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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 Quarterly Period Ended:
September 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 office) (Zip Code)
Registrant's telephone number, including area code: (850) 671-0300
--------------
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 October 31, 2003, 13,221,843 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
1
CAPITAL CITY BANK GROUP, INC.
FORM 10-Q I N D E X
ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER
- ---- ----------------------------- -----------
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
3. Quantitative and Qualitative Disclosure of
Market Risk 22
4. Controls and Procedures 22
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 Not Applicable
5. Other Information 25
6. Exhibits and Reports on Form 8-K 25
Signatures 25
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 SEPTEMBER 30
(Unaudited)
(Dollars In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $23,066 $23,897 $69,603 $71,294
Investment Securities:
U.S. Treasury 147 - 433 -
U.S. Govt. Agencies and Corporations 554 1,326 2,048 4,244
States and Political Subdivisions 592 678 1,833 2,099
Other Securities 141 320 470 1,317
Funds Sold 303 182 987 1,089
------- ------- ------- -------
Total Interest Income 24,803 26,403 75,374 80,043
INTEREST EXPENSE
Deposits 2,729 4,496 9,008 16,657
Short-Term Borrowings 282 194 951 531
Long-Term Debt 495 256 1,541 648
------- ------- ------- -------
Total Interest Expense 3,506 4,946 11,500 17,836
------- ------- ------- -------
Net Interest Income 21,297 21,457 63,874 62,207
Provision for Loan Losses 921 991 2,586 2,434
------- ------- ------- -------
Net Interest Income After
Provision for Loan Losses 20,376 20,466 61,288 59,773
NONINTEREST INCOME
Service Charges on Deposit Accounts 4,123 2,979 12,164 8,716
Data Processing 578 485 1,747 1,494
Asset Management Fees 660 585 1,915 1,890
(Loss) Gain on Sale of
Investment Securities (22) - 1 -
Mortgage Banking Revenues 2,434 1,612 5,903 3,957
Other 3,547 3,426 10,548 9,876
------- ------- ------- -------
Total Noninterest Income 11,320 9,087 32,278 25,933
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and Associate Benefits 12,238 10,888 34,964 31,947
Occupancy, Net 1,589 1,363 4,468 4,242
Furniture and Equipment 2,048 1,819 5,717 5,656
Other 5,996 6,456 18,498 18,478
------- ------- ------- -------
Total Noninterest Expense 21,871 20,526 63,647 60,323
------- ------- ------- -------
Income Before Income Taxes 9,825 9,027 29,919 25,383
Income Taxes 3,529 3,226 10,822 9,023
------- ------- ------- -------
NET INCOME $ 6,296 $ 5,801 $19,097 $16,360
======= ======= ======= =======
Basic Net Income Per Share $ .47 $ .44 $ 1.44 $ 1.23
======= ======= ======= =======
Diluted Net Income Per Share $ .47 $ .44 $ 1.44 $ 1.23
======= ======= ======= =======
Cash Dividends Per Share $ .1700 $ .1220 $ .4760 $ .3660
======= ======= ======= =======
Basic Average Shares Outstanding 13,221,264 13,188,677 13,221,114 13,237,377
========== ========== ========== ==========
Diluted Average Shares Outstanding 13,260,140 13,237,747 13,255,047 13,286,447
========== ========== ========== ==========
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 SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(Unaudited)
(Dollars In Thousands, Except Per Share Amounts)
September 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 105,407 $ 89,823
Funds Sold 161,579 170,936
---------- ----------
Total Cash and Cash Equivalents 266,986 260,759
Investment Securities, Available-for-Sale 162,734 180,315
Loans, Net of Unearned Interest 1,322,888 1,285,221
Allowance for Loan Losses (12,424) (12,495)
---------- ----------
Loans, Net 1,310,464 1,272,726
Premises and Equipment 55,347 48,897
Intangibles 26,603 29,034
Other Assets 32,289 33,040
---------- ----------
Total Assets $1,854,423 $1,824,771
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 456,302 $ 406,081
Interest Bearing Deposits 1,029,139 1,028,119
---------- ----------
Total Deposits 1,485,441 1,434,200
Short-Term Borrowings 112,255 113,675
Long-Term Debt 38,016 71,745
Other Liabilities 19,820 18,620
---------- ----------
Total Liabilities 1,655,532 1,638,240
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value,
3,000,000 shares authorized, no
shares issued and outstanding - -
Common Stock, $.01 par value; 112,500,000
shares authorized; 13,221,840 shares
outstanding at September 30, 2003
and 13,196,211 shares outstanding at
December 31, 2002 132 132
Additional Paid-In Capital 15,578 14,691
Retained Earnings 181,395 168,587
Accumulated Other Comprehensive Income,
Net of Tax 1,786 3,121
---------- ----------
Total Shareowners' Equity 198,891 186,531
---------- ----------
Total Liabilities and Shareowners' Equity $1,854,423 $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 NINE MONTH PERIODS ENDED SEPTEMBER 30
(Unaudited)
(Dollars In Thousands)
2003 2002
- ---------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 19,097 $ 16,360
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 2,586 2,434
Depreciation 3,543 3,711
Net Securities Amortization 1,545 725
Amortization of Intangible Assets 2,431 2,432
Gain on Sale of Investment Securities (1) -
Non-Cash Compensation 850 246
Net Decrease in Other Assets 2,799 3,811
Net Increase in Other Liabilities 1,200 1,909
-------- --------
Net Cash Provided by Operating Activities 34,050 31,628
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Payments/Maturities of
Investment Securities Available-for-Sale 75,989 54,224
Proceeds from Sale of Investment Securities
Available-for-Sale 125 -
Purchase of Investment Securities (62,184) (27,824)
Net Increase in Loans (41,599) (46,572)
Purchase of Premises & Equipment (10,051) (4,418)
Sales of Premises & Equipment 57 111
-------- --------
Net Cash Used in Investing Activities (37,663) (24,479)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits 51,241 (146,318)
Net (Decrease) Increase in Short-Term Borrowings (41,746) 3,304
Borrowing of Long-Term Debt 7,612 57,040
Repayment of Long-Term Debt (1,015) (3,623)
Dividends Paid (6,289) (4,850)
Repurchase of Common Stock - (3,396)
Issuance of Common Stock 37 511
-------- --------
Net Cash Provided by (Used in) Financing Activities 9,840 (97,332)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 6,227 (90,183)
Cash and Cash Equivalents at Beginning of Period 260,759 256,830
-------- --------
Cash and Cash Equivalents at End of Period $266,986 $166,647
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 9,455 $ 19,702
======== ========
Interest Paid on Debt $ 2,499 $ 1,094
======== ========
Transfer of Loans to ORE $ 1,275 $ 946
======== ========
Income Taxes Paid $ 12,560 $ 9,815
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 850 $ 246
======== ========
Transfer of Current Portion of Long-Term Debt to
Short-Term Borrowings $ 40,326 $ -
======== ========
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
September 30, 2003 and December 31, 2002, the results of operations for the
three and nine month periods ended September 30, 2003 and 2002, and cash flows
for the nine month periods ended September 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 that materially affect its financial
position, results of operations and cash flows are set forth in Notes to
Consolidated Financial Statements which are included in the Company's 2002
Annual Report on Form 10-K.
