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Form 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
Commission File Number 0-13358
CAPITAL CITY BANK GROUP, INC.
Incorporated in the State of Florida
I.R.S. Employer Identification Number 59-2273542
Address: 217 North Monroe Street, Tallahassee, Florida 32301
Telephone: (850) 671-0300
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock - $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of June 30, 2003, there were issued and outstanding 13,221,031 shares of
the registrant's common stock. The registrant's voting stock is listed on
the National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market under the symbol "CCBG." The aggregate market value of the
voting stock held by nonaffiliates of the registrant, based on the average of
the bid and asked prices of the registrant's common stock as quoted on Nasdaq
on June 30, 2003, was $477 million.
As of February 27, 2004, 13,273,494 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement (pursuant to
Regulation 14A), to be filed not more than 120 days after the end of the
fiscal year covered by this report, are incorporated by reference into Part
III.
1
CAPITAL CITY BANK GROUP, INC.
ANNUAL REPORT FOR 2003 ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
- ------ ----
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
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Item 5. Market for the Registrant's Common Equity and Related
Shareowner Matters 17
Item 6. Selected Financial & Other Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 45
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 79
Item 9A. Controls and Procedures 79
PART III
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Item 10. Directors and Executive Officers of the Registrant 80
Item 11. Executive Compensation 80
Item 12. Security Ownership of Certain Beneficial Owners and
Management 80
Item 13. Certain Relationships and Related Transactions 80
Item 14. Principal Accountant Fees and Services 80
PART IV
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Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 80
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 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2
PART I
Item 1. Business
General
Capital City Bank Group, Inc. ("CCBG" or the "Company"), is a financial
holding company registered under the Gramm-Leach-Bliley Act of 1999 ("Gramm-
Leach-Bliley Act") and is subject to the Bank Holding Company Act of 1956.
CCBG was organized under Florida law on December 13, 1982, to acquire five
national banks and one state bank that all subsequently became part of CCBG's
bank subsidiary, Capital City Bank ("CCB" or the "Bank").
At December 31, 2003, the Company had consolidated total assets of $1.8
billion and shareowners' equity of $203 million. Its principal asset is the
capital stock of the Bank. CCB accounted for approximately 100% of the
consolidated assets at December 31, 2003, and 100% of consolidated net income
of the Company for the year ended December 31, 2003. In addition to its
banking subsidiary, the Company has seven other indirect subsidiaries,
Capital City Trust Company, Capital City Mortgage Company (inactive), Capital
City Securities, Inc., Capital City Services Company, First Insurance Agency
of Grady County, Inc., Southern Oaks, Inc., and FNB Financial Services, Inc.,
all of which are wholly-owned subsidiaries of Capital City Bank.
On January 8, 2004, the Company announced the signing of a definitive
agreement to acquire the Quincy State Bank, located in Quincy Florida from
Synovus Financial Corp. Quincy State Bank is a $127 million asset
institution (as of December 31, 2003) with offices in Quincy and Havana,
Florida. Both markets adjoin Leon County, home to the Company's Tallahassee
headquarters. The purchase price is $26.1 million in cash and the closing is
scheduled for late in the first quarter of 2004.
Dividends and management fees received from the Bank are the Company's only
source of income. Dividend payments by the Bank to CCBG depend on the
capitalization, earnings and projected growth of the Bank, and are limited by
various regulatory restrictions. See the section entitled "Regulatory
Considerations" in this Item 1 and Note 15 in the Notes to Consolidated
Financial Statements for additional information. The Company had a total of
795 (full-time equivalent) associates at February 27, 2004. Page 18 contains
other financial and statistical information about the Company.
Banking Services
CCB is a Florida chartered full-service bank engaged in the commercial and
retail banking business.
Significant services offered by the Bank include:
* Business Banking - The Bank provides banking services to corporations
and other business clients. Loans are made for a wide variety of
general business purposes, including financing for commercial business
properties, equipment, inventories and accounts receivable, as well as
commercial leasing, letters of credit, treasury management services,
and merchant credit card transaction processing.
* Commercial Real Estate Lending - The Bank provides a wide range of
products to meet the financing needs of commercial developers and
investors, residential builders and developers, and community
development.
* Residential Real Estate Lending - The Bank provides products to help
meet the home financing needs of consumers, including conventional
permanent and construction/ permanent (fixed or adjustable rate)
financing arrangements, and FHA/VA loan products.
3
The Bank offers these products through its existing network of branch
offices. Geographical expansion of the delivery of this product line
has occurred over the past three years through the opening of four
mortgage lending offices in Gainesville (Alachua County), Lakeland
(Polk County), Ocala (Marion County), and Panacea (Wakulla County).
* Retail Credit - The Bank provides a full range of loan products to meet
the needs of consumers, including personal loans, automobile loans,
boat/RV loans, home equity loans, and credit card programs.
* Institutional Banking - The Bank provides banking services to meet the
needs of state and local governments, public schools and colleges,
charities, membership and not-for-profit associations including
customized checking and savings accounts, cash management systems, tax-
exempt loans, lines of credit, and term loans.
* Retail Banking - The Bank provides a full range of consumer banking
services, including checking accounts, savings programs, automated
teller machines, overdraft facilities, debit/credit cards, night
deposit services, safe deposit facilities, and PC/Internet banking.
Customers can use the "Star-Line" system to gain 24-hour access to
their deposit and loan account information, and transfer funds between
linked accounts. The Bank is a member of the "Star" ATM Network that
permits banking customers to access cash at automatic teller machines
("ATMs") or point of sale merchants at locations throughout the United
States.
Data Processing Services
Capital City Services Company provides data processing services to financial
institutions (including CCB), government agencies and commercial customers
located throughout North Florida and South Georgia. As of February 27, 2004,
the Services Company is providing computer services to six correspondent
banks, which have relationships with Capital City Bank.
Trust Services and Asset Management
Capital City Trust Company is the investment management arm of Capital City
Bank. The Trust Company provides asset management for individuals through
agency, personal trust, IRA's and personal investment management accounts.
Administration of pension, profit sharing and 401(k) plans is a significant
product line. Associations, endowments and other non-profit entities hire the
Trust Company to manage their investment portfolios. Individuals requiring
the services of a trustee, personal representative or a guardian are served
by a staff of well trained professionals. The market value of trust assets
under discretionary management exceeded $404 million as of December 31, 2003,
with total assets under administration exceeding $470 million.
Brokerage Services
The Company offers access to retail investment products through Capital City
Securities, Inc., a wholly-owned subsidiary of Capital City Bank. These
products are offered through INVEST Financial Corporation, a member of NASD
and SIPC. Non-deposit investment and insurance products are: (1) not FDIC
insured; (2) not deposits, obligations, or guaranteed by any bank; and (3)
subject to investment risk, including the possible loss of principal amount
invested. Capital City Securities, Inc.'s brokers are licensed through INVEST
Financial Corporation, and offer a full line of retail securities products,
including U.S. Government bonds, tax-free municipal bonds, stocks, mutual
funds, unit investment trusts, annuities, life insurance and long-term health
care. CCBG and its subsidiary are not affiliated with INVEST Financial
Corporation.
4
Expansion of Business
Since 1984, the Company has completed twelve acquisitions totaling $1.2
billion in deposits within existing and new markets. In addition, in 2003,
the Company opened four new offices - two in Tallahassee and one each in
Springhill and Starke (replacement office) - to improve service and product
delivery within these Florida markets.
The Company plans to continue its expansion, emphasizing a combination of
growth in existing markets and acquisitions. Acquisitions will be focused on
a three state area including Florida, Georgia, and Alabama with a particular
focus on acquiring banks and branches, which are $100 million to $400 million
in asset size, located on the outskirts of major metropolitan areas. The
Company will evaluate de novo expansion opportunities in attractive new
markets in the event that acquisition opportunities are not feasible. Other
expansion opportunities that will be evaluated include asset management,
insurance, and mortgage banking. Management anticipates that roughly half of
the Company's future earnings growth will be generated through growth in
existing markets and half through acquisitions.
Competition
The banking business is rapidly changing and CCBG and its subsidiary operate
in a highly competitive environment, especially with respect to services and
pricing. The on-going consolidation of the banking industry has altered and
continues to significantly alter the competitive environment within the
Florida, Georgia, and Alabama markets. Management believes this
consolidation further enhances the Company's competitive position and
opportunities in many of its markets. CCBG's primary market area is 17
counties in Florida, four counties in Georgia and one county in Alabama. In
these markets, the Bank competes against a wide range of banking and
nonbanking institutions including savings and loan associations, credit
unions, money market funds, mutual fund advisory companies, mortgage banking
companies, investment banking companies, finance companies and other types of
financial institutions.
All of Florida's major banking concerns have a presence in Leon County.
Capital City Bank's Leon County deposits totaled $602.6 million, or 40.9%, of
the Company's consolidated deposits at December 31, 2003.
5
The following table depicts CCBG's market share percentage within each
respective county, based on total commercial bank deposits within the county.
Market Share
as of September 30,
2003 2002 2001
- ----------------------------------------------------------------
Florida:
Bradford County 35.1% 38.4% 41.4%
Citrus County 3.5% 3.3% 3.7%
Clay County 2.7% 3.2% 4.0%
Dixie County 15.5% 17.5% 18.7%
Gadsden County 31.1% 29.4% 30.7%
Gilchrist County 41.8% 38.5% 39.2%
Gulf County 28.5% 23.5% 23.1%
Hernando County 1.8% 1.0% 1.5%
Jefferson County 27.0% 27.1% 28.6%
Leon County 17.9% 18.4% 23.2%
Levy County 33.3% 34.0% 37.3%
Madison County 18.1% 19.0% 23.7%
Pasco County .4% .4% .8%
Putnam County 12.8% 12.5% 15.5%
Suwannee County 8.6% 9.1% 10.4%
Taylor County 27.7% 29.0% 33.4%
Washington County 25.6% 20.4% 22.5%
Georgia:
Bibb County 3.1% 3.1% 3.6%
Burke County 11.0% 12.4% 11.4%
Grady County 24.5% 31.5% 43.3%
Troup County 10.0% 10.9% 11.2%
Alabama:
Chambers County 4.1% 3.3% 3.4%
Obtained from the September 30 Office Level Report published by the
Florida Bankers Association.
Does not include Alachua, Marion, Polk and Wakulla counties where
Capital City Bank maintains residential mortgage lending offices only.
Obtained from the June 30 FDIC/OTS Summary of Deposits Report.
6
The following table sets forth the number of commercial banks and offices,
including the Company and its competitors, within each of the respective
counties.
Number of Number of Commercial
County Commercial Banks Bank Offices
- --------------------------------------------------------------
Florida:
Bradford 3 3
Citrus 10 40
Clay 11 26
Dixie 3 4
Gadsden 4 7
Gilchrist 3 5
Gulf 4 6
Hernando 12 33
Jefferson 2 2
Leon 13 66
Levy 3 11
Madison 5 5
Pasco 16 82
Putnam 5 11
Suwannee 4 4
Taylor 3 4
Washington 3 3
Georgia:
Bibb 10 53
Burke 5 10
Grady 5 8
Troup 9 22
Alabama:
Chambers 5 10
Obtained from the September 30 Office Level Report published by the
Florida Bankers Association.
Obtained from the June 30 FDIC/OTS Summary of Deposits Report.
REGULATORY CONSIDERATIONS
The Company and the Bank must comply with state and federal banking laws and
regulations that control virtually all aspects of operations. These laws and
regulations generally aim to protect depositors, not shareholders. Any
changes in applicable laws or regulations may materially affect the business
and prospects of the Company. Such legislative or regulatory changes may also
affect the operations of the Company and the Bank. The following description
summarizes some of the laws and regulations to which the Company and the Bank
are subject. References to applicable statutes and regulations are brief
summaries, do not purport to be complete, and are qualified in their entirety
by reference to such statutes and regulations.
The Company
The Company is registered with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") as a financial holding company under the
Gramm-Leach-Bliley Act and is registered with the Federal Reserve as a bank
holding company under the Bank Holding Company Act of 1956 ("BHCA").
As a result, the Company is subject to supervisory regulation and examination
by the Federal Reserve. The Gramm-Leach-Bliley Act, the BHCA, and other
federal laws subject financial holding companies to particular restrictions
on the types of activities in which they may engage, and to a range of
supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations.
