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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended:
June 30, 2003
-------------
Commission File Number 0-13358
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CAPITAL CITY BANK GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2273542
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
217 North Monroe Street, Tallahassee, Florida 32301
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(850) 671-0300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
At July 31, 2003, 13,221,033 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
1
CAPITAL CITY BANK GROUP, INC.
FORM 10-Q INDEX
ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER
- ---- ----------------------------- ----------
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
3. Quantitative and Qualitative Disclosure of
Market Risk 23
4. Controls and Procedures 23
ITEM PART II. OTHER INFORMATION
- ---- --------------------------
1. Legal Proceedings Not Applicable
2. Changes in Securities and Use of Proceeds Not Applicable
3. Defaults Upon Senior Securities Not Applicable
4. Submission of Matters to a Vote of
Security Holders 25
5. Other Information 25
6. Exhibits and Reports on Form 8-K 25
Signatures 26
INTRODUCTORY NOTE
This Report and other Company communications and statements may contain
"forward-looking statements," including statements about our beliefs, plans,
objectives, goals, expectations, estimates and intentions. These statements
are subject to significant risks and uncertainties and are subject to change
based on various factors, many of which are beyond our control. For
information concerning these factors and related matters, see Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $23,363 $23,570 $46,537 $47,397
Investment Securities:
U.S. Treasury 150 - 286 -
U.S. Govt. Agencies and Corporations 628 1,471 1,494 2,918
States and Political Subdivisions 610 702 1,240 1,421
Other Securities 151 464 329 997
Funds Sold 332 392 685 907
------- ------- ------- -------
Total Interest Income 25,234 26,599 50,571 53,640
INTEREST EXPENSE
Deposits 3,053 5,314 6,280 12,161
Short-Term Borrowings 340 177 669 337
Long-Term Debt 501 202 1,045 392
------- ------- ------- -------
Total Interest Expense 3,894 5,693 7,994 12,890
------- ------- ------- -------
Net Interest Income 21,340 20,906 42,577 40,750
Provision for Loan Losses 886 641 1,665 1,443
------- ------- ------- -------
Net Interest Income After Provision
for Loan Losses 20,454 20,265 40,912 39,307
------- ------- ------- -------
NONINTEREST INCOME
Service Charges on Deposit Accounts 4,074 3,028 8,041 5,737
Data Processing 611 508 1,169 1,009
Asset Management Fees 650 675 1,255 1,305
Gain on Sale of Investment Securities 12 1 23 -
Mortgage Banking Revenues 1,893 1,098 3,469 2,345
Other 3,541 3,243 7,001 6,450
------- ------- ------- -------
Total Noninterest Income 10,781 8,552 20,958 16,846
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and Associate Benefits 11,356 10,515 22,726 21,059
Occupancy, Net 1,510 1,485 2,879 2,879
Furniture and Equipment 1,874 1,941 3,669 3,837
Other 6,366 6,391 12,502 12,022
------- ------- ------- -------
Total Noninterest Expense 21,106 20,332 41,776 39,797
------- ------- ------- -------
Income Before Income Taxes 10,129 8,485 20,094 16,356
Income Taxes 3,689 3,037 7,293 5,797
------- ------- ------- -------
NET INCOME $ 6,440 $ 5,448 $12,801 $10,559
======= ======= ======= =======
Basic Net Income Per Share $ .49 $ .41 $ .97 $ .80
======= ======= ======= =======
Diluted Net Income Per Share $ .49 $ .41 $ .97 $ .79
======= ======= ======= =======
Cash Dividends Per Share $ .1700 $ .1220 $ .3060 $ .2440
======= ======= ======= =======
Basic Average Shares Outstanding 13,209,124 13,219,401 13,208,999 13,262,130
========== ========== ========== ==========
Diluted Average Shares Outstanding 13,254,886 13,257,261 13,254,761 13,299,990
========== ========== ========== ==========
All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective June 13, 2003.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
(Unaudited)
(Dollars In Thousands, Except Share Data)
June 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 98,388 $ 89,823
Funds Sold 168,773 170,936
---------- ----------
Total Cash and Cash Equivalents 267,161 260,759
Investment Securities, Available-for-Sale 170,745 180,315
Loans, Net of Unearned Interest 1,332,387 1,285,221
Allowance for Loan Losses (12,434) (12,495)
---------- ----------
Loans, Net 1,319,953 1,272,726
Premises and Equipment, Net 53,132 48,897
Intangibles 27,413 29,034
Other Assets 32,186 33,040
---------- ----------
Total Assets $1,870,590 $1,824,771
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 456,050 $ 406,081
Interest Bearing Deposits 1,042,527 1,028,119
---------- ----------
Total Deposits 1,498,577 1,434,200
Short-Term Borrowings 101,629 113,675
Long-Term Debt 57,664 71,745
Other Liabilities 17,251 18,620
---------- ----------
Total Liabilities 1,675,121 1,638,240
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value, 3,000,000
shares authorized, no shares outstanding - -
Common Stock, $.01 par value; 112,500,000
shares authorized; 13,221,030 shares outstanding
at June 30, 2003 and 13,196,211 outstanding at
December 31, 2002 132 132
Additional Paid-In Capital 15,447 14,691
Retained Earnings 177,346 168,587
Accumulated Other Comprehensive Income, Net of Tax 2,544 3,121
---------- ----------
Total Shareowners' Equity 195,469 186,531
---------- ----------
Total Liabilities and Shareowners' Equity $1,870,590 $1,824,771
========== ==========
All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective June 13, 2003.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30
(Unaudited)
(Dollars in Thousands)
2003 2002
- ----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 12,801 $ 10,559
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 1,665 1,443
Depreciation 2,327 2,471
Net Securities Amortization 1,070 525
Amortization of Intangible Assets 1,621 1,621
Gains on Sale of Investment Securities (23) -
Non-Cash Compensation 334 246
Net Decrease in Other Assets 1,817 2,017
Net Decrease in Other Liabilities (1,369) (1,603)
-------- --------
Net Cash Provided by Operating Activities 20,243 17,279
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Payments/Maturities of
Investment Securities Available-for-Sale 54,166 33,444
Purchase of Investment Securities (46,555) (27,823)
Net Increase in Loans (49,520) (20,920)
Purchase of Premises & Equipment (6,563) (3,280)
Sales of Premises & Equipment 1 112
-------- --------
Net Cash Used In Investing Activities (48,471) (18,467)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits 64,377 (112,414)
Net Decrease in Short-Term Borrowings (32,372) (2,537)
Borrowing of Long-Term Debt 6,891 2,040
Repayment of Long-Term Debt (646) (2,547)
Dividends Paid (4,042) (3,241)
Repurchase of Common Stock - (3,396)
Issuance of Common Stock 422 498
-------- --------
Net Cash Provided By (Used In) Financing Activities 34,630 (121,597)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 6,402 (122,785)
Cash and Cash Equivalents at Beginning of Period 260,759 256,830
-------- --------
Cash and Cash Equivalents at End of Period $267,161 $134,045
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 6,591 $ 14,834
======== ========
Interest Paid on Debt $ 1,692 $ 740
======== ========
Transfer of Loans to ORE $ 628 $ 331
======== ========
Income Taxes Paid $ 9,496 $ 7,165
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 334 $ 246
======== ========
Transfer of Current Portion of Long-Term Debt to
Short-Term Borrowings $ 20,326 $ -
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
CAPITAL CITY BANK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, including Regulation S-X. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations. Prior period financial statements
have been reformatted and/or amounts reclassified, as necessary, to conform
with the current presentation.