Stock-based Compensation
- ------------------------
As of September 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
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
(Dollars in Thousands, Except Per Share Data) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Net income, as reported $6,296 $5,801 $19,097 $16,360
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects 320 138 541 415
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (104) (97) (334) (291)
------ ------ ------- -------
Pro forma net income $6,512 $5,842 $19,304 $16,484
------ ------ ------- -------
Earnings per share:
Basic-as reported $ .47 $ .44 $ 1.44 $ 1.23
------ ------ ------- -------
Basic-pro forma $ .49 $ .44 $ 1.46 $ 1.25
------ ------ ------- -------
Diluted-as reported $ .47 $ .44 $ 1.44 $ 1.23
------ ------ ------- -------
Diluted-pro forma $ .49 $ .44 $ 1.46 $ 1.24
------ ------ ------- -------
All share and per share data have been adjusted to reflect the 5-for-4 stock split effective
June 13, 2003.
(2) INVESTMENT SECURITIES
---------------------
The carrying value and related market value of investment securities at
September 30, 2003 and December 31, 2002 were as follows (dollars in thousands):
September 30, 2003
-------------------------------------------
Amortized Unrealized Unrealized Market
Available-For-Sale Cost Gains Losses Value
- ------------------ -------------------------------------------
U.S. Treasury $ 33,386 $ 128 $ - $ 33,514
U.S. Govt. Agencies and Corporations 43,000 303 - 43,303
States and Political Subdivisions 57,320 1,849 - 59,169
Mortgage-Backed Securities 14,276 483 - 14,759
Other Securities 11,932 57 - 11,989
-------- ------ --- --------
Total $159,914 $2,820 $ - $162,734
======== ====== === ========
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 September 30, 2003 and
December 31, 2002 was as follows (dollars in thousands):
September 30, 2003 December 31, 2002
------------------ -----------------
Commercial, Financial and Agricultural $ 151,671 $ 141,459
Real Estate - Construction 92,877 91,110
Real Estate - Commercial Mortgage 381,868 356,807
Real Estate - Residential 322,729 336,705
Real Estate - Home Equity 111,955 92,277
Real Estate - Loans Held-for-Sale 9,173 22,454
Consumer 226,428 221,776
Other Loans 26,187 22,633
---------- ----------
Loans, Net of Unearned Interest $1,322,888 $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 nine month
period ended September 30, 2003 and 2002, is as follows (dollars in
thousands):
September 30,
-----------------------------
2003 2002
-------- --------
Balance, Beginning of the Period $12,495 $12,096
Provision for Loan Losses 2,586 2,434
Recoveries on Loans Previously Charged-Off 724 1,129
Loans Charged-Off (3,381) (3,197)
------- -------
Balance, End of Period $12,424 $12,462
======= =======
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):
September 30,
---------------------------------------------
2003 2002
-------------------- --------------------
Impaired Loans: Valuation Valuation
Balance Allowance Balance Allowance
-------------------- --------------------
With Related Credit Allowance $4,112 $605 $1,274 $370
Without Related Credit Allowance 1,028 - 1,369 -
Average Recorded Investment
for the Period 7,091 N/A 2,643 N/A
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
September 30, 2003 and 2002, the Company recognized $148,000 and $96,000,
respectively, in interest income on impaired loans, all of which was
collected in cash.
(5) DEPOSITS
--------
The composition of the Company's interest bearing deposits at September 30,
2003 and December 31, 2002 was as follows (dollars in thousands):
September 30, 2003 December 31, 2002
------------------ -----------------
NOW Accounts $ 266,110 $ 276,487
Money Market Accounts 219,438 209,508
Savings Deposits 111,714 104,053
Other Time Deposits 431,877 438,071
---------- ----------
Total Interest Bearing Deposits $1,029,139 $1,028,119
========== ==========
8
(6) INTANGIBLE ASSETS
-----------------
As of January 1, 2002, the Company adopted SFAS 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 $26.6 million and $29.0 million at
September 30, 2003 and December 31, 2002, respectively. Intangible assets
were as follows (dollars in thousands):
September 30, 2003 December 31, 2002
----------------------- -----------------------
Gross Accumulated Gross Accumulated
Amount Amortization Amount Amortization
------- ------------ ------- ------------
Core Deposits Intangibles $33,752 $13,829 $33,752 $11,398
Goodwill 10,466 3,786 10,466 3,786
------- ------- ------- -------
Total Intangible Assets $44,218 $17,615 $44,218 $15,184
======= ======= ======= =======
Net Core Deposit Intangibles:
- ----------------------------
As of September 30, 2003 and December 31, 2002, the Company had core deposit
intangibles of $19.9 million and $22.5 million, respectively. The adoption of
SFAS No. 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 nine months of 2003 and 2002 was $2.4 million and $2.4 million,
respectively.