7
Financial Holding Companies
Permitted Activities. The Gramm-Leach-Bliley Act, enacted on November 12,
1999, repealed two anti-affiliation provisions of the Glass-Steagall Act:
Section 20, which restricted the affiliation of Federal Reserve Member Banks
with firms "engaged principally" in specified securities activities and
Section 32, which restricted officer, director, or employee interlocks
between a member bank and any company or person "primarily engaged" in
specified securities activities. In addition, the Gramm-Leach-Bliley Act
expressly preempts most state laws restricting state banks from owning or
acquiring interests in financial affiliates, such as insurance companies. The
general effect of the law was to establish a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firms, and other financial service providers. A bank holding company may now
engage in a full range of activities that are financial in nature by electing
to become a "Financial Holding Company." Activities that are financial in
nature are broadly defined to include not only banking, insurance, and
securities activities, but also merchant banking and additional activities
that the Federal Reserve, in consultation with the Secretary of the Treasury,
determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk
to the safety and soundness of depository institutions or the financial
system generally.
In contrast to financial holding companies, bank holding companies are
limited to managing or controlling banks, furnishing services to or
performing services for its subsidiaries, and engaging in other activities
that the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Except for
the activities relating to financial holding companies permissible under the
Gramm-Leach-Bliley Act, these restrictions will apply to the Company. In
determining whether a particular activity is permissible, the Federal Reserve
must consider whether the performance of such an activity reasonably can be
expected to produce benefits to the public that outweigh possible adverse
effects. Possible benefits include greater convenience, increased
competition, and gains in efficiency. Possible adverse effects include undue
concentration of resources, decreased or unfair competition, conflicts of
interest, and unsound banking practices. The Federal Reserve has determined
the following activities, among others, to be permissible for bank holding
companies: factoring accounts receivable, acquiring or servicing loans,
leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker and selling credit life insurance and certain other types of insurance
in connection with credit transactions, and performing certain insurance
underwriting activities. There are no territorial limitations on permissible
non-banking activities of financial holding companies. Despite prior
approval, the Federal Reserve may order a bank holding company or its
subsidiaries to terminate any activity or to terminate ownership or control
of any subsidiary when the Federal Reserve has reasonable cause to believe
that a serious risk to the financial safety, soundness or stability of any
bank subsidiary of that bank holding company may result from such an
activity.
Changes in Control. Subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a
financial holding company, such as the Company. A conclusive presumption of
control exists if an individual or company acquires 25% or more of any class
of voting securities of the financial holding company. A rebuttable
presumption of control exists if a person acquires 10% or more but less than
25% of any class of voting securities and either the Company has registered
securities under Section 12 of the Securities Exchange Act of 1934 (the
"Exchange Act"), or no other person will own a greater percentage of that
class of voting securities immediately after the transaction.
8
The BHCA requires, among other things, the prior approval of the Federal
Reserve in any case where a financial holding company proposes to (i) acquire
all or substantially all of the assets of a bank, (ii) acquire direct or
indirect ownership or control of more than 5% of the outstanding voting stock
of any bank (unless it owns a majority of such bank's voting shares), or
(iii) merge or consolidate with any other financial holding company or bank
holding company.
Under Florida law, a person or entity proposing to directly or indirectly
acquire control of a Florida bank must first obtain permission from the State
of Florida. Florida statutes define "control" as either (a) indirectly or
directly owning, controlling or having power to vote 25% or more of the
voting securities of a bank; (b) controlling the election of a majority of
directors of a bank; (c) owning, controlling or having power to vote 10% or
more of the voting securities as well as directly or indirectly exercising a
controlling influence over management or policies of a bank; or (d) as
determined by the Florida Department of Financial Services (the "Florida
Department"). These requirements will affect the Company because CCB is
chartered under Florida law and changes in control of the Company are
indirect changes in control of CCB.
Tying. Financial holding companies and their affiliates are prohibited from
tying the provision of certain services, such as extending credit, to other
services offered by the holding company or its affiliates.
Capital; Dividends; Source of Strength. The Federal Reserve imposes certain
capital requirements on the Company under the BHCA, including a minimum
leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted
assets. These requirements are described below under "Capital Regulations."
Subject to its capital requirements and certain other restrictions, the
Company is able to borrow money to make a capital contribution to the Bank,
and such loans may be repaid from dividends paid from the Bank to the
Company.
The ability of the Bank to pay dividends, however, will be subject to
regulatory restrictions which are described below under "Dividends." The
Company is also able to raise capital for contributions to the Bank by
issuing securities without having to receive regulatory approval, subject to
compliance with federal and state securities laws.
In accordance with Federal Reserve policy, the Company is expected to act as
a source of financial strength to the Bank and to commit resources to support
the Bank in circumstances in which the Company might not otherwise do so. In
furtherance of this policy, the Federal Reserve may require a financial
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious
risk to the financial soundness or stability of any subsidiary depository
institution of the financial holding company. Further, federal bank
regulatory authorities have additional discretion to require a financial
holding company to divest itself of any bank or nonbank subsidiary if the
agency determines that divestiture may aid the depository institution's
financial condition.
Capital City Bank
CCB is a banking institution that is chartered by and operated in the State
of Florida, and it is subject to supervision and regulation by the Florida
Department. The Florida Department supervises and regulates all areas of
CCB's operations including, without limitation, the making of loans, the
issuance of securities, the conduct of CCB's corporate affairs, the
satisfaction of capital adequacy requirements, the payment of dividends, and
the establishment or closing of branches. CCB is also a member bank of the
Federal Reserve System, which makes CCB's operations subject to broad federal
regulation and oversight by the Federal Reserve. In addition, CCB's deposit
accounts are insured by the FDIC to the maximum extent permitted by law, and
the FDIC has certain enforcement powers over CCB.
9
As a state chartered banking institution in the State of Florida, CCB is
empowered by statute, subject to the limitations contained in those statutes,
to take savings and time deposits and pay interest on them, to accept demand
deposits, to make loans on residential and other real estate, to make
consumer and commercial loans, to invest, with certain limitations, in equity
securities and in debt obligations of banks and corporations and to provide
various other banking services on behalf of CCB's customers. Various consumer
laws and regulations also affect the operations of CCB, including state usury
laws, laws relating to fiduciaries, consumer credit and equal credit
opportunity laws, and fair credit reporting. In addition, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") prohibits insured
state chartered institutions from conducting activities as principal that are
not permitted for national banks. A bank, however, may engage in an otherwise
prohibited activity if it meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the
deposit insurance funds.
Reserves
The Federal Reserve requires all depository institutions to maintain reserves
against some transaction accounts (primarily NOW and Super NOW checking
accounts). The balances maintained to meet the reserve requirements imposed
by the Federal Reserve may be used to satisfy liquidity requirements.
An institution may borrow from the Federal Reserve Bank "discount window."
As a secondary source of funds, provided that the institution meets the
Federal Reserve Bank's credit standards.
Dividends
CCB is subject to legal limitations on the frequency and amount of dividends
that can be paid to the Company. The Federal Reserve may restrict the ability
of CCB to pay dividends if such payments would constitute an unsafe or
unsound banking practice. These regulations and restrictions may limit the
Company's ability to obtain funds from CCB for its cash needs, including
funds for acquisitions and the payment of dividends, interest and operating
expenses.
In addition, Florida law also places certain restrictions on the declaration
of dividends from state chartered banks to their holding companies. Pursuant
to Section 658.37 of the Florida Banking Code, the board of directors of
state chartered banks, after charging off bad debts, depreciation and other
worthless assets, if any, and making provisions for reasonably anticipated
future losses on loans and other assets, may quarterly, semi-annually or
annually declare a dividend of up to the aggregate net profits of that period
combined with the bank's retained net profits for the preceding two years
and, with the approval of the Florida Department, declare a dividend from
retained net profits which accrued prior to the preceding two years. Before
declaring such dividends, 20% of the net profits for the preceding period as
is covered by the dividend must be transferred to the surplus fund of the
bank until this fund becomes equal to the amount of the bank's common stock
then issued and outstanding. A state chartered bank may not declare any
dividend if (i) its net income from the current year combined with the
retained net income for the preceding two years is a loss or (ii) the payment
of such dividend would cause the capital account of the bank to fall below
the minimum amount required by law, regulation, order or any written
agreement with the Florida Department or a federal regulatory agency.
Insurance of Accounts and Other Assessments
The deposit accounts of CCB are insured by the Bank Insurance Fund of the
FDIC generally up to a maximum of $100,000 per separately insured depositor,
and the Bank is subject to FDIC deposit insurance assessments. The federal
banking agencies may prohibit any FDIC-insured institution from engaging in
any activity they determine by regulation or order poses a serious threat to
the insurance fund. Pursuant to FDICIA, the FDIC adopted a risk-based system
for determining deposit insurance assessments under which all insured
institutions were placed into one of nine categories and assessed insurance
premiums, ranging from 0.0% to 0.27% of insured deposits, based upon
10
their level of capital and supervisory evaluation. Because the FDIC sets the
assessment rates based upon the level of assets in the insurance fund,
premium rates rise and fall as the number and size of bank failures increase
and decrease, respectively. Under the system, institutions are assigned to
one of three capital categories based solely on the level of an institution's
capital, "well capitalized," "adequately capitalized" and "undercapitalized."
These three groups are then divided into three subgroups that reflect varying
levels of supervisory concern, from those that are considered to be healthy
to those that are considered to be of substantial supervisory concern. Bank
Insurance Fund and Savings Association Insurance Fund deposits may be
assessed at different rates. Furthermore, the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 requires Bank Insurance Fund insured banks to
participate in the payment of interest due on Financing Corporation bonds
used to finance the thrift bailout.
Transactions With Affiliates
The authority of the Bank to engage in transactions with related parties or
"affiliates" or to make loans to insiders is limited by certain provisions of
law and regulations. Commercial banks, such as the Bank, are prohibited from
making extensions of credit to any affiliate that engages in an activity not
permissible under the regulations of the Federal Reserve for a bank holding
company. Pursuant to Sections 23A and 23B of the Federal Reserve Act ("FRA"),
member banks are subject to restrictions regarding transactions with
affiliates ("Covered Transactions").
With respect to any Covered Transaction, the term "affiliate" includes any
company that controls or is controlled by a company that controls the Bank, a
bank or savings association subsidiary of the Bank, any persons who own,
control or vote more than 25% of any class of stock of the Bank or the
Company and any persons who the Board of Directors determines exercises a
controlling influence over the management of the Bank or the Company. The
term "affiliate" also includes any company controlled by controlling
stockholders of the Bank or the Company and any company sponsored and advised
on a contractual basis by the Bank or any subsidiary or affiliate of the
Bank.
Such transactions between the Bank and their respective affiliates are
subject to certain requirements and limitations, including limitations on the
amounts of such Covered Transactions that may be undertaken with any one
affiliate and with all affiliates in the aggregate. The federal banking
agencies may further restrict such transactions with affiliates in the
interest of safety and soundness.
Section 23A of the FRA limits Covered Transactions with any one affiliate to
10% of an institution's capital stock and surplus and limits aggregate
affiliate transactions to 20% of the Bank's capital stock and surplus.
Sections 23A and 23B of the FRA provide that a loan transaction with an
affiliate generally must be collateralized (but may not be collateralized by
a low quality asset or securities issued by an affiliate) and that all
Covered Transactions, as well as the sale of assets, the payment of money or
the provision of services by the Bank to affiliates, must be on terms and
conditions that are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable nonaffiliated transactions. A
Covered Transaction generally is defined as a loan to an affiliate, the
purchase of securities issued by an affiliate, the purchase of assets from an
affiliate, the acceptance of securities issued by an affiliate as collateral
for a loan, or the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate. In addition, the Bank generally may not purchase
securities issued or underwritten by affiliates.
On October 31, 2002, the Federal Reserve issued a new regulation, Regulation
W, effective April 1, 2003, that comprehensively implements Sections 23A and
23B of the FRA. Regulation W unifies in one public document the Federal
Reserve's interpretations of Sections 23A and 23B, including several new
interpretive proposals and addresses new issues arising as a result of the
expanded scope of non-banking activities engaged in
11
by banks and bank holding companies in recent years and those authorized for
financial holding companies under the Gramm-Leach-Bliley Act.
