borrower's business. In addition, the collateral
securing the loans may depreciate over time, be difficult to appraise
and illiquid, and fluctuate in value based on the success of the
business.
* Construction Loans. The risk of loss is largely dependent on our
initial estimate of whether the property's value at completion equals
or exceeds the cost of property construction and the availability of
take-out financing. During the construction phase, a number of factors
can result in delays or cost overruns. If our estimate is inaccurate
or if actual construction costs exceed estimates, the value of the
property securing our loan may be insufficient to ensure full repayment
when completed through a permanent loan or by seizure of collateral.
* Consumer Loans. Consumer loans (such as personal lines of credit) are
collateralized, if at all, with assets that may not provide an adequate
source of payment of the loan due to depreciation, damage, or loss.
Our concentration in loans secured by real estate may increase our credit
losses, which would negatively affect our financial results.
Due to the lack of diversified industry within the markets served by the Bank
and the relatively close proximity of our geographic markets, we have both
geographic concentrations as well as concentrations in the types of loans
funded. Specifically, due to the nature of our markets, a significant
portion of the portfolio has historically been secured with real estate. As
of December 31, 2005, approximately 34.7% and 35.0% of our $2.1 billion loan
portfolio was secured by commercial real estate and residential real estate,
respectively. As of this same date, approximately 7.8% was secured by
property under construction.
19
A major change in the real estate market, such as a deterioration in the
value of the collateral, or in the local or national economy, could adversely
affect our clients' ability to repay their loans. In the event we are
required to foreclose on a property securing one of our mortgage loans or
otherwise pursue our remedies in order to protect our investment, there can
be no assurance that we will recover funds in an amount equal to our
projected return on our investment or in an amount sufficient to prevent a
loss to us due to prevailing economic conditions, real estate values and
other factors associated with the ownership of real property. As a result,
the market value of the real estate or other collateral underlying our loans
may not, at any given time, be sufficient to satisfy the outstanding
principal amount of the loans, and consequently, we would sustain loan
losses.
An economic downturn in Florida and Georgia could hinder our ability to
operate profitably and have an adverse impact on our operations.
Our interest-earning assets are heavily concentrated in mortgage loans
secured by properties located in Florida and Georgia. As of December 31,
2005, substantially all of our loans secured by real estate are secured by
properties located in Florida and Georgia. The concentration of our loans in
these areas subjects us to risk that a downturn in the economy or recession
in those areas could result in a decrease in loan originations and increases
in delinquencies and foreclosures, which would more greatly affect us than if
our lending were more geographically diversified. In addition, since a large
portion of our portfolio is secured by properties located in Florida, the
occurrence of a natural disaster, such as a hurricane, could result in a
decline in loan originations, a decline in the value or destruction of
mortgaged properties and an increase in the risk of delinquencies,
foreclosures or loss on loans originated by us in that state. We may suffer
losses if there is a decline in the value of the properties underlying our
mortgage loans which would have an adverse impact on our operations.
Since we engage in lending secured by real estate and may be forced to
foreclose on the collateral property and own the underlying real estate, we
may be subject to the increased costs associated with the ownership of real
property which could result in reduced net income.
Since we originate loans secured by real estate, we may have to foreclose on
the collateral property to protect our investment and may thereafter own and
operate such property, in which case we are exposed to the risks inherent in
the ownership of real estate. The amount that we, as a mortgagee, may
realize after a default, is dependent upon factors outside of our control,
including, but not limited to:
* general or local economic conditions;
* neighborhood values;
* interest rates;
* real estate tax rates;
* operating expenses of the mortgaged properties;
* supply of and demand for rental units or properties;
* ability to obtain and maintain adequate occupancy of the properties;
* zoning laws;
* governmental rules, regulations and fiscal policies; and
* acts of God.
Certain expenditures associated with the ownership of real estate,
principally real estate taxes and maintenance costs, may adversely affect the
income from the real estate. Therefore, the cost of operating real property
may exceed the rental income earned from such property, and we may have to
advance funds in order to protect our investment or we may be required to
dispose of the real property at a loss.
20
Limited trading activity for shares of our common stock may contribute to
price volatility.
While our common stock is listed and traded on The Nasdaq National Market,
there has been limited trading activity in our common stock. The average
daily trading volume of our common stock over the twelve-month period ending
December 31, 2005 was approximately 19,493 shares. Due to the limited
trading activity of our common stock, relativity small trades may have a
significant impact on the price of our common stock.
Our insiders have substantial control over matters requiring shareowner
approval, including changes of control.
Our shareowners who own more than 5% of our common stock, directors, and
executive officers, beneficially owned approximately 48.9% of the outstanding
shares of our stock as of December 31, 2005. Accordingly, these principal
shareowners, directors, and executive officers, if acting together, may be
able to influence or control matters requiring approval by our shareowners,
including the election of directors and the approval of mergers, acquisitions
or other extraordinary transactions. They may also have interests that
differ from yours and may vote in a way with which you disagree and which may
be adverse to your interests. The concentration of ownership may have the
effect of delaying, preventing or deterring a change of control of our
company, could deprive our shareowners of an opportunity to receive a premium
for their common stock as part of a sale of our company and might ultimately
affect the market price of our common stock.
Our future success is dependent on our ability to compete effectively in the
highly competitive banking industry.
We face vigorous competition from other banks and other financial
institutions, including savings and loan associations, savings banks, finance
companies and credit unions for deposits, loans and other financial services
in our market area. A number of these banks and other financial institutions
are significantly larger than we are and have substantially greater access to
capital and other resources, as well as larger lending limits and branch
systems, and offer a wider array of banking services. To a limited extent,
we also compete with other providers of financial services, such as money
market mutual funds, brokerage firms, consumer finance companies, insurance
companies and governmental organizations which may offer more favorable
financing than we can. Many of our non-bank competitors are not subject to
the same extensive regulations that govern us. As a result, these non-bank
competitors have advantages over us in providing certain services. This
competition may reduce or limit our margins and our market share and may
adversely affect our results of operations and financial condition.
We are subject to extensive regulation that could restrict our activities and
impose financial requirements or limitations on the conduct of our business
and limit our ability to receive dividends from the Bank.
The Bank is subject to extensive regulation, supervision and examination by
the Florida Department of Financial Services, and by the Federal Reserve. As
a member of the Federal Home Loan Bank ("FHLB"), the Bank must also comply
with applicable regulations of the Federal Housing Finance Board and the
FHLB. Regulation by these agencies is intended primarily for the protection
of our depositors and the deposit insurance fund and not for the benefit of
our shareowners. The Bank's activities are also regulated under consumer
protection laws applicable to our lending, deposit and other activities. A
sufficient claim against us under these laws could have a material adverse
effect on our results. Please refer to the Section entitled "Business -
Regulatory Considerations" of this Report.
21
Our Articles of Incorporation, Bylaws, and certain laws and regulations may
prevent or delay transactions you might favor, including a sale or merger of
CCBG.
CCBG is registered with the Federal Reserve as a financial holding company
under the Gramm-Leach-Bliley Act and is registered with the Federal Reserve
as a bank holding company under the BHCA. As a result, we are subject to
supervisory regulation and examination by the Federal Reserve. The Gramm-
Leach-Bliley Act, the BHCA, and other federal laws subject financial holding
companies to particular restrictions on the types of activities in which they
may engage, and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and
regulations.
Provisions of our Articles of Incorporation, Bylaws, certain laws and
regulations and various other factors may make it more difficult and
expensive for companies or persons to acquire control of us without the
consent of our Board of Directors. It is possible, however, that you would
want a takeover attempt to succeed because, for example, a potential buyer
could offer a premium over the then prevailing price of our common stock.
For example, our Articles of Incorporation permit our Board of Directors to
issue preferred stock without shareowner action. The ability to issue
preferred stock could discourage a company from attempting to obtain control
of us by means of a tender offer, merger, proxy contest or otherwise.
Additionally, our Articles of Incorporation and Bylaws divide our Board of
Directors into three classes, as nearly equal in size as possible, with
staggered three-year terms. One class is elected each year. The
classification of our Board of Directors could make it more difficult for a
company to acquire control of us. We are also subject to certain provisions
of the Florida Business Corporation Act and our Articles of Incorporation
which relate to business combinations with interested shareowners. Other
provisions in our Articles of Incorporation or Bylaws that may discourage
takeover attempts or make them more difficult include:
* Supermajority voting requirements to remove a director from office;
* Provisions regarding the timing and content of shareowner proposals and
nominations;
* Supermajority voting requirements to amend Articles of Incorporation
unless approval is received by a majority of "disinterested directors";
* Absence of cumulative voting; and
* Inability for shareowners to take action by written consent.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We are headquartered in Tallahassee, Florida. Our executive office is in the
Capital City Bank building located on the corner of Tennessee and Monroe
Streets in downtown Tallahassee. The building is owned by the Bank, but is
located on land leased under a long-term agreement.
The Bank's Parkway Office is located on land leased from the Smith Interests
General Partnership L.L.P. in which several directors and officers have an
interest. The annual lease provides for payments of approximately $109,000,
to be adjusted for inflation in future years.
The Bank leases its East Dublin Office from a partnership of which Director
McGrath Keen has one-half ownership interest. The annual lease provides for
payments of $46,500, to be adjusted for inflation in future years.
22
As of February 28, 2006, the Bank had 69 banking locations. Of the 69
locations, the Bank leases the land, buildings, or both at 14 locations and
owns the land and buildings at the remaining 55.
Item 3. Legal Proceedings
We are party to lawsuits and claims arising out of the normal course of
business. In management's opinion, there are no known pending claims or
litigation, the outcome of which would, individually or in the aggregate,
have a material effect on our consolidated results of operations, financial
position, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity, Related Shareowner
Matters, and Issuer Purchases of Equity Securities
Common Stock Market Prices and Dividends
Our common stock trades on the Nasdaq National Market under the symbol
"CCBG."
The following table presents the range of high and low closing sales prices
reported on the Nasdaq National Market and cash dividends declared for each
quarter during the past two years, as adjusted for our 5-for-4 stock split
effective July 1, 2005. We had a total of 1,716 shareowners of record as of
February 28, 2006.
2005 2004
------------------------------ ------------------------------
Fourth Third Second First Fourth Third Second First
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------------------------------------------------
Common stock price:
High $39.33 $38.72 $33.46 $33.60 $36.78 $32.96 $34.52 $36.44
Low 33.21 31.78 28.02 29.30 30.17 26.66 28.40 31.25
Close 34.29 37.71 32.32 32.41 33.44 30.97 31.67 33.00
Cash dividends
declared per share .1625 .1520 .1520 .1520 .1520 .1440 .1440 .1440
Future payment of dividends will be subject to determination and declaration
by our Board of Directors. Florida law limits our payment of dividends.
There are also legal limits on the frequency and amount of dividends that CCB
can pay us. See subsection entitled "Dividends" in the Business section on
page 12, in the Management's Discussion and Analysis of Financial Condition
and Operating Results on page 48 and Note 15 in the Notes to Consolidated
Financial Statements. These restrictions may limit our ability to pay
dividends to our shareowners. As of February 28, 2006, we do not believe
these restrictions will impair our ability to declare and pay our routine and
customary dividends.
23
Item 6. Selected Financial Data
(Dollars in Thousands, Except Per Share Data)(1)
For the Years Ended December 31,
----------------------------------------------------------
2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------------------------
Interest Income $ 140,053 $ 101,525 $ 94,830 $ 104,165 $ 117,156
Net Interest Income 109,990 86,084 79,991 81,662 68,907
Provision for Loan Losses 2,507 2,141 3,436 3,297 3,983
Net Income 30,281 29,371 25,193 23,082 16,866
Per Common Share:
Basic Net Income $ 1.66 $ 1.74 $ 1.53 $ 1.40 $ 1.02
Diluted Net Income 1.66 1.74 1.52 1.39 1.02
Cash Dividends Declared .619 .584 .525 .402 .381
Book Value 16.39 14.51 15.27 14.08 12.86
Key Performance Ratios:
Return on Average Assets 1.22% 1.46% 1.40% 1.34% 0.99%
Return on Average Equity 10.56 13.31 12.82 12.85 10.00
Net Interest Margin (FTE) 5.09 4.88 5.01 5.35 4.61
Dividend Pay-Out Ratio 37.35 33.62 34.51 28.87 37.48
Equity to Assets Ratio 11.65 10.86 10.98 10.22 9.43
Asset Quality:
Allowance for Loan Losses $ 17,410 $ 16,037 $ 12,429 $ 12,495 $ 12,096
Allowance for Loan Losses to Loans 0.84% 0.88% 0.93% 0.97% 0.98%
Nonperforming Assets 5,550 5,271 7,301 3,843 3,940
Nonperforming Assets to Loans + ORE 0.27 0.29 0.54 0.30 0.32
Allowance to Nonperforming Loans 331.11 345.18 529.80 497.72 496.96
Net Charge-Offs to Average Loans 0.13 0.22 0.27 0.23 0.31
Averages for the Year:
Loans, Net $1,968,289 $1,538,744 $1,318,080 $1,256,107 $1,184,290
Earning Assets 2,187,672 1,789,843 1,624,680 1,556,500 1,534,548
Total Assets 2,486,733 2,006,745 1,804,895 1,727,180 1,704,167
Deposits 1,954,888 1,599,201 1,431,808 1,424,999 1,442,916
Subordinated Notes 50,717 5,155 - - -
Long-Term Borrowings 70,216 59,462 55,594 30,423 15,308
Shareowners' Equity 286,712 220,731 196,588 179,652 168,652
Year-End Balances:
Loans, Net $2,067,494 $1,828,825 $1,341,632 $1,285,221 $1,243,351
Earning Assets 2,299,677 2,113,571 1,648,818 1,636,472 1,626,841
Total Assets 2,625,462 2,364,013 1,846,502 1,824,771 1,821,423
Deposits 2,079,346 1,894,886 1,474,205 1,434,200 1,550,101
Subordinated Notes 62,887 30,928 - - -
Long-Term Borrowings 69,630 68,453 46,475 71,745 13,570
Shareowners' Equity 305,776 256,800 202,809 186,531 171,783
Other Data:
Basic Average Shares Outstanding 18,263,855 16,805,696 16,528,109 16,531,606 16,552,446
Diluted Average Shares Outstanding 18,281,243 16,810,926 16,563,986 16,592,944 16,615,544
Shareowners of Record(2) 1,716 1,598 1,512 1,457 1,473
Banking Locations(2) 69 60 57 54 56
Full-Time Equivalent Associates(2) 1,013 926 795 781 787
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective
July 1, 2005, and the 5-for-4 stock split effective June 13, 2003.
(2) As of the record date. The record date is on or about March 1st of the following year.
24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's discussion and analysis ("MD&A") provides supplemental
information, which sets forth the major factors that have affected our
financial condition and results of operation and should be read in
conjunction with our consolidated financial statements and notes thereto
included in this Annual Report.
This Annual Report, including this MD&A section, contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements include, among others,
statements about our beliefs, plans, objectives, goals, expectations,
estimates and intentions that are subject to significant risks and
uncertainties and are subject to change based on various factors, many of
which are beyond our control. The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan," "target,"
"goal," and similar expressions are intended to identify forward-looking
statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those
set forth in our forward-looking statements. Please see the Introductory
Note and Item 1A Risk Factors of this Annual Report for a discussion of
factors that could cause our actual results to differ materially from those
in the forward-looking statements. However, other factors besides those
listed in Item 1A Risk Factors or discussed in this Annual Report also could
adversely affect our results, and you should not consider any such list of
factors to be a complete set of all potential risks or uncertainties. Any
forward-looking statements made by us or on our behalf speak only as of the
date they are made. We do not undertake to update any forward-looking
statement, except as required by applicable law.
BUSINESS OVERVIEW
We are a financial holding company headquartered in Tallahassee, Florida and
are the parent of our wholly-owned subsidiary, Capital City Bank. The Bank
offers a broad array of products and services through a total of 69 full-
service offices located in Florida, Georgia, and Alabama. The Bank also has
mortgage lending offices in three additional Florida communities, and one
Georgia community. The Bank offers commercial and retail banking services,
as well as trust and asset management, merchant services, brokerage and data
processing services.
From an industry and national perspective, our profitability, like most
financial institutions, is dependent to a large extent upon net interest
income, which is the difference between the interest received on earning
assets, such as loans and securities, and the interest paid on interest-
bearing liabilities, principally deposits and borrowings. Results of
operations are also affected by the provision for loan losses, operating
expenses such as salaries and employee benefits, occupancy and other
operating expenses including income taxes, and non-interest income such as
service charges on deposit accounts, asset management and trust fees,
mortgage banking revenues, merchant services, brokerage and data processing
revenues.
Our philosophy is to grow and prosper, building long-term relationships based
on quality service, high ethical standards, and safe and sound banking
practices. We are a super-community bank in the relationship banking
business with a locally oriented, community-based focus, which is augmented
by experienced, centralized support in select specialized areas. Our local
market orientation is reflected in our network of banking office locations,
experienced community executives, and community advisory boards which support
our focus on responding to local banking needs. We strive to offer a broad
array of sophisticated products and to provide quality service by empowering
associates to make decisions in their local markets.
25
Pursuant to our long-term strategic initiative "Project 2010", we have
continued our expansion, emphasizing a combination of growth in existing
markets and acquisitions. Acquisitions will continue to be focused on a
three state area including Florida, Georgia, and Alabama with a particular
focus on financial institutions, which are $100 million to $400 million in
asset size and generally located on the outskirts of major metropolitan
areas. We continue to evaluate de novo expansion opportunities in attractive
new markets in the event that acquisition opportunities are not feasible.
Other expansion opportunities that will be evaluated include asset
management, insurance, and mortgage banking.
Recent Acquisitions. On May 20, 2005, we completed our merger with First
Alachua Banking Corporation ("FABC"), headquartered in Alachua, Florida. We
issued approximately 906,000 shares of common stock and paid approximately
$29.0 million in cash for a total purchase price of $58.0 million. FABC's
wholly-owned subsidiary, First National Bank of Alachua ("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.
On October 15, 2004, we completed our acquisition of Farmers and Merchants
Bank ("FMB") in Dublin, Georgia, a $395 million asset institution with three
offices in Laurens County. We 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 our common stock and the payment of $33.3
million in cash for a total purchase price of approximately $66.7 million.
On March 19, 2004, our subsidiary, Capital City Bank, completed its merger
with Quincy State Bank ("QSB"), a former subsidiary of Synovus Financial
Corp. QSB had $116.6 million in assets with one office in Quincy, Florida
and one office in Havana, Florida. Both markets adjoin Leon County, home to
our Tallahassee headquarters. In addition, we acquired $208 million in trust
and other fiduciary assets from Synovus Trust Company, an affiliate of QSB.
The purchase price was $28.1 million in cash.
Throughout this section, we refer to the acquisitions of FABC, FMB, and QSB
as the "Recent Acquisitions."
FINANCIAL OVERVIEW
We are providing a summary overview of our financial performance for 2005
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 August 2004.
* Earnings of $30.3 million, or $1.66 per diluted share, represent
increases of 20.4% and 11.1%, respectively, over 2004 core earnings
(reported earnings excluding the one-time, after-tax gain on the sale
of the credit card portfolio of $4.2 million, or $.25 per diluted
share).
* Growth in earnings was attributable to strong growth in operating
revenues as reflected by 27.8% growth in net interest income and a
12.6% increase in noninterest income.
* Taxable equivalent net interest income grew 27.4% over 2004 due to
earning asset growth and an improved net interest margin.
* Net interest margin percentage improved 21 basis points to 5.09% driven
by an improved earning asset mix and higher earning asset yields.
* Noninterest income grew 12.6% over 2004 due primarily to higher deposit
service charge fees, asset management fees, mortgage banking revenues,
and merchant services fees.
26
* Strong credit quality continues to be a key driver in the Bank's
earnings performance. Net charge-offs totaled $2.5 million, or .13% of
average loans in 2005 compared to $3.4 million, or .22% in 2004. At
year-end the allowance for loan losses was .84% of outstanding loans
and provided coverage of 331% of nonperforming loans.
* Nonperforming assets totaled $5.6 million, or .27% of total loans and
other real estate at year-end 2005 compared to $7.4 million, or .36%,
at the end of the third quarter 2005 and $5.3 million, or .29%, at
year-end 2004.
* Average earning assets grew 22.2% over 2004 due to Recent Acquisitions
and strong loan growth in existing markets.
* The First National Bank of Alachua acquisition was completed in May
2005 adding $228.3 million in assets.
* Average deposits grew 22.2% over 2004 due to Recent Acquisitions and
our free checking campaign initiated in early 2005.
* We remain well-capitalized with a risk-based capital ratio of 13.56%.
RESULTS OF OPERATIONS
Net income for 2005 totaled $30.3 million, or $1.66 per diluted share. This
compares to $29.4 million, or $1.74 per diluted share in 2004, and $25.2
million, or $1.52 per diluted share in 2003. Net income in 2004 included a
one-time, after-tax gain of $4.2 million, or $.25 per diluted share, from the
sale of the Bank's credit card portfolio in August 2004.
The growth in core earnings (reported earnings excluding the one-time, after-
tax gain on sale of credit card portfolio) for 2005 of $5.2 million, or $.17
per diluted share, was primarily attributable to growth in operating revenue
(defined as the total of net interest income and noninterest income) of $29.4
million, or 22.7%, partially offset by a higher loan loss provision of $0.4
million, or 17.1%, an increase in noninterest expense of $20.6 million, or
23.1%, and a higher income tax provision of $3.3 million, or 25.1%. The
increase in operating revenue was driven by a 27.8% increase in net interest
income and a 12.6% increase in noninterest income.
The growth in net interest income for 2005 reflects earning asset growth and
an improved net interest margin. Higher deposit service charge fees,
mortgage banking revenues, asset management fees, and merchant services fees
drove the increase in noninterest income. The increase in noninterest
expense is primarily attributable to higher operating costs associated with
the integration of two recent acquisitions, which added 12 new offices to the
Capital City franchise, and marketing costs supporting our new "Absolutely
Free Checking" product.
A condensed earnings summary for the last three years is presented in Table 1.