Goodwill:
- --------
As of September 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 No. 142.
(7) COMPREHENSIVE INCOME
--------------------
Total comprehensive income is defined as net income and all other changes in
equity from transactions and other events and circumstances from non-owner
sources 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 nine month
periods ended September 30, 2003 and 2002, as follows (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------- -------
Net Income $6,296 $5,801 $19,097 $16,360
Other Comprehensive Income, Net of Tax
Unrealized (Losses) Gains on Securities:
Unrealized (Losses) Gains on Securities
During the Period (757) 680 (1,334) 1,321
Less: Reclassification Adjustments for
Losses (Gains) in Net Income 14 - (1) -
------ ------ ------- -------
Total Unrealized (Losses) Gains
On Securities (743) 680 (1,335) 1,321
------ ------ ------- -------
Other Comprehensive Income, Net of Tax $5,553 $6,481 $17,762 $17,681
====== ====== ======= =======
9
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
2003 2002 2001
---------------------------------- ---------------------------------------------- ----------
Third Second First Fourth Third Second First Fourth
---------------------------------- ---------------------------------------------- ----------
Summary of Operations:
Interest Income $ 24,803 $ 25,234 $ 25,337 $ 26,052 $ 26,403 $ 26,599 $ 27,041 $ 28,706
Interest Expense 3,506 3,894 4,100 4,667 4,946 5,693 7,197 9,454
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 21,297 21,340 21,237 21,385 21,457 20,906 19,844 19,252
Provision for
Loan Losses 921 886 779 863 991 641 802 932
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 20,376 20,454 20,458 20,522 20,466 20,265 19,042 18,320
Noninterest Income 11,320 10,781 10,177 11,243 9,087 8,552 8,294 8,536
Conversion/
Merger Expense - - - 59 - 39 114 588
Noninterest Expense 21,871 21,106 20,670 21,316 20,526 20,293 19,351 19,251
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 9,825 10,129 9,965 10,390 9,027 8,485 7,871 7,017
Provision for
Income Taxes 3,529 3,689 3,604 3,668 3,226 3,037 2,760 2,522
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 6,296 $ 6,440 $ 6,361 $ 6,722 $ 5,801 $ 5,448 $ 5,111 $ 4,495
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 21,650 $ 21,693 $ 21,607 $ 21,786 $ 21,873 $ 21,332 $ 20,284 $ 19,689
Per Common Share:
Net Income Basic $ .47 $ .49 $ .48 $ .51 $ .44 $ .41 $ .39 $ .34
Net Income Diluted .47 .49 .48 .51 .44 .41 .38 .34
Dividends Declared .1700 .1700 .1360 .1360 .1220 .1220 .1220 .1220
Diluted Book Value 15.00 14.73 14.42 14.08 13.74 13.39 13.10 12.86
Market Price:
High 40.93 36.43 32.32 32.04 29.55 27.84 22.00 19.74
Low 35.00 29.74 26.81 22.26 22.32 20.60 18.12 17.52
Close 38.16 36.08 31.29 31.35 26.45 27.62 21.60 19.38
Selected Average
Balances:
Loans $1,336,139 $1,316,705 $1,289,161 $1,292,893 $1,266,591 $1,234,787 $1,229,344 $1,242,516
Earning Assets 1,634,689 1,612,133 1,615,286 1,591,536 1,511,485 1,547,603 1,575,698 1,584,225
Assets 1,816,005 1,786,991 1,796,657 1,762,174 1,678,620 1,720,095 1,748,211 1,756,995
Deposits 1,451,879 1,415,798 1,407,763 1,404,818 1,388,396 1,440,615 1,467,257 1,488,961
Shareowners' Equity 199,060 194,781 190,416 185,412 180,910 176,678 175,485 176,549
Common Equivalent
Average Shares:
Basic 13,221 13,209 13,207 13,189 13,189 13,219 13,305 13,343
Diluted 13,260 13,255 13,253 13,238 13,238 13,257 13,343 13,393
Ratios:
ROA 1.38% 1.45% 1.44% 1.51% 1.37% 1.27% 1.19% 1.01%
ROE 12.55% 13.26% 13.55% 14.38% 12.72% 12.37% 11.81% 10.10%
Net Interest
Margin (FTE) 5.26% 5.40% 5.42% 5.44% 5.74% 5.52% 5.22% 4.93%
Efficiency Ratio 63.87% 62.50% 62.48% 62.08% 63.68% 65.20% 64.88% 65.30%
All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13, 2003.
10
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;
* 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);
11
* 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 September 30,
2003 had 57 banking offices, 72 ATMs and 11 Bank 'N Shop locations covering 22
counties in Florida, Georgia and Alabama. The Company also has four mortgage
lending offices located in four additional Florida counties.
RESULTS OF OPERATIONS
Net Income
- ----------
Earnings for the three and nine month periods ended September 30, 2003 were
$6.3 million, or $0.47 per diluted share and $19.1 million, or $1.44 per
diluted share, respectively. This compares to $5.8 million, or $0.44 per
diluted share, and $16.4 million, or $1.23 per diluted share in 2002.