In the opinion of management, the consolidated financial statements contain
all adjustments, which are those of a recurring nature, and disclosures
necessary to present fairly the financial position of the Company as of June
30, 2003 and December 31, 2002, the results of operations for the three and
six month periods ended June 30, 2003 and 2002, and cash flows for the six
month periods ended June 30, 2003 and 2002.
The Company and its subsidiaries follow accounting principles generally
accepted in the United States of America and reporting practices applicable
to the banking industry. The principles which materially affect its
financial position, results of operations and cash flows are set forth in
Notes to Consolidated Financial Statements which are included in the
Company's 2002 Annual Report on Form 10-K.
Stock-based Compensation
- ------------------------
As of June 30, 2003, the Company had three stock-based compensation plans,
consisting of the Associate Stock Incentive Plan ("AIP"), the Associate Stock
Purchase Plan ("ASPP") and the Director Stock Purchase Plan ("DSPP"). In
addition to stock-based compensation plans, the Company also executed an
employee incentive stock option arrangement effective January 1, 2003. Prior
to 2003, the Company accounted for its stock-based compensation under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations. Stock-
based employee compensation cost is reflected in 2002 net income for only the
AIP, as the ASPP and DSPP were considered noncompensatory under the
provisions of APB 25. Effective January 1, 2003, the Company adopted the
fair value recognition provisions of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123 ("SFAS
123"), Accounting for Stock-Based Compensation, prospectively to all employee
awards granted, modified, or settled on or after January 1, 2003. Awards
under the Company's plans vest over periods ranging from six-months to four
years. Therefore, the cost related to stock-based employee compensation
included in the determination of net income for 2003 and 2002 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 APB 25, the differences in what instruments are considered
noncompensatory, and the fact that awards granted prior to January 1, 2003
remain accounted for under APB 25. The following table illustrates the
effect on net income and earnings per share if the fair value based method
had been applied to all outstanding and unvested awards in each period.
6
(Dollars in Thousands, Except Per Share Data)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2003 2002 2003 2002
- -------------------------------------------------------------- ------------------------
Net income, as reported $6,440 $5,448 $12,801 $10,559
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects 80 138 221 276
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (132) (97) (229) (194)
------ ------ ------- -------
Pro forma net income $6,388 $5,489 $12,793 $10,641
------ ------ ------- -------
Earnings per share:
Basic-as reported $ .49 $ .41 $ .97 $ .80
------ ------ ------- -------
Basic-pro forma $ .48 $ .42 $ .97 $ .80
------ ------ ------- -------
Diluted-as reported $ .49 $ .41 $ .97 $ .79
------ ------ ------- -------
Diluted-pro forma $ .48 $ .41 $ .97 $ .80
------ ------ ------- -------
(2) INVESTMENT SECURITIES
---------------------
The carrying value and related market value of investment securities at
June 30, 2003 and December 31, 2002 were as follows (dollars in thousands):
June 30, 2003
-------------------------------------------
Amortized Unrealized Unrealized Market
Available-For-Sale Cost Gains Losses Value
- ------------------ --------- ---------- ---------- --------
U.S. Treasury $ 40,924 $ 223 $ - $ 41,147
U.S. Govt. Agencies and Corporations 35,357 535 - 35,892
States and Political Subdivisions 58,851 2,430 - 61,281
Mortgage-Backed Securities 19,184 704 - 19,888
Other Securities 12,413 130 6 12,537
-------- ------ --- --------
Total $166,729 $4,022 $ 6 $170,745
======== ====== === ========
December 31, 2002
-------------------------------------------
Amortized Unrealized Unrealized Market
Available-For-Sale Cost Gains Losses Value
- ------------------ --------- ---------- ---------- --------
U.S. Treasury $ 10,438 $ 5 $ - $ 10,443
U. S. Govt. Agencies and Corporations 51,075 884 - 51,959
States and Political Subdivisions 62,845 2,632 2 65,475
Mortgage-Backed Securities 34,750 1,180 - 35,930
Other Securities 16,281 227 - 16,508
-------- ------ --- --------
Total $175,389 $4,928 $ 2 $180,315
======== ====== === ========
7
(3) LOANS
-----
The composition of the Company's loan portfolio at June 30, 2003 and
December 31, 2002 was as follows (dollars in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
Commercial, Financial and Agricultural $ 154,261 $ 141,459
Real Estate-Construction 88,577 91,110
Real Estate-Commercial Mortgage 375,501 356,807
Real Estate-Residential 327,604 336,705
Real Estate-Home Equity 103,731 92,277
Real Estate-Loans Held-for-Sale 13,414 22,454
Consumer 227,542 221,776
Other Loans 41,757 22,633
---------- ----------
Loans, Net of Unearned Interest $1,332,387 $1,285,221
Consists primarily of loans-in-process.
(4) ALLOWANCE FOR LOAN LOSSES
-------------------------
An analysis of the changes in the allowance for loan losses for the six month
periods ended June 30, 2003 and 2002, is as follows (dollars in thousands):
June 30,
----------------------
2003 2002
-------- --------
Balance, Beginning of Period $12,495 $12,096
Provision for Loan Losses 1,665 1,443
Recoveries on Loans Previously Charged-Off 447 810
Loans Charged-Off (2,173) (2,122)
------- -------
Balance, End of Period $12,434 $12,227
======= =======
Impaired loans are primarily defined as all nonaccruing loans for the loan
categories which are included within the scope of SFAS 114. Selected
information pertaining to impaired loans is depicted in the table below
(dollars in thousands):
June 30,
-------------------------------------------
2003 2002
-------------------- --------------------
Valuation Valuation
Balance Allowance Balance Allowance
Impaired Loans: -------------------- --------------------
With Related Credit Allowance $ 878 $453 $2,159 $474
Without Related Credit Allowance 1,668 - 615 -
Average Recorded Investment for the Period 3,088 * 3,062 *
* Not Applicable
The Company recognizes income on impaired loans primarily on the cash basis.
Any change in the present value of expected cash flows is recognized through
the allowance for loan losses. For the periods ended June 30, 2003 and 2002,
the Company recognized $5,000 and $80,000, respectively, in interest income
on impaired loans, all of which was collected in cash.
8
(5) DEPOSITS
--------
The composition of the Company's interest bearing deposits at June 30, 2003
and December 31, 2002 was as follows (dollars in thousands):
June 30, 2003 December 31, 2002
------------- -----------------
NOW Accounts $ 278,708 $ 276,487
Money Market Accounts 219,122 209,508
Savings Deposits 110,698 104,053
Other Time Deposits 433,999 438,071
---------- ----------
Total Interest Bearing Deposits $1,042,527 $1,028,119
========== ==========
(6) INTANGIBLE ASSETS
-----------------
As of January 1, 2002, the Company adopted 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.
The Company had intangible assets of $27.4 million and $29.0 million at June
30, 2003 and December 31, 2002, respectively. Intangible assets were as
follows (dollars in thousands):
June 30, 2003 December 31, 2002
----------------------- -----------------------
Gross Accumulated Gross Accumulated
Description Amount Amortization Amount Amortization
- ----------- ------- ------------ ------- ------------
Core Deposit Intangibles $33,752 $13,019 $33,752 $11,398
Goodwill 10,466 3,786 10,466 3,786
------- ------- ------- -------
Total Intangible Assets $44,218 $16,805 $44,218 $15,184
======= ======= ======= =======
Net Core Deposit Intangibles: As of June 30, 2003 and December 31, 2002, the
Company had core deposit intangibles of $20.7 million and $22.5 million,
respectively. The adoption of SFAS 142 did not have a material impact on the
useful lives assigned to the Company's intangible assets subject to
amortization. Amortization expense for the first half of both 2003 and 2002
was $1.6 million.