Loans to executive officers, directors or to any person who directly or
indirectly, or acting through or in concert with one or more persons, owns,
controls or has the power to vote more than 10% of any class of voting
securities of a bank ("Principal Shareholders") and their related interests
(i.e., any company controlled by such executive officer, director, or
Principal Shareholders), or to any political or campaign committee the funds
or services of which will benefit such executive officers, directors, or
Principal Shareholders or which is controlled by such executive officers,
directors or Principal Shareholders, are subject to Sections 22(g) and 22(h)
of the FRA and the regulations promulgated thereunder (Regulation O) and
Section 13(k) of the Exchange Act relating to the prohibition on personal
loans to executives which exempts financial institutions in compliance with
the insider lending restrictions of Section 22(h) of the FRA.
Among other things, these loans must be made on terms substantially the same
as those prevailing on transactions made to unaffiliated individuals and
certain extensions of credit to such persons must first be approved in
advance by a disinterested majority of the entire board of directors. Section
22(h) of the FRA prohibits loans to any such individuals where the aggregate
amount exceeds an amount equal to 15% of an institution's unimpaired capital
and surplus plus an additional 10% of unimpaired capital and surplus in the
case of loans that are fully secured by readily marketable collateral, or
when the aggregate amount on all such extensions of credit outstanding to all
such persons would exceed the bank's unimpaired capital and unimpaired
surplus. Section 22(g) identifies limited circumstances in which the Bank is
permitted to extend credit to executive officers.
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") and the regulations issued
thereunder are intended to encourage banks to help meet the credit needs of
their service area, including low and moderate income neighborhoods,
consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in
meeting the needs of its service area when considering applications to
establish branches, merger applications and applications to acquire the
assets and assume the liabilities of another bank. Federal banking agencies
are required to make public a rating of a bank's performance under the CRA.
In the case of a financial holding company, the CRA performance record of the
banks involved in the transaction are reviewed in connection with the filing
of an application to acquire ownership or control of shares or assets of a
bank or to merge with any other financial holding company. An unsatisfactory
record can substantially delay or block the transaction.
Capital Regulations
The Federal Reserve has adopted risk-based, capital adequacy guidelines for
financial holding companies and their subsidiary state-chartered banks that
are members of the Federal Reserve System. The risk-based capital guidelines
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and financial holding companies, to
account for off-balance sheet exposure, to minimize disincentives for holding
liquid assets and to achieve greater consistency in evaluating the capital
adequacy of major banks throughout the world. Under these guidelines assets
and off-balance sheet items are assigned to broad risk categories each with
designated weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items.
The current guidelines require all financial holding companies and federally
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier I Capital. Tier I Capital, which
includes common stockholders' equity, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock, less
certain goodwill items and other intangible assets, is
12
required to equal at least 4% of risk-weighted assets. The remainder ("Tier
II Capital") may consist of (i) an allowance for loan losses of up to 1.25%
of risk-weighted assets, (ii) excess of qualifying perpetual preferred stock,
(iii) hybrid capital instruments, (iv) perpetual debt, (v) mandatory
convertible securities, and (vi) subordinated debt and intermediate-term
preferred stock up to 50% of Tier I Capital. Total capital is the sum of Tier
I and Tier II Capital less reciprocal holdings of other banking
organizations' capital instruments, investments in unconsolidated
subsidiaries and any other deductions as determined by the appropriate
regulator (determined on a case by case basis or as a matter of policy after
formal rule making).
In computing total risk-weighted assets, bank and financial holding company
assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain
off-balance sheet items are given similar credit conversion factors to
convert them to asset equivalent amounts to which an appropriate risk-weight
will apply. Most loans will be assigned to the 100% risk category, except for
performing first mortgage loans fully secured by residential property, which
carry a 50% risk rating. Most investment securities (including, primarily,
general obligation claims on states or other political subdivisions of the
United States) will be assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% risk-weight, and direct obligations of
the U.S. Treasury or obligations backed by the full faith and credit of the
U.S. Government, which have a 0% risk-weight. In covering off-balance sheet
items, direct credit substitutes, including general guarantees and standby
letters of credit backing financial obligations, are given a 100% conversion
factor. Transaction-related contingencies such as bid bonds, standby letters
of credit backing non-financial obligations, and undrawn commitments
(including commercial credit lines with an initial maturity of more than one
year) have a 50% conversion factor. Short-term commercial letters of credit
are converted at 20% and certain short-term unconditionally cancelable
commitments have a 0% factor.
The federal bank regulatory authorities have also adopted regulations which
supplement the risk-based guideline. These regulations generally require
banks and financial holding companies to maintain a minimum level of Tier I
Capital to total assets less goodwill of 4% (the "leverage ratio"). The
Federal Reserve permits a bank to maintain a minimum 3% leverage ratio if the
bank achieves a 1 rating under the CAMELS rating system in its most recent
examination, as long as the bank is not experiencing or anticipating
significant growth. The CAMELS rating is a non-public system used by bank
regulators to rate the strength and weaknesses of financial institutions. The
CAMELS rating is comprised of six categories: capital, asset quality,
management, earnings, liquidity, and interest rate sensitivity.
Banking organizations experiencing or anticipating significant growth, as
well as those organizations which do not satisfy the criteria described
above, will be required to maintain a minimum leverage ratio ranging
generally from 4% to 5%. The bank regulators also continue to consider a
"tangible Tier I leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier I leverage ratio is the ratio of a banking
organization's Tier I Capital, less deductions for intangibles otherwise
includable in Tier I Capital, to total tangible assets.
Federal law and regulations establish a capital-based regulatory scheme
designed to promote early intervention for troubled banks and require the
FDIC to choose the least expensive resolution of bank failures. The capital-
based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized"
institution, a bank must have a leverage ratio of no less than 5%, a Tier I
risk-based ratio of no less than 6%, and a total risk-based capital ratio of
no less than 10%, and the bank must not be under any order or directive from
the appropriate regulatory agency to meet and maintain a specific capital
level.
13
Under the regulations, the applicable agency can treat an institution as if
it were in the next lower category if the agency determines (after notice and
an opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or a part of
their operations. Financial holding companies controlling financial
institutions can be called upon to boost the institutions' capital and to
partially guarantee the institutions' performance under their capital
restoration plans.
It should be noted that the minimum ratios referred to above are merely
guidelines and the bank regulators possess the discretionary authority to
require higher ratios.
The Company and the Bank currently exceed the requirements contained in the
applicable regulations, policies and directives pertaining to capital
adequacy, and management of the Company and the Bank is unaware of any
material violation or alleged violation of these regulations, policies or
directives.
Interstate Banking and Branching
The BHCA was amended in September 1994 by the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Banking Act"). The
Interstate Banking Act provides that adequately capitalized and managed
financial holding companies are permitted to acquire banks in any state.
State laws prohibiting interstate banking or discriminating against out-of-
state banks are preempted. States were not permitted to enact laws opting out
of this provision; however, states were allowed to adopt a minimum age
restriction requiring that target banks located within the state be in
existence for a period of years, up to a maximum of five years, before such
bank may be subject to the Interstate Banking Act. The Interstate Banking Act
establishes deposit caps which prohibit acquisitions that result in the
acquiring company controlling 30% or more of the deposits of insured banks
and thrift institutions held in the state in which the target maintains a
branch or 10% or more of the deposits nationwide. States have the authority
to waive the 30% deposit cap. State-level deposit caps are not preempted as
long as they do not discriminate against out-of-state companies, and the
federal deposit caps apply only to initial entry acquisitions.
The Interstate Banking Act also provides that adequately capitalized and
managed banks are able to engage in interstate branching by merging with
banks in different states. States were permitted to enact legislation
authorizing interstate mergers earlier than June 1, 1997, or, unlike the
interstate banking provision discussed above, states were permitted to opt
out of the application of the interstate merger provision by enacting
specific legislation before June 1, 1997.
Florida responded to the enactment of the Interstate Banking Act by enacting
the Florida Interstate Branching Act (the "Florida Branching Act"). The
purpose of the Florida Branching Act was to permit interstate branching
through merger transactions under the Interstate Banking Act. Under the
Florida Branching Act, with the prior approval of the Florida Department, a
Florida bank may establish, maintain and operate one or more branches in a
state other than the State of Florida pursuant to a merger transaction in
which the Florida bank is the resulting bank. In addition, the Florida
Branching Act provides that one or more Florida banks may enter into a merger
transaction with one or more out-of-state banks, and an out-of-state bank
resulting from such transaction may maintain and operate the branches of the
Florida bank that participated in such merger. An out-of-state bank, however,
is not permitted to acquire
14
a Florida bank in a merger transaction unless the Florida bank has been in
existence and continuously operated for more than three years.
USA PATRIOT Act of 2001
On October 26, 2001, the USA PATRIOT Act of 2001 (the "Patriot Act") was
enacted in response to the terrorist attacks occurring on September 11, 2001.
The Patriot Act is intended to strengthen the U.S. law enforcement and
intelligence communities' ability to work together to combat terrorism. Title
III of the Patriot Act, the International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001, amended the Bank Secrecy Act and
adopted additional provisions that increased the obligations of financial
institutions, including the Bank, to identify their customers, watch for and
report upon suspicious transactions, respond to requests for information by
federal banking and law enforcement agencies, and share information with
other financial institutions. In addition, the collected customer
identification information must be verified within a reasonable time after a
new account is opened through documentary or non-documentary methods. All
new customers must be screened against any Section 326 government lists of
known or suspected terrorists within a reasonable time after opening an
account.
Consumer Laws and Regulations
The Bank is also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the list set
forth below is not exhaustive, these laws and regulations include the Truth
in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act,
the Expedited Funds Availability Act, the Equal Credit Opportunity Act, and
the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of its ongoing customer
relations.
Future Legislative Developments
Various legislation, including proposals to modify the bank regulatory
system, expand the powers of banking institutions and financial holding
companies and limit the investments that a depository institution may make
with insured funds, is from time to time introduced in Congress. Such
legislation may change banking statutes and the environment in which the
Company and its banking subsidiary operate in substantial and unpredictable
ways. We cannot determine the ultimate effect that potential legislation, if
enacted, or implementing regulations with respect thereto, would have upon
our financial condition or results of operations or that of our banking
subsidiary.
Expanding Enforcement Authority
One of the major additional burdens imposed on the banking industry by the
FDICIA is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve and FDIC are possessed with extensive authority to police unsafe or
unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC
may terminate the deposit insurance of any institution which it determines
has engaged in an unsafe or unsound practice. The agencies can also assess
civil money penalties, issue cease and desist or removal orders, seek
injunctions, and publicly disclose such actions. FDICIA, the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 and other laws have
expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
15
Effect of Governmental Monetary Policies
The commercial banking business in which the Bank engages is affected not
only by general economic conditions, but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the "discount window," open market operations,
the imposition of changes in reserve requirements against member banks'
deposits and assets of foreign branches and the imposition of and changes in
reserve requirements against certain borrowings by banks and their affiliates
are some of the instruments of monetary policy available to the Federal
Reserve. These monetary policies are used in varying combinations to
influence overall growth and distributions of bank loans, investments and
deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve have had a significant
effect on the operating results of commercial banks and are expected to do so
in the future. The monetary policies of the Federal Reserve are influenced by
various factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and in the fiscal policies of the
U.S. Government. Future monetary policies and the effect of such policies on
the future business and earnings of the Bank cannot be predicted.
Website Access to Company's Reports
The Company's internet website is www.ccbg.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including
any amendments to those reports filed or furnished pursuant to section 13(a)
or 15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the
Exchange Act are available free of charge through our website as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission.
Item 2. Properties
Capital City Bank Group, Inc., is headquartered in Tallahassee, Florida. The
Company's executive office is in the Capital City Bank building located on
the corner of Tennessee and Monroe Streets in downtown Tallahassee. The
building is owned by the Bank but is located, in part, on land leased under a
long-term agreement.