Amortization of intangible assets, net of taxes, totaled $1.5 million, or
$0.11 per diluted share, for the first nine months in 2003 and 2002.
The Company experienced growth in operating revenues (net interest income plus
noninterest income) of 6.8% and 9.1% over the comparable three and nine month
periods in 2002, respectively. The increase in both third quarter and year-
to-date earnings was primarily attributable to growth in noninterest income,
which increased 24.6% and 24.5%, respectively. Noninterest income grew as a
result of higher service charge revenues, reflecting a higher level of
NSF/overdraft fees, and increased mortgage banking revenues, which reflect the
higher volume of fixed-rate residential mortgage production sold in the
secondary market. A condensed earnings summary is presented below.
12
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
2003 2002 2003 2002
------- ------- ------- -------
Interest and Dividend Income $24,803 $26,403 $75,374 $80,043
Taxable-Equivalent Adjustment 353 416 1,076 1,282
------- ------- ------- -------
Interest Income (FTE) 25,156 26,819 76,450 81,325
Interest Expense 3,506 4,946 11,500 17,836
------- ------- ------- -------
Net Interest Income (FTE) 21,650 21,873 64,950 63,489
Provision for Loan Losses 921 991 2,586 2,434
Taxable-Equivalent Adjustment 353 416 1,076 1,282
------- ------- ------- -------
Net Interest Income After
Provision for Loan Losses 20,376 20,466 61,288 59,773
Noninterest Income 11,320 9,087 32,278 25,933
Noninterest Expense 21,871 20,526 63,647 60,323
------- ------- ------- -------
Income Before Income Taxes 9,825 9,027 29,919 25,383
Income Taxes 3,529 3,226 10,822 9,023
------- ------- ------- -------
Net Income $ 6,296 $ 5,801 $19,097 $16,360
======= ======== ======= =======
Percent Change 8.53% 55.02% 16.73% 32.24%
Return on Average Assets 1.38% 1.37% 1.42% 1.28%
Return on Average Equity 12.55% 12.72% 13.11% 12.38%
Computed using a federal 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. Third quarter taxable-
equivalent net interest income decreased $223,000, or 1.0%, over the
comparable quarter in 2002. During the first nine months of 2003, taxable-
equivalent net interest income increased $1.5 million, or 2.3%, over 2002.
The year-to-date favorable impact was a result of lower funding costs and a
shift in earning assets mix, partially offset by declining asset yields
attributable to the low interest rate environment. Table I on page 21
provides a comparative analysis of the Company's average balances and interest
rates.
For the three and nine month periods ended September 30, 2003, taxable-
equivalent interest income decreased $1.7 million, or 6.2%, and $4.9 million,
or 6.0%, 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 93 basis point reduction in the yield on
earning assets, which declined from 7.04% for the third quarter in 2002 to
6.11% for the same period in 2003. Earning asset yields are expected to
decline during the fourth quarter as assets reprice and yields on new
production are below current portfolio yields.
Interest expense for the three and nine month periods ended September 30, 2003
declined $1.4 million, or 29.1%, and $6.3 million, or 35.5%, 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 year-to-
date average deposits, declined from 35.7% in 2002 to 30.5% in 2003. The
average rate paid on interest bearing liabilities in the third quarter of 2003
declined 57 basis points over the comparable period in 2002, to a level of
1.18%.
The Company's interest rate spread (defined as the average federal taxable-
equivalent yield on earning assets less the average rate paid on interest
bearing liabilities) increased from 4.99% in the first nine months of 2002 to
5.01% in the comparable period of 2003, reflecting the lower cost of funds.
The Company's net interest margin percentage (defined as taxable-equivalent
net interest income divided by average earning assets) was 5.36% in the first
nine months of 2003, versus 5.50% in the first nine months of 2002. The lower
margin reflects the repricing of earning assets at lower yields partially
offset by lower funding costs. The margin, in terms of both amount and
percent, may continue to decline over the next quarter as historically low
interest rates continue to prevail and drive earning asset yields lower.
13
Depending on the magnitude, incremental loan growth can partially, or
completely, offset a reduction in net interest income attributable to lower
yields.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $921,000 and $2.6 million, respectively for
the three and nine month periods ended September 30, 2003, compared to
$991,000 and $2.4 million for the same periods in 2002. The increase for the
first nine months of 2003 reflects a higher level of net charge-offs between
comparable periods.
Net charge-offs increased by $589,000 over 2002, but remain at low levels
relative to the size of the portfolio. The net charge-off ratio increased to
..27% versus .22% in 2002. The increase in net charge-offs reflects a slight
increase in gross charge-offs coupled with a lower level of consumer loan
recoveries.
Charge-off activity for the respective periods is set forth below (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 61 $ 278 $ 379 $ 682
Real Estate - Construction - - - -
Real Estate - Commercial Mortgage 91 - 91 -
Real Estate - Residential 119 37 172 110
Consumer 937 760 2,739 2,405
------ ------ ------ ------
Total Charge-offs 1,208 1,075 3,381 3,197
------ ------ ------ ------
RECOVERIES
Commercial, Financial and Agricultural 73 21 129 122
Real Estate - Construction - - - -
Real Estate - Commercial Mortgage - - - -
Real Estate - Residential - 1 1 36
Consumer 204 297 594 971
------ ------ ------ ------
Total Recoveries 277 319 724 1,129
------ ------ ------ ------
Net Charge-offs $ 931 $ 756 $2,657 $2,068
====== ====== ====== ======
Net Charge-offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .28% .24% .27% .22%
====== ====== ====== ======
Noninterest Income
- ------------------
Noninterest income increased $2.2 million, or 24.6%, and $6.3 million, or
24.5%, over the comparable three and nine month periods in 2002. Noninterest
income represented 34.7% and 33.6% of operating revenue for the three and nine
month periods of 2003, respectively, compared to 29.8% and 29.4% 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 $1.1 million, or 38.4%, and $3.4
million, or 39.6%, respectively, over the comparable three and nine 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 nine months of 2003, compared to 2002, are attributable to an
increase in overdraft/NSF fees, which are anticipated to have a favorable
impact through the end of the year.