Goodwill: As of June 30, 2003 and December 31, 2002, the Company had
goodwill, net of accumulated amortization, of $6.7 million. Goodwill is the
Company's only intangible asset that is no longer subject to amortization
under the provisions of SFAS 142.
9
(7) COMPREHENSIVE INCOME
--------------------
Total comprehensive income is defined as net income and all other changes in
equity which, for the Company, consists solely of changes in unrealized gains
(losses) on available-for-sale securities, net of income taxes. The Company
reported total comprehensive income, net of tax, for the three and six month
periods ended June 30, 2003 and 2002, as follows (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net Income $6,440 $5,448 $12,801 $10,559
Other Comprehensive Income, Net of Tax
Unrealized Gains on Securities:
Unrealized Gains on Securities
During the Period (92) 1,027 (577) 641
Less: Reclassification Adjustments for
Gains in Net Income (8) - (15) -
------ ------ ------- -------
Total Unrealized Gains On Securities (100) 1,027 (592) 641
------ ------ ------- -------
Other Comprehensive Income, Net of Tax $6,340 $6,475 $12,209 $11,200
====== ====== ======= =======
10
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
2003 2002 2001
---------------------- ---------------------------------------------- ----------------------
Second First Fourth Third Second First Fourth Third
---------------------- ---------------------------------------------- ----------------------
Summary of Operations:
Interest Income $ 25,234 $ 25,337 $ 26,052 $ 26,403 $ 26,599 $ 27,041 $ 28,706 $ 30,258
Interest Expense 3,894 4,100 4,667 4,946 5,693 7,197 9,454 12,256
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 21,340 21,237 21,385 21,457 20,906 19,844 19,252 18,002
Provision for
Loan Losses 886 779 863 991 641 802 932 1,222
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 20,454 20,458 20,522 20,466 20,265 19,042 18,320 16,780
Noninterest Income 10,781 10,177 11,243 9,087 8,552 8,294 8,536 7,918
Conversion/
Merger Expense - - 59 - 39 114 588 -
Noninterest Expense 21,106 20,670 21,316 20,526 20,293 19,351 19,251 18,993
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 10,129 9,965 10,390 9,027 8,485 7,871 7,017 5,705
Provision for
Income Taxes 3,689 3,604 3,668 3,226 3,037 2,760 2,522 1,963
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 6,440 $ 6,361 $ 6,722 $ 5,801 $ 5,448 $ 5,111 $ 4,495 $ 3,742
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 21,693 $ 21,607 $ 21,786 $ 21,873 $ 21,332 $ 20,284 $ 19,689 $ 18,431
Per Common Share:
Net Income Basic $ .49 $ .48 $ .51 $ .44 $ .41 $ .39 $ .34 $ .28
Net Income Diluted .49 .48 .51 .44 .41 .38 .34 .28
Dividends Declared .1700 .1360 .1360 .1220 .1220 .1220 .1220 .1180
Diluted Book Value 14.73 14.42 14.08 13.74 13.39 13.10 12.86 12.99
Market Price:
High 36.43 32.32 32.04 29.55 27.84 22.00 19.74 20.20
Low 29.74 26.81 22.26 22.32 20.60 18.12 17.52 16.70
Close 36.08 31.29 31.35 26.45 27.62 21.60 19.38 18.78
Selected Average
Balances:
Loans $1,316,705 $1,289,161 $1,292,893 $1,266,591 $1,234,787 $1,229,344 $1,242,516 $1,204,323
Earning Assets 1,612,133 1,615,286 1,591,536 1,511,485 1,547,603 1,575,698 1,584,225 1,561,519
Assets 1,786,991 1,796,657 1,762,174 1,678,620 1,720,095 1,748,211 1,756,995 1,734,392
Deposits 1,415,798 1,407,763 1,404,818 1,388,396 1,440,615 1,467,257 1,488,961 1,483,527
Shareowners' Equity 194,781 190,416 185,412 180,910 176,678 175,485 176,549 170,511
Common Equivalent
Average Shares:
Basic 13,209 13,207 13,189 13,189 13,219 13,305 13,343 13,356
Diluted 13,255 13,253 13,238 13,238 13,257 13,343 13,393 13,366
Ratios:
ROA 1.45% 1.44% 1.51% 1.37% 1.27% 1.19% 1.01% .86%
ROE 13.26% 13.55% 14.38% 12.72% 12.37% 11.81% 10.10% 8.71%
Net Interest
Margin (FTE) 5.40% 5.42% 5.44% 5.74% 5.52% 5.22% 4.93% 4.70%
Efficiency Ratio 62.50% 62.48% 62.08% 63.68% 65.20% 64.88% 65.30% 68.17%
All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13, 2003.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis provides supplemental information, which
sets forth the major factors that have affected the Company's financial
condition and results of operations and should be read in conjunction with
the Consolidated Financial Statements and related notes. The Financial
Review is divided into subsections entitled "Results of Operations,"
"Financial Condition," "Liquidity and Capital Resources" and "Accounting
Policies." Information therein should facilitate a better understanding of
the major factors and trends that affect the Company's earnings performance
and financial condition, and how the Company's performance during 2003
compares with prior years. Throughout this section, Capital City Bank Group,
Inc., and its subsidiaries, collectively, are referred to as "CCBG" or the
"Company." Capital City Bank is referred to as "CCB" or the "Bank."
The period-to-date averages used in this report are based on daily balances
for each respective period. In certain circumstances, comparing average
balances for the comparable quarters of consecutive years may be more
meaningful than simply analyzing year-to-date averages. Therefore, where
appropriate, quarterly averages have been presented for analysis and have
been noted as such. See Table I for average balances and interest rates
presented on a quarterly basis.
All share and per share data have been adjusted to reflect the 5-for-4 stock
split effective June 13, 2003.
This Report and other Company communications and statements may contain
"forward-looking statements." These forward-looking statements include,
among others, statements about our beliefs, plans, objectives, goals,
expectations, estimates and intentions that are subject to significant risks
and uncertainties and are subject to change based on various factors, many of
which are beyond our control. The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify forward-looking statements. The
following factors, among others, could cause our financial performance to
differ materially from what is contemplated in those forward-looking
statements:
* The strength of the United States economy in general and the strength of
the local economies in which we conduct operations may be different than
expected resulting in, among other things, a deterioration in credit
quality or a reduced demand for credit, including the resultant effect
on our loan portfolio and allowance for loan losses;
* The effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the
Federal Reserve System;
* Inflation, interest rate, market and monetary fluctuations;
* Adverse conditions in the stock market and other capital markets and the
impact of those conditions on our capital markets and capital management
activities, including our investment and wealth management advisory
businesses and brokerage activities;
* Changes in U.S. foreign or military policy;
* The timely development of competitive new products and services by us
and the acceptance of those products and services by new and existing
customers;
* The willingness of customers to accept third-party products marketed by
us;
12
* The willingness of customers to substitute competitors' products and
services for our products and services and vice versa;
* The impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance);
* Technological changes;
* Changes in consumer spending and saving habits;
* The effect of corporate restructuring, acquisitions or dispositions,
including the actual restructuring and other related charges and the
failure to achieve the expected gains, revenue growth or expense savings
from such corporate restructuring, acquisitions or dispositions;
* The growth and profitability of our noninterest or fee income being less
than expected;
* Unanticipated regulatory or judicial proceedings;
* The impact of changes in accounting policies by the Securities and
Exchange Commission;
* Adverse changes in the financial performance and/or condition of our
borrowers, which could impact the repayment of those borrowers'
outstanding loans; and
* Our success at managing the risks involved in the foregoing.