The Bank's Parkway Office is located on land leased from the Smith Interests
General Partnership L.L.P. in which several directors and officers have an
interest. The annual lease provides for payments of approximately $85,000,
to be adjusted for inflation in future years.
As of February 27, 2004, the Bank had 57 banking locations. Of the 57
locations, the Bank leases the land, buildings, or both at 10 locations and
owns the land and buildings at the remaining 47.
Item 3. Legal Proceedings
The Company is a party to lawsuits and claims arising out of the normal
course of business. In management's opinion, there are no known pending
claims or litigation, the outcome of which would, individually or in the
aggregate, have a material effect on the consolidated results of operations,
financial position, or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
16
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareowner Matters
The Company's common stock trades on the Nasdaq National Market under the
symbol "CCBG."
The following table presents the range of high and low closing sales prices
reported on the Nasdaq National Market and cash dividends declared for each
quarter during the past two years, as adjusted for the Company's stock split
on June 13, 2003. The Company had a total of 1,512 shareowners of record as
of February 27, 2004.
2003 2002
------------------------------ -------------------------------
Fourth Third Second First Fourth Third Second First
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------------------------------------------------
Common stock price:
High $46.83 $40.93 $36.43 $32.32 $32.04 $29.55 $27.84 $22.00
Low 36.62 35.00 29.74 26.81 22.26 22.32 20.60 18.12
Close 45.99 38.16 36.08 31.29 31.35 26.45 27.62 21.60
Cash dividends
declared per share .180 .170 .170 .136 .136 .122 .122 .122
Future payment of dividends will be subject to determination and
declaration by the Board of Directors. Florida law limits the payment of
dividends by the Company. There are also legal limits on the frequency and
amount of dividends that can be paid by CCB to the Company. See subsection
entitled "Dividends" in the Business section on page 10, in the
Management's Discussion and Analysis of Financial Condition and Operating
Results on page 41 and Note 15 in the Notes to Consolidated Financial
Statements. These restrictions may limit the Company's ability to pay
dividends to its shareowners. As of February 27, 2004, the Company does
not believe these restrictions will impair the Company's ability to declare
and pay its routine and customary dividends.
17
Item 6. Selected Financial & Other Data
(Dollars in Thousands, Except Per Share Data)
For the Years Ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Interest Income $ 99,487 $ 106,095 $ 118,983 $ 109,334 $ 99,685
Net Interest Income 84,648 83,592 70,734 63,100 58,438
Provision for Loan Losses 3,436 3,297 3,983 3,120 2,440
Net Income 25,193 23,082 16,866 18,153 15,252
Per Common Share:
Basic Net Income $ 1.91 $ 1.75 $ 1.27 $ 1.43 $ 1.20
Diluted Net Income 1.90 1.74 1.27 1.43 1.20
Cash Dividends Declared .656 .502 .476 .436 .442
Diluted Book Value 15.27 14.08 12.86 11.61 10.36
Based on Net Income:
Return on Average Assets 1.40% 1.34% 0.99% 1.24% 1.06%
Return on Average Equity 12.82 12.85 10.00 12.99 11.64
Dividend Pay-out Ratio 34.51 28.87 37.48 30.49 36.83
Averages for the Year:
Loans, Net of Unearned
Interest $1,318,080 $1,256,107 $1,184,290 $1,002,122 $ 884,323
Earning Assets 1,624,680 1,556,500 1,534,548 1,315,024 1,291,262
Assets 1,804,895 1,727,180 1,704,167 1,463,612 1,444,069
Deposits 1,431,808 1,424,999 1,442,916 1,207,103 1,237,405
Long-Term Debt 55,594 30,423 15,308 13,070 17,274
Shareowners' Equity 196,588 179,652 168,652 139,738 131,058
Year-End Balances:
Loans, Net of Unearned
Interest $1,341,632 $1,285,221 $1,243,351 $1,051,832 $ 928,486
Earning Assets 1,648,818 1,636,472 1,626,841 1,369,294 1,263,296
Assets 1,846,502 1,824,771 1,821,423 1,527,460 1,430,520
Deposits 1,474,205 1,434,200 1,550,101 1,268,367 1,202,658
Long-Term Debt 46,475 71,745 13,570 11,707 14,258
Shareowners' Equity 202,809 186,531 171,783 147,607 132,216
Equity to Assets Ratio 10.98% 10.22% 9.43% 9.66% 9.24%
Other Data:
Basic Average Shares
Outstanding 13,222,487 13,225,285 13,241,957 12,732,749 12,718,681
Diluted Average Shares
Outstanding 13,251,189 13,274,355 13,292,435 12,768,553 12,745,291
Shareowners of Record 1,512 1,457 1,473 1,599 1,362
Banking Locations 57 54 56 56 48
Full-Time Equivalent Associates 795 781 787 791 678
All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective June 13, 2003.
As of the record date. The record date is on or about March 1st of the following year.
17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's discussion and analysis ("MD&A") provides supplemental
information, which sets forth the major factors that have affected the
Company's financial condition and results of operations and should be read in
conjunction with the Consolidated Financial Statements and related notes.
The MD&A is divided into subsections entitled "Executive Overview," "Earnings
Analysis," "Financial Condition," "Liquidity and Capital Resources," "Off-
Balance Sheet Arrangements," and "Accounting Policies." Information therein
should facilitate a better understanding of the major factors and trends that
affect the Company's earnings performance and financial condition, and how
the Company's performance during 2003 compares with prior years. Throughout
this section, Capital City Bank Group, Inc., and its subsidiary,
collectively, are referred to as "CCBG" or the "Company." Capital City Bank
is referred to as "CCB" or the "Bank."
The period-to-date averages used in this report are based on daily balances
for each respective period. In certain circumstances, comparing average
balances for the fourth 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 2 for annual averages and Table 15 for financial information
presented on a quarterly basis.
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;
19
* 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.
EXECUTIVE OVERVIEW
The Company is a financial holding company and a bank holding company
headquartered in Tallahassee, Florida that provides through its wholly owned
subsidiary, Capital City Bank, a broad array of products and services in 17
Florida counties, four Georgia counties, and one Alabama county. The Bank
also has mortgage lending offices in four additional Florida communities.
The Bank offers commercial and retail banking services, as well as trust and
asset management, brokerage, and data processing services.
From an industry and national perspective, the Company's profitability, like
most financial institutions, is dependent to a large extent upon net interest
income, which is the difference between the interest received on earning
assets, such as loans and securities, and the interest paid on interest-
bearing liabilities, principally deposits and borrowings. Results of
operations are also affected by the provision for loan losses, operating
expenses such as salaries and employee benefits, occupancy and other
operating expenses, including income taxes, and, to a lesser extent, non-
interest income such as service charges on deposit accounts, trust service
fees, mortgage banking revenues, and data processing revenues. Economic
conditions, competition and the monetary and fiscal policies of the Federal
government in general, significantly affect financial institutions, including
the Company. During 2003, the Federal government's focus was marked by steady
low interest rates intended to stabilize the current economy and to provide
stimulation to future industrial economic growth. Lending activities are also
significantly influenced by regional and local economic factors. Some
specific factors may include the demand for and supply of housing,
competition among lenders, interest rate conditions and prevailing market
rates on competing investments, customer preferences and levels of personal
income and savings in the Company's primary market area.
20
The Company philosophy is to grow and prosper, building long-term
relationships based on quality service, high ethical standards, and safe and
sound banking practices. The Company is a super-community bank in the
relationship banking business with a locally oriented, community-based focus,
which is augmented by experienced, centralized support in select specialized
areas. The Company's local market orientation is reflected in its network of
banking office locations, experienced community executives, and community
advisory boards which support the Company's focus of responding to local
banking needs. The Company strives to offer a broad array of sophisticated
products and to provide quality service by empowering associates to make
decisions in their local markets.
The Company plans to continue its expansion, emphasizing a combination of
growth in existing markets and acquisitions. Acquisitions will be focused on
a three state area including Florida, Georgia, and Alabama with a particular
focus on acquiring banks and branches, which are $100 million to $400 million
in asset size, located on the outskirts of major metropolitan areas. The
Company will evaluate de novo expansion opportunities in attractive new
markets in the event that acquisition opportunities are not feasible. Other
expansion opportunities that will be evaluated include asset management,
insurance, and mortgage banking. Management anticipates that roughly half of
the Company's future earnings growth will be generated through growth in
existing markets and half through acquisitions.
Pending Acquisition
On January 8, 2004, the Company announced the signing of a definitive
agreement to acquire Quincy State Bank, located in Quincy, Florida from
Synovus Financial Corp. Quincy State Bank is a $127 million asset
institution (as of December 31, 2003) with offices in Quincy and Havana,
Florida. Both markets adjoin Leon County, home to the Company's Tallahassee
headquarters. The purchase price is $26.1 million in cash and the closing is
scheduled for late in the first quarter of 2004.
Previous Acquisitions
On March 9, 2001, the Company completed a purchase and assumption transaction
with Wachovia Bank, NA, formerly First Union National Bank ("Wachovia") and
acquired six of Wachovia's offices in Georgia which included real estate,
loans and deposits. The transaction resulted in approximately $11.3 million
in intangible assets, primarily core deposit intangibles, which are being
amortized over a 10-year period. The Company purchased approximately $18
million in loans and assumed deposits of approximately $105 million.
On March 2, 2001, the Company completed its acquisition of First Bankshares
of West Point, Inc., and its subsidiary, First National Bank of West Point.
At the time of the acquisition, First National Bank of West Point had
approximately $144 million in assets with one office in West Point, Georgia,
and two offices in the Greater Valley area of Alabama. First Bankshares of
West Point, Inc., merged with the Company, and First National Bank of West
Point merged with Capital City Bank. The Company issued 3.6419 shares and
$17.7543 in cash for each of the 192,481 outstanding shares of First
Bankshares of West Point, Inc., resulting in the issuance of 701,000 shares
of Company common stock and the payment of $3.4 million in cash for a total
purchase price of approximately $17.0 million. The transaction was accounted
for as a purchase and resulted in approximately $2.5 million of intangible
assets, primarily goodwill.
21
EARNINGS ANALYSIS
Earnings for 2003 totaled $25.2 million, or $1.90 per diluted share. This
compares to $23.1 million, or $1.74 per diluted share in 2002, and $16.9
million, or $1.27 per diluted share in 2001. Return on average assets was
1.40% and return on average shareowners' equity was 12.82% for 2003, compared
to 2002's results of 1.34% and 12.85%, respectively, and 2001's performance
of .99% and 10.00%, respectively.
The increase in 2003 earnings was primarily attributable to growth in
operating revenues (defined as the total of net interest income and
noninterest income) of 5.8%, driven by 16.2% growth in noninterest income.
The increase in noninterest income reflects higher deposit fees, merchant
service fee income and mortgage banking revenues. These and other
significant factors are discussed throughout the Financial Review. A
condensed earnings summary is presented in Table 1.
Table 1
CONDENSED SUMMARY OF EARNINGS
(Dollars in Thousands, Except Per Share Data)
For the Years Ended December 31,
--------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------
Interest Income $ 99,487 $106,095 $118,983
Taxable Equivalent Adjustments 1,413 1,682 1,775
-------- -------- --------
Total Interest Income (FTE) 100,900 107,777 120,758
Interest Expense 14,839 22,503 48,249
-------- -------- --------
Net Interest Income (FTE) 86,061 85,274 72,509
Provision for Loan Losses 3,436 3,297 3,983
Taxable Equivalent Adjustments 1,413 1,682 1,775
-------- -------- --------
Net Interest Income After Provision
for Loan Losses 81,212 80,295 66,751
Noninterest Income 41,939 36,103 31,159
Noninterest Expense 84,378 80,625 71,926
-------- -------- --------
Income Before Income Taxes 38,773 35,773 25,984
Income Taxes 13,580 12,691 9,118
-------- -------- --------
Net Income $ 25,193 $ 23,082 $ 16,866
======== ======== ========
Basic Net Income Per Share $ 1.91 $ 1.75 $ 1.27
======== ======== ========
Diluted Net Income Per Share $ 1.90 $ 1.74 $ 1.27
======== ======== ========
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. An
analysis of the Company's net interest income, including average yields and
rates, is presented in Tables 2 and 3. This information is presented on a
"taxable equivalent" basis to reflect the tax-exempt status of income earned
on certain loans and investments, the majority of which are state and local
government debt obligations.