Data processing revenues of $578,000 and $1.7 million for the three and nine
month periods ended September 30, 2003 reflect an increase of 19.2% and 16.9%
over the comparable periods in 2002. The increase for both periods was a
result of higher revenues from both financial clients and government contract
processing. The Company currently provides data processing services for six
financial clients, an increase of one from the third quarter ended 2002.
During the first nine months of 2003, financial clients represented
approximately 60.6% of total processing revenues compared to 59.4% in the
comparable period in 2002. Management expects fourth quarter revenues to
remain consistent with the quarterly revenues generated in the first three
quarters of 2003.
14
Income from asset management activities increased $75,000, or 12.8%, compared
to the third quarter of 2002, and $25,000, or 1.3% over the comparable nine
month period in 2002. At September 30, 2003, assets under management totaled
$374.8 million, representing an increase of $50.8 million, or 15.7% from
September 30, 2002. This growth is due to an increase in new business and
improvements in asset values due to rising stock market values. Recent growth
in assets under management is expected to enhance revenues through the end of
the year.
Mortgage banking revenues increased $822,000, or 51.0%, and $1.9 million, or
49.2%, respectively, over the comparable three and nine month periods of 2003.
The Company continues to be among the leaders in the production of residential
real estate loans in a majority of its markets. The bank generally sells into
the secondary market all fixed rate residential loan production. The low
interest rates have produced a high level of fixed rate production and
increased mortgage banking revenues through the first nine months of the year.
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 for the remainder of the year.
Other income increased $121,000, or 3.5%, and $672,000, or 6.8%, respectively,
over the comparable three and nine month periods of 2002. For the first nine
months of 2003, the Company experienced increases in retail brokerage fees of
$57,000, debit/credit settlement fees of $82,000, ATM/Debit card fees of
$44,000, merchant processing fees of $404,000, interchange fees of $190,000,
and earnings from equity investment of $88,000. Partially offsetting these
increases were decreases in credit life insurance commission fees of $48,000,
miscellaneous recoveries of $71,000, gain on sale of ORE of $38,000, and
miscellaneous income of $38,000.
Noninterest income as a percent of average assets was 2.40% and 2.02%,
respectively, for the first nine months of 2003 and 2002. The increase in
2003 is attributable to growth in deposit fees and mortgage banking revenues.
Noninterest Expense
- -------------------
Noninterest expense increased $1.3 million, or 6.6%, and $3.3 million, or
5.5%, respectively, over the comparable three and nine month periods of 2002.
Factors impacting the Company's noninterest expense during the first nine
months of 2003 are discussed below.
Compensation expense increased $1.3 million, or 12.4%, and $3.0 million, or
9.4%, respectively, over the comparable three and nine month periods of 2002.
For the nine month period, the Company experienced increases in pension costs
of $1.1 million, salaries of $1.3 million, associate insurance of $245,000,
and stock-based incentive compensation of $285,000. The higher level of
pension expense is a result of an increase in the number of plan participants
and the lower than expected return on plan assets resulting from a general
stock market decline. Healthcare premiums have risen due to the addition of
plan participants and the rising costs charged by healthcare providers.
Higher salaries are reflective of normal associate raises and higher
commission payments to associates in the mortgage production division. In
addition, the number of full-time equivalent employees increased by 17 over
the second quarter of 2003, primarily attributable to the addition of new
offices. Stock-based compensation expense has increased primarily due the
general increase in the Company's stock price in 2003 and the adoption of SFAS
123 accounting methodology.
Occupancy expense, including premises, furniture, fixtures and equipment
increased $455,000, or 14.3%, and $287,000, or 2.9%, respectively, over the
comparable three and nine month periods in 2003. For the first nine months of
the year, the Company experienced increases in utilities of $27,000, property
taxes of $107,000, and furniture/fixtures of $164,000. These increases are
primarily attributable to the opening of two new banking offices during the
third quarter.
Other noninterest expense decreased $460,000, or 7.1%, and increased $20,000,
or .11%, respectively, over the comparable three and nine month periods of
2002. The increase for the nine month period was due to: (1) higher legal
costs of $79,000 primarily resulting from litigation costs and new corporate
governance compliance requirements; (2) higher processing service expense
of $220,000 resulting from higher ATM fees and payroll processing fees; (3)
increased ATM/Visa settlement service fees of $335,000 resulting from higher
transaction volumes in merchant services, and (4) higher contribution expense
of $103,000 due to higher level of contribution to the CCBG Foundation and
local charities.
15
These increases were partially offset by declines in advertising expense of
$253,000, printing/supplies expense of $95,000, and miscellaneous expense of
$400,000 (related to a reduction legal reserves).
Annualized net noninterest expense (noninterest income minus noninterest
expense, excluding intangible amortization) as a percent of average assets was
2.15% in the first nine months of 2003 versus 2.48% for the first nine months
of 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 62.96% in the
first nine months of 2003 compared to 64.57% for the comparable period in
2002. This improvement is attributable to growth in operating revenues.
Income Taxes
- ------------
The provision for income taxes increased $303,000, or 9.4%, during the third
quarter and $1.8 million, or 20.0%, during the first nine months of 2003,
relative to the comparable prior year periods. The Company's effective tax
rate for the first nine months of 2003 was 36.2% versus 35.5% 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.