We caution that the foregoing list of important factors is not exhaustive.
Also, we do not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by us or on our behalf.
The Company is headquartered in Tallahassee, Florida and as of June 30, 2003
had 53 offices covering 17 counties in Florida, four counties in Georgia and
one county in Alabama.
RESULTS OF OPERATIONS
Net Income
- ----------
Earnings for the three and six months ended June 30, 2003 were $6.4 million,
or $0.49 per diluted share, and $12.8 million, or $0.97 per diluted share,
respectively. This compares to $5.4 million, or $0.41 per diluted share, and
$10.6 million, or $0.79 per diluted share in 2002. Amortization of
intangible assets, net of taxes, totaled $1.0 million, or $0.07 per diluted
share, for the first six months in 2003 and 2002.
The Company experienced growth in operating revenues of 9.0% and 10.3% over
the comparable three and six month periods in 2002, respectively. The
increase in both second quarter and year-to-date earnings was primarily
attributable to growth in net interest income and noninterest income. Net
interest income increased 2.1% and 4.4%, respectively for the three and six
month periods. The net interest margin for the first half of 2003 improved 3
basis points over the first half of 2002 to a level of 5.41%. Growth in
noninterest income resulted from higher service charge revenues, reflecting a
higher level of NSF/overdraft fees, and mortgage banking revenues,
attributable to the higher volume of fixed rate residential mortgage
production sold in the secondary market. These increases were the most
significant factors contributing to the increase in net income. A condensed
earnings summary is presented below.
13
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- -------
Interest and Dividend Income $25,234 $26,599 $50,571 $53,640
Taxable-Equivalent Adjustment 353 426 723 866
------- ------- ------- -------
Interest Income (FTE) 25,587 27,025 51,294 54,506
Interest Expense 3,894 5,693 7,994 12,890
------- ------- ------- -------
Net Interest Income (FTE) 21,693 21,332 43,300 41,616
Provision for Loan Losses 886 641 1,665 1,443
Taxable Equivalent Adjustment 353 426 723 866
------- ------- ------- -------
Net Int. Inc. After Provision 20,454 20,265 40,912 39,307
Noninterest Income 10,781 8,552 20,958 16,846
Noninterest Expense 21,106 20,332 41,776 39,797
------- ------- ------- -------
Income Before Income Taxes 10,129 8,485 20,094 16,356
Income Taxes 3,689 3,037 7,293 5,797
------- ------- ------- -------
Net Income $ 6,440 $ 5,448 $12,801 $10,559
======= ======= ======= =======
Percent Change 18.21% 27.29% 21.23% 22.36%
Return on Average Assets 1.45% 1.27% 1.44% 1.23%
Return on Average Equity 13.26% 12.37% 13.40% 12.09%
Computed using a statutory tax rate of 35%
Annualized
Net Interest Income
- -------------------
Net interest income represents the Company's single largest source of
earnings and is equal to interest income and fees generated by earning
assets, less interest expense paid on interest bearing liabilities. Second
quarter of 2003 taxable-equivalent net interest income increased $361,000, or
1.7%, over the comparable quarter in 2002. During the first half of 2003,
taxable-equivalent net interest income increased $1.7 million, or 4.0%, over
the first half of 2002. The favorable impact of lower funding costs and shift
in earning assets mix was partially offset by declining asset yields
attributable to the low interest rate environment. Table I on page 22
provides a comparative analysis of the Company's average balances and
interest rates.
For the three and six month periods ended June 30, 2002, taxable-equivalent
interest income decreased $1.4 million, or 5.3%, and $3.2 million, or 5.9%,
respectively, over the comparable prior year periods. Earning assets
continue to reprice at lower levels, reflecting the low rate environment and
competition experienced in most markets. New loan production and repricing
of existing earning assets produced a 63 basis point reduction in the yield
on earning assets, which declined from 7.00% for the second quarter in 2002
to 6.37% for the same period in 2003. Earning asset yields are expected to
decline as a result of the recent interest rate cut initiated by the Federal
Reserve.
Interest expense for the three and six months periods ended June 30, 2003
declined $1.8 million, or 31.6% and $4.9 million, or 38.0%, respectively,
from the comparable prior year periods. The favorable variances attributable
to lower rates were further enhanced by a favorable 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 average
deposits, declined from 36.8% in 2002 to 30.8% in 2003. The average rate paid
on interest bearing liabilities in 2003 declined 97 basis points over first
half of 2002, to a level of 1.25%.
14
The Company's interest rate spread (defined as the average federal taxable-
equivalent yield on earning assets less the average rate paid on interest
bearing liabilities) increased from 4.85% in the first half of 2002 to 5.05%
in the comparable period of 2003.
The Company's net interest margin percentage (defined as taxable-equivalent
net interest income divided by average earning assets) was 5.41% in the first
half of 2003, versus 5.38% in the first half of 2002. The improvement in both
the spread and margin reflects the lower cost of funds. The margin
percentage may continue to decline slightly over the next quarter as
historically low interest rates continue to prevail and the recent interest
rate cut by the Federal Reserve drives earning asset yields lower.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $886,000 and $1.7 million, respectively,
for the three and six month periods ended June 30, 2003, compared to $641,000
and $1.4 million for the same periods in 2002. The provision increase in the
first half of 2003 reflects a slightly higher level of net charge-offs
between comparable periods.
Net charge-offs increased in comparison to the first half of 2002 by
$414,000, but remain at low levels relative to the size of the portfolio.
The net charge-off ratio increased to .27% versus .21% in 2002. The primary
reason for the increase in net charge-offs is due to the lower level of
recoveries in the first half of 2003. The Company's nonperforming assets
ratio increased to .38% at June 30, 2003 compared to .30% for year-end 2002
and .28% at June 30, 2002. The increase in the nonperforming asset ratio is
reflective of a higher level of nonaccrual loans. The majority of the
increase in nonaccrual loans is made up of three agriculture loans totaling
$1.5 million, of which $1.1 million is supported with 90% government
guaranties for principal and interest.
Charge-off activity for the respective periods is set forth below:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 177 $ 220 $ 319 $ 404
Real Estate - Construction 0 0 0 0
Real Estate - Commercial Mortgage 0 0 0 0
Real Estate - Residential 20 9 40 73
Consumer 928 753 1,814 1,645
------ ------ ------ ------
Total Charge-offs 1,125 982 2,173 2,122
------ ------ ------ ------
RECOVERIES
Commercial, Financial and Agricultural 42 56 56 101
Real Estate - Construction 0 0 0 0
Real Estate - Commercial Mortgage 0 0 0 0
Real Estate - Residential 0 35 1 35
Consumer 194 365 390 674
------ ------ ------ ------
Total Recoveries 236 456 447 810
------ ------ ------ ------
Net Charge-offs $ 889 $ 526 $1,726 $1,312
====== ====== ====== ======
Net Charge-offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .27% .17% .27% .21%
====== ====== ====== ======
15
Noninterest Income
- ------------------
Noninterest income increased $2.2 million, or 26.1%, and $4.1 million, or
24.4%, over the comparable three and six month periods in 2002. Noninterest
income represented 33.6% and 33.0% of operating revenue for the three and
six-month periods of 2003 compared to 29.0% and 29.3% for the same periods in
2002. Increases in deposit fees and mortgage banking revenues were the
primary drivers underlying the growth.