27
Table 1
CONDENSED SUMMARY OF EARNINGS
For the Years Ended December 31,
--------------------------------------
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004 2003
- -------------------------------------------------------------------------------------------
Interest Income $140,053 $101,525 $ 94,830
Taxable Equivalent Adjustments 1,222 1,207 1,414
-------- -------- --------
Total Interest Income (FTE) 141,275 102,732 96,244
Interest Expense 30,063 15,441 14,839
-------- -------- --------
Net Interest Income (FTE) 111,212 87,291 81,405
Provision for Loan Losses 2,507 2,141 3,436
Taxable Equivalent Adjustments 1,222 1,207 1,414
-------- -------- --------
Net Interest Income After Provision
for Loan Losses 107,483 83,943 76,555
Noninterest Income 49,198 43,372 41,939
Gain on Sale of Credit Card Portfolios - 7,181 -
Noninterest Expense 109,814 89,226 79,721
-------- -------- --------
Income Before Income Taxes 46,867 45,270 38,773
Income Taxes 16,586 15,899 13,580
-------- -------- --------
Net Income $ 30,281 $ 29,371 $ 25,193
======== ======== ========
Basic Net Income Per Share $ 1.66 $ 1.74 $ 1.53
======== ======== ========
Diluted Net Income Per Share $ 1.66 $ 1.74 $ 1.52
======== ======== ========
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective July 1, 2005, and the 5-for-4 stock split effective June 13, 2003.
Net Interest Income
Net interest income represents our 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. An analysis of our net
interest income, including average yields and rates, is presented in Tables 2
and 3. This information is presented on a "taxable equivalent" basis to
reflect the tax-exempt status of income earned on certain loans and
investments, the majority of which are state and local government debt
obligations.
In 2005, taxable equivalent net interest income increased $23.9 million, or
27.4%. This follows an increase of $5.9 million, or 7.2%, in 2004, and a
decrease of $1.9 million, or 2.3%, in 2003. The favorable impact in 2005
resulted from a $397.8 million, or 22.2%, growth in average earning assets
and a 21 basis point improvement in the net interest margin percentage.
28
Table 2
AVERAGE BALANCES AND INTEREST RATES
2005
----------------------------
Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate
- -------------------------------------------------------------------------------
Assets:
Loans, Net of Unearned Interest(1)(2) $1,968,289 $133,665 6.79%
Taxable Investment Securities 142,406 4,250 2.98
Tax-Exempt Investment Securities(2) 49,252 2,369 4.81
Funds Sold 27,725 991 3.53
---------- -------- ----
Total Earning Assets 2,187,672 141,275 6.46
Cash & Due From Banks 105,787
Allowance For Loan Losses (17,081)
Other Assets 210,355
----------
TOTAL ASSETS $2,486,733
==========
Liabilities:
NOW Accounts $ 430,601 $ 2,868 0.67%
Money Market Accounts 275,830 4,337 1.57
Savings Accounts 152,890 292 0.19
Time Deposits 550,821 13,637 2.48
---------- -------- ----
Total Interest Bearing Deposits 1,410,142 21,134 1.50
Short-Term Borrowings 97,863 2,854 2.92
Subordinated Notes Payable 50,717 2,981 5.88
Other Long-Term Borrowings 70,216 3,094 4.41
---------- -------- ----
Total Interest Bearing Liabilities 1,628,938 30,063 1.85
Noninterest Bearing Deposits 544,746
Other Liabilities 26,337
----------
TOTAL LIABILITIES 2,200,021
Shareowners' Equity:
Common Stock 186
Additional Paid-In Capital 70,678
Retained Earnings 215,848
----------
TOTAL SHAREOWNERS' EQUITY 286,712
----------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $2,486,733
==========
Interest Rate Spread 4.61%
=====
Net Interest Income $111,212
========
Net Interest Margin(3) 5.09%
=====
2004
----------------------------
Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate
- -------------------------------------------------------------------------------
Assets:
Loans, Net of Unearned Interest(1)(2) $1,538,744 $ 95,796 6.23%
Taxable Investment Securities 131,842 3,138 2.38
Tax-Exempt Investment Securities(2) 51,979 2,965 5.70
Funds Sold 67,278 833 1.24
---------- -------- ----
Total Earning Assets 1,789,843 102,732 5.74
==========
Cash & Due From Banks 93,070
Allowance For Loan Losses (13,846)
Other Assets 137,678
----------
TOTAL ASSETS $2,006,745
==========
Liabilities:
NOW Accounts $ 292,492 $ 733 0.25%%
Money Market Accounts 227,808 1,190 0.521
Savings Accounts 130,282 164 0.13
Time Deposits 459,464 9,228 2.01
---------- -------- ----
Total Interest Bearing Deposits 1,110,046 11,315 1.02
Short-Term Borrowings 100,582 1,270 1.26
Subordinated Notes Payable 5,155 294 5.71
Other Long-Term Borrowings 59,462 2,562 4.31
---------- -------- ----
Total Interest Bearing Liabilities 1,275,245 15,441 1.21
Noninterest Bearing Deposits 489,155
Other Liabilities 21,614
----------
TOTAL LIABILITIES 1,786,014
Shareowners' Equity:
Common Stock 178
Additional Paid-In Capital 24,543
Retained Earnings 196,010
----------
TOTAL SHAREOWNERS' EQUITY 220,731
----------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $2,006,745
==========
Interest Rate Spread 4.53%
=====
Net Interest Income $ 87,291
========
=====
Net Interest Margin(3) 4.88%
2003
----------------------------
Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate
- -------------------------------------------------------------------------------
Assets:
Loans, Net of Unearned Interest(1)(2) $1,318,080 $ 87,608 6.65%
Taxable Investment Securities 124,541 3,725 2.98
Tax-Exempt Investment Securities(2) 61,387 3,650 5.95
Funds Sold 120,672 1,261 1.03
---------- -------- ----
Total Earning Assets 1,624,680 96,244 5.92
Cash & Due From Banks 79,625
Allowance For Loan Losses (12,544)
Other Assets 113,134
----------
TOTAL ASSETS $1,804,895
==========
Liabilities:
NOW Accounts $ 264,159 $ 676 0.26%
Money Market Accounts 215,597 1,312 0.61
Savings Accounts 109,837 189 0.17
Time Deposits 433,176 9,390 2.17
---------- -------- ----
Total Interest Bearing Deposits 1,022,769 11,567 1.13
Short-Term Borrowings 101,274 1,270 1.25
Subordinated Notes Payable - - -
Other Long-Term Borrowings 55,594 2,002 3.60
---------- -------- ----
Total Interest Bearing Liabilities 1,179,637 14,839 1.26
Noninterest Bearing Deposits 409,039
Other Liabilities 19,631
----------
TOTAL LIABILITIES 1,608,307
Shareowners' Equity:
Common Stock 175
Additional Paid-In Capital 15,229
Retained Earnings 181,184
----------
TOTAL SHAREOWNERS' EQUITY 196,588
----------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $1,804,895
==========
Interest Rate Spread 4.66%
=====
Net Interest Income $ 81,405
========
Net Interest Margin(3) 5.01%
=====
(1) Average balances include nonaccrual loans. Interest income includes fees on
loans of approximately $3.1 million, $1.7 million and $1.8 million in 2005,
2004 and 2003, respectively.
(2) Interest income includes the effects of taxable equivalent adjustments using
a 35% tax rate to adjust interest on tax-exempt loans and securities to a
taxable equivalent basis.
(3) Taxable equivalent net interest income divided by average earning assets.
28
Table 3
RATE/VOLUME ANALYSIS(1)
(Taxable Equivalent Basis - Dollars in Thousands)
2005 Changes from 2004 2004 Changes from 2003
-------------------------------------- ------------------------------------
Due To Due To
Average Average
----------------- -----------------
Total Calendar(3) Volume Rate Total Calendar(3) Volume Rate
- -----------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Loans, Net of Unearned Interest(2) $37,870 $(262) $27,076 $11,056 $8,188 $240 $13,939 $(5,991)
Investment Securities:
Taxable(2) 1,110 (3) 693 420 (587) 3 68 (658)
Tax-Exempt (597) - (156) (441) (685) - (558) (127)
Funds Sold 158 (2) (488) 648 (428) 3 (558) 127
------- ----- ------- ------- ------ ---- ------- -------
Total 38,541 (267) 27,125 11,683 6,488 246 12,891 (6,649)
------- ----- ------- ------- ------ ---- ------- -------
Interest Bearing Liabilities:
NOW Accounts 2,134 (2) 347 1,789 55 2 73 (20)
Money Market Accounts 3,148 (3) 251 2,900 (121) 4 74 (199)
Savings Accounts 128 (1) 28 101 (25) - 35 (60)
Time Deposits 4,408 (25) 1,840 2,593 (161) 26 568 (755)
Short-Term Borrowings 1,585 (3) 83 1,505 - 3 (197) 194
Subordinated Notes Payable 2,687 (1) 2,609 79 294 - 294 -
Long-Term Borrowings 532 (7) 465 74 560 5 139 416
Total 14,622 (42) 5,623 9,041 602 40 986 (424)
------- ----- ------- ------- ------ ---- ------- -------
Changes in Net Interest Income $23,919 $(225) $21,502 $ 2,642 $5,886 $206 $11,905 $(6,225)
======= ===== ======= ======= ------ ---- ------- -------
(1) This table shows the change in taxable equivalent net interest income for comparative periods based on either changes in
average volume or changes in average rates for earning assets and interest bearing liabilities. Changes which are not solely
due to volume changes or solely due to rate changes have been attributed to rate changes.
(2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest on tax-exempt
loans and securities to a taxable equivalent basis.
(3) Reflects difference in 365 day year (2005 and 2003) versus 366 day year (2004).
30
For the year 2005, taxable equivalent interest income increased $38.5
million, or 37.5%, over 2004, and increased $6.5 million, or 6.7%, in 2004
over 2003. Growth in 2005 was driven by strong organic loan growth, loans
acquired in connection with Recent Acquisitions, and higher yields on earning
assets. Rising interest rates, coupled with new loan production and the
repricing of existing earning assets were the primary factors contributing to
a 72 basis point improvement in the yield on earning assets, which increased
from 5.74% in 2004 to 6.46% for 2005. This compares to an 18 basis point
reduction in 2004 over 2003. As shown in Table 3, the loan portfolio was a
significant contributor to the increase in interest income.
Interest expense increased $14.6 million, or 94.7%, over 2004, and $0.6
million, or 4.1%, in 2004 over 2003. Rising interest rates and growth in
interest bearing liabilities drove the increase in 2005. However, the impact
of rising rates was partially offset by a shift in mix, as certificates of
deposit (generally a higher cost deposit product) declined relative to total
deposits. Certificates of deposit, as a percent of total average deposits,
declined from 28.7% in 2004 to 28.2% in 2005. The average rate paid on
interest bearing liabilities in 2005 increased 64 basis points compared to
2004, reflecting both deposit competition and the Federal Reserve's continued
increases in the federal funds target rate.
Our interest rate spread (defined as the taxable equivalent yield on average
earning assets less the average rate paid on interest bearing liabilities)
increased 8 basis points in 2005 and decreased 13 basis points in 2004. The
increase in 2005 was primarily attributable to the higher yields on earning
assets.
Our net interest margin (defined as taxable equivalent interest income less
interest expense divided by average earning assets) was 5.09% in 2005,
compared to 4.88% in 2004 and 5.01% in 2003. In 2005, the higher yields on
earning assets (partially offset by higher rates paid on interest bearing
liabilities) resulted in a 21 basis point improvement in the margin.
Loan growth is anticipated to have a favorable impact on net interest income
during the upcoming year along with any further increases in the Federal
Reserve's target rate on overnight funds. However, these improvements will
be partially offset by the rising cost of funds. A further discussion of our
earning assets and funding sources can be found in the section entitled
"Financial Condition."
Provision for Loan Losses
The provision for loan losses was $2.5 million in 2005, compared to $2.1
million in 2004 and $3.4 million in 2003. The loan loss provisions in both
2004 and 2005 were impacted by a re-assessment of the reserve to reflect the
changing risk profile associated with the Bank's sale of its credit card
portfolio during the third quarter of 2004 and the addition of Recent
Acquisitions.
Net charge-offs for 2005 totaled $2.5 million, or .13% of average loans for
the year compared to $3.4 million, or .22% for 2004 and $3.5 million, or .27%
for 2003. At December 31, 2005, the allowance for loan losses totaled $17.4
million compared to $16.0 million in 2004 and $12.4 million in 2003. At
year-end 2005, the allowance represented .84% of total loans and provided
coverage of 331% of nonperforming loans. Management considers the allowance
to be adequate based on the current level of nonperforming loans and the
estimate of losses inherent in the portfolio at year-end. See the section
entitled "Financial Condition" and Tables 7 and 8 for further information
regarding the allowance for loan losses.
31
Noninterest Income
In 2005, noninterest income (excluding the before-tax gain of $6.9 million on
the sale of the Bank's credit card portfolio in August 2004) increased $5.5
million, or 12.6%, over 2004 primarily due to higher deposit service charge
fees, asset management fees, mortgage banking revenues, and merchant services
fees.
Noninterest income (excluding the above referenced gain) for 2004 increased
$1.8 million, or 4.3%, over 2003. The increase primarily reflects a higher
level of deposit service charge fees, asset management fees, data processing
fees, and merchant services fees, partially offset by a decrease in mortgage
banking revenues.
The table below reflects the major components of noninterest income.
For the Years Ended December 31,
---------------------------------
(Dollars in Thousands) 2005 2004 2003
- -----------------------------------------------------------------------------
Noninterest Income:
Service Charges on Deposit Accounts $20,740 $17,574 $16,319
Data Processing 2,610 2,628 2,403
Asset Management Fees 4,419 4,007 2,650
Retail Brokerage Fees 1,322 1,401 1,212
Gain on Sale of Investment Securities 9 14 1
Mortgage Banking Revenues 4,072 3,208 6,090
Merchant Services Fees 6,174 5,135 4,563
Interchange Fees 2,239 2,229 2,183
Gain on Sale of Credit Card Portfolios - 7,180 -
ATM/Debit Card Fees 2,206 2,007 1,939
Other 5,407 5,170 4,579
------- ------- -------
Total Noninterest Income $49,198 $50,553 $41,939
======= ======= =======
Various significant components of noninterest income are discussed in more
detail below.
Service Charges on Deposit Accounts. Deposit service charge fees increased
$3.2 million, or 18.0%, in 2005, compared to an increase of $1.3 million, or
7.7%, in 2004. Deposit service charge revenues in any one year are dependent
on the number of accounts, primarily transaction accounts, the level of
activity subject to service charges, and the collection rate. The increase
in deposit service charge fees in 2005 is due to higher overdraft and
nonsufficient funds ("NSF") fees due to growth in deposit accounts
attributable to Recent Acquisitions and "Absolutely Free Checking." The
increase in service charge revenues in 2004 was primarily attributable to
growth in overdraft and NSF fees primarily associated with a revised fee
structure implemented in mid-2004.
Asset Management Fees. In 2005, asset management fees increased $412,000, or
10.3%, versus an increase of $1.4 million, or 51.2%, in 2004. At year-end
2005, assets under management totaled $693.0 million, reflecting net growth
of $40.0 million, or 6.1% over 2004. The increase reflects new business
which produced growth in assets of $118.0 million partially offset by normal
distribution activity within managed accounts and estates. At year-end 2004,
assets under management totaled $653.0 million, reflecting growth of $249.0
million, or 61.6% over 2003. This growth was due to the purchase of $208.0
million in trust and investment management accounts from Synovus Trust
Company in connection with the Quincy State Bank acquisition, growth in new
business, and improved asset returns.
Mortgage Banking Revenues. In 2005, mortgage banking revenues increased
$864,000, or 26.9%, compared to a decrease of $2.9 million, or 47.3% in 2004.
The increase in 2005 reflects a 19.2% increase in production over 2004 which
was driven by increased home purchase and construction activity in Bank
markets and lower interest rates for residential real estate financing. The
decrease in 2004 was due to a decline in fixed rate mortgage production that
was affected by a general slow-down in residential lending markets. We
generally sell all fixed rate residential loan production into the secondary
market. The level of interest rates, origination volume and percent of fixed
rate production have significant impacts on our mortgage banking revenues.
32
Merchant Services Fees. Merchant services fees increased $1.0 million, or
20.2% in 2005 compared to a $572,000, or 12.5% increase in 2004. The
improvement in both periods is directly related to growth in merchant card
transaction volume primarily driven by growth in the client base.
Noninterest income as a percent of average assets was 1.98% in 2005, compared
to 2.52% in 2004, and 2.32% in 2003. The decline from 2004 to 2005 primarily
reflects the impact of the one-time gain on sale of the Bank's credit card
portfolio in August 2004. The decline from 2003 versus 2005 reflects the
impact of Recent Acquisitions which brought a lower and less diverse level of
noninterest income in relation to the consolidated asset base.
Noninterest Expense
Noninterest expense grew by $20.6 million, or 23.1%, in 2005 and $9.5
million, or 11.9% in 2004 due to higher expense for compensation, occupancy,
professional fees, advertising, and intangible amortization.
The table below reflects the major components of noninterest expense.
For the Years Ended December 31,
---------------------------------
(Dollars in Thousands) 2005 2004 2003
- ---------------------------------------------------------------------------
Noninterest Expense:
Salaries $ 40,978 $33,968 $30,677
Associate Benefits 12,709 10,377 9,785
-------- ------- -------
Total Compensation 53,687 44,345 40,462
Premises 8,293 7,074 5,972
Equipment 8,970 8,393 7,840
-------- ------- -------
Total Occupancy 17,263 15,467 13,812
Legal Fees 1,827 1,301 1,226
Professional Fees 3,825 2,858 1,918
Processing Services 1,481 997 999
Advertising 4,275 2,001 1,260
Travel and Entertainment 1,414 1,023 970
Printing and Supplies 2,372 1,854 1,742
Telephone 2,493 2,048 1,872
Postage 1,195 1,007 1,042
Intangible Amortization 5,440 3,824 3,241
Merger Expense 438 550 -
Interchange Fees 5,402 4,741 4,181
Courier Service 1,360 1,143 1,068
Miscellaneous 7,342 6,067 5,928
-------- ------- -------
Total Other 38,864 29,414 25,447
Total Noninterest Expense $109,814 $89,226 $79,721
======== ======= =======
Compensation. Our aggregate compensation expense in 2005 totaled $53.7
million, an increase of $9.3 million, or 21.1%, over 2004. The increase in
compensation was driven by higher expense for associate salaries, pension,
and insurance benefits, primarily reflective of the integration of associates
from acquisitions in late 2004 and mid-2005.
In 2004, compensation increased $3.9 million, or 9.6%, over 2003. The
increase was due to higher expense for associate salaries, higher
performance-based compensation, increased pension costs, and insurance
benefits. The increase in associate salaries was partially due to two
acquisitions.
33
Occupancy. Occupancy expense (including furniture, fixtures and equipment)
increased by $1.8 million, or 11.6%, in 2005, compared to $1.7 million, or
12.0% in 2004. The increase in 2005 was driven by higher expense for
depreciation, maintenance and repair, and property taxes, primarily
attributable to the increase in the number of banking offices, and higher
expense for core processing and other software maintenance agreements. The
increase in 2004 was primarily due to higher expense for utilities, property
taxes, depreciation, and premises rental attributable to the increase in
banking offices.
Other. Other noninterest expense increased $9.4 million, or 32.1%, in 2005,
compared to $4.0 million, or 15.6%, in 2004. The increase in 2005 was
attributable primarily to: (1) higher legal expense of $526,000; (2) higher
professional fees of $967,000; (3) increased processing service cost of
$484,000; (4) higher advertising costs of $2.3 million; (5) increased
printing and supply expense of $518,000; (6) higher intangible amortization
of $1.6 million; (7) increased interchange fees of $661,000; and (8) higher
miscellaneous expense of $1.3 million.
Legal fees 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 upgrades. The increase in advertising
expense reflects the marketing costs to support our "Absolutely Free
Checking" strategy. The higher expense for printing and supplies is driven
by Recent Acquisitions. The increase in intangible amortization reflects
core deposit amortization from Recent Acquisitions. The increase in
interchange fees is due to merchant card transaction volume and was offset by
higher merchant service fees reflected in noninterest income. The higher
level of miscellaneous expense is due to increases in Federal Reserve account
analysis fees, ATM/Debit card production fees, associate hiring expense,
training expense, and other real estate expense.
The increase in 2004 was attributable to: (1) higher professional fees of
$940,000 reflective of the internal and external costs of Sarbanes-Oxley
Section 404 compliance and testing work; (2) higher director fees of $101,000
due to an increase in the number of directors, higher fee structure, and
number of meetings; (3) higher advertising expense of $741,000 reflective of
an increased level of marketing initiatives aimed at supporting two
acquisitions and an increased level of product and market support activities;
(4) increased interchange service fees of $560,000 due to higher merchant
card transaction volume; (5) higher telephone expense of $176,000; (6)
increased intangible amortization expense of $583,000; and (7) higher merger
expenses of $550,000. The increases in telephone, intangible amortization,
and merger expenses were due to the integration of two acquisitions during
the year.
The net noninterest expense ratio (defined as noninterest income minus
noninterest expense, net of intangible amortization and conversion/merger-
related expenses, as a percent of average assets) was 2.20% in 2005 compared
to 1.71% in 2004, and 1.91% in 2003. Our efficiency ratio (expressed as
noninterest expense, net of intangible amortization and conversion/merger-
related expenses, as a percent of taxable equivalent net interest income plus
noninterest income) was 64.8%, 61.6%, and 62.0% in 2005, 2004 and 2003,
respectively. Excluding the effect of the one-time gain of $6.9 million
realized from the sale of the Bank's credit card portfolio, the above
mentioned metrics for 2004 adjust to 2.05% and 64.8%, respectively.
Income Taxes
The consolidated provision for federal and state income taxes was $16.6
million in 2005, compared to $15.9 million in 2004, and $13.6 million in
2003. The increase in each of the three respective years was due to higher
taxable income, driven by earnings growth and lower tax exempt income.
34
The effective tax rate was 35.4% in 2005, 35.1% in 2004, and 35.0% in 2003.
These rates differ from the combined federal and state statutory tax rates
due primarily to tax-exempt income on loans and securities.
FINANCIAL CONDITION
Our 2005 balance sheet reflects growth from within our existing markets plus
the integration of the Recent Acquisitions. Average assets totaled $2.5
billion, an increase of $480.0 million, or 23.9%, in 2005 versus the
comparable period in 2004. Average earning assets for 2005 were $2.2
billion, representing an increase of $397.8 million, or 22.2%, over 2004.