In 2003, taxable equivalent net interest income increased $787,000, or 1.0%.
This follows an increase of $12.8 million, or 17.6%, in 2002, and $7.8
million, or 12.1%, in 2001. The 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.
Lower interest rates paid on deposit products and a favorable shift in
deposit mix led to a net reduction in interest expense of $7.7 million over
2002. This favorable variance continued to be partially offset by declining
yields on earning assets, which produced a decline in taxable equivalent
interest income of $6.9 million. Over the last three years, management has
aggressively repriced interest bearing liabilities in response to the Federal
Reserve's reduction in its target rate on overnight funds.
22
Table 2
AVERAGE BALANCES AND INTEREST RATES
(Taxable Equivalent Basis - Dollars in Thousands)
2003 2002 2001
------------------------------ ------------------------------ -----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Loans, Net of Unearned
Interest $1,318,080 $ 92,264 7.00% $1,256,107 $ 95,222 7.58% $1,184,290 $102,737 8.68%
Taxable Investment
Securities 124,541 3,724 2.98 135,865 6,941 5.11 170,328 9,619 5.65
Tax-Exempt Investment
Securities 61,387 3,651 5.95 68,915 4,133 6.00 78,928 4,792 6.07
Funds Sold 120,672 1,261 1.03 95,613 1,481 1.53 101,002 3,610 3.55
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Earning Assets 1,624,680 100,900 6.21 1,556,500 107,777 6.92 1,534,548 120,758 7.87
Cash & Due From Banks 79,625 72,960 69,242
Allowance For Loan Losses (12,544) (12,409) (11,910)
Other Assets 113,134 110,129 112,287
---------- ---------- ----------
TOTAL ASSETS $1,804,895 $1,727,180 $1,704,167
========== ========== ===========
Liabilities:
NOW Accounts $ 264,159 $ 676 0.26% $ 241,873 $ 1,272 0.53% $ 214,881 $ 4,046 1.88%
Money Market Accounts 215,597 1,312 0.61 224,275 2,904 1.30 208,526 6,237 2.99
Savings Accounts 109,837 189 0.17 104,967 500 0.48 108,284 1,865 1.72
Time Deposits 433,176 9,390 2.17 493,956 15,875 3.21 604,909 33,066 5.47
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Interest
Bearing Deposits 1,022,769 11,567 1.13 1,065,071 20,551 1.93 1,136,600 45,214 3.98
Short-Term Borrowings 101,274 1,270 1.25 72,594 767 1.06 58,111 2,164 3.72
Long-Term Debt 55,594 2,002 3.60 30,423 1,185 3.90 15,308 871 5.69
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Interest
Bearing Liabilities 1,179,637 14,839 1.26 1,168,088 22,503 1.93 1,210,019 48,249 3.99
Noninterest Bearing Deposits 409,039 -------- ---- 359,928 -------- ---- 306,316
Other Liabilities 19,631 19,512 19,180
---------- ---------- ----------
TOTAL LIABILITIES 1,608,307 1,547,528 1,535,515
Shareowners' Equity:
Common Stock 132 132 132
Additional Paid-In Capital 15,272 15,386 18,940
Retained Earnings 181,184 164,184 149,580
---------- ---------- ----------
TOTAL SHAREOWNERS' EQUITY 196,588 179,652 168,652
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $1,804,895 $1,727,180 $1,704,167
========== ========== ===========
Interest Rate Spread 4.95% 4.99% 3.88%
==== ==== ====
Net Interest Income $ 86,061 $ 85,274 $ 72,509
======== ======== ========
Net Interest Margin 5.30% 5.47% 4.73%
==== ==== ====
Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $6.4 million, $4.6 million
and $4.3 million in 2003, 2002 and 2001, respectively.
Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest on tax-exempt
loans and securities to a taxable equivalent basis.
Taxable equivalent net interest income divided by average earning assets.
23
Table 3
RATE/VOLUME ANALYSIS
(Taxable Equivalent Basis - Dollars in Thousands)
2003 Changes from 2002 2002 Changes from 2001
-------------------------------- ---------------------------------
Due To Due To
Average Average
-------------------- ---------------------
Total Volume Rate Total Volume Rate
- ----------------------------------------------------------------------------------------------------------------
Earning Assets:
Loans, Net of Unearned Interest $(2,958) $5,916 $ (8,874) $(7,515) $6,698 $(14,213)
Investment Securities:
Taxable (3,217) (2,448) (769) (2,678) (1,987) (691)
Tax-Exempt (482) (450) (32) (659) (608) (51)
Funds Sold (220) 389 (609) (2,129) (215) (1,914)
------- ------ -------- ------- ------ --------
Total (6,877) 3,407 (10,284) (12,981) 3,888 (16,869)
------- ------ -------- ------- ------ --------
Interest Bearing Liabilities:
NOW Accounts (596) 117 (713) (2,774) 509 (3,283)
Money Market Accounts (1,592) (111) (1,481) (3,333) 471 (3,804)
Savings Accounts (311) 23 (334) (1,365) (57) (1,308)
Time Deposits (6,485) (1,953) (4,532) (17,191) (6,065) (11,126)
Short-Term Borrowings 503 578 (75) (1,397) 447 (1,844)
Long-Term Debt 817 981 (164) 314 860 (546)
------- ------ -------- ------- ------ --------
Total (7,664) (365) (7,299) (25,746) (3,835) (21,911)
------- ------ -------- ------- ------ --------
Changes in Net Interest Income $ 787 $3,772 $ (2,985) $12,765 $7,723 $ 5,042
======= ====== ======== ======= ====== ========
This table shows the change in taxable equivalent net interest income for comparative periods based on either
changes in average volume or changes in average rates for earning assets and interest bearing liabilities.
Changes which are not solely due to volume changes or solely due to rate changes have been attributed to rate
changes.
Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest
on tax-exempt loans and securities to a taxable equivalent basis.
24
For the year 2003, taxable equivalent interest income decreased $6.9 million,
or 6.4%, over 2002, and $13.0 million, or 10.7%, in 2002 over 2001. New loan
production and repricing of existing earning assets produced a 71 basis point
reduction in the yield on earning assets, which declined from 6.92% for 2002
to 6.21% for 2003. This compares to a 95 basis point reduction in 2002 over
2001. The unfavorable impact of declining yields was partially mitigated by
growth in earning assets of $68.2 million, which produced an overall
improvement in the mix. The yield on the investment securities portfolio
continued to decline as a result of the low rate environment. As shown in
Table 3, both the investment and loan portfolios were significant
contributors to the net reduction in interest income. In the current rate
environment, portfolio repricing will continue to put pressure on interest
income, but may be partially or completely offset by earning asset growth.
Interest expense decreased $7.7 million, or 34.1%, over 2002, and $25.7
million, or 53.4%, in 2002 over 2001. The general decline in interest rates
produced favorable rate variances on interest bearing liabilities throughout
the year. This was 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 total
average deposits, declined from 34.7% in 2002 to 30.2% in 2003. Lower
interest rates and a favorable shift in mix led to a decline in the average
rate paid on interest bearing liabilities in 2003 of 67 basis points compared
to 2002.
The Company's interest rate spread (defined as the taxable equivalent yield
on average earning assets less the average rate paid on interest bearing
liabilities) decreased 4 basis points in 2003 and increased 111 basis points
in 2002. The decrease in 2003 was attributable to the continued decline in
the earning asset yield. The significant increase in 2002 is attributable to
management's ability to rapidly adjust the average rate paid on interest
bearing liabilities relative to the decline in yield on earning assets.
The Company's net interest margin (defined as taxable equivalent interest
income less interest expense divided by average earning assets) was 5.30% in
2003, compared to 5.47% in 2002 and 4.73% in 2001. In 2003, the lower yields
on earning assets (partially offset by lower rates paid on interest bearing
liabilities) resulted in the 17 basis point decline in the margin.
Loan growth is anticipated to have a favorable impact on the net interest
margin during the upcoming year along with any favorable changes in the
Federal Reserve's target rate on overnight funds. However, depending on the
magnitude of the loan growth, the improvement attributable to growth may be
partially or completely offset by unfavorable repricing variances associated
with loans and securities and any further unfavorable changes in the Federal
Reserve's target rate on overnight funds. A further discussion of the
Company's earning assets and funding sources can be found in the section
entitled "Financial Condition."
Provision for Loan Losses
The provision for loan losses was $3.4 million in 2003, compared to $3.3
million in 2002 and $4.0 million in 2001. The slight increase in the 2003
provision reflects a slightly higher level of net charge-offs. The Company's
stable provision over the last three-year period reflects continued stable
credit quality supported by an adequate allowance for loan losses.
Net charge-offs remain at historically low levels relative to the size of the
portfolio. Net charge-offs for 2003 totaled $3.5 million, or .27% of average
loans. This compares to $2.9 million, or .23% for 2002. The increase is due
primarily to a higher level of consumer loan net charge-offs, primarily
automobile loans. In addition, the increase in 2003 over 2002 is reflective
of an above normal level of consumer loan recoveries in 2002.
25
At December 31, 2003, the allowance for loan losses totaled $12.4 million
compared to $12.5 million in 2002. At year-end 2003, the allowance
represented 0.93% of total loans and provided coverage of 530% of
nonperforming loans. Management considers the allowance to be adequate based
on the current level of nonperforming loans and the estimate of losses
inherent in the portfolio at year-end. See the section entitled "Financial
Condition" and Tables 7 and 8 for further information regarding the allowance
for loan losses.
Noninterest Income
In 2003, noninterest income increased $5.8 million, or 16.2%, and represented
33.1% of operating revenue, compared to an increase of $4.9 million, or
15.9%, and 30.2%, respectively, in 2002. The increase in the level of
noninterest income is attributable primarily to growth in deposit service
charges, merchant service fee income, and mortgage banking revenues. The
increase in 2002 was attributable to growth in deposit service charges,
mortgage banking revenues, and other income (primarily retail brokerage fees
and ATM/debit/credit card transaction fees). Factors affecting noninterest
income are discussed below.
Service charges on deposit accounts increased $3.6 million, or 28.0%, in
2003, compared to an increase of $2.1 million, or 19.7%, in 2002. Service
charge revenues in any one year are dependent on the number of accounts,
primarily transaction accounts, the level of activity subject to service
charges, and the collection rate. The increase in service charges in 2003
was primarily attributable to growth in NSF/overdraft fees associated with a
new overdraft protection program implemented in the fourth quarter of 2002.
Integration of acquisitions during 2004 will further enhance deposit service
charge revenues. The increase in service charges in 2002 reflects an
increase in the number of deposit accounts, primarily attributable to the
2001 Georgia banking office acquisitions, and increased NSF/overdraft fees in
the fourth quarter of 2002.
Data processing revenues increased $396,000, or 19.8%, in 2003 versus a
decrease of $73,000, or 3.5%, in 2002. The data processing center provides
computer services to both financial and non-financial clients in North
Florida and South Georgia. The increase in 2003 was due to higher revenues
from both financial clients and government contract processing. The Company
added one financial client in late 2002 increasing the number currently being
processed to six. In addition, government contract processing increased
20.0% during 2003 primarily due to increased processing volume with one
client. In 2003, processing revenues for non-financial entities represented
approximately 39.3% of total processing, compared to 41.5% in 2002. The
decrease in total processing revenues for 2002 was primarily the result of a
decline in revenues for financial clients. Management expects data
processing revenues to remain stable during 2004.
In 2003, asset management fees increased $129,000, or 5.1%, versus a decrease
of $35,000, or 1.4%, in 2002. At year-end 2003, assets under management
totaled $404 million, reflecting growth of $61 million, or 17.8% over 2002.
This growth is due to an increase in new business in existing markets and
appreciation in stock market values over 2002. At year-end 2002, assets
under management totaled $343 million, reflecting growth of $6.0 million, or
1.8% over 2001.
The Company continues to be among the leaders in the production of
residential mortgage loans in many of its markets. In 2003, mortgage banking
revenues increased $588,000, or 10.7%, compared to $2.4 million, or 75.3% in
2002. The increase in 2003 was due to the continued low interest rate
environment resulting in a high level of fixed rate loan production through
the third quarter of the year. The Company generally sells all fixed rate
residential loan production into the secondary market. Fixed rate mortgage
refinancing activity slowed significantly in the fourth quarter of 2003 and
as a result mortgage banking revenues declined in the fourth quarter.