Service charges on deposit accounts increased $1.0 million, or 34.6%, and
$2.3 million, or 40.2%, respectively, over the comparable three and six month
periods for 2002. Service charge revenues in any one period are dependent on
the number of accounts, primarily transaction accounts, the level of activity
subject to service charges and the rate of collection. The higher revenues
in the first half of 2003, compared to 2002, are attributable to an increase
in overdraft/NSF fees, which are anticipated to have a favorable impact
throughout the remainder of the year.
Data processing revenues of $611,000 and $1.2 million for the three and six
month periods ended June 30, 2003 reflect an increase of 20.2% and 15.8% over
the comparable periods in 2002. The increase for both periods was a result
of higher government contract processing. The Company currently provides
data processing services for six financial clients, an increase of one from
the second quarter ended 2002. During the first half of 2003, financial
clients represented approximately 54.2% of total processing revenues compared
to 59.1% in the comparable period in 2002. Management believes that revenues
for the remainder of 2003 will remain consistent with the revenues generated
in the first half of the year.
Income from asset management activities decreased $25,000, or 3.7%, compared
to the second quarter of 2002, and $50,000, or 3.8%, over the comparable six
month period in 2002. At June 30, 2003, assets under management totaled
$368.2 million, representing an increase of $44.1 million, or 13.6% from June
30, 2002. This growth is attributable to recent (second quarter) growth in
new business, and improvement in asset values due to improvement in the stock
market. Recent growth in assets under management is expected to enhance
revenues for the second half of the year.
Mortgage banking revenues increased $796,000, or 72.4%, and $1.1 million, or
48.0%, respectively, over the comparable three and six month periods in 2002.
The Company continues to be among the leaders in the production of
residential real estate loans in most of its markets. The bank generally
sells into the secondary market all fixed rate residential loan production.
The low interest rates continue to produce a high level of fixed rate
production and increased mortgage banking revenues. The level of interest
rates, origination volume and percent of fixed rate production is expected to
impact the Company's ability to maintain the current level of mortgage
banking revenues throughout the remainder of 2003.
Other income increased $298,000, or 9.2%, and $551,000, or 8.5%,
respectively, over the comparable three and six month periods in 2002. For
the first half of the year, the Company experienced increases in retail
brokerage fees of $39,000, debit/credit settlement fees of $84,000, merchant
card processing fees of $254,000, interchange fees of $125,000, and ATM/Debit
card fees of $43,000. The recent Visa/MasterCard legal settlement will
adversely impact debit card fees. However, growth in the number of debit
cards issued will partially offset loss of revenue.
Noninterest income as a percent of average assets was 2.36% and 1.96%,
respectively, for the first half of 2003 and 2002. The increase in 2003 is
attributable to growth in deposit fees and mortgage banking revenues.
16
Noninterest Expense
- -------------------
Noninterest expense increased $774,000, or 3.8%, and $2.0 million, or 5.0%,
respectively, over the comparable three and six month periods in 2002.
Factors impacting the Company's noninterest expense during the first six
months of 2003 are discussed below.
Compensation expense increased $840,000, or 8.0%, and $1.7 million, or 7.9%
over the comparable three and six month periods in 2002. For the first half
of the year, the company experienced increases in pension costs of $726,000,
associate insurance of $224,000, and salaries of $703,000. The higher
pension costs is a result of an increase in the number of plan participants
and the lower than expected return on plan assets resulting from the general
stock market decline. Healthcare premiums have risen due to the addition of
plan participants and the rising costs charged by healthcare providers.
These premiums are expected to increase during the second half of 2003.
Higher salaries are reflective of normal associate raises and higher
commission payments to associates in the mortgage production division.
Occupancy expense, including premises, furniture, fixtures and equipment
decreased $42,000, 1.2%, and $168,000, or 2.5%, respectively, over the
comparable three and six month periods in 2002. For the first half of the
year, the company experienced decreases in depreciation of $144,000 and
maintenance and repairs of $135,000. This was attributable to lower levels
of FF&E purchased and non-renewal of maintenance agreements, primarily at
offices acquired in 2001 and 2002. These decreases were partially offset by
increases in property taxes of $77,000, premises rental of $16,000, and other
furniture/fixture expense of $18,000.
Other noninterest expense decreased $24,000, or 0.4% for the quarter ended
June 30, 2003, but reflected an increase of $480,000, or 4.0% over the six
month period in 2002. For the first half of the year, the increase was
primarily attributable to: (1) higher EDP processing service expense of
$294,000 resulting from the system conversion during 2002; (2) higher legal
costs of $62,000 primarily resulting from litigation costs and new corporate
governance compliance requirements; (3) increased ATM/Visa settlement service
fees of $204,000 resulting from higher transaction volumes in merchant
services; (4) higher postage of $33,000 and (5) higher miscellaneous expenses
of $133,000. These increases were partially offset by declines in
advertising expense of $165,000, and printing/supplies expense of $92,000.
Net noninterest expense (noninterest income minus noninterest expense,
excluding intangible amortization) as a percent of average assets was 2.16%
in the first half of 2003 compared to 2.46% in 2002. The Company's
efficiency ratio (noninterest expense, excluding intangible amortization,
expressed as a percent of the sum of taxable-equivalent net interest income
plus noninterest income) was 62.49% for the first half of 2003 compared to
65.04% for the comparable period in 2002. This improvement is attributable
to growth in operating revenues.
Income Taxes
- ------------
The provision for income taxes increased $652,000, or 21.5%, during the
second quarter and $1.5 million, or 25.8%, during the first six months of
2003, relative to the comparable prior year periods. The Company's effective
tax rate for the first half of 2003 was 36.3% versus 35.4% for the comparable
period in 2002. The increase in the effective tax rate is attributable to a
higher operating profit and a reduction in tax-exempt municipal interest.
17
FINANCIAL CONDITION
The Company's average assets increased $57.8 million, or 3.3%, from $1.7
billion in the first half of 2002 to $1.8 billion for the comparable period
in 2003. Average earning assets of $1.6 billion for the six months ended
June 30, 2003, increased $52.1 million, or 3.3% from the comparable period of
2002. There was a favorable shift in mix of earning assets throughout 2002
and the first half of 2003, as the Company experienced net loan growth.
Growth in the loan portfolio was fueled by increased production in all lending
categories, with the exception of 1-4 families. The current loan growth was
primarily funded through the maturity of investment securities, short-term and
long-term borrowings. Table I on page 22 presents average balances for the
three and six month periods ended June 30, 2003 and 2002.
Average loans increased $71.9 million, or 5.8%, over the first half of 2002.
The strong production levels have resulted in growth in all loan categories,
with the exception of residential 1-4 family. The decline in residential 1-4
family loans was a result of the high level of refinancing activity that
continues to occur as a result of the low interest rate environment. Loans
as a percent of average earning assets increased to 80.7% for the second
quarter of 2003, compared to 78.8% for the second quarter of 2002. Price and
product competition remain strong. As the low rate environment continues,
there is increased demand for fixed-rate, longer term financing. Loan
production remains moderate to strong in most markets.
Although management is continually evaluating alternative sources of revenue,
lending is a major component of the Company's 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.
Management maintains the allowance for loan losses at a level sufficient to
provide for the estimated credit losses inherent in the loan portfolio as of
the balance sheet date. Credit losses arise from the borrowers' ability and
willingness to repay, and from other risks inherent in the lending process,
including collateral risk, operations risk, concentration risk and economic
risk. All related risks of lending are considered when assessing the
adequacy of the loan loss reserve. The allowance for loan losses is
established through a provision charged to expense. Loans are charged
against the allowance when management believes collection of the principal is
unlikely. The allowance for loan losses is based on management's judgment of
overall loan quality. This is a significant estimate based on a detailed
analysis of the loan portfolio. The balance can and will change based on
changes in the assessment of the portfolio's overall credit quality.