Loan growth, in existing markets and from acquisitions, fueled the earning
asset increase in 2005 as average loans increased $429.5 million, or 27.9%.
A $7.8 million, or 4.3% increase in investment securities also contributed to
the increase. Partially offsetting the aforementioned increases was a
decrease in average funds sold of $39.6 million, or 58.8%. Funding of 2005
earning asset growth is discussed in more detail under the section entitled
"Liquidity."
Table 2 provides information on average balances and rates, Table 3 provides
an analysis of rate and volume variances, and Table 4 highlights the changing
mix of our earning assets over the last three years.
Loans
Average loans increased $429.5 million, or 27.9%, over the comparable period
in 2004. Loans as a percent of average earning assets increased to 90.0% for
the year, compared to 86.0% for 2004. Loan growth occurred in all loan
categories during the year as noted in Table 4 below. The growth reflects
Recent Acquisitions and strong organic loan growth within existing markets.
Although management is continually evaluating alternative sources of revenue,
lending is a major component of our business and is key to profitability.
While management strives to identify opportunities to increase loans
outstanding and enhance the portfolio's overall contribution to earnings, it
can do so only by adhering to sound lending principles applied in a prudent
and consistent manner. Thus, management will not relax its underwriting
standards in order to achieve designated growth goals.
Table 4
SOURCES OF EARNING ASSET GROWTH
Components of
2004 to Percentage Average Earning Assets
2005 of Total ----------------------
(Average Balances - Dollars in Thousands) Change Change 2005 2004 2003
- ----------------------------------------------------------------------------------------
Loans:
Commercial, Financial
and Agricultural $ 22,696 5.7% 9.5% 10.3% 9.2%
Real Estate - Construction 41,406 10.4 6.9 6.2 5.5
Real Estate - Commercial 197,179 49.6 31.4 27.3 23.4
Real Estate - Residential 163,479 41.1 31.3 29.1 29.1
Consumer 4,785 1.2 10.9 13.1 13.9
-------- ----- ----- ----- -----
Total Loans 429,545 108.0 90.0 86.0 81.1
-------- ----- ----- ----- -----
Securities:
Taxable 10,564 2.7 6.5 7.4 7.7
Tax-Exempt (2,727) (0.7) 2.3 2.9 3.8
-------- ----- ----- ----- -----
Total Securities 7,837 2.0 8.8 10.3 11.5
-------- ----- ----- ----- -----
Funds Sold (39,553) (10.0) 1.2 3.7 7.4
-------- ----- ----- ----- -----
Total Earning Assets $397,829 100.0% 100.0% 100.0% 100.0%
======== ===== ===== ===== =====
35
Our average loan-to-deposit ratio increased to 100.7% in 2005 from 96.2% in
2004. This compares to an average loan-to-deposit ratio in 2003 of 92.1%.
The higher average loan-to-deposit ratio in all three periods reflects strong
loan growth as discussed above.
Real estate loans, combined, represented 77.5% of total loans at December 31,
2005, versus 76.3% in 2004. This increase is reflective of increases in all
real estate loan categories as noted above. See the section entitled "Risk
Element Assets" for a discussion concerning loan concentrations.
The composition of our loan portfolio at December 31, for each of the past
five years is shown in Table 5. Table 6 arrays our total loan portfolio as
of December 31, 2005, based upon maturities. As a percent of the total
portfolio, loans with fixed interest rates represent 34.9% as of December 31,
2005, versus 36.6% at December 31, 2004.
Table 5
LOANS BY CATEGORY
As of December 31,
----------------------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
- --------------------------------------------------------------------------------------
Commercial, Financial and
Agricultural $ 218,434 $ 206,474 $ 160,048 $ 141,459 $ 128,480
Real Estate - Construction 160,914 140,190 89,149 91,110 72,778
Real Estate - Commercial 718,741 655,426 391,250 356,807 302,239
Real Estate - Residential 723,336 600,375 467,790 474,069 530,546
Consumer 246,069 226,360 233,395 221,776 209,308
---------- ---------- ---------- ---------- ----------
Total Loans, Net of
Unearned Interest $2,067,494 $1,828,825 $1,341,632 $1,285,221 $1,243,351
========== ========== ========== ========== ==========
Table 6
LOAN MATURITIES
Maturity Periods
-------------------------------------------------
Over One Over
One Year Through Five
(Dollars in Thousands) or Less Five Years Years Total
- --------------------------------------------------------------------------------
Commercial, Financial and
Agricultural $ 91,765 $ 92,780 $ 33,889 $ 218,434
Real Estate 463,150 284,786 855,055 1,602,991
Consumer(1) 30,306 165,704 50,059 246,069
-------- -------- -------- ----------
Total $585,221 $543,270 $939,003 $2,067,494
======== ======== ======== ==========
Loans with Fixed Rates $337,826 $359,971 $ 24,277 $ 722,074
Loans with Floating or
Adjustable Rates 247,395 183,299 914,726 1,345,420
-------- -------- -------- ----------
Total $585,221 $543,270 $939,003 $2,067,494
======== ======== ======== ==========
(1) Demand loans and overdrafts are reported in the category of one year or less.
Allowance for Loan Losses
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' inability
and unwillingness to repay, and from other risks inherent in the lending
process including collateral risk, operations risk, concentration risk, and
economic risk. As such, all related risks of lending are considered when
assessing the adequacy of the allowance. 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 credit 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 and other
risk factors both internal and external to us.
36
Management evaluates the adequacy of the allowance for loan losses on a
quarterly basis. Loans that have been identified as impaired are reviewed
for adequacy of collateral, with a specific reserve assigned to those loans
when necessary. Impaired loans are defined as those in which the full
collection of principal and interest in accordance with the contractual terms
is improbable. Impaired loans generally include those that are past due for
90 days or more and those classified as doubtful in accordance with our risk
rating system. Loans classified as doubtful have a high possibility of loss,
but because of certain factors that may work to strengthen the loan, its
classification as a loss is deferred until a more exact status may be
determined. Not all loans are considered in the review for impairment; only
loans that are for business purposes exceeding $25,000 are considered. The
evaluation is based on current financial condition of the borrower or current
payment status of the loan.
The method used to assign a specific reserve depends on whether repayment of
the loan is dependent on liquidation of collateral. If repayment is
dependent on the sale of collateral, the reserve is equivalent to the
recorded investment in the loan less the fair value of the collateral after
estimated sales expenses. If repayment is not dependent on the sale of
collateral, the reserve is equivalent to the recorded investment in the loan
less the estimated cash flows discounted using the loan's effective interest
rate. The discounted value of the cash flows is based on the anticipated
timing of the receipt of cash payments from the borrower. The reserve
allocations assigned to impaired loans are sensitive to the extent market
conditions or the actual timing of cash receipts change.
Once specific reserves have been assigned to impaired loans, general reserves
are assigned to the remaining portfolio. General reserves are assigned to
commercial purpose loans of $100,000 or more that are not impaired and large
groups of smaller-balance homogenous loans, including commercial loans less
than $100,000, consumer loans, and residential mortgage loans.
Commercial purpose loans exceeding $100,000 that are not impaired, but
exhibit specific weaknesses are detailed in a monthly Problem Loan Report.
These loans are divided into seven different pools based on various risk
characteristics and the underlying value of collateral taken to secure
specific loans within the pools. These classified loans are monitored for
changes in risk ratings that are assigned based on the Bank's Asset
Classification Policy, and for the ultimate disposition of the loan. The
ultimate disposition may include upgrades in risk ratings, payoff of the
loan, or charge-off of the loan. This migration analysis results in a loan
loss ratio by loan pool of classified loans that is applied to the balance of
the pool to determine general reserves for specifically identified pools of
problem loans. This charge-off ratio is adjusted for various environmental
factors including past due and nonperforming trends in the loan portfolio,
the micro- and macro-economic outlook, and credit administration practices as
determined by independent parties.
General reserves are assigned to smaller balance homogenous loan pools,
including commercial loans less than $100,000, consumer loans, and
residential mortgage loans based on calculated overall loan loss ratios for
the past three years. The loan loss ratios applied are adjusted for various
environmental factors, with further consideration given to the highest
charge-off experience of the Bank dating back to the recession of the late
1980s.
The allowance for loan losses is compared against the sum of the specific
reserves assigned to impaired loans plus the general reserves assigned to the
remaining portfolio. Adjustments are made when appropriate. A most likely
reserve value is determined within the computed range of required calculated
reserve, with the actual allowance for loan losses compared to the most
likely reserve value. The unallocated reserve is monitored on a regular
basis and adjusted based on qualitative risk factors both internal and
external to us. Table 7 analyzes the activity in the allowance over the past
five years.
37
Table 7
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------
Balance at Beginning of Year $16,037 $12,429 $12,495 $12,096 $10,564
Acquired Reserves 1,385 5,713 - - 1,206
Reserve Reversal(1) - (800) - - -
Charge-Offs:
Commercial, Financial
and Agricultural 1,287 873 426 818 483
Real Estate - Construction - - - - -
Real Estate - Commercial 255 48 91 - 32
Real Estate - Residential 321 191 228 175 159
Consumer 2,380 3,946 3,794 3,279 3,976
------- ------- ------- ------- -------
Total Charge-Offs 4,243 5,058 4,539 4,272 4,650
------- ------- ------- ------- -------
Recoveries:
Commercial, Financial
and Agricultural 180 81 142 136 44
Real Estate - Construction - - - - -
Real Estate - Commercial 3 14 - 20 65
Real Estate - Residential 37 188 18 37 116
Consumer 1,504 1,329 877 1,181 768
------- ------- ------- ------- -------
Total Recoveries 1,724 1,612 1,037 1,374 993
------- ------- ------- ------- -------
Net Charge-Offs 2,519 3,446 3,502 2,898 3,657
------- ------- ------- ------- -------
Provision for Loan Losses 2,507 2,141 3,436 3,297 3,983
------- ------- ------- ------- -------
Balance at End of Year $17,410 $16,037 $12,429 $12,495 $12,096
======= ======= ======= ======= =======
Ratio of Net Charge-Offs
to Average Loans Outstanding .13% .22% .27% .23% .31%
======= ======= ======= ======= =======
Allowance for Loan Losses as a
Percent of Loans at End of Year .84% .88% .93% .97% .97%
======= ======= ======= ======= =======
Allowance for Loan Losses as a
Multiple of Net Charge-Offs 6.91x 4.65x 3.55x 4.31x 3.31x
======= ======= ======= ======= =======
(1) Reflects recapture of reserves allocated to the credit card portfolio sold in August 2004.
The allowance for loan losses of $17.4 million at December 31, 2005 compares
to $16.0 million at year-end 2004. As a percent of total loans, the
allowance was .84% in 2005 and .88% in 2004. The allowance for loan losses
reflects management's current estimation of the credit quality of our loan
portfolio. While there can be no assurance that we will not sustain loan
losses in a particular period that are substantial in relation to the size of
the allowance, management's assessment of the loan portfolio does not
indicate a likelihood of this occurrence. It is management's opinion that
the allowance at December 31, 2005 is adequate to absorb losses inherent in
the loan portfolio at year-end.
Table 8 provides an allocation of the allowance for loan losses to specific
loan types for each of the past five years. The reserve allocations, as
calculated using the above methodology, are assigned to specific loan
categories corresponding to the type represented within the components
discussed. There was a significant change in the reserve allocation in 2004
as noted by reserves held for the consumer loan, commercial
38
real estate, and commercial portfolios. The Bank's credit card portfolio,
which previously accounted for up to one-third of net loan losses annually,
was sold in August 2004, thus reducing the reserves required to support
consumer loans. The large increase in 2004 for reserves held for commercial
real estate and commercial loans was due to the acquisition of loans from FMB
in late 2004. First National Bank of Alachua was acquired during 2005, which
pushed total reserves higher.
39
Table 8
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
2005 2004 2003 2002 2001
---------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Allow- Category Allow- Category Allow- Category Allow- Category Allow- Category
ance To Total ance To Total ance To Total ance To Total ance To Total
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------------------
Commercial, Financial
and Agricultural $ 3,663 10.6% $ 4,341 11.3% $ 2,824 11.9% $ 2,740 11.0% $ 3,257 10.3%
Real Estate:
Construction 762 7.8 578 7.7 313 6.6 348 7.1 600 5.9
Commercial 6,352 34.7 6,296 35.8 2,831 29.2 2,559 27.8 3,098 24.3
Residential 1,019 35.0 705 32.8 853 34.9 1,021 36.9 947 42.7
Consumer 3,105 11.9 2,966 12.4 4,169 17.4 4,210 17.2 4,194 16.8
Not Allocated 2,509 - 1,151 - 1,439 - 1,617 - - -
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $17,410 100.0% $16,037 100.0% $12,429 100.0% $12,495 100.0% $12,096 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
40
Risk Element Assets
Risk element assets consist of nonaccrual loans, renegotiated loans, other
real estate, loans past due 90 days or more, potential problem loans and loan
concentrations. Table 9 depicts certain categories of our risk element
assets as of December 31 for each of the last five years. Potential problem
loans and loan concentrations are discussed within the narrative portion of
this section.
Our nonperforming loans increased $612,000, or 13.2%, from a level of $4.6
million at December 31, 2004, to $5.3 million at December 31, 2005. During
2005 loans totaling approximately $10.7 million were added, while loans
totaling $10.1 million were removed from nonaccruing status. Of the $10.1
million removed, $2.0 million consisted of principal reductions and loan
payoffs, $3.0 million represented loans transferred to other real estate,
$4.1 million consisted of loans brought current and returned to an accrual
status, and $1.0 million was charged off. Where appropriate, management has
allocated specific reserves to absorb anticipated losses.
All nonaccrual loans exceeding $25,000 not secured by 1-4 family residential
properties are reviewed quarterly for impairment. A loan is considered
impaired when the full collection of principal and interest in accordance
with the contractual terms is improbable. When a loan is considered
impaired, it is reviewed for exposure to credit loss. If credit loss is
probable, a specific reserve is allocated to absorb the anticipated loss. We
had $7.3 million in loans considered impaired at December 31, 2005. The
anticipated loss in those impaired loans is $2.9 million.
Table 9
RISK ELEMENT ASSETS
As of December 31,
-----------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------
Nonaccruing Loans $ 5,258 $ 4,646 $ 2,346 $ 2,510 $ 2,414
Restructured - - - - 20
------- ------- ------- ------- -------
Total Nonperforming Loans 5,258 4,646 2,346 2,510 2,434
Other Real Estate 292 625 4,955 1,333 1,506
------- ------- ------- ------- -------
Total Nonperforming Assets $ 5,550 $ 5,271 $ 7,301 $ 3,843 $ 3,940
======= ======= ======= ======= =======
Past Due 90 Days or More $ 309 $ 605 $ 328 $ 2,453 $ 1,065
======= ======= ======= ======= =======
Nonperforming Loans/Loans .25% .25% .17% .20% .20%
======= ======= ======= ======= =======
Nonperforming Assets/Loans
Plus Other Real Estate .27% .29% .54% .30% .32%
======= ======= ======= ======= =======
Nonperforming Assets/Capital(1) 1.72% 1.93% 3.39% 1.93% 2.14%
======= ======= ======= ======= =======
Allowance/Nonperforming Loans 331.11% 345.18% 529.80% 497.72% 496.96%
======= ======= ======= ======= =======
(1) For computation of this percentage, "Capital" refers to shareowners' equity plus
the allowance for loan losses.
Interest on nonaccrual loans is generally recognized only when received.
Cash collected on nonaccrual loans is applied against the principal balance
or recognized as interest income based upon management's expectations as to
the ultimate collectibility of principal and interest in full. If interest
on nonaccruing loans had been recognized on a fully accruing basis, interest
income recorded would have been $186,000 higher for the year ended December
31, 2005.
Other real estate totaled $292,000 at December 31, 2005, versus $625,000 at
December 31, 2004. This category includes property owned by the Bank that
was acquired either through foreclosure procedures or by receiving a deed in
lieu of foreclosure. During 2005, we added properties totaling $2.7 million,
and partially or completely liquidated properties totaling $3.0 million,
resulting in a net decrease in other real estate of approximately $333,000.
41
Potential problem loans are defined as those loans which are now current but
where management has doubt as to the borrower's ability to comply with
present loan repayment terms. Potential problem loans totaled $9.8 million
at December 31, 2005, compared to $7.1 million at year-end 2004.
Loans past due 90 days or more totaled $309,000 at year-end, down from
$605,000 at the previous year-end.
Loan concentrations are considered to exist when there are amounts loaned to
a multiple number of borrowers engaged in similar activities which cause them
to be similarly impacted by economic or other conditions and such amount
exceeds 10% of total loans. Due to the lack of diversified industry within
the markets served by the Bank and the relatively close proximity of the
markets, we have both geographic concentrations as well as concentrations in
the types of loans funded. Specifically, due to the nature of our markets, a
significant portion of the portfolio has historically been secured with real
estate.
While we have a majority of our loans (77.5%) secured by real estate, the
primary types of real estate collateral are commercial properties and 1-4
family residential properties. At December 31, 2005, commercial real estate
mortgage loans and residential real estate mortgage loans accounted for 34.7%
and 35.0%, respectively, of the loan portfolio.
The real estate portfolio, while subject to cyclical pressures, is not
typically speculative in nature and is originated at amounts that are within
or below regulatory guidelines for collateral values. Management anticipates
no significant reduction in the percentage of real estate loans to total
loans outstanding.
Management is continually analyzing its loan portfolio in an effort to
identify and resolve problem assets as quickly and efficiently as possible.
As of December 31, 2005, management believes it has identified and adequately
reserved for such problem assets. However, management recognizes that many
factors can adversely impact various segments of its markets, creating
financial difficulties for certain borrowers. As such, management continues
to focus its attention on promptly identifying and providing for potential
losses as they arise.
Investment Securities
In 2005, our average investment portfolio increased $7.8 million, or 4.3%,
from 2004 and decreased $2.1 million, or 1.1%, from 2003 to 2004. As a
percentage of average earning assets, the investment portfolio represented
8.8% in 2005, compared to 10.3% in 2004. In 2005, the increase in the
portfolio was due to additional securities obtained through an acquisition in
late 2004, and the increase in required holdings of Federal Home Loan Bank
stock. In 2004, the decline in the portfolio was attributable to the
maturities of investment securities, which in anticipation of future loan
growth, were only partially replaced during the period. Throughout 2006, we
will closely monitor liquidity levels to assess the need to purchase
additional investments.
In 2005, average taxable investments increased $10.5 million, or 8.0%, while
tax-exempt investments decreased $2.7 million, or 5.2%. Management will
continue to purchase "bank qualified" municipal issues when it considers the
yield to be attractive and we can do so without adversely impacting our tax
position. As of December 31, 2005, we may purchase additional tax-exempt
securities without adverse tax consequences.
The investment portfolio is a significant component of our operations and, as
such, it functions as a key element of liquidity and asset/liability
management. As of December 31, 2005, all securities are classified as
available-for-sale. Classifying securities as available-for-sale offers
management full flexibility in managing our liquidity and interest rate
sensitivity without adversely impacting our regulatory capital levels.
Securities in the available-for-sale portfolio are recorded at fair value
with unrealized gains and losses associated with these securities recorded,
net of tax, in the
42
accumulated other comprehensive loss component of shareowners' equity. At
December 31, 2005, shareowners' equity included a net unrealized loss of $1.2
million, compared to an unrealized loss of $0.4 million at December 31, 2004.
It is neither management's intent nor practice to participate in the trading
of investment securities for the purpose of recognizing gains and therefore
we do not maintain a trading portfolio.
The average maturity of the total portfolio at December 31, 2005 and 2004,
was 1.65 and 1.63 years, respectively. See Table 10 for a breakdown of
maturities by investment type.
The weighted average taxable equivalent yield of the investment portfolio at
December 31, 2005 was 3.57%, versus 3.38% in 2004. The increase in yield was
due to acquisitions and purchases of securities throughout the year in a
higher interest rate environment. The quality of the municipal portfolio at
year-end is depicted on page 45. There were no investments in obligations,
other than U.S. Governments, of any one state, municipality, political
subdivision or any other issuer that exceeded 10% of our shareowners' equity
at December 31, 2005.
Table 10 and Note 3 in the Notes to Consolidated Financial Statements present
a detailed analysis of our investment securities as to type, maturity and
yield.
43
Table 10
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
As of December 31,
--------------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------------
Weighted(1) Weighted(1) Weighted(1)
Amortized Market Average Amortized Market Average Amortized Market Average
(Dollars in Thousands) Cost Value Yield Cost Value Yield Cost Value Yield
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENTS
Due in 1 year or less $ 58,032 $ 57,621 2.30% $ 48,553 $ 48,327 2.08% $ 82,654 $ 82,749 1.26%
Due over 1 year through 5 years 24,296 23,662 3.52 66,863 66,204 2.38 22,706 22,848 2.04
Due over 5 years through 10 years 1,970 1,948 3.57 7,684 7,589 3.75 - - -
Due over 10 years - - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 84,298 83,231 2.68 123,100 122,120 2.35 105,360 105,597 1.43
STATES & POLITICAL SUBDIVISIONS
Due in 1 year or less 21,097 21,048 4.66 27,916 28,090 5.94 19,018 19,205 4.18
Due over 1 year through 5 years 32,130 31,702 4.11 21,076 21,200 4.56 36,046 37,337 4.47
Due over 5 years through 10 years 384 393 6.53 897 916 5.36 577 610 4.36
Due over 10 years - - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 53,611 53,143 4.34 49,889 50,206 5.35 55,641 57,152 4.37
MORTGAGE-BACKED SECURITIES(2)
Due in 1 year or less 339 337 3.97 489 493 5.13 356 361 5.12
Due over 1 year through 5 years 14,958 14,685 4.12 22,719 22,839 3.96 11,167 11,586 5.29
Due over 5 years through 10 years 5,651 5,509 5.09 3,085 3,068 4.83 95 98 3.26
Due over 10 years - - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 20,948 20,531 4.38 26,293 26,400 4.09 11,618 12,045 5.27
OTHER SECURITIES
Due in 1 year or less - - - - - - 1,003 1,016 6.18
Due over 1 year through 5 years - - - - - - - - -
Due over 5 years through 10 years - - - - - - 2 2 -
Due over 10 years(3) 14,114 14,114 4.75 11,514 11,514 4.31 5,922 5,922 3.89
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 14,114 14,114 4.75 11,514 11,514 4.31 6,927 6,940 4.22
TOTAL INVESTMENT SECURITIES $172,971 $171,019 3.57% $210,796 $210,240 3.38% $179,546 $181,734 2.69%
======== ======== ==== ======== ======== ==== ======== ======== ====
(1) Weighted average yields are calculated on the basis of the amortized cost of the security. The weighted average yields
on tax-exempt obligations are computed on a taxable equivalent basis using a 35% tax rate.