Management does not expect mortgage banking revenues to remain at the levels
experienced in 2003. The increase in
26
revenue in 2002 was due to higher fixed rate mortgage production driven by
the low interest rate environment, and a gain (pre-tax) of $675,000 on the
one-time sale of $23.5 million in residential mortgage loans during the
fourth quarter of 2002. The level of interest rates, origination volume and
percent of fixed rate production have a significant impact on the Company's
mortgage banking revenues.
Other noninterest income increased $1.2 million, or 8.7%, in 2003 versus an
increase of $580,000, or 4.5% in 2002. The increase in 2003 was attributable
primarily to an increase in merchant service fee income and miscellaneous
recoveries. Merchant service fee income increased $848,000, or 22.8%, due to
increased transaction volume and was partially offset with higher interchange
service fees, which is reflected in noninterest expense. Miscellaneous
recoveries were $241,000, or 86.5%, higher as a result of recovering legal
and settlement costs associated with two lawsuits. The 2002 increase in
noninterest income was attributable primarily to higher retail brokerage fees
and ATM/debit/credit card transaction fees.
Noninterest income as a percent of average assets increased to 2.32% in 2003,
compared to 2.09% in 2002, and 1.83% in 2001, driven primarily by service
charge income, mortgage banking revenues and merchant service fee income.
Noninterest Expense
Noninterest expense for 2003 was $84.4 million, an increase of $3.8 million,
or 4.7%, over 2002, compared with an increase of $8.7 million, or 12.1%, in
2002. Factors impacting the Company's noninterest expense during 2003 and
2002 are discussed below.
The Company's aggregate compensation expense in 2003 totaled $45.1 million,
an increase of $3.0 million, or 7.1%, over 2002. The increase is primarily
attributable to associate salary increases, higher performance-based
compensation (commissions), increased pension costs, and higher healthcare
insurance premiums. The increase in associate salaries reflects normal
annual merit increases and higher performance-based compensation, which is
reflective of higher commissions paid to mortgage originators. The higher
pension cost 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 in recent years. Pension costs are expected to increase
in 2004 by approximately 13%. Healthcare premiums are expected to continue
to increase due to additional participants and rising costs from healthcare
providers. In 2002, aggregate compensation increased $5.3 million, or 14.5%,
over 2001. This increase was primarily due to the addition of Georgia and
Alabama offices, higher performance-based compensation (profit participation,
commissions, and incentives), increased pension costs, and higher healthcare
insurance premiums.
Occupancy expense (including furniture, fixtures and equipment) increased by
$416,000, or 3.1%, in 2003, compared to $726,000, or 5.7% in 2002. The
increase in 2003 was primarily due to higher furniture/fixture, utility, and
building depreciation expenses associated with the addition of four new
offices. The increase in 2002 was primarily due to the addition of nine
offices associated with the Georgia acquisitions, and costs associated with
the conversion and full implementation of a new data processing system.
Additional increases were experienced for 2002 in office leases and building
maintenance/repairs.
Other noninterest expense increased $360,000, or 1.4%, in 2003, compared to
$2.6 million, or 11.7%, in 2002. The increase in 2003 was attributable to:
(1) higher legal costs of $106,000 primarily resulting from corporate
governance compliance work associated with the Sarbanes-Oxley Act; (2)
increased processing expenses of $272,000 associated with implementation of
new database systems in human resources, and custom programming work
performed by the bank's core processing system vendor to facilitate the
implementation of new applications (platform automation and home banking);
and (3) increased interchange service fees of $717,000 associated with
27
higher merchant card processing volume. These increases were partially
offset with approximately $617,000 lower expense for contingency reserves,
and lower seminar/education expense of $123,000.
The increase in 2002 was attributable to: (1) higher legal costs of $351,000
primarily resulting from merchant credit card processing; (2) increased
professional fees associated with external audit, tax and pension consulting
of $594,000; (3) increased processing expenses of $390,000 associated with
customization of a newly implemented data processing system, increased ATM
processing and trust account processing; (4) increased contributions of
$175,000 attributable to increased funding for Capital City Bank Group
Foundation, Inc.; (5) increased telephone costs of $215,000 resulting from
Georgia acquisitions and line upgrades to the existing wide-area network; and
(6) higher miscellaneous expense of $1.2 million attributable to: loan
underwriting/closing costs ($302,000), other losses/cash short ($304,000),
credit card interchange fees ($262,000), seminars/education ($139,000), and
other miscellaneous ($248,000).
The net noninterest expense ratio (defined as noninterest income minus
noninterest expense, net of intangible amortization and conversion/merger-
related expenses, as a percent of average assets) was 2.17% in 2003 compared
to 2.38% in 2002, and 2.14% in 2001. The Company's efficiency ratio
(expressed as noninterest expense, net of intangible amortization and
conversion/merger-related expenses, as a percent of taxable equivalent
operating revenues) was 63.4%, 63.6%, and 65.2% in 2003, 2002 and 2001,
respectively.
Income Taxes
The consolidated provision for federal and state income taxes was $13.6
million in 2003, compared to $12.7 million in 2002, and $9.1 million in 2001.
The increase in the 2003 tax provision was a result of higher taxable income
and a decline in tax exempt income. The increase in the 2002 tax provision
from 2001 was also due to higher taxable income and lower tax exempt income.
The effective tax rate was 35.0% in 2003, 35.5% in 2002, and 35.1% in 2001.
The decrease in the effective tax rate for 2003 is due to an adjustment in
federal income tax expense in the amount of $500,000 made during the fourth
quarter of 2003. Following a recent IRS examination, the Company performed
an evaluation of all its tax accounts. Upon completion of this analysis in
the fourth quarter of 2003, the Company determined certain tax accounts
should be adjusted to more appropriately reflect its current and deferred
assets and liabilities. The effective tax rates previously noted differ from
the combined federal and state statutory tax rates due primarily to tax-
exempt income.
The increase in the effective tax rate for 2002 was primarily attributable to
an increase in state taxable income as well as a decline of tax-exempt income
relative to pre-tax income.
FINANCIAL CONDITION
Average assets totaled $1.8 billion, an increase of $78.0 million, or 4.5%,
in 2003 versus the comparable period in 2002. Average earning assets for
2003 were $1.6 billion, representing an increase of $68.0 million, or 4.4%,
over 2002. During 2003, average loans increased $62.0 million, or 4.9%, and
average funds sold increased $25.1 million, or 26.2%. These increases were
partially offset by a decline in average securities of $19.0 million, or
9.2%. Loan growth during 2003 was primarily funded through existing
liquidity and deposit growth.
Table 2 provides information on average balances and rates, Table 3 provides
an analysis of rate and volume variances, while Table 4 highlights the
changing mix of the Company's earning assets over the last three years.
28
Loans
Average loans increased $62.0 million, or 4.9%, over the comparable period in
2002. Loan growth was slow for the first quarter of the year, but picked up
momentum during the second and third quarters. Loans, on average, increased
$27.5 million in the second quarter and $19.4 million in the third quarter.
Loan growth fell off during the fourth quarter primarily due to a decline in
the residential held-for-sale loan portfolio. Loans as a percent of average
earning assets increased to 81.1% for the year, compared to 80.7% for the
comparable period of 2002. Loan growth occurred in all loan categories
during the year with the exception of residential 1-4 family. The decline in
the residential 1-4 family was due to a decline in held-for-sale loans
resulting from a slow down in refinancing activity during the fourth quarter
of 2003. Management anticipates that the pace of loan refinancing will slow
in 2004 resulting in loan production producing greater net growth for the
total loan portfolio.
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.
Table 4
SOURCES OF EARNING ASSET GROWTH
(Average Balances - Dollars in Thousands)
Components
2002 to Percentage of Average Earning Assets
2003 of Total -------------------------
Change Change 2003 2002 2001
- --------------------------------------------------------------------------------------------
Loans:
Commercial, Financial
and Agricultural $16,100 23.6% 9.2% 8.6% 8.0%
Real Estate - Construction 7,996 11.7 5.5 5.3 5.3
Real Estate - Commercial Mortgage 57,250 84.0 23.4 20.7 17.6
Real Estate - Residential (35,386) (51.9) 29.1 32.6 32.8
Consumer 16,013 23.5 13.9 13.5 13.5
------- ----- ----- ----- -----
Total Loans 61,973 90.9 81.1 80.7 77.2
------- ----- ----- ----- -----
Securities:
Taxable (11,324) (16.6) 7.7 8.8 11.1
Tax-Exempt (7,528) (11.1) 3.8 4.4 5.1
------- ----- ----- ----- -----
Total Securities (18,852) (27.7) 11.5 13.2 16.2
------- ----- ----- ----- -----
Funds Sold 25,059 36.8 7.4 6.1 6.6
------- ----- ----- ----- -----
Total Earning Assets $68,180 100.0% 100.0% 100.0% 100.0%
------- ----- ----- ----- -----
The Company's average loan-to-deposit ratio increased to 92.1% in 2003 from
88.1% in 2002. This compares to an average loan-to-deposit ratio in 2001 of
82.1%. The higher average loan-to-deposit ratio in 2003 primarily reflects
higher loan growth.
Real estate loans, combined, represented 70.7% of total loans at December 31,
2003, versus 71.7% in 2002. This decline from the prior year reflects the
decline in 1-4 family residential loans discussed above. See the section
entitled "Risk Element Assets" for a discussion concerning loan
concentrations.
The composition of the Company's loan portfolio at December 31, for each of
the past five years is shown in Table 5. Table 6 arrays the Company's total
loan portfolio as of December 31, 2003, based upon maturities. As a percent
of the total portfolio, loans with fixed interest rates represent 32.5% as of
December 31, 2003, versus 32.9% at December 31, 2002.
29
Table 5
LOANS BY CATEGORY
As of December 31,
--------------------------------------------------------
(Dollars in Thousands) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------
Commercial, Financial and
Agricultural $ 160,048 $ 141,459 $ 128,480 $ 108,340 $ 98,894
Real Estate - Construction 89,149 91,110 72,778 84,133 62,166
Real Estate - Commercial
Mortgage 391,250 356,807 302,239 231,099 214,036
Real Estate - Residential 467,790 474,069 530,546 444,489 383,536
Consumer 233,395 221,776 209,308 183,771 169,854
---------- ---------- ---------- ---------- --------
Total Loans, Net of
Unearned Interest $1,341,632 $1,285,221 $1,243,351 $1,051,832 $928,486
========== ========== ========== ========== ========
Table 6
LOAN MATURITIES
Maturity Periods
----------------------------------
Over One Over
One Year Through Five
(Dollars in Thousands) or Less Five Years Years Total
- --------------------------------------------------------------------------------
Commercial, Financial and
Agricultural $ 66,448 $ 69,703 $ 23,896 $ 160,048
Real Estate 155,684 126,634 665,871 948,189
Consumer 61,872 141,386 30,138 233,395
-------- -------- -------- ----------
Total $284,004 $337,723 $719,905 $1,341,632
======== ======== ======== ==========
Loans with Fixed Rates $189,337 $222,813 $ 24,039 $ 436,189
Loans with Floating or
Adjustable Rates 94,667 114,910 695,866 905,443
-------- -------- -------- ----------
Total $284,004 $337,723 $719,905 $1,341,632
======== ======== ======== ==========
Demand loans and overdrafts are reported in the category of one year or less.
Allowance for Loan Losses
Management maintains the allowance for loan losses at a level sufficient to
provide for the estimated credit losses inherent in the loan portfolio as of
the balance sheet date. Credit losses arise from the borrowers' inability
and unwillingness to repay, and from other risks inherent in the lending
process including collateral risk, operations risk, concentration risk and
economic risk. As such, all related risks of lending are considered when
assessing the adequacy of the 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. Loans that have been identified as impaired are reviewed
for adequacy of collateral, with a specific reserve assigned to those loans
when necessary. Impaired loans are defined as those in which the full
collection of principal and interest in accordance with the contractual terms
is improbable. Impaired loans generally include those that are past due for
90 days or more and those classified as doubtful in accordance with the
Company's risk rating system. Loans classified as doubtful have a high
possibility of loss, but because of certain factors that may work to
strengthen the loan, its classification as a loss is deferred until a more
exact status may be determined. Not all loans are considered in the review
for impairment; only loans that are for business purposes exceeding $25,000
are considered. The evaluation is based on current financial condition of
the borrower or current payment status of the loan.