Management evaluates the adequacy of the allowance for loan losses on a
quarterly basis.
The allowance for loan losses at June 30, 2003 was $12.4 million, slightly
higher than the $12.2 million recorded at June 30, 2002. The allowance as a
percent of total loans was 0.93% in 2003, versus 0.97% at June 30, 2002.
While there can be no assurance that the Company will not sustain loan losses
in a particular period that are substantial in relation to the size of the
allowance, management's assessment of the loan portfolio would not indicate a
likelihood of this occurrence. It is management's opinion that the allowance
at June 30, 2003 is adequate to absorb losses inherent in the loan portfolio
at quarter-end.
The Company continues to operate with a high level of liquidity with year-to-
date average funds sold of $118.5 million. This represents an increase of
$18.2 million, or 7.5% from the June 30, 2002 level of $110.3 million. For a
further discussion on liquidity see the section "Liquidity and Capital
Resources."
18
The investment portfolio is a significant component of the Company's
operations and, as such, it functions as a key element of liquidity and
asset/liability management. For the six months ended June 30, 2003 the
average investment portfolio decreased $27.0 million, or 12.3%, from the
first half of 2002. The decline was partially offset by management's
decision to purchase available-for-sale securities during the fourth quarter
of 2002 and early first quarter of 2003. The excess funds generated from the
securities maturing were partially used to fund loan growth. Management will
evaluate the need to purchase securities for the investment portfolio
throughout 2003.
Securities in the available-for-sale portfolio are recorded at fair value and
unrealized gains and losses associated with these securities are recorded,
net of tax, as a separate component of shareowners' equity. At June 30,
2003, shareowners' equity included a net unrealized gain of $2.5 million
compared to a gain of $3.1 million at December 31, 2002. The decrease in
value reflects a slight increase in interest rates during the second quarter.
The Company's nonperforming assets were $5.1 million at June 30, 2003, versus
$3.5 million for the same period in 2002. The increase in nonperforming
assets experienced in the second quarter of 2003 was primarily due to three
loans totaling $1.5 million being moved to nonaccrual status. These loans
are agricultural in nature, and $1.1 million is supported with 90% government
guaranties of both principal and interest. As a percent of nonperforming
loans, the allowance for loan losses represented 331% at June 30, 2003 versus
498% at December 31, 2002 and 431% at June 30, 2002. Nonperforming loans
include nonaccruing and restructured loans. Other real estate, which
includes property acquired either through foreclosure or by receiving a deed
in lieu of foreclosure, was $1.3 million at June 30, 2003, versus $1.3
million at December 31, 2002 and $700,000 at June 30, 2002. The ratio of
nonperforming assets as a percent of loans plus other real estate was .38% at
June 30, 2003 compared to .30% at December 31, 2002 and .28% at June 30,
2002. While these metric depict marginal deterioration in credit quality,
they remains at historically low levels. The Company expects this trend to
continue into the third quarter.
Average deposits decreased $42.1 million from $1.5 billion in the first half of
2002, to $1.4 billion in the first half of 2003. The Company experienced a
steep decline in certificates of deposit throughout 2002. This decline was
partially offset by growth of nonmaturity deposits that created a favorable
shift in the deposit mix and a positive impact on the Bank's cost of funds.
The shift in mix and certificate of deposit run-off in the second half of 2003,
if any, is anticipated to be at a slower pace than experienced during 2002.
The ratio of average noninterest bearing deposits to total deposits was 28.1%
for the first half of 2003 compared to 24.1% for the first half of 2002. For
the same periods, the ratio of average interest bearing liabilities to
average earning assets was 73.3% compared to 76.1%.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a banking institution is the availability of funds to meet
increased loan demand and/or excessive deposit withdrawals. Management
monitors the Company's financial position in an effort to ensure the Company
has ready access to sufficient liquid funds to meet normal transaction
requirements, take advantage of investment opportunities and cover unforeseen
liquidity demands. In addition to core deposit growth, sources of funds
available to meet liquidity demands include cash received through ordinary
business activities (i.e., collection of interest and fees), federal funds
sold, loan and investment maturities, bank lines of credit for the Company,
approved lines for the purchase of federal funds by CCB and Federal Home Loan
Bank advances. The Company maintains a $25.0 million revolving line of
credit. As of June 30, 2003, the Company had no borrowings under the
revolving line of credit.
19
During the first half of 2003, the Company borrowed $6.9 million from the
Federal Home Loan Bank to fund loan growth. This borrowing was priced at
3.82% and has a maturity of 15 years. During the third quarter of 2002, the
Company borrowed $75 million from the Federal Home Loan Bank to fund growth
in loan demand and the decline in certificates of deposit. The borrowing
consists of four separate advances with maturities ranging from 12 to 36
months and a weighted average rate of 2.51%.
The Company's equity capital was $195.5 million as of June 30, 2003 compared
to $186.5 million as of December 31, 2002. Management continues to monitor
its capital position in relation to its level of assets with the objective of
maintaining a strong capital position. The leverage ratio was 8.85% at June
30, 2003 compared to 8.46% at December 31, 2002. Further, the Company's
risk-adjusted capital ratio of 12.58% at June 30, 2003, exceeds the 8.0%
minimum requirement under the risk-based regulatory guidelines.
Adequate capital and financial strength is paramount to the stability of CCBG
and its subsidiary bank. Cash dividends declared and paid should not place
unnecessary strain on the Company's capital levels. Although a consistent
dividend payment is believed to be favorably viewed by the financial markets
and shareowners, the Board of Directors will declare dividends only if the
Company is considered to have adequate capital. Future capital requirements
and corporate plans are considered when the Board considers a dividend
payment. In June 2003, the Board of Directors authorized a dividend increase
of 25% and a 5-for-4 stock split. Dividends declared and paid during the
first half of 2003 totaled $.306 per share compared to $.244 per share for
the first half of 2002, an increase of 24.4%. The dividend payout ratios for
the first six months ended June 30, 2003 and 2002 were 34.8% and 38.3%,
respectively.
State and federal regulations as well as the Company's long-term debt
agreements place certain restrictions on the payment of dividends by both the
Company and the Bank. At June 30, 2003, these regulations and covenants did
not impair the Company's (or its subsidiaries') ability to declare and pay
dividends or to meet other existing obligations in the normal course of
business.
During the first six months of 2003, shareowners' equity increased $8.9
million, or 9.7%, on an annualized basis. Growth in equity during the first
half was positively impacted by net income of $12.8 million and the issuance
of common stock of $756,000. Equity was reduced by dividends paid during the
first half of $4.0 million, or $.306 per share and a reduction in the net
unrealized gain on available-for-sale securities of $577,000. At June 30,
2003, the Company's common stock had a book value of $14.73 per diluted share
compared to $14.08 at December 31, 2002.
On March 30, 2000, the Company's Board of Directors authorized the repurchase
of up to 625,000 shares of its outstanding common stock. On January 24,
2002, the Company's Board of Directors authorized the repurchase of an
additional 312,500 shares of its outstanding common stock. The purchases
will be made in the open market or in privately negotiated transactions. The
Company did not purchase any shares in the first half of 2003. During 2002,
155,775 shares were acquired. From March 30, 2000 through June 30, 2003, the
Company repurchased 572,193 shares at an average purchase price of $19.23 per
share.