(2) Based on weighted average life.
(3) Federal Home Loan Bank Stock and Federal Reserve Bank Stock are included in this category for weighted average yield,
but do not have stated maturities.
44
AVERAGE MATURITY
As of December 31,
------------------------------
(In Years) 2005 2004 2003
- --------------------------------------------------------------------
U.S. Governments 1.01 1.54 .73
States and Political Subdivisions 1.31 1.32 1.23
Mortgage-Backed Securities 5.05 2.67 1.56
Other Securities - - .30
---- ---- ----
TOTAL 1.65 1.63 .90
MUNICIPAL PORTFOLIO QUALITY
(Dollars in Thousands)
Moody's Rating Amortized Cost Percentage
- ----------------------------------------------
AAA $48,831 91.09%
AA-1 500 .93
AA-2 502 .94
AA-3 613 1.14
AA 45 .08
Not Rated(1) 3,120 5.82
------- ------
Total $53,611 100.00%
======= ======
(1) All of the securities not rated by Moody's are rated "A-" or higher
by S&P.
Deposits and Funds Purchased
Average total deposits of $1.95 billion in 2005 increased $355.7 million, or
22.2%, from the prior year. Deposit growth for the year was driven primarily
by the integration of deposits from bank acquisitions and the introduction of
"Absolutely Free Checking." All deposit categories grew, with a majority of
the growth being realized in non-maturity interest bearing deposits. Average
noninterest bearing deposits as a percent of average total deposits declined
from 30.6% in 2004 to 27.9% in 2005. This was primarily a result of
"Absolutely Free Checking," promotions on interest bearing deposit products,
and an increase in the level of interest rates. We experienced deposit run-
off in acquisition markets throughout 2005, primarily in certificates of
deposit. Competition for deposits remains strong in all Bank markets. In
2006, growth is anticipated to continue in nonmaturity deposits and be
partially offset by a decline in certificates of deposits, but at a slower
pace than 2005.
Table 2 provides an analysis of our average deposits, by category, and
average rates paid thereon for each of the last three years. Table 11
reflects the shift in our deposit mix over the last three years and Table 12
provides a maturity distribution of time deposits in denominations of
$100,000 and over.
Average short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase, Federal Home Loan Bank
advances (maturing in less than one year), and other borrowings, declined
$2.7 million, or 2.7%. The slight decline is attributable to a $14.8 million
decline in repurchase agreements, partially offset by a $9.4 million increase
in federal funds purchased and a $2.7 million increase in short-term Federal
Home Loan Bank advances. See Note 9 in the Notes to Consolidated Financial
Statements for further information on short-term borrowings.
45
Table 11
SOURCES OF DEPOSIT GROWTH
Components of
2004 to Percentage Total Deposits
2005 of Total ----------------------
(Average Balances - Dollars in Thousands) Change Change 2005 2004 2003
- -----------------------------------------------------------------------------------------
Noninterest Bearing Deposits $ 55,591 15.6% 27.9% 30.6% 28.6%
NOW Accounts 138,109 38.8 22.0 18.3 18.4
Money Market Accounts 48,022 13.5 14.1 14.3 15.1
Savings 22,608 6.4 7.8 8.1 7.7
Time Deposits 91,357 25.7 28.2 28.7 30.2
-------- ----- ----- ----- -----
Total Deposits $355,687 100.0% 100.0% 100.0% 100.0%
======== ===== ===== ===== =====
Table 12
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR OVER
December 31, 2005
---------------------------------------
(Dollars in Thousands) Time Certificates of Deposit Percent
- -----------------------------------------------------------------------
Three months or less $ 41,852 29.19%
Over three through six months 28,158 19.64
Over six through twelve months 41,609 29.02
Over twelve months 31,755 22.15
-------- ------
Total $143,374 100.00%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity for a banking institution is the availability of funds to meet
increased loan demand and/or excessive deposit withdrawals. Management
monitors our financial position in an effort to ensure we have ready access
to sufficient liquid funds to meet normal transaction requirements, can 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
(e.g., collection of interest and fees), federal funds sold, loan and
investment maturities, our bank lines of credit, approved lines for the
purchase of federal funds by CCB and Federal Home Loan Bank advances.
We ended 2005 with approximately $61.1 million in liquidity, a decline of
approximately $13.9 million from the previous year-end. On a year-to-date
average basis, liquidity declined $39.6 million from 2004. The decline was
primarily the result of loan growth. Management expects liquidity to
continue to decline throughout 2006 due to the funding of planned loan
growth.
We have the ability to draw on a $25.0 million Revolving Credit Note, due on
October 15, 2007. Interest is payable quarterly at LIBOR plus an applicable
margin on advances. The revolving credit is unsecured. The existing loan
agreement contains certain financial covenants that we must maintain. At
December 31, 2005, we were in compliance with all of the terms of the
agreement and had $25.0 million available under the line of credit facility.
At December 31, 2005, we had $98.6 million in borrowings outstanding to the
Federal Home Loan Bank of Atlanta ("FHLB") consisting of 39 notes. Three
notes totaling $30.0 million are classified as short-term borrowings with the
remaining notes classified as long-term borrowings. The interest rates are
fixed and the weighted average rate at December 31, 2005 was 4.29%. Required
annual principal reductions approximate $2.7 million, with the remaining
balances due at maturity ranging from 2006 to 2024. During 2005, we obtained
three advances from the FHLB totaling $30.0 million with an average fixed
rate of 4.30% and maturing in one year increments starting in September 2006
and concluding in September 2008. Other FHLB long-term borrowings obtained
in 2005
46
consisted of $3.6 million primarily used to match-fund longer-term, fixed
rate loan products, which management elected not to fund internally due to
asset/liability management considerations. The aforementioned FHLB notes are
collateralized by a blanket floating lien on all 1-4 family residential
mortgage loans, commercial real estate mortgage loans, and home equity
mortgage loans. See Note 10 in the Notes to Consolidated Financial
Statements for additional information on these borrowings.
Table 13
CONTRACTUAL CASH OBLIGATIONS
Table 13 sets forth certain information about contractual cash obligations at
December 31, 2005.
Payments Due By Period
------------------------------------------------
1 Year 1 - 3 4 - 5 After
(Dollars in Thousands) or Less Years Years 5 Years Total
- ------------------------------------------------------------------------------------
Federal Home Loan Bank Advances $32,816 $30,748 $6,049 $28,985 $ 98,598
Subordinated Notes Payable - - - 62,887 62,887
Operating Lease Obligations 1,345 2,386 2,177 6,349 12,258
------- ------- ------ ------- --------
Total Contractual Cash Obligations $34,161 $33,135 $8,226 $98,221 $173,742
======= ======= ====== ======= ========
We issued two junior subordinated deferrable interest notes to wholly owned
Delaware statutory trusts. The first note for $30.9 million was issued to
CCBG Capital Trust I in November 2004. The second note for $32.0 million was
issued to CCBG Capital Trust II in May 2005. See Note 10 in the Notes to
Consolidated Financial Statements for additional information on these
borrowings. The interest payments for the CCBG Capital Trust I borrowing are
due quarterly at a fixed rate of 5.71% for five years, then adjustable
annually to LIBOR plus a margin of 1.90%. This note matures on December 31,
2034. The proceeds of this borrowing were used to partially fund the Farmers
and Merchants Bank of Dublin acquisition. The interest payments for the CCBG
Capital Trust II borrowing are due quarterly at a fixed rate of 6.07% for
five years, then adjustable quarterly to LIBOR plus a margin of 1.80%. This
note matures on June 15, 2035. The proceeds of this borrowing were used to
partially fund the First Alachua Banking Corporation acquisition.
It is anticipated that capital expenditures will approximate $16.6 million
over the next twelve months. These capital expenditures are expected to
consist primarily of several new offices in existing markets, office
equipment and furniture, and technology purchases. Management believes these
capital expenditures can be funded internally without impairing our ability
to meet our on-going obligations.
Capital
We continue to maintain a strong capital position. The ratio of shareowners'
equity to total assets at year-end was 11.65%, 10.86%, and 10.98%, in 2005,
2004, and 2003, respectively.
We are subject to risk-based capital guidelines that measure capital relative
to risk weighted assets and off-balance sheet financial instruments. Capital
guidelines issued by the Federal Reserve Board require bank holding companies
to have a minimum total risk-based capital ratio of 8.00%, with at least half
of the total capital in the form of Tier 1 capital. As of December 31, 2005,
we exceeded these capital guidelines with a total risk-based capital ratio of
13.56% and a Tier 1 ratio of 12.61%, compared to 12.33% and 11.44%,
respectively, in 2004. 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 our capital
calculations previously noted. See Note 10 in the Notes to Consolidated
Financial Statements for additional information on our two trust preferred
security offerings. See Note 14 in the Notes to Consolidated Financial
Statements for additional information as to our capital adequacy.
47
A tangible leverage ratio is also used in connection with the risk-based
capital standards and is defined as Tier 1 capital divided by average assets.
The minimum leverage ratio under this standard is 3% for the highest-rated
bank holding companies which are not undertaking significant expansion
programs. An additional 1% to 2% may be required for other companies,
depending upon their regulatory ratings and expansion plans. On December 31,
2005, we had a leverage ratio of 10.27% compared to 8.79% in 2004.
Shareowners' equity as of December 31, for each of the last three years is
presented below:
Shareowners' Equity
(Dollars in Thousands) 2005 2004 2003
- --------------------------------------------------------------------------
Common Stock $ 186 $ 177 $ 165
Additional Paid-in Capital 83,304 52,328 16,124
Retained Earnings 223,532 204,648 185,134
-------- -------- --------
Subtotal 307,022 257,153 201,423
-------- -------- --------
Accumulated Other Comprehensive
(Loss) Income, Net of Tax (1,246) (353) 1,386
-------- -------- --------
Total Shareowners' Equity $305,776 $256,800 $202,809
======== ======== ========
At December 31, 2005, our common stock had a book value of $16.39 per diluted
share compared to $14.51 in 2004. Beginning in 1994, book value has been
impacted by the net unrealized gains and losses on investment securities
available-for-sale. At December 31, 2005, the net unrealized loss was $1.2
million compared to a net unrealized loss of $.4 million in 2004. The
increase in unrealized loss is primarily due to the general increase in
interest rates.
Our Board of Directors has authorized the repurchase of up to 1,171,875
shares of our outstanding common stock. The purchases are made in the open
market or in privately negotiated transactions. To date, we have repurchased
a total of 715,884 shares at an average purchase price of $15.34 per share.
We offer an Associate Incentive Plan under which certain associates are
eligible to earn shares of our common stock based upon achieving established
performance goals. In 2005, we issued 8,450 shares, valued at approximately
$283,000 under this plan.
We also offer stock purchase plans, whereby employees and directors may
purchase shares at a 10% discount. In 2005, 23,435 shares, valued at
approximately $679,000 (before 10% discount), were issued under these plans.
Dividends
Adequate capital and financial strength is paramount to our stability and the
stability of our subsidiary bank. Cash dividends declared and paid should
not place unnecessary strain on our capital levels. When determining the
level of dividends the following factors are considered:
* Compliance with state and federal laws and regulations;
* Our capital position and our ability to meet our financial obligations;
* Projected earnings and asset levels; and
* The ability of the Bank and us to fund dividends.
Although a consistent dividend payment is believed to be favorably viewed by
the financial markets and shareowners, the Board of Directors will declare
dividends only if we are considered to have adequate capital. Future capital
requirements and corporate plans are considered when the Board considers a
dividend payment.
48
Dividends declared and paid totaled $.6185 per share in 2005. For the first
through third quarters of 2005 we declared a dividend of $.1525 per share.
The dividend was raised 7.2% in the fourth quarter of 2005 from $.1525 per
share to $.1625 per share. We paid dividends of $.5840 per share in 2004 and
$.5248 per share in 2003. The dividend payout ratio was 37.35%, 33.62%, and
34.54% for 2005, 2004 and 2003, respectively. Total cash dividends declared
per share in 2005 represented a 6.0% increase over 2004. All share and per
share data has been adjusted to reflect the five-for-four stock split
effective July 1, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently engage in the use of derivative instruments to hedge
interest rate risks. However, we are a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the
financing needs of our clients.
At December 31, 2005, we had $445.3 million in commitments to extend credit
and $20.7 million in standby letters of credit. Commitments to extend credit
are agreements to lend to a client so long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Standby letters of credit are conditional commitments
issued by us to guarantee the performance of a client to a third party. We
use the same credit policies in establishing commitments and issuing letters
of credit as we do for on-balance sheet instruments.
If commitments arising from these financial instruments continue to require
funding at historical levels, management does not anticipate that such
funding will adversely impact its ability to meet on-going obligations. In
the event these commitments require funding in excess of historical levels,
management believes current liquidity, available lines of credit from the
FHLB, investment security maturities and our revolving credit facility
provide a sufficient source of funds to meet these commitments.
ACCOUNTING POLICIES
Critical Accounting Policies
The consolidated financial statements and accompanying Notes to Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make
various estimates and assumptions (see Note 1 in the Notes to Consolidated
Financial Statements). We believe that, of our significant accounting
policies, the following may involve a higher degree of judgment and
complexity.
Allowance for Loan Losses. The allowance for loan losses is established
through a charge to the provision for loan losses. Provisions are made to
reserve for estimated losses in loan balances. The allowance for loan losses
is a significant estimate and is evaluated quarterly by us for adequacy. The
use of different estimates or assumptions could produce a different required
allowance, and thereby a larger or smaller provision recognized as expense in
any given reporting period. A further 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.
Intangible Assets. Intangible assets consist primarily of goodwill, core
deposit assets, and other identifiable intangibles that were recognized in
connection with various acquisitions. Goodwill represents the excess of the
cost of acquired businesses over the fair market value of their identifiable
net assets. We perform an impairment review on an annual basis to determine
if there has been impairment of our goodwill. We have determined that no
impairment existed at December 31, 2005.
49
Impairment testing requires management to make significant judgments and
estimates relating to the fair value of its identified reporting units.
Significant changes to these estimates may have a material impact on our
reported results.
Core deposit assets represent the premium we paid for core deposits. Core
deposit intangibles are amortized on the straight-line method over various
periods ranging from 5-10 years. Generally, core deposits refer to
nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW,
money market and savings. We make certain estimates relating to the useful
life of these assets, and rate of run-off based on the nature of the specific
assets and the client bases acquired. If there is a reason to believe there
has been a permanent loss in value, management will assess these assets for
impairment. Any changes in the original estimates may materially affect
reported earnings.
Pension Assumptions. We have a defined benefit pension plan for the benefit
of substantially all of our associates. Our funding policy with respect to
the pension plan is to contribute amounts to the plan sufficient to meet
minimum funding requirements as set by law. Pension expense, reflected in
the Consolidated Statements of Income in noninterest expense as "Salaries and
Associate Benefits," is determined by an external actuarial valuation based
on assumptions that are evaluated annually as of December 31, the measurement
date for the pension obligation. The Consolidated Statements of Financial
Condition reflect an accrued pension benefit cost due to funding levels and
unrecognized actuarial amounts. The most significant assumptions used in
calculating the pension obligation are the weighted-average discount rate
used to determine the present value of the pension obligation, the weighted-
average expected long-term rate of return on plan assets, and the assumed
rate of annual compensation increases. These assumptions are re-evaluated
annually with the external actuaries, taking into consideration both current
market conditions and anticipated long-term market conditions.
The weighted-average discount rate is determined by matching anticipated
Retirement Plan cash flows for a 30-year period to long-term corporate Aa-
rated bonds and solving for the underlying rate of return, which investing in
such securities would generate. This methodology is applied consistently
from year-to-year. The discount rate utilized in 2005 was 6.00%. The
estimated impact to 2005 pension expense of a 25 basis point increase or
decrease in the discount rate would have been a decrease of approximately
$252,000 and an increase of approximately $263,000, respectively. We
anticipate using a 5.75% discount rate in 2006.
The weighted-average expected long-term rate of return on plan assets is
determined based on the current and anticipated future mix of assets in the
plan. The assets currently consist of equity securities, U.S. Government and
Government agency debt securities, and other securities (typically temporary
liquid funds awaiting investment). The weighted-average expected long-term
rate of return on plan assets utilized for 2005 was 8.0%. The estimated
impact to pension expense of a 25 basis point increase or decrease in the
rate of return would have been an approximate $99,000 decrease or increase,
respectively. We anticipate using a rate of return on plan assets for 2006
of 8.0%.
The assumed rate of annual compensation increases of 5.50% in 2005 is based
on expected trends in salaries and the employee base. This assumption is not
expected to change materially in 2006.
Detailed information on the pension plan, the actuarially determined
disclosures, and the assumptions used are provided in Note 12 of the Notes to
Consolidated Financial Statements.
50
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. We do not
expect SFAS 154 will significantly impact our financial statements upon its
adoption on January 1, 2006.
FASB Staff Position (FSP) No. 115-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." FSP 115-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss.
An investment is considered impaired if the fair value of the investment is
less than its cost. If, after consideration of all available evidence to
evaluate the realizable value of its investment, impairment is determined to
be other-than-temporary, then an impairment loss should be recognized equal
to the difference between the investment's cost and its fair value. FSP 115-
1 nullifies certain provisions of Emerging Issues Task Force (EITF) Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments," while retaining the disclosure requirements of EITF 03-
1 which were adopted in 2003. FSP 115-1 is effective for reporting periods
beginning after December 15, 2005. We do not expect FSP 115-1 will
significantly impact our financial statements upon its adoption on January 1,
2006.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment" (Revised). SFAS 123R establishes
standards for the accounting for transactions in which an entity
(i) exchanges its equity instruments for goods or services, or (ii) incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to
account for stock-based compensation using APB 25 and requires that such
transactions be recognized as compensation cost in the income statement based
on their fair values on the date of the grant. We adopted the accounting
standards set forth in SFAS No. 123 in 2003 and have accordingly expensed
stock-based compensation for 2003, 2004, and 2005. See Note 1 - Accounting
Policies.
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 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
51
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 us beginning January 1, 2005. We adopted SOP 03-3 and
application of its guidance for the recent First Alachua Bank Corporation
acquisition, which did not have a significant impact on our financial
statements. Loans acquired in future acquisitions will continue to be
accounted for under SOP 03-3.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Overview
Market risk management arises from changes in interest rates, exchange rates,
commodity prices, and equity prices. We have risk management policies to
monitor and limit exposure to market risk and do not participate in
activities that give rise to significant market risk involving exchange
rates, commodity prices, or equity prices. In asset and liability management
activities, policies are in place that are designed to minimize structural
interest rate risk.
Interest Rate Risk Management
The normal course of business activity exposes us to interest rate risk.
Fluctuations in interest rates may result in changes in the fair market value
of our financial instruments, cash flows and net interest income. We seek to
avoid fluctuations in our net interest margin and to maximize net interest
income within acceptable levels of risk through periods of changing interest
rates. Accordingly, our interest rate sensitivity and liquidity are
monitored on an ongoing basis by our Asset and Liability Committee ("ALCO"),
which oversees market risk management and establishes risk measures, limits
and policy guidelines for managing the amount of interest rate risk and its
effects on net interest income and capital. A variety of measures are used
to provide for a comprehensive view of the magnitude of interest rate risk,
the distribution of risk, the level of risk over time and the exposure to
changes in certain interest rate relationships.
ALCO continuously monitors and manages the balance between interest rate-
sensitive assets and liabilities. ALCO's objective is to manage the impact
of fluctuating market rates on net interest income within acceptable levels.
In order to meet this objective, management may adjust the rates charged/paid
on loans/deposits or may shorten/lengthen the duration of assets or
liabilities within the parameters set by ALCO.
Our financial assets and liabilities are classified as other-than-trading.
An analysis of the other-than-trading financial components, including the
fair values, are presented in Table 14. This table presents our consolidated
interest rate sensitivity position as of year-end 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 our net
interest income due to fluctuations in interest rates. The asset and
liability values presented in Table 14 may not necessarily be indicative of
our interest rate sensitivity over an extended period of time.
52
We expect rising rates to have a favorable impact on the net interest margin,
subject to the magnitude and timeframe over which the rate changes occur.
However, as general interest rates rise or fall, other factors such as
current market conditions and competition may impact how we respond to
changing rates and thus impact the magnitude of change in net interest
income. Non-maturity deposits offer management greater discretion as to the
direction, timing, and magnitude of interest rate changes and can have a
material impact on our interest rate sensitivity. In addition, the relative
level of interest rates as compared to the current yields/rates of existing
assets/liabilities can impact both the direction and magnitude of the change
in net interest margin as rates rise and fall from one period to the next.
Inflation
The impact of inflation on the banking industry differs significantly from
that of other industries in which a large portion of total resources are
invested in fixed assets such as property, plant and equipment.
Assets and liabilities of financial institutions are virtually all monetary
in nature, and therefore are primarily impacted by interest rates rather than
changing prices. While the general level of inflation underlies most
interest rates, interest rates react more to changes in the expected rate of
inflation and to changes in monetary and fiscal policy. Net interest income
and the interest rate spread are good measures of our ability to react to
changing interest rates and are discussed in further detail in the section
entitled "Results of Operations."