30
The method used to assign a specific reserve depends on whether repayment of
the loan is dependent on liquidation of collateral. If repayment is
dependent on the sale of collateral, the reserve is equivalent to the
recorded investment in the loan less the fair value of the collateral after
estimated sales expenses. If repayment is not dependent on the sale of
collateral, the reserve is equivalent to the recorded investment in the loan
less the estimated cash flows discounted using the loan's effective interest
rate. The discounted value of the cash flows is based on the anticipated
timing of the receipt of cash payments from the borrower.
The reserve allocations assigned to impaired loans are sensitive to the
extent market conditions or the actual timing of cash receipts change.
Once specific reserves have been assigned to impaired loans, general reserves
are assigned to the remaining portfolio. General reserves are assigned to
commercial purpose loans exceeding $100,000 that are not impaired, but that
have weaknesses requiring closer management attention. General reserves are
also assigned to commercial purpose loans exceeding $100,000 that do not
exhibit weaknesses requiring closer monitoring. Finally, general reserves
are assigned to large groups of smaller-balance homogenous loans, including
commercial purpose loans less than $100,000, consumer loans, credit card
loans and residential mortgage loans.
Large commercial purpose loans exhibiting specific weaknesses are detailed in
a monthly Problem Loan Report. These loans are divided into ten different
pools based on various risk characteristics and the underlying value of
collateral taken to secure specific loans within the pools. These classified
loans are monitored for changes in risk ratings that are assigned based on
the Bank's Asset Classification Policy, and for the ultimate disposition of
the loan. The ultimate disposition may include upgrades in risk ratings,
payoff of the loan, or charge-off of the loan. This migration analysis
results in a charge-off ratio by loan pool of classified loans that is
applied to the balance of the pool to determine general reserves for
specifically identified problem loans. This charge-off ratio is adjusted for
various environmental factors including past due and nonperforming trends in
the loan portfolio, the micro-and macro-economic outlook, and credit
administration practices as determined by independent parties.
General reserves are assigned to large commercial purpose loans exceeding
$100,000 that do not exhibit weaknesses and pools of smaller-balance
homogenous loans based on calculated overall charge-off ratios over the past
three years. The charge-off ratios applied are adjusted as detailed above,
with further consideration given to the highest charge-off experience of the
bank dating back to the recession of the late 1980s.
The allowance for loan losses is compared against the sum of the specific
reserves assigned to problem loans plus the general reserves assigned to
pools of loans that are not specific problem loans. Adjustments are made
when appropriate. A most likely reserve value is determined within the
computed range of required calculated reserve, with the actual allowance for
loan losses compared to the most likely reserve value. The unallocated
reserve is monitored on a regular basis and adjusted based on qualitative
factors. Table 7 analyzes the activity in the allowance over the past five
years.
31
Table 7
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------
Balance at Beginning of Year $12,495 $12,096 $10,564 $ 9,929 $9,827
Acquired Reserves - - 1,206 - -
Charge-Offs:
Commercial, Financial
and Agricultural 426 818 483 626 480
Real Estate - Construction - - - 7 -
Real Estate - Commercial Mortgage 91 - 32 - 354
Real Estate - Residential 228 175 159 168 251
Consumer 3,794 3,279 3,976 2,387 2,113
------- ------- ------- ------ ------
Total Charge-Offs 4,539 4,272 4,650 3,188 3,198
------- ------- ------- ------ ------
Recoveries:
Commercial, Financial
and Agricultural 142 136 44 52 142
Real Estate - Construction - - - 11 -
Real Estate - Commercial Mortgage - 20 65 73 84
Real Estate - Residential 18 37 116 54 11
Consumer 877 1,181 768 513 623
------- ------- ------- ------ ------
Total Recoveries 1,037 1,374 993 703 860
------- ------- ------- ------ ------
Net Charge-Offs 3,502 2,898 3,657 2,485 2,338
------- ------- ------- ------ ------
Provision for Loan Losses 3,436 3,297 3,983 3,120 2,440
------- ------- ------- ------ ------
Balance at End of Year $12,429 $12,495 $12,096 $10,564 $9,929
======= ======= ======= ====== ======
Ratio of Net Charge-Offs
to Average Loans Outstanding .27% .23% .31% .25% .26%
======= ======= ======= ====== ======
Allowance for Loan Losses as a
Percent of Loans at End of Year .93% .97% .97% 1.00% 1.07%
======= ======= ======= ====== ======
Allowance for Loan Losses as a
Multiple of Net Charge-Offs 3.55x 4.31x 3.31x 4.25x 4.25x
======= ======= ======= ====== ======
The allowance for loan losses at December 31, 2003 of $12.4 million compares
to $12.5 million at year-end 2002. The allowance as a percent of total loans
was 0.93% in 2003 and 0.97% in 2002. The allowance for loan losses as a
percentage of loans reflects management's current estimation of the credit
quality of the Company's loan portfolio. While there can be no assurance
that the Company will not sustain loan losses in a particular period that are
substantial in relation to the size of the allowance, management's assessment
of the loan portfolio does not indicate a likelihood of this occurrence. It
is management's opinion that the allowance at December 31, 2003 is adequate
to absorb losses inherent in the loan portfolio at year-end.
Table 8 provides an allocation of the allowance for loan losses to specific
loan types for each of the past five years. The reserve allocations, as
calculated using the above methodology, are assigned to specific loan
categories corresponding to the type represented within the components
discussed. The greatest losses experienced by the Company have occurred in
the consumer loan portfolio, including credit cards. As such, the greatest
amount of the allowance is allocated to consumer loans despite its relatively
small balance. Management is constantly reviewing the delivery, underwriting
and collection of these products to reduce loan losses.
32
Risk Element Assets
Risk element assets consist of nonaccrual loans, renegotiated loans, other
real estate, loans past due 90 days or more, potential problem loans and loan
concentrations. Table 9 depicts certain categories of the Company's risk
element assets as of December 31 for each of the last five years. Potential
problem loans and loan concentrations are discussed within the narrative
portion of this section.
The Company's nonperforming loans decreased $164,000, or 6.6% from a level of
$2.5 million at December 31, 2002, to $2.3 million at December 31, 2003.
During 2003 loans totaling approximately $9.0 million were added, while loans
totaling $9.2 million were removed from nonaccruing status. A single loan of
$3.7 million was both added and removed during the year. Of the $9.2 million
removed, $1.5 million consisted of principal reductions and loan payoffs,
$5.1 million represented loans transferred to other real estate, $2.4 million
consisted of loans brought current and returned to an accrual status, and
$165,000 was charged off. Where appropriate, management has allocated
specific reserves to absorb anticipated losses. The majority (83%) of the
Company's charge-offs in 2003 were in the consumer portfolio where loans are
charged off based on past due status and are not recorded as nonaccruing
loans.
All nonaccrual loans exceeding $25,000 not secured by 1-4 family residential
properties are reviewed quarterly for impairment. A loan is considered
impaired when it is probable that all principal and interest will not be
collected according to the contractual terms. When a loan is considered
impaired, it is reviewed for exposure to credit loss. If credit loss is
probable, a specific reserve is allocated to absorb the anticipated loss.
The Company had $1.3 million in loans considered impaired at December 31,
2003. The anticipated loss in those impaired loans is only $178,000.
33
Table 8
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Allow- Category Allow- Category Allow- Category Allow- Category Allow- Category
ance To Total ance To Total ance To Total ance To Total ance To Total
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------------------
Commercial, Financial
and Agricultural $ 2,824 11.9% $ 2,740 11.0% $ 3,257 10.3% $ 1,423 10.3% $1,873 10.7%
Real Estate:
Construction 313 6.6 348 7.1 600 5.9 424 8.0 477 6.7
Commercial Mortgage 2,831 29.2 2,559 27.8 3,098 24.3 3,157 22.0 3,228 23.0
Residential 853 34.9 1,021 36.9 947 42.7 922 42.3 573 41.3
Consumer 4,169 17.4 4,210 17.2 4,194 16.8 3,423 17.4 3,327 18.3
Not Allocated 1,439 - 1,617 - - - 1,215 - 451 -
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Total $12,429 100.0% $12,495 100.0% $12,096 100.0% $10,564 100.0% $9,929 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ====== =====
34
Table 9
RISK ELEMENT ASSETS
As of December 31,
-----------------------------------------------
(Dollars in Thousands) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------
Nonaccruing Loans $ 2,346 $ 2,510 $ 2,414 $ 2,919 $ 2,965
Restructured - - 20 19 26
------- ------- ------- ------- -------
Total Nonperforming Loans 2,346 2,510 2,434 2,938 2,991
Other Real Estate 4,955 1,333 1,506 971 934
------- ------- ------- ------- -------
Total Nonperforming Assets $ 7,301 $ 3,843 $ 3,940 $ 3,909 $ 3,925
======= ======= ======= ======= =======
Past Due 90 Days or More $ 328 $ 2,453 $ 1,065 $ 1,102 $ 781
======= ======= ======= ======= =======
Nonperforming Loans/Loans .17% .20% .20% .28% .32%
======= ======= ======= ======= =======
Nonperforming Assets/Loans
Plus Other Real Estate .54% .30% .32% .37% .42%
======= ======= ======= ======= =======
Nonperforming Assets/Capital 3.39% 1.93% 2.14% 2.47% 2.76%
======= ======= ======= ======= =======
Reserve/Nonperforming Loans 529.80% 497.72% 496.96% 359.57% 331.96%
======= ======= ======= ======= =======
For computation of this percentage, "capital" refers to shareowners' equity
plus the allowance for loan losses.
Interest on nonaccrual loans is generally recognized only when received.
Cash collected on nonaccrual loans is applied against the principal balance
or recognized as interest income based upon management's expectations as to
the ultimate collectibility of principal and interest in full. If interest
on nonaccruing loans had been recognized on a fully accruing basis, interest
income recorded would have been $166,000 higher for the year ended December
31, 2003.
Other real estate totaled $5.0 million at December 31, 2003, versus $1.3
million at December 31, 2002. This category includes property owned by
Capital City Bank that was acquired either through foreclosure procedures or
by receiving a deed in lieu of foreclosure. During 2003, the Company added
properties totaling $5.4 million, and partially or completely liquidated
properties totaling $1.7 million, resulting in a net increase in other real
estate of approximately $3.7 million. The majority of the increase is the
result of foreclosing on a large commercial building in December. The amount
of the loan was $3.9 million. The building was under contract at year-end,
and was subsequently sold with no loss of principal.
Potential problem loans are defined as those loans which are now current but
where management has doubt as to the borrower's ability to comply with
present loan repayment terms. Potential problem loans totaled $3.5 million
at December 31, 2003.
Loans past due 90 days or more totaled $328,000 at year-end, down from $2.4
million from the previous year. This is primarily the result of the payoff
of one loan, and one other loan being brought current.
Loan concentrations are considered to exist when there are amounts loaned to
a multiple number of borrowers engaged in similar activities which cause them
to be similarly impacted by economic or other conditions and such amount
exceeds 10% of total loans. Due to the lack of diversified industry within
the markets served by the Bank and the relatively close proximity of the
markets, the Company has both geographic concentrations as well as
concentrations in the types of loans funded. Specifically, due to the nature
of the Company's markets, a significant portion of the portfolio has
historically been secured with real estate.
While the Company has a majority of its loans secured by real estate, the
primary type of real estate collateral is 1-4 family residential properties.
At December 31, 2003, approximately 70.7% of the portfolio consisted of real
estate loans. Residential properties comprise approximately 49.3% of the
real estate portfolio.
35
The real estate portfolio, while subject to cyclical pressures, is not
typically speculative in nature and is originated at amounts that are within
or below regulatory guidelines for collateral values. Management anticipates
no significant reduction in the percentage of real estate loans to total
loans outstanding.