FINANCIAL CONDITION
The Company's average assets increased $84.6 million, or 4.9%, from $1.71
billion for the first nine months of 2002 to $1.80 billion for the comparable
period in 2003. Average earning assets of $1.62 billion for the nine months
ended September 30, 2003, increased $76.1 million, or 4.9% from the comparable
period in 2002. There has been a favorable shift in the mix of earning assets
in 2002 and the first nine months 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 the residential 1-4 family real
estate category. The current loan growth was primarily funded through the
maturity of investment securities and borrowings from the Federal Home Loan
Bank ("FHLB"). Table I on page 21 presents average balances for the three and
nine month periods ended September 30, 2003 and 2002.
Average loans increased $70.4 million, or 5.7%, over the comparable nine month
period in 2002. The strong production levels have resulted in growth in all
loan categories, with the exception of the residential 1-4 family real estate
category. The low interest rate environment has provided incentive for
consumers to refinance existing mortgages and take advantage of low fixed rate
financing. On average, 85% of the bank's residential loan production is sold
to the secondary market and not held in CCB's portfolio. As a result, the
bank's residential portfolio has declined throughout the year. Loans, as a
percent of average earning assets, increased to 81.1% for the first nine
months of 2003, compared to 80.5% for the comparable period of 2002. Price
and product competition remain strong. As the low interest rate environment
continues, there is an increased demand for fixed-rate, longer term financing.
Loan demand, with the exception of 1-4 family residential production, is
moderate 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' inability and
unwillingness 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
16
quality. Management evaluates the adequacy of the allowance for loan losses
on a quarterly basis.
The allowance for loan losses at September 30, 2003 was $12.4 million,
slightly lower than the $12.5 million recorded at September 30, 2002. The
allowance as a percent of total loans was .94% at September 30, 2003, versus
..97% at September 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 September 30, 2003 is adequate to
absorb losses inherent in the loan portfolio.
The Company continues to operate with a high level of liquidity as year-to-
date average funds sold totaled $122.4 million. This represents an increase
of $34.4 million, or 39.1%, from the September 30, 2002 level of $88.0
million. For a further discussion on liquidity and the recent FHLB advances,
see the section "Liquidity and Capital Resources".
The investment portfolio is a significant component of the Company's
operations and, as such, it functions as a key element of liquidity and
asset/liability management. For the nine months ended September 30, 2003, the
average investment portfolio decreased $28.7 million, or 13.5%, from the
comparable period of 2002. The decline was partially offset by management's
decision to purchase available-for-sale securities during the fourth quarter
of 2002 and throughout 2003. The excess funds generated from the securities
maturing were used to fund loan growth. Management will continue to evaluate
the need to purchase additional securities for the investment portfolio for
the remainder of 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 September 30,
2003, shareowners' equity included a net unrealized gain of $1.8 million
compared to a gain of $3.1 million at December 31, 2002. The decrease in
value reflects the slight increase in interest rates in 2003.
The Company's nonperforming assets were $8.4 million at September 30, 2003,
$3.8 million at December 31, 2002, and $3.7 million September 30, 2002. As a
percent of nonperforming loans, the allowance for loan losses represented 183%
at September 30, 2003 versus 498% at December 31, 2002 and 504% at September
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 $1.6 million at September
30, 2003, versus $1.3 million at December 31, 2002 and $1.2 million at
September 30, 2002. The ratio of nonperforming assets as a percent of loans
plus other real estate was .63% at September 30, 2003 compared to .30% at
December 31, 2002 and .28% at September 30, 2002. The deterioration in the
loan quality metrics noted above is primarily attributable to one large
commercial real estate loan in the amount of $3.7 million that was placed on
non-accrual status in the third quarter. The bank expects to take ownership of
the subject property through the receipt of a deed in lieu of foreclosure in
the fourth quarter. Management believes this loan is well secured and expects
no loss upon disposition of the collateral.
Average deposits decreased $6.5 million to $1.42 billion for the first nine
months 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 deposit mix and a
positive impact on the Bank's cost of funds.
The ratio of average noninterest bearing deposits to total deposits was 28.4%
for the first nine months of 2003 compared to 24.7% for the first nine months
of 2002. For the same periods, the ratio of average interest bearing
liabilities to average earning assets was 72.8% compared to 75.4%.
17
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 FHLB advances.
The Company maintains a $25.0 million revolving line of credit. As of
September 30, 2003, the Company had no borrowings under the revolving line of
credit.
During the first nine months of 2003, the Company borrowed $7.6 million from
the FHLB to fund loan growth. The borrowings consisted of seven separate
advances with a weighted average maturity of 144 months and a weighted average
rate of 3.72%. In September of 2003, the Bank repaid a $20 million advance
from the FLHB. This advance originated during the third quarter of 2002, when
$75 million was borrowed from the FHLB to fund growth in loan demand and the
decline in certificates of deposit. The borrowings consisted 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 $198.9 million as of September 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
9.19% at September 30, 2003 compared to 8.46% at December 31, 2002. Further,
the Company's risk-adjusted capital ratio of 12.98% at September 30, 2003,
exceeds the 8.0% minimum requirement and 10.5% "well-capitalized" threshold
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 nine months of 2003 totaled $.476 per share compared to $.366 per share
for the first nine months of 2002, an increase of 30.1%. The dividend payout
ratios for the nine months ended September 30, 2003 and 2002 were 32.94% and
29.65%, respectively.