20
OTHER
Prior to 2002, the Bank maintained several relationships with various
Independent Service Organizations (ISOs) in connection with its card
processing operations. During late 2000 and early 2001, a small number of
one of the ISO's merchants generated a large amount of charge-backs. Certain
merchants have alleged they are entitled to receive financial reserves placed
with the ISO. The Bank is currently named as a co-defendant in a lawsuit
brought against the ISO by a merchant. Management does not believe that the
ultimate resolution of these issues will have a material impact on the
Company's financial position or results of operations. The Bank no longer
maintains merchant service relationships with ISOs.
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 U.S., which require the Company to make various
estimates and assumptions (see Note 1 in the Notes to Consolidated Financial
Statements in the Company's 2002 Form 10-K). The Company believes that, of
its significant accounting policies, the following may involve a higher
degree of judgment and complexity.
Allowance for Loan Losses: The allowance for loan losses is established
through a charge to the provision for loan losses. Provisions are made to
reserve for estimated losses in loan balances. The allowance for loan losses
is a significant estimate and is evaluated quarterly by the Company for
adequacy. The use of different estimates or assumptions could produce a
different required allowance, and thereby a larger or smaller provision
recognized as expense in any given reporting period. A further discussion of
the allowance for loan losses can be found in the section entitled "Allowance
for Loan Losses" and Note 1 in the Notes to Consolidated Financial Statements
in the Company's 2002 Form 10-K.
Intangible Assets: Intangible assets consist primarily of goodwill and core
deposit assets that were recognized in connection with various acquisitions.
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their identifiable net assets. The Company performs an
impairment review on an annual basis to determine if there has been
impairment of its goodwill. Impairment testing requires management to make
significant judgments and estimates relating to the fair value of its
identified reporting units. Significant changes to these estimates may have
a material impact on the Company's reported results.
Core deposit assets represent the premium the Company paid for core deposits.
Core deposit intangibles are amortized on the straight-line method over
various periods ranging from 10 - 15 years, with the majority being amortized
over approximately 10 years. Generally, core deposits refer to nonpublic,
nonmaturing deposits including noninterest-bearing deposits, NOW, money
market and savings. The Company makes certain estimates relating to the
useful life of these assets, and rate of run-off based on the nature of the
specific assets and the customer bases acquired. If there is a reason to
believe there has been a permanent loss in value, management will assess
these assets for impairment. Any changes in the original estimates may
materially affect reported earnings.
21
TABLE I
AVERAGE BALANCES & INTEREST RATES
(Taxable Equivalent Basis - Dollars in Thousands)
FOR THREE MONTHS ENDED JUNE 30,
2003 2002
-------------------------- --------------------------
Balance Interest Rate Balance Interest Rate
-------------------------- --------------------------
ASSETS
Loans, Net of Unearned Interest $1,316,705 $23,403 7.13% $1,234,787 $23,646 7.68%
Taxable Investment Securities 118,494 929 3.13% 150,188 1,935 5.17%
Tax-Exempt Investment Securities 62,552 923 5.90% 69,472 1,052 6.06%
Funds Sold 114,382 332 1.15% 93,156 392 1.66%
---------- ------- ---------- -------
Total Earning Assets 1,612,133 25,587 6.37% 1,547,603 27,025 7.00%
Cash & Due From Banks 74,537 74,178
Allowance for Loan Losses (12,531) (12,265)
Other Assets 112,852 110,579
---------- ----------
TOTAL ASSETS $1,786,991 $1,720,095
========== ==========
LIABILITIES
NOW Accounts $ 256,675 $ 193 0.30% $ 241,059 $ 323 .54%
Money Market Accounts 211,314 392 0.74% 234,454 823 1.41%
Savings Accounts 109,424 68 0.25% 105,396 134 .51%
Other Time Deposits 434,515 2,400 2.22% 501,440 4,034 3.23%
---------- ------- ---------- -------
Total Int. Bearing Deposits 1,011,928 3,053 1.21% 1,082,349 5,314 1.97%
Short-Term Borrowings 102,510 340 1.33% 70,257 177 1.01%
Long-Term Debt 54,434 501 3.69% 13,924 202 5.83%
---------- ------- ---------- -------
Total Interest Bearing
Liabilities 1,168,872 3,894 1.34% 1,166,530 5,693 1.96%
Noninterest Bearing Deposits 403,870 358,266
Other Liabilities 19,468 18,621
---------- ----------
TOTAL LIABILITIES 1,592,210 1,543,417
SHAREOWNERS' EQUITY
Common Stock 114 106
Surplus 15,181 15,343
Other Comprehensive Income 2,568 2,354
Retained Earnings 176,918 158,875
---------- ----------
TOTAL SHAREOWNERS' EQUITY 194,781 176,678
---------- ----------
TOTAL LIABILITIES & EQUITY $1,786,991 $1,720,095
========== ==========
Interest Rate Spread 5.03% 5.04%
==== ====
Net Interest Income $21,693 $21,332
======= =======
Net Interest Margin 5.40% 5.52%
==== ====
FOR SIX MONTHS ENDED JUNE 30,
2003 2002
-------------------------- --------------------------
Balance Interest Rate Balance Interest Rate
-------------------------- --------------------------
ASSETS
Loans, Net of Unearned Interest $1,303,008 $46,623 7.22% $1,232,081 $47,557 7.78%
Taxable Investment Securities 128,514 2,109 3.28% 149,000 3,915 5.30%
Tax-Exempt Investment Securities 63,656 1,877 5.90% 70,199 2,127 6.06%
Funds Sold 118,523 685 1.15% 110,293 907 1.64%
---------- ------- ---------- -------
Total Earning Assets 1,613,701 51,294 6.41% 1,561,573 54,506 7.04%
Cash & Due From Banks 78,473 73,228
Allowance for Loan Losses (12,575) (12,248)
Other Assets 112,198 111,522
---------- ----------
TOTAL ASSETS $1,791,797 $1,734,075
========== ==========
LIABILITIES
NOW Accounts $ 259,630 $ 396 0.31% $ 235,906 $ 655 .56%
Money Market Accounts 212,918 812 0.77% 228,138 1,616 1.43%
Savings Accounts 107,841 133 0.25% 103,770 265 .52%
Other Time Deposits 434,669 4,939 2.29% 535,116 9,624 3.63%
---------- ------- ---------- -------
Total Int. Bearing Deposits 1,015,058 6,280 1.25% 1,102,930 12,160 2.22%
Short-Term Borrowings 104,642 669 1.29% 71,144 338 .96%
Long-Term Debt 63,354 1,045 3.33% 13,863 392 5.70%
---------- ------- ---------- -------
Total Interest Bearing
Liabilities 1,183,054 7,994 1.36% 1,187,937 12,890 2.19%
Noninterest Bearing Deposits 396,744 350,933
Other Liabilities 19,389 19,121
---------- ----------
TOTAL LIABILITIES 1,599,187 1,557,991
SHAREOWNERS' EQUITY
Common Stock 110 106
Surplus 15,022 16,199
Other Comprehensive Income 2,786 2,583
Retained Earnings 174,692 157,196
---------- ----------
TOTAL SHAREOWNERS' EQUITY 192,610 176,084
---------- ----------
TOTAL LIABILITIES & EQUITY $1,791,797 $1,734,075
========== ==========
Interest Rate Spread 5.05% 4.85%
==== ====
Net Interest Income $43,300 $41,616
======= =======
Net Interest Margin 5.41% 5.38%
==== ====
Average balances include nonaccrual loans. Interest income includes fees on loans of
approximately $1.7 million and $3.3 million, for the three and six months ended
June 30, 2003, versus $1.1 million and $2.1 million, for the comparable periods ended June 30, 2002.
Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE FOR MARKET RISK
Overview
- --------
Market risk management arises from changes in interest rates, exchange rates,
commodity prices and equity prices. The Company has risk management policies
to monitor and limit exposure to market risk. CCBG does not actively
participate in exchange rates, commodities or equities. In asset and
liability management activities, policies are in place that are designed to
minimize structural interest rate risk.
Interest Rate Risk Management
- -----------------------------
The normal course of business activity exposes CCBG to interest rate risk.
Fluctuations in interest rates may result in changes in the fair market value
of the Company's financial instruments, cash flows and net interest income.
CCBG's asset/liability management process manages the Company's interest rate
risk.
The financial assets and liabilities of the Company are classified as other-
than-trading. An analysis of the other-than-trading financial components,
including the fair values, are presented in Table II on page 24. This table
presents the Company's consolidated interest rate sensitivity position as of
June 30, 2003 based upon certain assumptions as set forth in the Notes to the
Table. The objective of interest rate sensitivity analysis is to measure the
impact on the Company's net interest income due to fluctuations in interest
rates. The asset and liability values presented in Table II may not
necessarily be indicative of the Company's interest rate sensitivity over an
extended period of time.
The Company is currently liability sensitive, which generally indicates that,
in a period of rising interest rates, the net interest margin will be
adversely impacted as the velocity and/or volume of liabilities being
repriced exceeds assets. The opposite is true in a falling rate environment.
However, as general interest rates rise or fall, other factors such as
current market conditions and competition may impact how the Company responds
to changing rates and thus impact the magnitude of change in net interest
income. Nonmaturity deposits offer management greater discretion as to the
direction, timing and magnitude of interest rate changes and can have a
material impact on the Company's interest rate sensitivity. In addition, the
relative level of interest rates as compared to the current yields/rates of
existing assets/liabilities can impact both the direction and magnitude of
the change in net interest margin as rates rise and fall from one period to
the next.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
As of the end of the period covered by this report, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-
15(e) under the Securities Exchange Act of 1934, as amended). Based on their
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective.
However, the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
Changes in Internal Controls
- ----------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has reviewed the Company's internal controls. There have
been no significant changes in the Company's internal controls during the
Company's most recently completed fiscal quarter that could significantly
affect these controls subsequent to the date of their evaluation.
23
Table II
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS
(Dollars in Thousands)
Other Than Trading Portfolio June 30, 2003
- ---------------------------- ---------------------------------------------------- Fair
Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
-------- -------- -------- -------- -------- -------- ----------- -----------
Loans
Fixed Rate $ 199,599 $ 95,212 $ 67,107 $26,329 $14,118 $25,671 $ 428,036 $ 444,244
Average Interest Rate 7.37% 7.97% 7.53% 8.08% 7.87% 7.72% 7.59%
Floating Rate 595,492 109,611 150,934 32,808 5,489 10,017 904,351 938,591
Average Interest Rate 5.38% 7.13% 6.67% 7.43% 6.73% 6.62% 5.91%
Investment Securities
Fixed Rate 91,631 49,284 14,832 3,753 563 6,637 166,700 166,700
Average Interest Rate 3.37% 3.10% 4.36% 4.81% 5.73% 4.10% 3.32%
Floating Rate 4,045 - - - - - 4,045 4,045
Average Interest Rate 4.62% - - - - - 4.62%
Other Earning Assets
Floating Rate 168,773 - - - - - 168,773 168,773
Average Interest Rates 1.17% - - - - - 1.17%
Total Financial Assets $1,059,540 $254,107 $232,873 $62,890 $20,170 $42,325 $1,671,905 $1,722,353
Average Interest Rates 4.91% 6.66% 6.77% 7.54% 7.50% 6.89% 5.60%
Deposits
Fixed Rate Deposits $ 339,232 $ 71,174 $ 13,879 $ 5,938 $ 4,546 $ 6 $ 434,775 $ 440,301
Average Interest Rates 1.92% 2.98% 3.32% 3.99% 3.70% 4.85% 2.15%
Floating Rate Deposits 607,752 - - - - - 607,752 607,752
Average Interest Rates 0.47% - - - - - 0.47%
Other Interest Bearing
Liabilities
Fixed Rate Debt 40,000 20,145 16,261 - 899 20,359 97,664 99,445
Average Interest Rate 2.14% 2.51% 3.27% - 4.80% 4.89% 3.00%
Floating Rate Debt 61,629 - - - - - 61,629 61,629
Average Interest Rate 0.43% - - - - - 0.43%
Total Financial Liabilities $1,048,613 $ 91,319 $ 30,140 $ 5,938 $ 5,445 $20,365 $1,201,820 $1,209,127
Average interest Rate 1.00% 2.87% 3.29% 3.99% 3.88% 4.89% 1.28%
Based upon expected cashflows, unless otherwise indicated.
Based upon a combination of expected maturities and repricing opportunities.
Based upon contractual maturity, except for callable and floating rate securities, which are based on expected
maturity and weighted average life, respectively.
Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as
floating rates deposits in Year 1. Other time deposit balances are classified according to maturity.
24
PART II. OTHER INFORMATION
Items 1-3.
- ----------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders of Capital City Bank Group, Inc. was held
on April 22, 2003. Proxies for the meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, and there was no
solicitation in opposition to management's solicitations. The following
summarizes all matters voted upon at this meeting.
1. The following directors were elected for terms expiring as noted. These
individuals served on the Board of Directors prior to the Annual Meeting.
The number of votes cast were as follows:
For terms to expire at Against/ Abstentions/
the 2006 annual meeting: For Withheld Broker Non-Votes
------------------------ --------- -------- ----------------
DuBose Ausley 8,853,420 93,075 -
John K. Humphress 8,916,925 29,570 -
2. The shareowners ratified the selection of KPMG LLP as the Company's
independent auditors for the fiscal year ending December 31, 2003. The
number of votes cast were as follows:
Against/ Abstentions/
For Withheld Broker Non-Vote
--------- -------- ---------------
8,907,671 35,708 3,116
Item 5. Other Information
- -------------------------
On June 26, 2003, Capital City Bank Group, Inc. issued a press release
announcing the election of four new members to the Board of Directors. The
new members are: Frederick Carroll, III, J. Everitt Drew, Dr. Henry Lewis,
III and Ruth A. Knox. The Company also announced the election of William G.
Smith, Jr. as Chairman of the Board in addition to his duties as President
and Chief Executive Officer. DuBose Ausley, the Company's former Chairman,
continues to serve on the Board as Chairman of the Executive Committee
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(A) Exhibits
31.1 Certification of William G. Smith, Jr., Chairman, President and Chief
Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief
Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32.1 Certification of William G. Smith, Jr., Chairman, President and Chief
Executive Officer of Capital City Bank Group, Inc., Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief
Financial Officer of Capital City Bank Group, Inc., Pursuant to 18
U.S.C. Section 1350.
25
(B) Reports on Form 8-K
On April 25, 2003, the Company filed an 8-K to report the following event:
issuance of a press release to report earnings for the quarter ended March
31, 2003.
On May 22, 2003, the Company filed an 8-K to report the following event:
issuance of a press release to report declaration of a 5-for-4 stock split
effected in the form of a 25% common stock dividend payable to holders of
record as of close of business on June 2, 2003.
On June 26, 2003, the Company filed an 8-K to report the following event:
issuance of a press release to announce the election of four new members to
the Board of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned Chief Financial Officer hereunto duly authorized.
CAPITAL CITY BANK GROUP, INC.
(Registrant)
By: /s/ J. Kimbrough Davis
----------------------
J. Kimbrough Davis
Executive Vice President and
Chief Financial Officer
Date: August 14, 2003
??
56