53
Table 14
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
Other Than Trading Portfolio
Maturing or Repricing in:
---------------------------------------------------------------------------------- Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- ----------------------------------------------------------------------------------------------------------------------------------
Loans:
Fixed Rate $ 337,826 $159,503 $117,903 $52,794 $29,771 $24,277 $ 722,074 $ 719,765
Average Interest Rate 6.16% 7.25% 7.26% 7.22% 7.46% 6.35% 6.72%
Floating Rate(2) 1,082,130 137,593 106,314 7,748 4,952 6,683 1,345,420 1,342,599
Average Interest Rate 6.20% 6.28% 6.82% 7.17% 7.47% 7.74% 6.28%
Investment Securities:(3)
Fixed Rate 78,444 49,018 11,215 3,127 8,373 18,804 168,981 168,981
Average Interest Rate 2.57% 3.08% 3.59% 3.84% 3.95% 4.82% 3.13%
Floating Rate 2,038 - - - - - 2,038 2,038
Average Interest Rate 4.63% - - - - - 4.63%
Other Earning Assets:
Floating Rate 61,164 - - - - - 61,164 61,164
Average Interest Rate 4.32% - - - - - 4.32%
Total Financial Assets $1,561,602 $346,114 $235,432 $63,669 $43,096 $49,764 $2,299,677 $2,294,547
Average Interest Rate 5.93% 6.27% 6.89% 7.05% 6.78% 5.96% 6.13%
Deposits:(4)
Fixed Rate $ 409,844 $ 71,258 $ 29,600 $ 9,105 $ 5,317 $ 251 $ 525,375 $ 449,663
Average Interest Rate 2.83% 3.29% 3.46% 3.59% 3.80% 4.94% 2.95%
Floating Rate 995,136 - - - - - 995,136 995,136
Average Interest Rate 1.44% - - - - - 1.44%
Other Interest Bearing Liabilities:
Fixed Rate Debt 3,399 16,879 13,921 3,021 2,759 29,652 69,631 69,295
Average Interest Rate 4.68% 4.14% 4.41% 4.41% 4.88% 5.08% 4.66%
Floating Rate Debt 82,973 - - 30,928 31,959 - 145,860 145,797
Average Interest Rate 3.35% - - 5.71% 6.07% - 4.45%
Total Financial Liabilities $1,491,352 $ 88,137 $ 43,521 $43,054 $40,035 $29,904 $1,736,002 $1,659,891
Average Interest Rate 1.94% 3.46% 3.76% 1.07% 5.69% 5.08% 2.18%
(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. Time deposit balances are classified according to maturity.
54
Item 8. Financial Statements and Supplementary Data
Table 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
2005
----------------------------------------------
(Dollars in Thousands, Except Per Share Data)(1) Fourth Third Second First
- ------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 38,780 $ 36,889 $ 33,910 $ 30,474
Interest Expense 9,470 7,885 6,788 5,920
---------- ---------- ---------- ----------
Net Interest Income 29,310 29,004 27,122 24,554
Provision for Loan Losses 1,333 376 388 410
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 27,977 28,628 26,734 24,144
Gain on Sale of Credit Card Portfolios - - - -
Noninterest Income 12,974 13,123 12,041 11,060
Conversion/Merger Expense 24 180 234 -
Noninterest Expense 29,318 28,429 26,362 25,267
---------- ---------- ---------- ----------
Income Before Provision for Income Taxes 11,609 13,142 12,179 9,937
Provision for Income Taxes 4,150 4,565 4,311 3,560
---------- ---------- ---------- ----------
Net Income $ 7,459 $ 8,577 $ 7,868 $ 6,377
========== ========== ========== ==========
Net Interest Income (FTE) $ 29,652 $ 29,329 $ 27,396 $ 24,835
Per Common Share:
Net Income Basic $ .40 $ .46 $ .44 $ .36
Net Income Diluted .40 .46 .44 .36
Dividends Declared .163 .152 .152 .152
Diluted Book Value 16.39 16.17 15.87 14.69
Market Price:
High 39.33 38.72 33.46 33.60
Low 33.21 31.78 28.02 29.30
Close 34.29 37.71 32.32 32.41
Selected Average
Balances:
Loans $2,062,775 $2,046,968 $1,932,637 $1,827,327
Earning Assets 2,279,010 2,250,902 2,170,483 2,047,049
Assets 2,607,597 2,569,524 2,458,788 2,306,807
Deposits 2,027,017 2,013,427 1,932,144 1,847,378
Shareowners' Equity 306,208 300,931 278,107 260,946
Common Equivalent Average Shares:
Basic 18,624 18,623 18,094 17,700
Diluted 18,654 18,649 18,102 17,708
Ratios:
ROA 1.14% 1.32% 1.28% 1.12%
ROE 9.67% 11.31% 11.35% 9.91%
Net Interest Margin (FTE) 5.16% 5.17% 5.07% 4.92%
Efficiency Ratio 65.22% 63.60% 63.56% 67.06%
2004
----------------------------------------------
(Dollars in Thousands, Except Per Share Data)(1) Fourth Third Second First
- ------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 29,930 $ 24,660 $ 24,265 $ 22,670
Interest Expense 5,634 3,408 3,221 3,178
---------- ---------- ---------- ----------
Net Interest Income 24,296 21,252 21,044 19,492
Provision for Loan Losses 300 300 580 961
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 23,996 20,952 20,464 18,531
Gain on Sale of Credit Card Portfolios 324 6,857 - -
Noninterest Income 11,596 10,864 11,031 9,881
Conversion/Merger Expense 436 68 4 42
Noninterest Expense 24,481 21,565 21,597 21,033
---------- ---------- ---------- ----------
Income Before Provision for Income Taxes 10,999 17,040 9,894 7,337
Provision for Income Taxes 3,737 6,221 3,451 2,490
---------- ---------- ---------- ----------
Net Income $ 7,262 $ 10,819 $ 6,443 $ 4,847
========== ========== ========== ==========
Net Interest Income (FTE) $ 24,619 $ 21,528 $ 21,333 $ 19,811
Per Common Share:
Net Income Basic $ .40 $ .66 $ .38 $ .30
Net Income Diluted .40 .66 .38 .30
Dividends Declared .152 .144 .144 .144
Diluted Book Value 14.51 13.19 12.64 12.43
Market Price:
High 36.78 32.96 34.52 36.44
Low 30.17 26.66 28.40 31.24
Close 33.44 30.97 31.67 33.00
Selected Average
Balances:
Loans $1,779,736 $1,524,401 $1,491,142 $1,357,206
Earning Assets 2,066,111 1,734,708 1,721,655 1,634,468
Assets 2,322,870 1,941,372 1,929,485 1,830,496
Deposits 1,853,588 1,545,224 1,538,630 1,457,160
Shareowners' Equity 248,773 217,273 210,211 206,395
Common Equivalent Average Shares:
Basic 17,444 16,604 16,593 16,578
Diluted 17,451 16,609 16,596 16,607
Ratios:
ROA 1.24% 2.22%(2) 1.34% 1.06%
ROE 11.61% 19.81%(2) 12.33% 9.45%
Net Interest Margin (FTE) 4.75% 4.94% 4.99% 4.88%
Efficiency Ratio 63.85% 52.60%(2) 63.87% 68.06%
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005.
(2) Includes $6.9 million ($4.2 million after-tax) one-time gain on sale of credit card portfolio.
55
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
- ----
57 Report of Independent Registered Public Accounting Firm
58 Consolidated Statements of Income
59 Consolidated Statements of Financial Condition
60 Consolidated Statements of Changes in Shareowners' Equity
61 Consolidated Statements of Cash Flows
62 Notes to Consolidated Financial Statements
56
Report of Independent Registered Public Accounting Firm
The Board of Directors
Capital City Bank Group, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Capital City Bank Group, Inc. and subsidiary (the Company) as of
December 31, 2005 and 2004, and the related consolidated statements of
income, changes in shareowners' equity, and cash flows for each of the years
in the three-year period ended December 31, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capital
City Bank Group, Inc and subsidiary as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 16, 2006 expressed an unqualified opinion
on management's assessment of, and the effective operation of, internal
control over financial reporting.
KPMG LLP
Orlando, Florida
March 16, 2006
Certified Public Accountants
57
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
----------------------------------
(Amounts in Thousands, Except Per Share Data)(1) 2005 2004 2003
- ------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $133,268 $ 95,607 $ 87,435
Investment Securities:
U.S. Treasury 412 759 664
U.S. Government Agencies and Corporations 3,223 2,111 2,486
States and Political Subdivisions 1,545 1,944 2,409
Other Securities 614 271 575
Funds Sold 991 833 1,261
-------- -------- --------
Total Interest Income 140,053 101,525 94,830
-------- -------- --------
INTEREST EXPENSE
Deposits 21,134 11,315 11,567
Short-Term Borrowings 2,854 1,270 1,270
Subordinated Notes Payable 2,981 294 -
Other Long-Term Borrowings 3,094 2,562 2,002
-------- -------- --------
Total Interest Expense 30,063 15,441 14,839
-------- -------- --------
Net Interest Income 109,990 86,084 79,991
Provision for Loan Losses 2,507 2,141 3,436
-------- -------- --------
Net Interest Income After
Provision for Loan Losses 107,483 83,943 76,555
-------- -------- --------
NONINTEREST INCOME
Service Charges on Deposit Accounts 20,740 17,574 16,319
Data Processing 2,610 2,628 2,403
Asset Management Fees 4,419 4,007 2,650
Gain on Sale of Investment Securities 9 14 1
Mortgage Banking Revenues 4,072 3,208 6,090
Gain on Sale of Credit Card Portfolios - 7,181 -
Other 17,348 15,941 14,476
-------- -------- --------
Total Noninterest Income 49,198 50,553 41,939
-------- -------- --------
NONINTEREST EXPENSE
Salaries and Associate Benefits 53,687 44,345 40,462
Occupancy, Net 8,293 7,074 5,972
Furniture and Equipment 8,970 8,393 7,840
Intangible Amortization 5,440 3,824 3,241
Merger Expense 438 550 -
Other 32,986 25,040 22,206
-------- -------- --------
Total Noninterest Expense 109,814 89,226 79,721
-------- -------- --------
Income Before Income Taxes 46,867 45,270 38,773
Income Taxes 16,586 15,899 13,580
-------- -------- --------
NET INCOME $ 30,281 $ 29,371 $ 25,193
======== ======== ========
BASIC NET INCOME PER SHARE $ 1.66 $ 1.74 $ 1.53
======== ======== ========
DILUTED NET INCOME PER SHARE $ 1.66 $ 1.74 $ 1.52
======== ======== ========
Average Basic Common Shares Outstanding 18,264 16,806 16,528
======== ======== ========
Average Diluted Common Shares Outstanding 18,281 16,811 16,564
======== ======== ========
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective July 1, 2005, and the 5-for-4 stock split effective June 13, 2003.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
58
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of December 31,
-----------------------------
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004
- ----------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 105,195 $ 87,039
Funds Sold and Interest Bearing Deposits 61,164 74,506
---------- ----------
Total Cash and Cash Equivalents 166,359 161,545
Investment Securities, Available-for-Sale 171,019 210,240
Loans, Net of Unearned Interest 2,067,494 1,828,825
Allowance for Loan Losses (17,410) (16,037)
---------- ----------
Loans, Net 2,050,084 1,812,788
Premises and Equipment, Net 73,818 58,963
Goodwill 84,829 54,341
Other Intangible Assets 25,622 25,964
Other Assets 53,731 40,172
Total Assets $2,625,462 $2,364,013
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 559,492 $ 566,991
Interest Bearing Deposits 1,519,854 1,327,895
---------- ----------
Total Deposits 2,079,346 1,894,886
Short-Term Borrowings 82,973 96,014
Subordinated Notes Payable 62,887 30,928
Other Long-Term Borrowings 69,630 68,453
Other Liabilities 24,850 16,932
---------- ----------
Total Liabilities 2,319,686 2,107,213
---------- ----------
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value; 3,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 90,000,000 shares
authorized; 18,631,706 and 17,694,139 shares
issued and outstanding at December 31, 2005
and December 31, 2004, respectively 186 177
Additional Paid-In Capital 83,304 52,328
Retained Earnings 223,532 204,648
Accumulated Other Comprehensive Loss, Net of Tax (1,246) (353)
---------- ----------
Total Shareowners' Equity 305,776 256,800
---------- ----------
Commitments and Contingencies (See Note 18)
Total Liabilities and Shareowners' Equity $2,622,110 $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.
59
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
Accumulated Other
Additional Comprehensive
Common Paid-In Retained (Loss) Income,
(Dollars in Thousands, Except Per Share Data)(1) Stock Capital Earnings Net of Taxes Total
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $165 $14,658 $168,587 $3,121 $186,531
Comprehensive Income:
Net Income - - 25,193
Net Change in Unrealized Loss
On Available-for-Sale Securities - - - (1,735)
Total Comprehensive Income - - - - 23,458
Cash Dividends ($.525 per share) - - (8,646) - (8,646)
Stock Performance Plan Compensation - 62 - - 62
Issuance of Common Stock - 1,421 - - 1,421
Repurchase and Retirement of Common Stock - (17) - - (17)
---- ------- -------- ------ --------
Balance, December 31, 2003 165 16,124 185,134 1,386 202,809
Comprehensive Income:
Net Income - - 29,371
Net Change in Unrealized Loss
On Available-for-Sale Securities - - - (1,739)
Total Comprehensive Income - - - - 27,632
Cash Dividends ($.584 per share) - - (9,857) - (9,857)
Stock Performance Plan Compensation - 193 - - 193
Issuance of Common Stock 12 36,011 - - 36,023
---- ------- -------- ------ --------
Balance, December 31, 2004 177 52,328 204,648 (353) 256,800
Comprehensive Income:
Net Income - - 30,281
Net Change in Unrealized Loss
On Available-for-Sale Securities - - - (893)
Total Comprehensive Income - - - - 29,388
Cash Dividends ($.619 per share) - - (11,397) - (11,397)
Stock Performance Plan Compensation - 968 - - 968
Issuance of Common Stock 9 30,008 - - 30,017
---- ------- -------- ------ --------
Balance, December 31, 2005 $186 $83,304 $223,532 $(1,246) $305,776
==== ======= ======== ====== ========
(1) All share, per share, and shareowners' equity data have been adjusted to reflect the 5-for-4 stock split
effective July 1, 2005, and the 5-for-4 stock split effective June 13, 2003.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
60
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
----------------------------------
(Dollars in Thousands) 2005 2004 2003
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 30,281 $ 29,371 $ 25,193
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 2,507 2,141 3,436
Depreciation 5,899 5,288 4,857
Loss on Disposal of Fixed Assets - - 92
Net Securities Amortization 1,454 2,117 2,180
Amortization of Intangible Assets 5,440 3,824 3,241
Gain on Sale of Investment Securities (9) (14) (1)
Non-Cash Compensation 968 1,707 508
Deferred Income Taxes 182 765 755
Net (Increase) Decrease in Other Assets (11,839) (4,210) 1,385
Net Increase (Decrease) in Other Liabilities 9,264 3,182 (3,791)
-------- -------- --------
Net Cash Provided by Operating Activities 44,147 44,171 37,855
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities Available-for-Sale:
Purchases (45,717) (88,028) (107,695)
Sales 35,142 3,466 125
Payments, Maturities, and Calls 81,783 128,617 101,234
Net Increase in Loans (123,105) (139,507) (65,180)
Net Cash Acquired (Used) in Acquisitions 37,412 (31,743) -
Purchase of Premises & Equipment (18,336) (5,576) (11,152)
Proceeds From Sales of Premises & Equipment 897 1,155 1,090
-------- -------- --------
Net Cash Used in Investing Activities (31,924) (131,616) (81,578)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits (17,125) 23,776 40,005
Net Decrease in Short-Term Borrowings (33,085) (33,559) (45,913)
Proceeds from Subordinated Notes Payable 31,959 30,928 -
Increase in Other Long-Term Borrowings 23,600 59,741 16,564
Repayment of Other Long-Term Borrowings (2,380) (41,815) (1,412)
Dividends Paid (11,397) (9,857) (8,646)
Repurchase of Common Stock - - (17)
Issuance of Common Stock 1,019 1,184 975
-------- -------- --------
Net Cash (Used In) Provided By Financing Activities (7,409) 30,398 1,556
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 4,814 (57,047) (42,167)
Cash and Cash Equivalents at Beginning of Year 161,545 218,592 260,759
-------- -------- --------
Cash and Cash Equivalents at End of Year $166,359 $161,545 $218,592
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest Paid on Deposits $ 19,964 $ 10,661 $ 11,999
======== ======== ========
Interest Paid on Debt $ 8,754 $ 4,066 $ 3,238
======== ======== ========
Taxes Paid $ 15,923 $ 12,606 $ 16,303
======== ======== ========
Loans Transferred to Other Real Estate $ 2,689 $ 1,351 $ 5,267
======== ======== ========
Issuance of Common Stock as Non-Cash Compensation $ 339 $ 1,707 $ 508
======== ======== ========
Transfer of Current Portion of Long-Term Borrowings
to Short-Term Borrowings $ 20,043 $ 16,002 $ 40,423
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
61
Notes to Consolidated Financial Statements
Note 1
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Capital City
Bank Group, Inc. ("CCBG"), and its wholly-owned subsidiary, Capital City Bank
("CCB" or the "Bank" and together with CCBG, the "Company"). All material
inter-company transactions and accounts have been eliminated.
The Company, which operates in a single reportable business segment comprised
of commercial banking within the states of Florida, Georgia, and Alabama,
follows accounting principles generally accepted in the United States of
America and reporting practices applicable to the banking industry. The
principles which materially affect the financial position, results of
operations and cash flows are summarized below.
The Company determines whether it has a controlling financial interest in an
entity by first evaluating whether the entity is a voting interest entity or
a variable interest entity under accounting principles generally accepted in
the United States of America. Voting interest entities are entities in which
the total equity investment at risk is sufficient to enable the entity to
finance itself independently and provides the equity holders with the
obligation to absorb losses, the right to receive residual returns and the
right to make decisions about the entity's activities. The Company
consolidates voting interest entities in which it has all, or at least a
majority of, the voting interest. As defined in applicable accounting
standards, variable interest entities (VIEs) are entities that lack one or
more of the characteristics of a voting interest entity. A controlling
financial interest in an entity is present when an enterprise has a variable
interest, or a combination of variable interests, that will absorb a majority
of the entity's expected losses, receive a majority of the entity's expected
residual returns, or both. The enterprise with a controlling financial
interest, known as the primary beneficiary, consolidates the VIE. CCBG's
wholly-owned subsidiaries, CCBG Capital Trust I (established November 1,
2004) and CCBG Capital Trust II (established May 24, 2005) are VIEs for which
the Company is not the primary beneficiary. Accordingly, the accounts of
these entities are not included in the Company's consolidated financial
statements.
Certain items in prior financial statements have been reclassified to conform
to the current presentation. All acquisitions during the reported periods
were accounted for using the purchase method. Accordingly, the operating
results of the acquired companies are included with the Company's results of
operations since their respective dates of acquisition (see Note 2 -
Acquisitions).
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 the close of
business on June 17, 2005. All share, per share, and shareowners' equity
data have been adjusted to reflect the stock split.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could vary
from these estimates. Material estimates that are particularly susceptible
to significant changes in the near-term relate to the determination of the
allowance for loan losses, income taxes, and valuation of goodwill and other
intangibles and their respective analysis of impairment.
62
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits in other banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods and all other cash equivalents
have a maturity of 90 days or less.
Investment Securities
Investment securities available-for-sale are carried at fair value and
represent securities that are available to meet liquidity and/or other needs
of the Company. Gains and losses are recognized and reported separately in
the Consolidated Statements of Income upon realization or when impairment of
values is deemed to be other than temporary. Gains or losses are recognized
using the specific identification method. Unrealized holding gains and
losses for securities available-for-sale are excluded from the Consolidated
Statements of Income and reported net of taxes in the accumulated other
comprehensive (loss) income component of shareowners' equity until realized.
Accretion and amortization are recognized on the effective yield method over
the life of the securities.
Loans
Loans are stated at the principal amount outstanding, net of unearned income.
Interest income is generally accrued on the effective yield method based on
outstanding balances. The accrual of interest is generally suspended on
loans more than 90 days past due with respect to principal and interest.
When a loan is placed on nonaccrual status, all previously accrued and
uncollected interest is reversed against current income. Interest income on
nonaccrual loans is recognized on a cash basis when the ultimate
collectibility is no longer considered doubtful. Loans are returned to
accrual status when the principal and interest amounts contractually due are
brought current and future payments are reasonably assured. Fees charged to
originate loans and direct loan origination costs are deferred and amortized
over the life of the loan as a yield adjustment.
Loans Held For Sale
Certain residential mortgage loans are originated for sale in the secondary
mortgage loan market. Additionally, certain other loans are periodically
identified to be sold. These loans are classified as loans held for sale and
carried at the lower of cost or estimated fair value. Fair value is
determined on the basis of rates quoted in the respective secondary market
for the type of loan held for sale. Loans are generally sold at a premium or
discount from the carrying amount of the loans. Such premium or discount is
recognized as mortgage banking revenue at the date of sale. Fixed
commitments may be used at the time loans are originated or identified for
sale to mitigate interest rate risk. The fair value of fixed commitments to
originate and sell loans held for sale is not material.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision
for loan losses charged to expense, which represents management's best
estimate of probable losses that have been incurred within the existing
portfolio of loans. The allowance is that amount considered adequate to
absorb losses inherent in the loan portfolio based on management's evaluation
of credit risk as of the balance sheet date.
The allowance for loan losses includes allowance allocations calculated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118,
and allowance allocations calculated in accordance with SFAS 5, "Accounting
for Contingencies." The level of the allowance reflects management's
continuing evaluation of specific credit risks, loan loss experience, current
loan portfolio quality, present economic conditions and unidentified losses
inherent in the current loan portfolio, as well as trends in the
63
foregoing. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The Company's allowance for loan losses consists of three elements:
(i) specific valuation allowances established for probable losses on specific
loans deemed impaired; (ii) general valuation allowances calculated based on
historical loan loss experience for similar loans with similar
characteristics and trends; and (iii) unallocated general valuation
allowances determined based on general economic conditions and other
qualitative risk factors both internal and external to the Company.
Long-Lived Assets
Premises and equipment are stated at cost less accumulated depreciation,
computed on the straight-line method over the estimated useful lives for each
type of asset with premises being depreciated over a range of 10 to 40 years,
and equipment being depreciated over a range of 3 to 10 years. Major
additions are capitalized and depreciated in the same manner. Repairs and
maintenance are charged to noninterest expense as incurred.
Intangible assets, other than goodwill, consist of core deposit assets, and a
client relationship and non-compete asset that were recognized in connection
with various acquisitions. Core deposit intangible assets are amortized on
the straight-line method over various periods, with the majority being
amortized over an average of 5 to 10 years. Other identifiable intangibles
are amortized on the straight-line method over their estimated useful lives.
Long-lived assets are evaluated for impairment if circumstances suggest that
their carrying value may not be recoverable, by comparing the carrying value
to estimated undiscounted cash flows. If the asset is deemed impaired, an
impairment charge is recorded equal to the carrying value less the fair
value.