State and federal regulations as well as the Company's long-term debt
agreements place certain restrictions on the payment of dividends by both the
Company and the Bank. At September 30, 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 nine months of 2003, shareowners' equity increased $12.4
million, or 8.9%, on an annualized basis. Growth in equity during the first
nine months was positively impacted by net income of $19.1 million and the
issuance of common stock of $887,000. Equity was reduced by dividends paid
during the first nine months of $6.3 million, or $.476 per share and a
reduction in the net unrealized gain on available-for-sale securities of $1.3
million. At September 30, 2003, the Company's common stock had a book value
of $15.00 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 nine months of 2003. During 2002, 155,775
shares were acquired. From March 30, 2000 through September 30, 2003, the
Company repurchased 572,193 shares at an average purchase price of $19.23 per
share. (Note: all shares above are stated on a split-adjusted basis).
18
OTHER
Prior to 2002, the Bank maintained relationships with a small number of
Independent Service Organizations (ISOs) in connection with its card
processing operations. Certain merchant clients of one ISO 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 this
issue 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 the 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.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." Interpretation
No. 46 addresses the consolidation by business enterprises of variable
interest entities which have certain characteristics. This interpretation
applies immediately to variable interests in variable interest entities
created or obtained after January 31, 2003. The Company does not currently
maintain any variable interest entities that would require the accounting
treatment prescribed by this pronouncement.
In May 2003, the FASB issued Statement No. 150 (SFAS No. 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Accounting for three types of
freestanding financial instruments is affected: mandatorily redeemable shares,
which
19
the issuing company is obligated to buy back in exchange for cash or other
assets; put options and forward purchase contracts involving instruments that
do or may require the issuer to buy back some of its shares in exchange for
cash or other assets; and obligations that can be settled with shares, for
which the monetary value is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, all of whose
shares are mandatorily redeemable. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. The Company does not currently maintain any financial instruments
that would require the accounting treatment prescribed by this pronouncement.
20
TABLE I
AVERAGES BALANCES & INTEREST RATES
(Taxable Equivalent Basis - Dollars in Thousands)
FOR THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
----------------------- -----------------------
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Loans, Net of Unearned
Interest $1,336,139 $23,114 6.86% $1,266,591 $23,969 7.51%
Taxable Investment Securities 108,234 841 3.08% 131,939 1,646 4.95%
Tax-Exempt Investment
Securities 60,306 898 5.96% 68,692 1,022 5.95%
Funds Sold 130,010 303 0.91% 44,263 182 1.61%
---------- ------- ---------- -------
Total Earning Assets 1,634,689 25,156 6.11% 1,511,485 26,819 7.04%
Cash & Due From Banks 80,246 69,765
Allowance for Loan Losses (12,534) (12,503)
Other Assets 113,604 109,873
---------- ----------
TOTAL ASSETS $1,816,005 $1,678,620
========== ==========
LIABILITIES
NOW Accounts $ 263,729 $ 151 0.23% $ 240,032 $ 324 0.54%
Money Market Accounts 220,924 257 0.46% 221,521 731 1.31%
Savings Accounts 111,644 28 0.10% 106,551 137 0.51%
Other Time Deposits 434,206 2,293 2.10% 462,139 3,304 2.84%
---------- ------- ---------- -------
Total Int. Bearing Deposits 1,030,503 2,729 1.05% 1,030,243 4,496 1.73%
Short-Term Borrowings 92,316 282 1.21% 64,915 194 1.19%
Long-Term Debt 53,041 495 3.70% 24,763 256 4.09%
---------- ------- ---------- -------
Total Interest Bearing
Liabilities 1,175,860 3,506 1.18% 1,119,921 4,946 1.75%
Noninterest Bearing Deposits 421,376 358,153
Other Liabilities 19,709 19,636
---------- ----------
TOTAL LIABILITIES 1,616,945 1,497,710
SHAREOWNERS' EQUITY
Common Stock 132 106
Surplus 15,465 14,530
Other Comprehensive Income 2,144 3,412
Retained Earnings 181,319 162,862
---------- ----------
TOTAL SHAREOWNERS' EQUITY 199,060 180,910
---------- ----------
TOTAL LIABILITIES & EQUITY $1,816,005 $1,678,620
========== ==========
Interest Rate Spread 4.93% 5.29%
==== ====
Net Interest Income $21,650 $21,873
======= =======
Net Yield on Earning Assets 5.26% 5.74%
==== ====
FOR NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
----------------------- -----------------------
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Loans, Net of Unearned
Interest $1,314,173 $69,736 7.09% $1,243,711 $71,527 7.69%
Taxable Investment Securities 121,680 2,951 3.24% 143,251 5,561 5.19%
Tax-Exempt Investment
Securities 62,527 2,775 5.92% 69,691 3,148 6.02%
Funds Sold 122,394 988 1.06% 88,041 1,089 1.63%
---------- ------- ---------- -------
Total Earning Assets 1,620,774 76,450 6.31% 1,544,694 81,325 7.04%
Cash & Due From Banks 79,071 72,061
Allowance for Loan Losses (12,561) (12,334)
Other Assets 112,671 110,966
---------- ----------
TOTAL ASSETS $1,799,955 $1,715,387
========== ==========
LIABILITIES
NOW Accounts $ 261,011 $ 546 0.28% $ 237,296 $ 980 0.55%
Money Market Accounts 215,616 1,069 0.66% 225,908 2,346 1.39%
Savings Accounts 109,123 161 0.20% 104,707 403 0.51%
Other Time Deposits 434,513 7,232 2.23% 510,523 12,928 3.39%
---------- ------- ---------- -------
Total Int. Bearing Deposits 1,020,263 9,008 1.18% 1,078,434 16,657 2.07%
Short-Term Borrowings 100,487 951 1.27% 69,046 531 1.03%
Long-Term Debt 59,879 1,541 3.44% 17,536 648 4.94%
---------- ------- ---------- -------
Total Interest Bearing
Liabilities 1,180,629 11,500 1.30% 1,165,016 17,836 2.05%
Noninterest Bearing Deposits 405,045 353,366
Other Liabilities 19,497 19,294
---------- ----------
TOTAL LIABILITIES 1,605,171 1,537,676
SHAREOWNERS' EQUITY
Common Stock 117 106
Surplus 15,171 15,637
Other Comprehensive Income 2,570 2,863
Retained Earnings 176,926 159,105
---------- ----------
TOTAL SHAREOWNERS' EQUITY 194,784 177,711
---------- ----------
TOTAL LIABILITIES & EQUITY $1,799,955 $1,715,387
========== ==========
Interest Rate Spread 5.01% 4.99%
==== ====
Net Interest Income $64,950 $63,489
======= =======
Net Yield on Earning Assets 5.36% 5.50%
==== ====
Average balances include nonaccrual loans. Interest income includes fees on loans
of approximately $1.7 million and $5.1 million for the three and nine months ended
September 30, 2003, versus $1.2 million and $3.4 million, for the comparable periods
ended September 30, 2002.