Goodwill
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). The adoption of SFAS 142 required the Company to discontinue goodwill
amortization and identify reporting units to which the goodwill related for
purposes of assessing potential impairment of goodwill on an annual basis, or
more frequently, if events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. In accordance with the
guidelines in SFAS 142, the Company determined it has one reporting unit with
goodwill. As of December 31, 2005, the Company performed its annual
impairment review and concluded that no impairment adjustment was necessary.
Income Taxes
The Company files a consolidated federal income tax return and each
subsidiary files a separate state income tax return. In general, the parent
company and its Bank subsidiary compute their tax provisions as separate
entities prior to recognition of any tax expense or benefits which may accrue
from filing a consolidated return.
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
carrying amounts of existing assets and liabilities on the Company's
consolidated statement of financial position and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
64
Stock Based Compensation
As of December 31, 2005, the Company had three stock-based compensation
plans, consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005
Associate Stock Purchase Plan and the 2005 Director Stock Purchase Plan.
Prior to 2005, the Company maintained stock based compensation plans
substantially similar to the aforementioned plans (each a "Predecessor
Plan"). As a result of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the Company adopted the fair value
recognition provisions of SFAS No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation," prospectively to all awards granted, modified, or
settled on or after January 1, 2003. Awards under the Company's plans vest
over periods ranging from six months to three years. Therefore, the cost
related to stock-based associate compensation included in the determination
of net income for 2003 is different than that which would have been
recognized if the fair value based method had been applied to all awards
since the original effective date of SFAS 123, as a result of the difference
between compensation measurement dates under SFAS 123 and Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), the differences in what instruments are considered non-
compensatory, and the fact that awards granted prior to January 1, 2003 were
accounted for under APB 25. The cost related to all stock-based associate
compensation included in net income is accounted for under the fair value
based method during 2005 and 2004, as all awards have grant dates after
January 1, 2003.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based compensation.
(Dollars in Thousands, Except Per Share Data) 2005 2004 2003
- ----------------------------------------------------------------------------------
Net income, as reported $30,281 $29,371 $25,193
Add: Stock based compensation included
in reported net income, net of tax 671 400 634
Deduct: Stock based compensation
determined under fair value based method
for all awards, net of tax (671) (400) (348)
------- ------- -------
Pro forma net income $30,281 $29,371 $25,479
======= ======= =======
Net income per share:
Basic-as reported $ 1.66 $ 1.74 $ 1.53
======= ======= =======
Basic-pro forma $ 1.66 $ 1.74 $ 1.54
======= ======= =======
Diluted-as reported $ 1.66 $ 1.74 $ 1.52
======= ======= =======
Diluted-pro forma $ 1.66 $ 1.74 $ 1.54
======= ======= =======
2005 Director Stock Purchase Plan ("DSPP"). The Company's DSPP allows the
directors to purchase the Company's common stock at a price equal to 90% of
the closing price on the date of purchase. Stock purchases under the DSPP
are limited to the amount of the directors' annual retainer and meeting fees.
The DSPP has 93,750 shares reserved for issuance. In 2005, CCBG issued 6,589
shares under the DSPP. During 2004 and 2003, CCBG issued 9,211 and 6,076
shares, respectively, under the Predecessor Plan to the DSPP. A total of
6,589 shares have been issued to directors since the inception of this plan.
In accordance with the Company's adoption of SFAS 123, compensation expense
has been recognized for the Company's plan activity in all reported periods.
2005 Associate Stock Purchase Plan ("ASPP"). Under the Company's ASPP,
substantially all associates may purchase the Company's common stock through
payroll deductions at a price equal to 90% of the lower of the fair market
value at the beginning or end of each six-month offering period. Stock
purchases under the ASPP are limited to 10% of
65
an associate's eligible compensation, up to a maximum of $25,000 (fair market
value on each enrollment date) in any plan year. The ASPP has 593,750 shares
of common stock reserved for issuance. CCBG issued 16,846 shares under the
plan in 2005 at a weighted average price of $28.92. A total of 16,846 shares
have been issued since inception of the ASPP. During 2004 and 2003, CCBG
issued 25,070 and 31,543 shares under a Predecessor Plan to the ASPP at a
weighted average price of $28.50 and $24.37, respectively. In accordance
with the Company's adoption of SFAS 123, compensation expense has been
recognized for the Company's plan activity in all reported periods.
Based on the Black-Scholes option pricing model, the weighted average
estimated fair value of the purchase rights granted under the ASPP Plan was
$5.77 in 2005. For 2004 and 2003, the weighted average fair value of the
purchase rights granted was $5.90 and $3.17, respectively. In calculating
compensation, the fair value of each stock purchase right was estimated on
the date of grant using the following weighted average assumptions:
2005 2004 2003
- -----------------------------------------------------
Dividend yield 1.9% 1.7% 1.8%
Expected volatility 28.0% 30.0% 34.5%
Risk-free interest rate 2.6% 1.1% 1.1%
Expected life (in years) 0.5 0.5 0.5
2005 Associate Incentive Plan ("AIP"). Under the Company's AIP, shares are
granted to participants based upon the achievement of performance goals
established by the Board of Directors at the beginning of each award period.
Shares earned are issued during the first calendar quarter of the following
year. A total of 875,000 shares of common stock have been reserved for
issuance under this plan. CCBG issued 8,450 shares under the AIP in 2005. A
total of 8,450 shares have been issued since inception of this plan. During
2004 and 2003, CCBG issued 46,726 and 13,245 shares under the Predecessor
Plan to the AIP. In accordance with the Company's adoption of SFAS 123,
compensation expense has been recognized for the Company's plan activity in
all reported periods.
Executive Stock Option Agreement. In 2005, the Company's Board of Directors
approved a stock option agreement for a key executive officer (William G.
Smith, Jr. - Chairman, President and CEO, CCBG) under the provisions of the
AIP. Similar stock option agreements were approved in 2004 and 2003 under
the Predecessor Plan to the AIP. These agreements grant a non-qualified
stock option award upon achieving certain annual earnings per share
conditions set by the Board, subject to certain vesting requirements. The
options granted under the agreements have a term of ten years and vest at a
rate of one-third on each of the first, second, and third anniversaries of
the date of grant. Under the 2004 and 2003 agreements, 37,246 and 23,138
option shares, respectively, were issued, none of which has been exercised.
The fair value of a 2004 option share was $13.42, and the fair value of a
2003 option share was $11.64. The exercise prices for the 2004 and 2003
shares are $32.69 and $32.96, respectively. Under the 2005 agreement, the
earnings per share conditions were not met; therefore, no economic value was
earned by the executive. During 2005, 2004 and 2003, the Company recognized
expense of approximately $193,000, $193,000, and $62,000, respectively,
related to these agreements in accordance with the provisions of SFAS 123.
66
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 Company
does not expect SFAS 154 will significantly impact its financial statements
upon its adoption on January 1, 2006.
FASB Staff Position (FSP) No. 115-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." FSP 115-1 provides
guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary, and measurement of an impairment loss.
An investment is considered impaired if the fair value of the investment is
less than its cost. If, after consideration of all available evidence to
evaluate the realizable value of its investment, impairment is determined to
be other-than-temporary, then an impairment loss should be recognized equal
to the difference between the investment's cost and its fair value. FSP 115-
1 nullifies certain provisions of Emerging Issues Task Force (EITF) Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments," while retaining the disclosure requirements of EITF 03-
1 which were adopted in 2003. FSP 115-1 is effective for reporting periods
beginning after December 15, 2005. The Company does not expect FSP 115-1
will significantly impact its financial statements upon its adoption on
January 1, 2006.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No.123R, "Share-Based Payment" (Revised). SFAS 123R establishes
standards for the accounting for transactions in which an entity
(i) exchanges its equity instruments for goods or services, or (ii) incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to
account for stock-based compensation using APB 25 and requires that such
transactions be recognized as compensation cost in the income statement based
on their fair values on the date of the grant. The Company adopted the
accounting standards set forth in SFAS No. 123 in 2003 and has accordingly
expensed stock-based compensation for 2003, 2004, and 2005.
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 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
67
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 First
Alachua Banking Corporation acquisition did not have a significant impact on
its financial statements. Loans acquired in future acquisitions will
continue to be accounted for under SOP 03-3.
Note 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.
On May 20, 2005, the Company issued a $32.0 million junior subordinated
deferrable interest note to a wholly owned Delaware statutory trust, 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 and
are described in Note 10.
68
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 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.
For the 12 Months Ended
December 31,
-------------------------
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004(3)
- ------------------------------------------------------------------------------
Interest Income $144,440 $112,670
Interest Expense 31,888 20,078
-------- --------
Net Interest Income 112,552 92,592
Provision for Loan Losses 2,507 2,141
-------- --------
Net Interest Income After
Provision for Loan Losses 110,045 90,451
Noninterest Income 50,017 52,448
Noninterest Expense(2) 113,808 96,447
-------- --------
Income Before Income Taxes 46,254 46,452
Income Taxes 16,596 16,348
-------- --------
Net Income $ 29,658 $ 30,104
======== ========
Basic Net Income Per Share $ 1.59 $ 1.70
======== ========
Diluted Net Income Per Share $ 1.59 $ 1.70
======== ========
(1) All share and per share data have been adjusted to reflect the 5-for-4
stock split effective July 1, 2005.
(2) Includes year-to-date 2005 non-recurring merger related expenses 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
the Bank's credit card portfolio in August 2004.
69
Note 3
INVESTMENT SECURITIES
Investment Portfolio Composition. The amortized cost and related market
value of investment securities available-for-sale at December 31, were as
follows:
2005
---------------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury $ 9,065 $ - $ 50 $ 9,015
U.S. Government Agencies
and Corporations 75,233 - 1,017 74,216
States and Political
Subdivisions 53,611 44 512 53,143
Mortgage-Backed Securities 20,948 35 452 20,531
Other Securities(1) 14,114 - - 14,114
-------- ---- ------ --------
Total Investment
Securities $172,971 $ 79 $2,031 $171,019
======== ==== ====== ========
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.
Securities with an amortized cost of $70.5 million and $142.8 million at
December 31, 2005 and 2004, respectively, were pledged to secure public
deposits and for other purposes.
Investment Sales. The total proceeds from the sale of investment securities
and the gross realized gains and losses from the sale of such securities for
each of the last three years are as follows:
Total Gross Gross
(Dollars in Thousands) Year Proceeds Realized Gains Realized Losses
- ------------------------------------------------------------------------------
2005 $35,142 $ 9 $ -
2004 $ 3,466 $17 $ 3
2003 $ 125 $24 $23
Maturity Distribution. As of December 31, 2005, the Company's investment
securities had the following maturity distribution based on contractual
maturities:
(Dollars in Thousands) Amortized Cost Market Value
- -----------------------------------------------------------------
Due in one year or less $ 79,468 $ 79,006
Due after one through five years 71,384 70,049
Due after five through ten years 8,005 7,850
No Maturity 14,114 14,114
-------- --------
Total Investment Securities $172,971 $171,019
======== ========
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
70
Other Than Temporarily Impaired Securities. Securities with unrealized
losses at year-end 2005 not recognized in income by period of time unrealized
losses have existed are as follows:
Less Than Greater Than
12 months 12 Months Total
------------------ ------------------ ------------------
Market Unrealized Market Unrealized Market Unrealized
(Dollars in Thousands) Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------
U.S. Treasury $ - $ - $ 9,015 $ 50 $ 9,015 $ 50
U.S. Government Agencies
and Corporations 7,907 98 66,309 919 74,216 1,017
States and Political
Subdivisions 34,640 348 10,926 164 45,566 512
Mortgage-Backed Securities 7,680 179 9,741 273 17,421 452
------- ---- ------- ------ -------- ------
Total Investment
Securities $50,227 $625 $95,991 $1,406 $146,218 $2,031
======= ==== ======= ====== ======== ======
At December 31, 2005, the Company had securities of $173.0 million with net
unrealized losses of $2.0 million on these securities. $50.2 million of
these securities, with net unrealized losses of $.6 million, have been in a
loss position for less than 12 months and $96.0 million, with unrealized
losses of $1.4 million, have been in a loss position for longer than 12
months. The Company believes that these securities are only temporarily
impaired and that the full principle will be collected as anticipated.
Of the total, $83.2 million, or 56.9%, are either a direct obligation of the
U.S Government or its agencies and are in a loss position because they were
acquired when the general level of interest rates was lower than that on
December 31, 2005. As of December 31, 2005, $17.4 million, or 11.9% are
mortgage-backed securities that are guaranteed by the U.S. Government or its
agencies. The mortgage-backed securities are in a loss position due to
either the lower interest rate at time of purchase or due to accelerated
prepayments driven by the low rate environment. The remaining $45.6 million,
or 31.2%, of the securities in a loss position are municipal bonds which all
maintain satisfactory ratings by a credit rating agency. The municipal bonds
are also in a loss position due to the lower interest rate environment at the
time of purchase.
Because the declines in the market value of these investments are
attributable to changes in interest rates and not credit quality and because
the Company has the ability and intent to hold these investments until a
recovery in fair value, which may be maturity, the Company does not consider
these investments to be other-than-temporarily impaired at December 31, 2005.
Note 4
LOANS
Loan Portfolio Composition. At December 31, the composition of the Company's
loan portfolio was as follows:
(Dollars in Thousands) 2005 2004
- ----------------------------------------------------------------------
Commercial, Financial and Agricultural $ 218,434 $ 206,474
Real Estate - Construction 160,914 140,190
Real Estate - Commercial Mortgage 718,741 655,426
Real Estate - Residential 553,124 438,484
Real Estate - Home Equity 165,337 150,061
Real Estate - Loans Held-for-Sale 4,875 11,830
Consumer 246,069 226,360
---------- ----------
Total Loans, Net of Unearned Interest $2,067,494 $1,828,825
========== ==========
Net deferred fees included in loans at December 31, 2005 and December 31,
2004 were $1.6 million and $1.0 million, respectively.
71
Concentrations of Credit. Most of the Company's lending activity occurs
within the states of Florida, Georgia, and Alabama. A large majority of the
Company's loan portfolio (77.5%) consists of loans secured by real estate,
the primary types of collateral being commercial properties and residential
properties. At December 31, 2005, commercial real estate mortgage loans and
residential real estate mortgage loans accounted for 34.7% and 35.0% of the
loan portfolio, respectively. As of December 31, 2005, there were no
concentrations of loans related to any single borrower or industry in excess
of 10% of total loans.
Nonperforming Loans. Nonaccruing loans amounted to $5.3 million and $4.6
million, at December 31, 2005 and 2004, respectively. There were no
restructured loans at December 31, 2005 or 2004. Interest on nonaccrual
loans is generally recognized only when received. Cash collected on
nonaccrual loans is applied against the principal balance or recognized as
interest income based upon management's expectations as to the ultimate
collectibility of principal and interest in full. If interest on nonaccruing
loans had been recognized on a fully accruing basis, interest income recorded
would have been $186,000, $189,000, and $166,000 higher for the years ended
December 31, 2005, 2004, and 2003, respectively.
Note 5
ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the years
ended December 31, is as follows:
(Dollars in Thousands) 2005 2004 2003
- ----------------------------------------------------------------------------------
Balance, Beginning of Year $16,037 $12,429 $12,495
Acquired Reserves 1,385 5,713 -
Reserve Reversal(1) - (800) -
Provision for Loan Losses 2,507 2,141 3,436
Recoveries on Loans Previously Charged-Off 1,724 1,612 1,037
Loans Charged-Off (4,243) (5,058) (4,539)
------- ------- -------
Balance, End of Year $17,410 $16,037 $12,429
======= ======= =======
(1) Reflects recapture of reserves allocated to the Bank's credit card portfolio,
which was sold in August 2004.
Impaired Loans. Selected information pertaining to impaired loans, at
December 31,is as follows:
2005 2004
------------------------------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- -----------------------------------------------------------------------------
Impaired Loans:
With Related Credit Allowance $5,612 $2,915 $ 578 $313
Without Related Credit Allowance $1,658 - $3,150 -
(Dollars in Thousands) 2005 2004 2003
- --------------------------------------------------------------------
Average Recorded Investment
in Impaired Loans $9,786 $5,382 $6,737
Interest Income on Impaired Loans
Recognized 218 140 194
Collected in Cash $ 218 $ 120 $ 194
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful, at which
time payments received are recorded as reduction of principal.
72
Note 6
INTANGIBLE ASSETS
The Company had intangible assets of $110.5 million and $80.3 million at
December 31, 2005 and December 31, 2004, respectively. Intangible assets at
December 31, were as follows:
2005 2004
----------------------- -----------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- ----------------------------------------------------------------------------------
Core Deposits Intangibles $ 47,176 $23,312 $ 42,078 $18,300
Goodwill 88,615 3,786 58,127 3,786
Client Relationship
Intangible 1,867 305 1,867 114
Non-Compete Agreement 483 287 483 50
-------- ------- -------- -------
Total Intangible Assets $138,141 $27,690 $102,555 $22,250
======== ======= ======== =======
Net Core Deposit Intangibles. As of December 31, 2005 and December 31, 2004,
the Company had net core deposit intangibles of $23.9 million and $23.8
million, respectively. Amortization expense for the twelve months of 2005,
2004 and 2003 was $5.0 million, $3.7 million, and $3.2 million, respectively.
The estimated annual amortization expense for the next five years is expected
to be approximately $5.6 million per year.
Goodwill. As of December 31, 2005 and December 31, 2004, the Company had
goodwill, net of accumulated amortization, of $84.8 million and $54.3
million, respectively. The increase in goodwill is due to the acquisition of
First National Bank of Alachua in May 2005. Goodwill is the Company's only
intangible asset that is no longer subject to amortization under the
provisions of SFAS 142. On December 31, 2005, the Company performed its
annual impairment review and concluded that no impairment adjustment was
necessary.
Other. As of December 31, 2005, the Company had a client relationship
intangible, net of accumulated amortization, of $1.6 million. This
intangible was booked as a result of the March 2004 acquisition of trust
client relationships from Synovus Trust Company. Amortization expense for
the twelve months of 2005 was $191,000. Estimated annual amortization
expense is $191,000 based on use of a 10-year useful life. The Company also
had a non-compete intangible, net of accumulated amortization, of $196,000.
This intangible was booked as a result of the October 2004 acquisition of
Farmers and Merchants Bank of Dublin. Amortization expense for the twelve
months of 2005 was $237,000. Estimated annual amortization expense for 2006
is $196,000.
Note 7
PREMISES AND EQUIPMENT
The composition of the Company's premises and equipment at December 31, was
as follows:
(Dollars in Thousands) 2005 2004
- --------------------------------------------------------
Land $ 16,503 $ 13,251
Buildings 69,924 59,311
Fixtures and Equipment 46,293 40,878
-------- --------
Total 132,720 113,440
Accumulated Depreciation (58,902) (54,477)
-------- --------
Premises and Equipment, Net $ 73,818 $ 58,963
======== ========
73
Note 8
DEPOSITS
Interest bearing deposits, by category, as of December 31, were as follows:
(Dollars in Thousands) 2005 2004
- ----------------------------------------------------
NOW Accounts $ 520,878 $ 338,932
Money Market Accounts 331,094 270,095
Savings Accounts 144,296 147,348
Time Deposits 523,586 571,520
---------- ----------
Total $1,519,854 $1,327,895
At December 31, 2005 and 2004, $3.6 million and $4.1 million, respectively,
in overdrawn deposit accounts were reclassified as loans.
Deposits from certain directors, executive officers, and their related
interests totaled $34.1 million and $23.1 million at December 31, 2005 and
2004, respectively.
Time deposits in denominations of $100,000 or more totaled $143.4 million and
$166.8 million at December 31, 2005 and 2004, respectively.
At December 31, 2005, the scheduled maturities of time deposits were as
follows:
(Dollars in Thousands)
- -----------------------------------
2006 $408,055
2007 71,258
2008 29,600
2009 9,105
2010 and thereafter 5,568
--------
Total $523,586
========
Interest expense on deposits for the three years ended December 31, was
as follows:
(Dollars in Thousands) 2005 2004 2003
- ----------------------------------------------------------------
NOW Accounts $ 2,868 $ 733 $ 678
Money Market Accounts 4,337 1,189 1,310
Savings Accounts 292 164 189
Time Deposits < $100,000 9,247 6,683 7,007
Time Deposits > $100,000 4,390 2,546 2,383
------- ------- -------
Total $21,134 $11,315 $11,567
======= ======= =======
74
Note 9
SHORT-TERM BORROWINGS
Short-term borrowings included the following:
Securities
Federal Sold Under Other
Funds Repurchase Short-Term
(Dollars in Thousands) Purchased Agreements Borrowings(1)
- ------------------------------------------------------------------------------------
2005
- ----
Balance at December 31, $11,925 $38,702 $32,346
Maximum indebtedness at any month end 26,825 65,206 67,122
Daily average indebtedness outstanding 31,644 39,784 26,435
Average rate paid for the year 3.36% 2.30% 3.32%
Average rate paid on period-end borrowings 3.88% 3.21% 3.48%
2004
- ----
Balance at December 31, $19,800 $58,431 $17,783
Maximum indebtedness at any month end 27,875 77,087 41,941
Daily average indebtedness outstanding 22,291 54,607 23,683
Average rate paid for the year 1.27% 0.71% 2.52%
Average rate paid on period-end borrowings 1.97% 1.12% 3.19%
2003
- ----
Balance at December 31, $12,624 $53,223 $42,337
Maximum indebtedness at any month end 23,930 90,209 44,226
Daily average indebtedness outstanding 14,768 49,785 36,721
Average rate paid for the year 0.94% 0.59% 2.28%
Average rate paid on period-end borrowings 0.68% 0.31% 2.50%
(1) Includes FHLB debt of $30.0 million and TT&L balance of $2.3 million at
December 31, 2005.