Interest income includes the effects of taxable equivalent adjustments using a 35%
federal tax rate.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Overview
- --------
Market risk management arises from changes in interest rates, exchange rates,
commodity prices and equity prices. The Company has risk management policies
to monitor and limit exposure to market risk. CCBG does not actively
participate in exchange rates, commodities or equities. In asset and
liability management activities, policies are in place which 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
September 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 fair 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 asset sensitive, which generally indicates that, in a
period of rising interest rates, the net interest margin will be positively
impacted as the velocity and/or volume of assets being repriced exceeds
liabilities. 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
- ------------------------------------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended, are recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that the information is accumulated and
communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any disclosure
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired objectives, and management
was required to apply its judgment in evaluating the cost-benefit relationship
of possible disclosure controls and procedures. The Company's management,
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based upon that evaluation and subject to the
foregoing, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of the Company's disclosure controls
and procedures provided reasonable assurance that the disclosure controls and
procedures are effective to accomplish their objectives.
22
Changes in Internal Controls
- ----------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has reviewed the Company's internal controls. There have
been no significant changes in the Company's internal controls during the
Company's most recently completed fiscal quarter, nor subsequent to the date
of their evaluation, that could significantly affect the Company's disclosure
controls and procedures.
23
Table II
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS
(Dollars in Thousands)
Other Than Trading Portfolio September 30, 2003
- ---------------------------- ----------------------------------------------------------------------------------- Market
Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
-------- -------- -------- -------- -------- -------- --------- ----------
Loans
Fixed Rate $ 199,966 $ 97,121 $ 68,410 $26,416 $15,232 $18,218 $ 425,363 $ 436,348
Average Interest Rate 7.49% 7.79% 7.28% 7.79% 7.50% 6.59% 7.50%
Floating Rate 579,473 118,505 165,487 17,683 3,820 12,557 897,525 918,769
Average Interest Rate 5.41% 6.95% 6.53% 7.21% 6.69% 6.96% 5.86%
Investment Securities
Fixed Rate 87,207 45,445 15,018 2,742 749 8,184 159,345 159,345
Average Interest Rate 3.36% 3.19% 4.03% 4.75% 5.49% 3.88% 3.36%
Floating Rate 3,389 - - - - - 3,389 3,389
Average Interest Rate 4.51% - - - - - 4.51%
Other Earning Assets
Floating Rates 161,580 - - - - - 161,580 161,580
Average Interest Rates 0.92% - - - - - 0.92%
Total Financial Assets $1,031,615 $261,071 $248,915 $46,841 $19,801 $38,959 $1,647,202 $1,679,431
Average Interest Rates 4.91% 6.61% 6.59% 7.39% 7.27% 6.89% 5.55%
Deposits
Fixed Rate Deposits $ 335,256 $ 63,600 $ 22,531 $ 8,451 $ 2,822 $ 6 $ 432,666 $ 435,352
Average Interest Rates 1.77% 2.90% 3.16% 3.68% 3.28% 4.85% 2.06%
Floating Rate Deposits 596,473 - - - - - 596,473 601,200
Average Interest Rates 0.27% - - - - - 0.27%
Other Interest Bearing
Liabilities
Fixed Rate Debt 2,111 17,138 1,787 1,718 1,751 13,511 38,016 35,860
Average Interest Rate 5.13% 3.31% 4.90% 4.83% 4.85% 4.94% 4.20%
Floating Rate Debt 112,255 - - - - - 112,255 105,878
Average Interest Rate 0.95% - - - - - 0.95%
Total Financial Liabilities $1,046,095 $ 80,738 $ 24,318 $10,169 $ 4,573 $13,517 $1,179,410 $1,178,290
Average interest Rate 1.04% 2.99% 3.29% 3.88% 3.88% 4.94% 1.12%
Based upon expected cash-flows, 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
rate deposits in Year 1. Other time deposit balances are classified according to maturity.
24
PART II. OTHER INFORMATION
ITEMS 1-4
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
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.
(B) Reports on Form 8-K
On July 24, 2003, the Company filed an 8-K to report the following event:
issuance of a press release to report earnings for the quarter ended June 30,
2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned Chief Financial Officer hereunto duly authorized.
CAPITAL CITY BANK GROUP, INC.
(Registrant)
/s/ J. Kimbrough Davis
- ------------------------------
J. Kimbrough Davis
Executive Vice President and
Chief Financial Officer
Date: November 14, 2003
25
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