75
Note 10
LONG-TERM BORROWINGS
Federal Home Loan Bank Notes. At December 31, Federal Home Loan Bank advances
included:
(Dollars in Thousands) 2005 2004
- ---------------------------------------------------------------------------------
Due on February 15, 2006, fixed rate of 3.00%(1) 10 49
Due on September 8, 2006, fixed rate of 4.28%(1) 10,000 -
Due on September 11, 2006, fixed rate of 2.93%(1) 20,000 20,000
Due on February 13, 2007, fixed rate of 3.05% 3,000 3,000
Due on April 24, 2007, fixed rate of 7.30% 80 136
Due on September 10, 2007, fixed rate of 4.29% 10,000 -
Due on May 30, 2008, fixed rate of 2.50% 98 134
Due on June 13, 2008, fixed rate of 5.40% 357 500
Due on September 8, 2008, fixed rate of 4.32% 10,000 -
Due on November 10, 2008, fixed rate of 4.12% 2,270 2,346
Due on October 19, 2009, fixed rate of 3.69% 638 784
Due on November 10, 2010, fixed rate of 4.72% 749 774
Due on December 31, 2010, fixed rate of 3.85% 864 1,006
Due on April 4, 2011, fixed rate of 4.00%(2) 5,000 5,000
Due on December 18, 2012, fixed rate of 4.84% 589 610
Due on March 18, 2013, fixed rate of 6.37% 638 699
Due on June 17, 2013, fixed rate of 3.53% 888 977
Due on June 17, 2013, fixed rate of 3.85% 92 96
Due on June 17, 2013, fixed rate of 4.11% 1,776 1,828
Due on September 23, 2013, fixed rate of 5.64% 915 998
Due on January 26, 2014, fixed rate of 5.79% 1,246 1,297
Due on March 10, 2014, fixed rate of 4.21% 634 694
Due on May 27, 2014, fixed rate of 5.92% 482 527
Due on May 31, 2014, fixed rate of 4.88% 3,412 -
Due on July 20, 2016, fixed rate of 6.27% 1,252 1,371
Due on October 3, 2016, fixed rate of 5.41% 325 355
Due on October 31, 2016, fixed rate of 5.16% 722 789
Due on June 27, 2017, fixed rate of 5.53% 805 875
Due on October 31, 2017, fixed rate of 4.79% 986 1,070
Due on December 11, 2017, fixed rate of 4.78% 875 948
Due on December 20, 2017, fixed rate of 5.37% - 979
Due on February 26, 2018, fixed rate of 4.36% 2,076 2,247
Due on September 18, 2018, fixed rate of 5.15% 612 660
Due on November 5, 2018, fixed rate of 5.10% 3,627 3,749
Due on December 3, 2018, fixed rate of 4.87% 639 688
Due on December 17, 2018, fixed rate of 6.33% 1,566 1,640
Due on December 14, 2018, fixed rate of 6.29% 713 742
Due on February 16, 2021, fixed rate of 3.00% 850 884
Due on May 30, 2023, fixed rate of 2.50% 967 1,001
Due on May 21, 2024, fixed rate of 5.94% 8,845 9,000
------- -------
Total outstanding $98,598 $68,453
======= =======
(1) $30.0 million is classified as short-term borrowings.
(2) This advance is callable quarterly at the option of the FHLB.
The contractual maturities of FHLB debt for the five years succeeding
December 31, 2005, are as follows:
(Dollars in Thousands)
- ----------------------------------
2006 $32,816(1)
2007 15,875
2008 14,873
2009 2,740
2010 3,309
2011 and thereafter 28,985
-------
Total $98,598
=======
(1) $30.0 million is classified as short-term borrowings.
76
The Federal Home Loan Bank advances are collateralized by a blanket floating
lien on all 1-4 family residential mortgage loans, commercial real estate
mortgage loans, and home equity mortgage loans. Interest on the Federal Home
Loan Bank advances is paid on a monthly basis.
Repurchase Agreements - Term. At December 31, the Company maintained three
long-term repurchase agreements totaling $1.0 million collateralized by bank-
owned securities. The agreements have maturities as follows (in millions):
2007, $.4; 2008, $.4; 2009, $.2. Interest is payable upon maturity.
Line of Credit. The Company has the ability to draw on a Revolving Credit
Note, due on October 15, 2007. Interest is payable quarterly at LIBOR plus
an applicable margin on advances. The revolving credit is unsecured. The
existing loan agreement contains certain financial covenants that must be
maintained by the Company. At December 31, 2005, the Company was in
compliance with all of the terms of the agreement and had $25.0 million
available under a $25.0 million line of credit facility.
Junior Subordinated Deferrable Interest Notes. The Company has issued two
junior subordinated deferrable interest notes to wholly owned Delaware
statutory trusts. The first note for $30.9 million was issued to CCBG
Capital Trust I. The second note for $32.0 million was issued to CCBG
Capital Trust II. The two trusts are considered variable interest entities
for which the Company is not the primary beneficiary. Accordingly, the
accounts of the trusts are not included in the Company's consolidated
financial statements. See Note 1 - Summary of Significant Accounting
Policies for additional information about the Company's consolidation policy.
Details of the Company's transaction with the two trusts are provided below.
In November 2004, CCBG Capital Trust I issued $30.0 million of trust
preferred securities which represent beneficial interest in the assets of the
trust. The interest rate is fixed at 5.71% for a period of five years, then
adjustable annually to LIBOR plus a margin of 1.90%. The trust preferred
securities will mature on December 31, 2034, and are redeemable upon approval
of the Federal Reserve Board in whole or in part at the option of the Company
at any time after December 31, 2009 and in whole at any time upon occurrence
of certain events affecting their tax or regulatory capital treatment.
Distributions on the trust preferred securities are payable quarterly on
March 31, June 30, September 30, and December 31 of each year. CCBG Capital
Trust I also issued $928,000 of common equity securities to CCBG. The
proceeds of the offering of trust preferred securities and common equity
securities were used to purchase a $30.9 million junior subordinated
deferrable interest note issued by the Company, which has terms substantially
similar to the trust preferred securities.
In May 2005, CCBG Capital Trust II issued $31.0 million of trust preferred
securities which represent beneficial interest in the assets of the trust.
The interest rate is fixed at 6.07% for a period of five years, then
adjustable quarterly to LIBOR plus a margin of 1.80%. The trust preferred
securities will mature on June 15, 2035, and are redeemable upon approval of
the Federal Reserve Board in whole or in part at the option of the Company at
any time after May 20, 2010 and in whole at any time upon occurrence of
certain events affecting their tax or regulatory capital treatment.
Distributions on the trust preferred securities are payable quarterly on
March 15, June 15, September 15, and December 15 of each year. CCBG Capital
Trust II also issued $959,000 of common equity securities to CCBG. The
proceeds of the offering of trust preferred securities and common equity
securities were used to purchase a $32.0 million junior subordinated
deferrable interest note issued by the Company, which has terms substantially
similar to the trust preferred securities.
The Company has the right to defer payments of interest on the two notes at
any time or from time to time for a period of up to twenty consecutive
quarterly interest payment periods. Under the terms of each note, in the
event that under certain circumstances there is an event of default under the
note or the Company has elected to defer interest on the note, the Company
may not, with certain exceptions, declare or pay any dividends
77
or distributions on its capital stock or purchase or acquire any of its
capital stock. The Company is current on the interest payment obligations
and has not executed the right to defer interest payments on the notes.
The Company has entered into agreements to guarantee the payments of
distributions on the trust preferred securities and payments of redemption of
the trust preferred securities. Under these agreements, the Company also
agrees, on a subordinated basis, to pay expenses and liabilities of the two
trusts other than those arising under the trust preferred securities. The
obligations of the Company under the two junior subordinated notes, the trust
agreements establishing the two trusts, the guarantee and agreement as to
expenses and liabilities, in aggregate, constitute a full and conditional
guarantee by the Company of the two trusts' obligations under the two trust
preferred security issuances.
Despite the fact that the accounts of CCBG Capital Trust I and CCBG Capital
Trust II are not included in the Company's consolidated financial statements,
the $30.0 million and $31.0 million, respectively, in trust preferred
securities issued by these subsidiary trusts are included in the Tier 1
capital of Capital City Bank Group, Inc. as allowed by Federal Reserve Board
guidelines.
Note 11
INCOME TAXES
The provision for income taxes reflected in the statement of income is
comprised of the following components:
(Dollars in Thousands) 2005 2004 2003
- ----------------------------------------------------------------
Current:
Federal $15,114 $13,753 $10,876
State 1,290 1,381 1,949
Deferred:
Federal 156 656 682
State 26 109 73
------- ------- -------
Total $16,586 $15,899 $13,580
======= ======= =======
Income taxes provided were different than the tax expense computed by
applying the statutory federal income tax rate of 35% to pre-tax income as a
result of the following:
(Dollars in Thousands) 2005 2004 2003
- --------------------------------------------------------------------------
Tax Expense at Federal Statutory Rate $16,403 $15,845 $13,571
Increases (Decreases) Resulting From:
Tax-Exempt Interest Income (1,054) (992) (957)
State Taxes, Net of Federal Benefit 856 969 1,314
Other 381 77 (348)
------- ------- -------
Actual Tax Expense $16,586 $15,899 $13,580
======= ======= =======
Deferred income tax liabilities and assets result from difference between
assets and liabilities measured for financial reporting purposes and for
income tax return purposes. These assets and liabilities are measured using
the enacted tax rates and laws that are currently in effect. The net
deferred tax asset and the temporary differences comprising that balance at
December 31, 2005 and 2004, are as follows:
78
(Dollars in Thousands) 2005 2004
- --------------------------------------------------------------------
Deferred Tax Assets attributable to:
Allowance for Loan Losses $6,733 $5,681
Associate Benefits 650 229
Unrealized Losses on Investment Securities 706 203
Accrued Pension/SERP - 1,390
Market Value of Loans 19 248
Interest on Nonperforming Loans 170 45
Net Operating Loss Carry Forwards 228 -
Intangible Assets 44 18
Accrued Expense 592 573
Other 251 331
------ ------
Total Deferred Tax Assets $9,393 $8,718
Deferred Tax Liabilities attributable to:
Depreciation on Premises and Equipment $4,676 $3,433
Deferred Loan Costs 1,752 2,016
Core Deposit Intangible Amortization 1,173 465
Intangible Assets 1,019 -
Accrued Pension/SERP 133 -
Securities Accretion 17 20
Other 243 321
------ ------
Total Deferred Tax Liabilities 9,013 6,255
------ ------
Net Deferred Tax Assets $ 380 $2,463
====== ======
In the opinion of management, it is more likely than not that all of the
deferred tax assets will be realized; therefore, a valuation allowance is
not required.
Changes in net deferred income tax assets were:
(Dollars in Thousands) 2005 2004
- --------------------------------------------------------------------
Balance at Beginning of Year $2,463 $1,147
Purchase Accounting Acquisitions (2,403) 1,076
Income Tax Benefit From Change
in Unrealized Losses on
Available-for-Sale Securities 502 1,005
Deferred Income Tax Expense
on Continuing Operations (182) (765)
------ ------
Balance at End of Year $ 380 $2,463
====== ======
Note 12
EMPLOYEE BENEFIT PLANS
Pension Plan
The Company sponsors a noncontributory pension plan covering substantially
all of its associates. Benefits under this plan generally are based on the
associate's years of service and compensation during the years immediately
preceding retirement. The Company's general funding policy is to contribute
amounts deductible for federal income tax purposes.
The defined benefit pension plan for the Farmers and Merchants Bank of Dublin
was merged into the Company's pension plan as of December 31, 2005. The
following table details on a consolidated basis the components of pension
expense, the funded status of the plan, amounts recognized in the Company's
consolidated statements of financial condition, and major assumptions used to
determine these amounts.
79
(Dollars in Thousands) 2005 2004 2003
- ---------------------------------------------------------------------------------------
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year $ 57,403 $ 46,227 $ 37,941
Service Cost 4,352 3,776 3,302
Interest Cost 3,410 2,893 2,571
Actuarial Loss 2,900 2,890 3,196
Benefits Paid (3,859) (1,092) (1,060)
Expenses Paid (75) (165) (237)
Plan Change(1) - - 514
-------- -------- --------
Projected Benefit Obligation at End of Year $ 64,131 $ 54,529 $ 46,227
======== ======== ========
Accumulated Benefit Obligation at End of Year $ 45,645 $ 38,325 $ 32,444
======== ======== ========
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year $ 43,921 $ 34,784 $ 27,423
Actual Return on Plan Assets 1,790 2,710 4,915
Employer Contributions 10,500 4,888 3,744
Benefits Paid (3,859) (1,092) (1,061)
Expenses Paid (75) (165) (237)
-------- -------- --------
Fair Value of Plan Assets at End of Year $ 52,277 $ 41,125 $ 34,784
-------- -------- --------
Reconciliation of Funded Status:
Funded Status $(11,853) $(13,404) $(11,443)
Unrecognized Net Actuarial Losses 14,823 11,676 9,993
Unrecognized Prior Service Cost 1,302 1,517 1,732
Unrecognized Net Transition Obligation - - 1
-------- -------- --------
Prepaid (Accrued) Benefit Cost $ 4,272 $ (211) $ 283
======== ======== ========
Components of Net Periodic Benefit Costs:
Service Cost $ 4,352 $ 3,776 $ 3,302
Interest Cost 3,410 2,893 2,571
Expected Return on Plan Assets (3,373) (2,665) (2,168)
Amortization of Prior Service Costs 215 215 216
Transition Obligation Recognition 11 1 1
Recognized Net Actuarial Loss 1,324 1,163 1,127
-------- -------- --------
Net Periodic Benefit Cost $ 5,939 $ 5,383 $ 5,049
======== ======== ========
Assumptions:
Weighted-average used to determine benefit obligations:
Discount Rate 5.75% 6.00% 6.25%
Expected Return on Plan Assets 8.00% 8.00% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
Measurement Date 12/31/05 12/31/04 12/31/03
Weighted-average used to determine net cost:
Discount Rate 6.00% 6.25% 6.75%
Expected Return on Plan Assets 8.00% 8.00% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
(1) Represents a change in mortality assumptions set forth in IRC 417(e).
80
Return on Plan Assets. The overall expected long-term rate of return on
assets is a weighted-average expectation for the return on plan assets. The
Company considers historical performance and current benchmarks to arrive at
expected long-term rates of return in each asset category. The Company
assumed that 65% of its portfolio would be invested in equity securities,
with the remainder invested in debt securities.
Plan Assets. The Company's pension plan asset allocation at year-end 2005
and 2004, and the target asset allocation for 2006 are as follows:
Percentage of Plan
Target Allocation Assets at Year-End(1)
----------------- ---------------------
2006 2005 2004
- -----------------------------------------------------------------
Equity Securities 65% 55% 58%
Debt Securities 35% 24% 28%
Real Estate - - -
Cash Equivalent - 21% 14%
--- --- ---
Total 100% 100% 100%
(1) Represents asset allocation at year-end which may differ from the
average target allocation for the year due to the year-end cash
contribution to the plan.
The Company's pension plan assets are overseen by the CCBG Retirement
Committee. Capital City Trust Company acts as plan trustee and investment
manager. The investment strategy is to maximize return on investments while
minimizing risk. The Company believes the best way to accomplish this goal
is to take a conservative approach to its investment strategy by investing in
high-grade equity and debt securities.
Expected Benefit Payments. As of December 31, 2005, expected benefit
payments related to the Company's defined benefit pension plan were as
follows:
2006 $ 2,874,654
2007 3,139,350
2008 4,203,199
2009 4,150,829
2010 3,919,446
2011 through 2015 31,659,590
$49,947,068
Contributions. The following table details the amounts contributed to the
pension plan in 2005 and 2004, and the expected amount to be contributed in
2006.
Expected
2005 2004 2006(1)
----------- ---------- ----------------
Actual Contributions $10,500,000 $4,888,000 $0 to $6,000,000
(1) Estimate calculated based on pension funding laws and regulations
currently in effect.
Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan ("SERP") covering
selected executive officers. Benefits under this plan generally are based on
the executive officer's years of service and compensation during the years
immediately preceding retirement. The Company recognized expense during
2005, 2004 and 2003 of approximately $478,000, $491,000, and $208,000,
respectively.
The following table details the components of the Supplemental Executive
Retirement Plan's periodic benefit cost, the funded status of the plan,
amounts recognized in the Company's consolidated statements of financial
condition, and major assumptions used to determine these amounts.
81
(Dollars in Thousands) 2005 2004 2003
- ----------------------------------------------------------------------------------------
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year $ 3,601 $ 1,880 $ 2,770
Service Cost 133 147 80
Interest Cost 207 198 111
Actuarial (Gain) Loss (63) 1,376 (1,107)
Plan Change(1) - - 26
------- ------- -------
Projected Benefit Obligation at End of Year $ 3,878 $ 3,601 $ 1,880
======= ======= =======
Accumulated Benefit Obligation at End of Year $ 2,295 $ 1,894 $ 1,206
======= ======= =======
Reconciliation of Funded Status:
Funded Status $(3,878) $(3,601) $(1,880)
Unrecognized Net Actuarial Loss (Gain) 734 874 (418)
Unrecognized Prior Service Cost 388 449 511
------- ------- -------
Accrued Benefit Cost $(2,756) $(2,278) $(1,787)
======= ======= =======
Components of Net Periodic Benefit Costs:
Service Cost $ 133 $ 147 $ 80
Interest Cost 207 198 111
Amortization of Prior Service Cost 61 62 61
Recognized Net Actuarial Loss (Gain) 77 84 (44)
------- ------- -------
Net Periodic Benefit Cost $ 478 $ 491 $ 208
======= ======= =======
Assumptions:
Weighted-average used to determine the benefit obligations:
Discount Rate 5.75% 6.00% 6.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
Weighted-average used to determine the net cost:
Discount Rate 6.00% 6.25% 6.75%
Rate of Compensation Increase 5.50% 5.50% 5.50%
(1) Represents a change in mortality assumptions set forth in IRC 417(e)
Expected Benefit Payments. As of December 31, 2005, expected benefit
payments related to the Company's SERP were as follows:
2006 $ 18,627
2007 19,461
2008 98,113
2009 208,477
2010 269,937
2011 through 2015 3,719,795
----------
$4,334,410
401(k) Plan
The Company has a 401(k) Plan which enables associates to defer a portion of
their salary on a pre-tax basis. The plan covers substantially all
associates of the Company who meet minimum age requirements. The plan is
designed to enable participants to elect to have an amount from 1% to 15% of
their compensation withheld in any plan year placed in the 401(k) Plan trust
account. Matching contributions from the Company are made up to 6% of the
participant's compensation for eligible associates. During 2005, 2004, and
2003, the Company made matching contributions of $154,483, $66,281 and
$32,258, respectively. The participant may choose to invest their
contributions into sixteen investment funds available to CCBG participants,
including CCBG's common stock. A total of 50,000 shares of Capital City Bank
Group, Inc. common stock have been reserved for issuance.
82
Other Plans
The Company has a Dividend Reinvestment and Optional Stock Purchase Plan. A
total of 250,000 shares have been reserved for issuance. In recent years,
shares for the Dividend Reinvestment and Optional Stock Purchase Plan have
been acquired in the open market and, thus, CCBG did not issue any shares
under this plan in 2005, 2004 and 2003.
Note 13
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
(Dollars in Thousands, Except Per Share Data) 2005 2004 2003
- -----------------------------------------------------------------------------------------
Numerator:
Net Income $ 30,281 $ 29,371 $ 25,193
========== ========== ==========
Denominator:
Denominator for Basic Earnings Per Share
Weighted-Average Shares 18,263,855 16,805,696 16,528,109
Effects of Dilutive Securities
Stock Compensation Plans 17,388 5,230 35,878
---------- ---------- ----------
Denominator for Diluted Earnings Per Share
Adjusted Weighted-Average Shares and
Assumed Conversions 18,281,243 16,810,926 16,563,986
========== ========== ==========
Basic Earnings Per Share $ 1.66 $ 1.74 $ 1.53
========== ========== ==========
Diluted Earnings per Share $ 1.66 $ 1.74 $ 1.52
========== ========== ==========
Note 14
CAPITAL
The Company is subject to various regulatory capital requirements which
involve quantitative measures of the Company's assets, liabilities and
certain off-balance sheet items. The Company's capital amounts and
classification are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require that the Company
maintain amounts and ratios (set forth in the table below) of total and Tier
I capital to risk-weighted assets, and of Tier I capital to average assets.
As of December 31, 2005, the Company met all capital adequacy requirements to
which it is subject.
A summary of actual, required, and capital levels necessary to be considered
well-capitalized for Capital City Bank Group, Inc. consolidated and its
banking subsidiary, Capital City Bank, as of December 31, 2005 and December
31, 2004 are as follows:
83
To Be Well-
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------
As of December 31, 2005:
- -----------------------
Tier I Capital:
CCBG $257,572 12.61% $ 81,675 4.00% * *
CCB 252,096 12.36% 81,599 4.00% $122,398 6.00%
Total Capital:
CCBG 276,869 13.56% 163,349 8.00% * *
CCB 269,506 13.21% 163,198 8.00% 203,997 10.00%
Tier I Leverage:
CCBG 257,572 10.27% 61,256 4.00% * *
CCB 252,096 10.07% 61,199 4.00% 101,999 5.00%
As of December 31, 2004:
- -----------------------
Tier I Capital:
CCBG $207,776 11.44% $ 72,617 4.00% * *
CCB 199,565 11.01% 72,506 4.00% $108,759 6.00%
Total Capital:
CCBG 223,813 12.33% 145,235 8.00% * *
CCB 215,602 11.89% 145,012 8.00% 181,265 10.00%
Tier I Leverage:
CCBG 207,776 8.79% 54,463 4.00% * *
CCB 199,565 8.47% 54,379 4.00% 90,632 5.00%
*Not applicable to bank holding companies.
Note 15
DIVIDEND RESTRICTIONS
Substantially all the Company's retained earnings are undistributed earnings
of its banking subsidiary which are restricted by various regulations
administered by federal and state bank regulatory authorities.
The approval of the appropriate regulatory authority is required if the total
of all dividends declared by a subsidiary bank in any calendar year exceeds
the bank's net profits (as defined under Florida law) for that year combined
with its retained net profits for the preceding two calendar years. In 2006,
the bank subsidiary may declare dividends without regulatory approval of
$37.5 million plus an additional amount equal to the net profits of the
Company's subsidiary bank for 2006 up to the date of any such dividend
declaration.
Note 16
RELATED PARTY INFORMATION
DuBose Ausley, a Director of the Company, is employed by and is the former
Chairman of Ausley & McMullen, the Company's general counsel. Fees paid by
the Company and its subsidiary for legal services, in aggregate, approximated
$813,000, $797,000, and $765,000 during 2005, 2004, and 2003, respectively.
Under a lease agreement expiring in 2024, the Bank leases land from a
partnership in which several directors and officers have an interest. The
lease agreement with Smith Interests General Partnership L.L.P., provides for
annual lease payments of approximately $109,000, to be adjusted for inflation
in future years.
84
Under a lease agreement expiring in 2018, the Bank leases its East Dublin
Office from a partnership involving McGrath Keen, a Director of the Company.
The lease agreement provides for annual lease payments of $46,500, to be
adjusted for inflation every five years beginning in 2008. Director Keen has
one-half ownership interest in the aforementioned partnership.
Under an agreement with Keen Insurance Agency, the Bank shares with the
agency one-half of the commissions received from the sale of credit life and
accident/health insurance to Bank clients in the Dublin market. Payments
made to the agency during 2005 were approximately $30,000. McGrath Keen,
Jr., a director of the Company, has sixty-percent ownership interest in Keen
Insurance Agency.
At December 31, 2005 and 2004, certain officers and directors were indebted
to the Company's bank subsidiary in the aggregate amount of $17.7 million and
$18.8 million, respectively. During 2005, $13.5 million in new loans were
made and repayments totaled $14.6 million. In the opinion of management,
these loans were made on similar terms as loans to other individuals of
comparable creditworthiness and were all current at year-end.
Note 17
SUPPLEMENTARY INFORMATION
Components of other noninterest income and noninterest expense in excess of
1% of the sum of total interest income and noninterest income, which are not
disclosed separately elsewhere, are presented below for each of the
respective years.
(Dollars in Thousands) 2005 2004 2003
- -------------------------------------------------------------------
Noninterest Income:
Merchant Fee Income $6,174 $5,135 $4,563
Interchange Commission Fees 2,239 2,229 2,183
Noninterest Expense:
Professional Fees 3,825 2,858 1,918
Printing & Supplies 2,372 1,854 1,742
Interchange Service Fees 5,402 4,741 4,181
Telephone 2,493 2,048 1,872
Advertising 4,275 2,001(1) 1,260(1)
(1) <1% of appropriate threshold.
Note 18
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 December 31, 2005, the amounts associated with the
Company's off-balance sheet obligations were as follows:
(Dollars in Thousands) Amount
- -----------------------------------------------
Commitments to Extend Credit(1) $445,299
Standby Letters of Credit $ 20,709
(1) Commitments include unfunded loans, revolving lines of credit, and other
unused commitments.
85
Commitments to extend credit are agreements to lend to a client so long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a client to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities. In general, management does not
anticipate any material losses as a result of participating in these types of
transactions. However, any potential losses arising from such transactions
are reserved for in the same manner as management reserves for its other
credit facilities.
For both on- and off-balance sheet financial instruments, the Company
requires collateral to support such instruments when it is deemed necessary.
The Company evaluates each client's creditworthiness on a case-by-case basis.
The amount of collateral obtained upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies,
but may include deposits held in financial institutions; U.S. Treasury
securities; other marketable securities; real estate; accounts receivable;
property, plant and equipment; and inventory.
Other Commitments. In the normal course of business, the Company enters into
lease commitments which are classified as operating leases. Rent expense
incurred under these leases was approximately $1.3 million in 2005, $1.3
million in 2004, and $1.1 million in 2003. Minimum lease payments under
these leases due in each of the five years subsequent to December 31, 2005,
are as follows (in millions): 2006, $1.4; 2007, $1.2; 2008, $1.2; 2009, $1.1;
2010, $1.0; thereafter, $6.4.
Contingencies. The Company is a party to lawsuits and claims arising out of
the normal course of business. In management's opinion, there are no known
pending claims or litigation, the outcome of which would, individually or in
the aggregate, have a material effect on the consolidated results of
operations, financial position, or cash flows of the Company.
Note 19
FAIR VALUE OF FINANCIAL INSTRUMENTS
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items
include Cash and Due From Banks, Interest Bearing Deposits with Other Banks,
Federal Funds Sold, Federal Funds Purchased, Securities Sold Under Repurchase
Agreements, and Short-Term Borrowings. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. The resulting fair values may be significantly
affected by the assumptions used, including the discount rates and estimates
of future cash flows.
The methods and assumptions used to estimate the fair value of the Company's
other financial instruments are as follows:
Investment Securities - Fair values for investment securities are based on
quoted market prices. If a quoted market price is not available, fair value
is estimated using market prices for similar securities.
Loans - The loan portfolio is segregated into categories and the fair value
of each loan category is calculated using present value techniques based upon
projected cash flows and estimated discount rates. The calculated present
values are then reduced by an allocation of the allowance for loan losses
against each respective loan category.
Deposits - The fair value of Noninterest Bearing Deposits, NOW Accounts,
Money Market Accounts and Savings Accounts are the amounts payable on demand
at the reporting date.
86
The fair value of fixed maturity certificates of deposit is estimated using
present value techniques and rates currently offered for deposits of similar
remaining maturities.
Subordinated Notes Payable - The fair value of each note is calculated using
present value techniques, based upon projected cash flows and estimated
discount rates as well as rates being offered for similar obligations.
Long-Term Borrowings - The fair value of each note is calculated using
present value techniques, based upon projected cash flows and estimated
discount rates as well as rates being offered for similar debt.
Commitments to Extend Credit and Standby Letters of Credit - The fair value
of commitments to extend credit is estimated using the fees currently charged
to enter into similar agreements, taking into account the present
creditworthiness of the counterparties. The fair value of these fees is not
material.
The Company's financial instruments that have estimated fair values are
presented below:
At December 31,
---------------------------------------------------
2005 2004
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Thousands) Value Value Value Value
- -------------------------------------------------------------------------------------
Financial Assets:
Cash $ 105,195 $ 105,195 $ 87,039 $ 87,039
Short-Term Investments 61,164 61,164 74,506 74,506
Investment Securities 171,019 171,019 210,240 210,240
Loans, Net of Allowance
for Loan Losses 2,050,084 2,044,954 1,812,788 1,816,670
---------- ---------- ---------- ----------
Total Financial Assets $2,387,462 $2,382,332 $2,184,573 $2,188,455
========== ========== ========== ==========
Financial Liabilities:
Deposits $2,079,346 $1,953,576 $1,894,886 $1,791,797
Short-Term Borrowings 82,973 82,748 96,014 96,053
Subordinated Notes Payable 62,887 63,049 30,928 31,040
Long-Term Borrowings 69,630 69,295 68,453 68,582
---------- ---------- ---------- ----------
Total Financial Liabilities $2,294,836 $2,168,668 $2,090,281 $1,987,472
========== ========== ========== ==========
Certain financial instruments and all nonfinancial instruments are excluded
from the above table. The disclosures also do not include certain intangible
assets such as client relationships, deposit base intangibles and goodwill.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
87
Note 20
PARENT COMPANY FINANCIAL INFORMATION
The operating results of the parent company for the three years ended
December 31, are shown below:
Parent Company Statements of Income
(Dollars in Thousands) 2005 2004 2003
- -------------------------------------------------------------------------------
OPERATING INCOME
Income Received from Subsidiary Bank:
Dividends $10,597 $12,716 $11,599
Overhead Fees 2,716 3,232 2,935
Other Income 87 2 -
------- ------- -------
Total Operating Income 13,400 15,950 14,534
------- ------- -------
OPERATING EXPENSE
Salaries and Associate Benefits 2,191 2,257 1,847
Interest on Long-Term Borrowings - 33 -
Interest on Subordinated Notes Payable 2,981 294 -
Professional Fees 1,399 895 1,104
Advertising 467 286 193
Legal Fees 701 468 374
Other 471 480 404
------- ------- -------
Total Operating Expense 8,210 4,713 3,922
------- ------- -------
Income Before Income Taxes and Equity
in Undistributed Earnings of Subsidiary Bank 5,190 11,237 10,612
Income Tax Benefit (2,060) (581) (278)
------- ------- -------
Income Before Equity in Undistributed
Earnings of Subsidiary Bank 7,250 11,818 10,890
Equity in Undistributed Earnings
of Subsidiary Bank 23,031 17,553 14,303
------- ------- -------
Net Income $30,281 $29,371 $25,193
======= ======= =======
88
The following are condensed statements of financial condition of the parent
company at December 31:
Parent Company Statements of Financial Condition
(Dollars in Thousands, Except Per Share Data)(1) 2005 2004
- -------------------------------------------------------------------------------
ASSETS
Cash and Due From Subsidiary Bank $ 5,434 $ 6,893
Investment in Subsidiary Bank 364,898 282,034
Other Assets 1,447 1,536
-------- --------
Total Assets $371,779 $290,463
======== ========
LIABILITIES
Subordinated Notes Payable $ 62,887 $ 30,928
Other Liabilities 3,116 2,735
-------- --------
Total Liabilities $ 66,003 $ 33,663
-------- --------
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value, 3,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 90,000,000
shares authorized; 18,631,706 and 17,694,139
shares issued and outstanding at December 31,
2005 and December 31, 2004, respectively 186 177
Additional Paid-In Capital 83,304 52,328
Retained Earnings 223,532 204,648
Accumulated Other Comprehensive Loss, Net of Tax (1,246) (353)
-------- --------
Total Shareowners' Equity 305,776 256,800
-------- --------
Total Liabilities and Shareowners' Equity $371,779 $290,463
======== ========
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock
split effective July 1, 2005.
89
The cash flows for the parent company for the three years ended December 31,
were as follows:
Parent Company Statements of Cash Flows
(Dollars in Thousands) 2005 2004 2003
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $30,281 $29,371 $25,193
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Equity in Undistributed
Earnings of Subsidiary Bank (23,031) (17,553) (14,303)
Non-Cash Compensation 110 1,707 508
Increase in Other Assets 131 (189) (130)
Increase in Other Liabilities 381 68 300
------- ------- -------
Net Cash Provided by Operating Activities 7,872 13,404 11,568
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Paid for Investment in:
CCBG Trust I and CCBG Trust II (959) (928) -
Cash Paid for Acquisitions (29,953) (35,688) -
------- ------- -------
Net Cash Used in Investing Activities (30,912) (36,616) -
------- ------- -------
CASH FROM FINANCING ACTIVITIES:
Proceeds from Subordinated Notes 31,959 30,928 -
Increase in Other Long-Term Borrowings - 30,000 -
Repayments of Long-Term Borrowings - (30,000) -
Payment of Dividends (11,397) (9,857) (8,646)
Repurchase of Common Stock - - (17)
Issuance of Common Stock 1,019 1,184 975
------- ------- -------
Net Cash Provided by (Used in)
Financing Activities 21,581 22,255 (7,688)
------- ------- -------
Net (Decrease) Increase in Cash (1,459) (957) 3,880
Cash at Beginning of Period 6,893 7,850 3,970
------- ------- -------
Cash at End of Period $ 5,434 $ 6,893 $ 7,850
======= ======= =======
Note 21
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that certain
transactions and other economic events that bypass the income statement be
displayed as other comprehensive income (loss). The Company's comprehensive
income (loss) consists of net income (loss) and changes in unrealized gains
(losses) on securities available-for-sale, net of income taxes. Changes in
unrealized gains (losses) (net of taxes) on securities are reported as other
comprehensive (loss) income and totaled ($893,000), ($1,739,000), and
($1,735,000), for 2005, 2004 and 2003, respectively. Reclassification
adjustments consist only of realized gains on sales of investment securities
and were not material for the years ended December 31, 2005, 2004 and 2003.
90
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of December 31, 2005,
the end of the period covered by this Annual Report on Form 10-K, our
management, including our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer each concluded that as of December 31, 2005, the end of the
period covered by this Annual Report on Form 10-K, we maintained effective
disclosure controls and procedures.
Management's Report on Internal Control Over Financial Reporting. Our
management is responsible for establishing and maintaining effective internal
control over financial reporting. Internal control over financial reporting
is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles.
Under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation under the framework in Internal Control - Integrated
Framework, our management has concluded we maintained effective internal
control over financial reporting, as such term is defined in Securities
Exchange Act of 1934 Rule 13a-15(f), as of December 31, 2005.
Internal control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control over
financial reporting can also be circumvented by collusion or improper
management override. Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of
the consolidated financial statements and other financial information
contained in this report. The accompanying consolidated financial statements
were prepared in conformity with U.S. generally accepted accounting
principles and include, as necessary, best estimates and judgments by
management.
KPMG LLP, an independent registered public accounting firm, has audited our
consolidated financial statements as of and for the year ended December 31,
2005, and management's assessment as to the effectiveness of internal control
over financial reporting as of December 31, 2005, as stated in its
attestation report, which is included herein on page 92.
Change in Internal Control. Our management, including the Chief Executive
Officer and Chief Financial Officer, has reviewed our internal control.
There have been no significant changes in our internal control during our
most recently completed fiscal quarter, nor subsequent to the date of their
evaluation, that could significantly affect our internal control over
financial reporting.
91
Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors
Capital City Bank Group, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Capital City Bank Group, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Capital City Bank Group,
Inc.'s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express
an opinion on management's assessment and an opinion on the effectiveness of
the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
92
In our opinion, management's assessment that Capital City Bank Group, Inc.
maintained effective internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Capital City Bank Group, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial condition of Capital City Bank Group, Inc. and subsidiary as of
December 31, 2005 and 2004, and the related consolidated statements of
income, changes in shareowners' equity, and cash flows for each of the years
in the three-year period ended December 31, 2005, and our report dated
March 16, 2006 expressed an unqualified opinion on those consolidated
financial statements.
KPMG LLP
Orlando, Florida
March 16, 2006
Certified Public Accountants
93
Item 9B. Other Information
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference to the sections entitled "Corporate
Governance," "Nominees for Election as Directors," "Continuing Directors and
Executive Officers," the subsection entitled "Committees of the Board" under
the Section "Board and Committee Membership," the subsection "Codes of Conduct
and Ethics" under the section "Corporate Governance" and "Share Ownership" in
the Registrant's Proxy Statement relating to its Annual Meeting of Shareowners
to be held April 25, 2006.
Item 11. Executive Compensation
Incorporated herein by reference to the sections entitled "Executive
Compensation," the subsection entitled "Directors' Fees" under the section
entitled "Board and Committee Membership," "Executive Officers and
Transactions with Management," "Compensation Committee Report," "Retirement
Plans," and "Five Year Performance Graph" in the Registrant's Proxy Statement
relating to its Annual Meeting of Shareowners to be held April 25, 2006.
94
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareowners Matters
Equity Compensation Plan Information
Our 2005 Associate Incentive Plan, 2005 Associate Stock Purchase Plan, and
2005 Director Stock Purchase Plan were approved by our shareowners at the
2004 Annual Meeting. The following table provides certain information
regarding our equity compensation plans.
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ---------------------- ------------------------ ----------------------- ----------------------------
(a) (b) (c)
Equity Compensation
Plans Approved by 60,384(1) $32.83 1,530,615(2)
Securities Holders
Equity Compensation
Plans Not Approved - - -
by Securities Holders
------------------------ ----------------------- ----------------------------
Total 60,384 $32.83 1,530,615
------------------------ ----------------------- ----------------------------
(1) Includes 60,384 shares that may be issued upon exercise of outstanding options under the terminated
1996 Associate Incentive Plan.
(2) Consists of 866,550 shares available for issuance under our 2005 Associate Incentive Plan, 576,904 shares
available for issuance under our 2005 Associate Stock Purchase Plan, and 87,161 shares available for
issuance under our 2005 Director Stock Purchase Plan. Of these plans, the only plan under which options
may be granted in the future is our 2005 Associate Incentive Plan.
For additional information about our equity compensation plans, see Stock
Based Compensation in Note 1 in the Notes to the Consolidated Financial
Statements.
The other information required by Item 12 is incorporated herein by reference
to the section entitled "Share Ownership" in the Registrant's Proxy Statement
relating to its Annual Meeting of Shareowners to be held April 25, 2006.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the subsection entitled "Transactions
With Management and Related Parties" under the section entitled "Executive
Officers and Transactions with Management" in the Registrant's Proxy
Statement relating to its Annual Meeting of Shareowners to be held April 25,
2006.
Item 14. Principal Accountant Fees and Services
Incorporated herein by reference to the subsection entitled "Fees Paid to
Principal Accountants" under the section entitled "Ratification of Auditors"
in the Registrant's Proxy Statement relating to its Annual Meeting of
Shareowners to be held April 25, 2006.
95
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for Fiscal Years 2005, 2004, and 2003
Consolidated Statements of Financial Condition at the end of Fiscal
Years 2005 and 2004
Consolidated Statements of Changes in Shareowners' Equity for Fiscal
Years 2005, 2004, and 2003
Consolidated Statements of Cash Flows for Fiscal Years 2005, 2004, and
2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Other schedules and exhibits are omitted because the required information
either is not applicable or is shown in the financial statements or the notes
thereto.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K
Reg. S-K
Exhibit
Table
Item No. Description of Exhibit
-------- ----------------------
2.1 Agreement and Plan of Merger, dated as of January 7,
2004, by and among Capital City Bank Group, Inc.,
Capital City Bank, Synovus Financial Corp. and Quincy
State Bank - incorporated herein by reference to the
Registrant's Form 8-K (filed 1/13/04) (No. 0-13358).
2.2 Agreement and Plan of Merger, dated as of May 12, 2004,
by and among Capital City Bank Group, Inc., Capital City
Bank, and Farmers and Merchants Bank - incorporated
herein by reference to the Registrant's Form 10-Q/A
(filed 8/10/04) (No. 0-13358).
2.3 Agreement and Plan of Merger, dated as of February 3,
2005, by and among Capital City Bank Group, Inc., First
Alachua Banking Corporation, and First National Bank of
Alachua (the schedules and exhibits have been omitted
pursuant to Item 601(b)(2) of Regulation S-K) -
incorporated herein by reference to the Registrant's Form
8-K (filed 2/9/05) (No. 0-13358).
3.1 Amended and Restated Articles of Incorporation -
incorporated herein by reference to Exhibit 3 of the
Registrant's 1996 Proxy Statement (filed 4/11/96) (No. 0-
13358).
3.2 Amended and Restated Bylaws - incorporated herein by
reference to Exhibit 3(b) of the Registrant's Form 10-Q
(filed 1/13/97) (No. 0-13358).
4.1 Capital City Bank Group, Inc. 2005 Director Stock
Purchase Plan - incorporated herein by reference to
Exhibit 4.3 of the Registrant's Form S-8 (filed 11/5/04)
(No. 333-120242).
96
4.2 Capital City Bank Group, Inc. 2005 Associate Stock
Purchase Plan - incorporated herein by reference to
Exhibit 4.4 of the Registrant's Form S-8 (filed 11/5/04)
(No. 333-120242).
4.3 Capital City Bank Group, Inc. 2005 Associate Incentive
Plan - incorporated herein by reference to Exhibit 4.5 of
the Registrant's Form S-8 (filed 11/5/04) (No. 333-
120242).
4.4 Junior Subordinated Indenture between the Registrant and
Wilmington Trust Company, dated as of November 1, 2004 -
incorporated herein by reference to Exhibit 4.1 of the
Registrant's Form 8-K (filed 11/4/04) (No. 0-13358).
4.5 Guarantee Agreement between the Registrant and Wilmington
Trust Company, dated as of November 1, 2004 -
incorporated herein by reference to Exhibit 4.2 of the
Registrant's Form 8-K (filed 11/4/04) (No. 0-13358).
4.6 Amended and Restated Trust Agreement among the
Registrant, Wilmington Trust Company and certain
Administrative Trustees, dated as of November 1, 2004 -
incorporated herein by reference to Exhibit 4.3 of the
Registrant's Form 8-K (filed 11/4/04) (No. 0-13358).
10.1 Capital City Bank Group, Inc. 1996 Dividend Reinvestment
and Optional Stock Purchase Plan - incorporated herein by
reference to Exhibit 10 of the Registrant's Form S-3
(filed 01/30/97) (No. 333-20683).
10.2 Capital City Bank Group, Inc. Supplemental Executive
Retirement Plan - incorporated herein by reference to
Exhibit 10(d) of the Registrant's Form 10-K (filed
3/27/03) (No. 0-13358).
10.3 Capital City Bank Group, Inc. 401(K) Profit Sharing Plan
- incorporated herein by reference to Exhibit 4.3 of
Registrant's Form S-8 (filed 09/30/97) (No. 333-36693)
11 Statement re Computation of Per Share Earnings.*
14 Capital City Bank Group, Inc. Code of Ethics for the
Chief Financial Officer and Senior Financial Officers -
incorporated herein by reference to Exhibit 14 of the
Registrant's Form 8-K (filed 3/11/05) (No. 0-13358).
21 Capital City Bank Group, Inc. Subsidiaries, as of
December 31, 2004.**
23 Consent of Independent Registered Public Accounting Firm.**
31.1 Certification of CEO pursuant to Securities and Exchange
Act Section 302 of the Sarbanes-Oxley Act of 2002.**
31.2 Certification of CFO pursuant to Securities and Exchange
Act Section 302 of the Sarbanes-Oxley Act of 2002.**
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.**
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.**
* Information required to be presented in Exhibit 11 is provided in note
13 to the consolidated financial statements under Part II, Item 8 of
this Form 10-K in accordance with the provisions of FASB Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
** Filed electronically herewith.
97
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on March 16, 2006, on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL CITY BANK GROUP, INC.
/s/ William G. Smith, Jr.
- ----------------------------------
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 16, 2006 by the following persons in the
capacities indicated.
/s/ William G. Smith, Jr.
- ----------------------------------
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ J. Kimbrough Davis
- ----------------------------------
J. Kimbrough Davis
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Directors:
/s/ DuBose Ausley /s/ McGrath Keen, Jr.
- ---------------------------------- ----------------------------------
DuBose Ausley McGrath Keen, Jr.
/s/ Thomas A. Barron
- ---------------------------------- ----------------------------------
Thomas A. Barron Lina S. Knox
/s/ Frederick Carroll, III /s/ Ruth A. Knox
- ---------------------------------- ----------------------------------
Frederick Carroll, III Ruth A. Knox
/s/ Cader B. Cox, III
- ---------------------------------- ----------------------------------
Cader B. Cox, III Henry Lewis III
/s/ J. Everitt Drew /s/ William G. Smith, Jr.
- ---------------------------------- ----------------------------------
J. Everitt Drew William G. Smith, Jr.
/s/ John K. Humphress
- ----------------------------------
John K. Humphress
98
39