Management is continually analyzing its loan portfolio in an effort to
identify and resolve its problem assets as quickly and efficiently as
possible. As of December 31, 2003, management believes it has identified and
adequately reserved for such problem assets. However, management recognizes
that many factors can adversely impact various segments of its markets,
creating financial difficulties for certain borrowers. As such, management
continues to focus its attention on promptly identifying and providing for
potential losses as they arise.
Investment Securities
In 2003, the Company's average investment portfolio decreased $18.9 million,
or 9.2%, from 2002 and $44.5 million, or 17.8%, from 2002 compared to 2001.
As a percentage of average earning assets, the investment portfolio
represented 11.4% in 2003, compared to 13.2% in 2002. In both years, the
decline in the portfolio was attributable to the maturities of investment
securities in most categories,, which in anticipation of future loan growth,
were not replaced during the period. In 2004, the Company will closely
monitor liquidity levels to determine if the Company should purchase
additional investments.
In 2003, average taxable investments decreased $11.3 million, or 8.3%, while
tax-exempt investments decreased $7.5 million, or 10.9%. Although the Tax
Reform Act of 1986 significantly reduced the tax benefits associated with
tax-exempt securities, management will continue to purchase "bank qualified"
municipal issues when it considers the yield to be attractive and the Company
can do so without adversely impacting its tax position. As of December 31,
2003, the Company may purchase additional tax-exempt securities without
adverse tax consequences.
The investment portfolio is a significant component of the Company's
operations and, as such, it functions as a key element of liquidity and
asset/liability management. As of December 31, 2003, all securities are
classified as available-for-sale. Classifying securities as available-for-
sale offers management full flexibility in managing its liquidity and
interest rate sensitivity without adversely impacting its regulatory capital
levels. Securities in the available-for-sale portfolio are recorded at fair
value with unrealized gains and losses associated with these securities
recorded, net of tax, in the accumulated other comprehensive income (loss)
component of shareowners' equity. At December 31, 2003, shareowners' equity
included a net unrealized gain of $1.4 million, compared to a gain of $3.1
million at December 31, 2002. It is neither management's intent nor practice
to participate in the trading of investment securities for the purpose of
recognizing gains and therefore the Company does not maintain a trading
portfolio.
The average maturity of the total portfolio at December 31, 2003 and 2002,
was 0.90 and 1.32 years, respectively. See Table 10 for a breakdown of
maturities by portfolio.
The weighted average taxable equivalent yield of the investment portfolio at
December 31, 2003 was 2.69%, versus 4.98% in 2002. The quality of the
municipal portfolio at such date is depicted on page 38. There were no
investments in obligations, other than U.S. Governments, of any one state,
municipality, political subdivision or any other issuer that exceeded 10% of
the Company's shareowners' equity at December 31, 2003.
Table 10 and Note 3 in the Notes to Consolidated Financial Statements present
a detailed analysis of the Company's investment securities as to type,
maturity and yield.
36
Table 10
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
As of December 31,
------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Amortized Market Average Amortized Market Average Amortized Market Average
(Dollars in Thousands) Cost Value Yield Cost Value Yield Cost Value Yield
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENTS
Due in 1 year or less $ 82,654 $ 82,749 1.26% $ 27,037 $ 27,651 4.57% $ 15,307 $ 15,582 5.24%
Due over 1 year through 5 years 22,706 22,848 2.04 34,476 34,751 3.09 25,996 26,797 5.25
Due over 5 years through 10 years - - - - - - - - -
Due over 10 years - - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 105,360 105,597 1.43 61,513 62,402 3.74 41,303 42,379 5.25
STATE & POLITICAL SUBDIVISIONS
Due in 1 year or less 19,018 19,205 4.18 5,193 5,251 5.48 9,227 9,312 6.56
Due over 1 year through 5 years 36,046 37,337 4.47 56,724 59,264 5.96 60,149 61,236 6.00
Due over 5 years through 10 years 577 610 4.36 928 960 6.41 1,336 1,329 6.32
Due over 10 years - - - - - - 193 188 6.53
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 55,641 57,152 4.37 62,845 65,475 5.93 70,905 72,065 6.08
MORTGAGE-BACKED SECURITIES
Due in 1 year or less 356 361 5.12 10,593 10,707 4.66 6,707 6,785 5.29
Due over 1 year through 5 years 11,167 11,586 5.29 24,048 25,112 5.61 56,803 57,599 5.71
Due over 5 years through 10 years 95 98 3.26 109 111 4.27 872 864 5.89
Due over 10 years - - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 11,618 12,045 5.27 34,750 35,930 5.31 64,382 65,248 5.67
OTHER SECURITIES
Due in 1 year or less 1,003 1,016 6.18 8,515 8,693 5.42 22,284 22,646 5.60
Due over 1 year through 5 years - - - 1,016 1,065 6.18 9,619 9,880 5.53
Due over 5 years through 10 years 2 2 - 127 127 - - - -
Due over 10 years 5,922 5,922 3.89 6,623 6,623 5.12 6,871 6,855 6.11
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 6,927 6,940 4.22 16,281 16,508 5.34 38,774 39,381 5.67
TOTAL INVESTMENT SECURITIES $179,546 $181,734 2.69% $175,389 $180,315 4.98% $215,364 $219,073 5.72%
======== ======== ==== ======== ======== ==== ======== ======== ====
Weighted average yields are calculated on the basis of the amortized cost of the security. The weighted average
yields on tax-exempt obligations are computed on a taxable equivalent basis using a 35% tax rate.
Based on weighted average life.
Federal Home Loan Bank Stock and Federal Reserve Bank Stock are included in this category for weighted average
yield, but do not have stated maturities.
37
AVERAGE MATURITY (In Years)
AS OF DECEMBER 31,
2003 2002 2001
- -------------------------------------------------------------------
U.S. Governments .73 .75 1.16
State and Political Subdivisions 1.23 1.99 2.69
Mortgage-Backed Securities 1.56 1.60 2.41
Other Securities .30 .75 .89
TOTAL .90 1.32 2.02
MUNICIPAL PORTFOLIO QUALITY
(Dollars in Thousands)
Moody's Rating Amortized Cost Percentage
- ----------------------------------------------
AAA $36,854 66.2%
AA-1 2,977 5.4
AA-2 1,057 1.9
AA-3 1,881 3.4
AA 80 .1
A-1 374 .7
A-2 734 1.3
Not Rated 11,684 21.0
------- -----
Total $55,641 100.0%
======= =====
All of the securities not rated by Moody's are rated "A"
or higher by S&P.
Deposits and Funds Purchased
Average total deposits of $1.4 billion in 2003 increased $6.8 million, or
0.5% from the prior year. Growth of nonmaturity deposits created a favorable
shift in deposit mix and a positive impact on the Bank's cost of funds. This
was partially offset by the continued decline in certificates of deposit.
Average certificates of deposit as a percent of average total deposits have
declined from 34.7% in 2002 to 30.2% in 2003. This was primarily a result of
increased competition and the relative low level of interest rates.
Table 2 provides an analysis of the Company's average deposits, by category,
and average rates paid thereon for each of the last three years. Table 11
reflects the shift in the Company's deposit mix over the last three years and
Table 12 provides a maturity distribution of time deposits in denominations
of $100,000 and over.
Average short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase, Federal Home Loan Bank
advances, and other borrowings, increased $28.7 million, or 39.5%. The
increase is primarily attributable to the reclassification of two Federal
Home Loan Bank advances totaling $40 million from long-term debt. See Note 9
in the Notes to Consolidated Financial Statements for further information.
Table 11
SOURCES OF DEPOSIT GROWTH
(Average Balances - Dollars in Thousands)
2002 to Percentage Components of Total Deposits
2003 of Total ----------------------------
Change Change 2003 2002 2001
- --------------------------------------------------------------------------------
Noninterest Bearing
Deposits $49,111 721.2% 28.6% 25.3% 21.2%
NOW Accounts 22,286 327.3 18.4 17.0 14.9
Money Market Accounts (8,678) (127.4) 15.1 15.7 14.5
Savings 4,870 71.5 7.7 7.4 7.5
Time Deposits (60,780) (892.6) 30.2 34.7 41.9
------- ----- ----- ----- -----
Total Deposits $ 6,809 100.0% 100.0% 100.0% 100.0%
38
Table 12
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR OVER
December 31, 2003
----------------------------------------
(Dollars in Thousands) Time Certificates of Deposit Percent
- ------------------------------------------------------------------------
Three months or less $ 44,033 41.1%
Over three through six months 20,318 19.0
Over six through twelve months 20,220 18.9
Over twelve months 22,610 21.0
-------- -----
Total $107,181 100.0%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity for a banking institution is the availability of funds to meet
increased loan demand and/or excessive deposit withdrawals. Management
monitors the Company's financial position in an effort to ensure the Company
has ready access to sufficient liquid funds to meet normal transaction
requirements, can take advantage of investment opportunities and cover
unforeseen liquidity demands. In addition to core deposit growth, sources of
funds available to meet liquidity demands include cash received through
ordinary business activities (e.g., collection of interest and fees), federal
funds sold, loan and investment maturities, 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 ended 2003 with approximately $125 million in liquidity, a
decline of approximately $45 million from the previous year-end. The decline
was primarily the result of loan growth. The Company intends to use
approximately $26.1 million of cash to acquire Quincy State Bank, which may
decrease liquidity in the first quarter of 2004. Management expects to use a
mixture of debt and stock to fund future acquisition opportunities.
As of December 31, 2003, the Company had a $25.0 million credit facility
under which all the funds were currently available. The facility offers the
Company an unsecured, revolving line of credit that matures in May 2004 at
which time renewal terms will be negotiated. Upon expiration of the
revolving line of credit, the outstanding balance may be converted to a term
loan and repaid over a period of seven years. The term loan is to be secured
by stock of the subsidiary bank equal to at least 125% of the principal
balance of the term loan. The Company, at its option, may select from
various loan rates including Prime, LIBOR or the lenders' Cost of Funds rate
("COF"), plus or minus increments thereof. The LIBOR or COF rates may be
fixed for a period of up to six months. The Company also has the option to
select fixed rates for periods of one through five years. As of December 31,
2003, the Company did not have any debt outstanding on the line of credit.
The Company's credit facility imposes certain limitations on the level of the
Company's equity capital, and federal and state regulatory agencies have
established regulations which govern the payment of dividends to a bank
holding company by its bank subsidiaries. As of year-end 2003, the Company
was in compliance with all of these contractual and/or regulatory
requirements. A further discussion of the Company's credit facility can be
found in Note 10 in the Notes to Consolidated Financial Statements.
At December 31, 2003, the Company had $46.5 million in long-term debt
outstanding to the Federal Home Loan Bank of Atlanta. The debt consists of
29 loans. The interest rates are fixed and the weighted average rate at
December 31, 2003 was 4.27%. Required annual principal reductions approximate
$1.5 million, with the remaining balances due at maturity ranging from 2005
to 2023. During 2003, the Company reclassified $40 million, consisting of
two advances from the Federal Home
39
Loan Bank of Atlanta, from long-term to short-term debt. Additions to long-
term debt consists of approximately $16 million used to match-fund longer-
term, fixed rate loan products, which management elected not to fund
internally due to asset/liability management considerations. The debt is
secured by 1-4 family residential mortgage loans. See Note 10 in the Notes
to Consolidated Financial Statements for additional information as to the
Company's long-term debt.
It is anticipated that capital expenditures will approximate $5 million over
the next twelve months. These capital expenditures are expected to consist
primarily of several new offices in existing markets, office equipment and
furniture, and technology purchases. Management believes these capital
expenditures can be funded internally without impairing the Company's ability
to meet its on-going obligations.
Table 13
Table 13 sets forth certain information about contractual cash obligations at
December 31, 2003.
Payments Due By Period
----------------------------------------------------------
1 Year 1 - 3 4 - 5 After
(Dollars in Thousands) or Less Years Years 5 Years Total
- ---------------------------------------------------------------------------------
Long-Term Debt
Obligations $1,878 $19,790 $5,942 $18,865 $46,475
Operating Lease
Obligations 1,107 2,757 1,937 1,009 6,810
------ ------- ------ ------- -------
Total Contractual
Cash Obligations $2,985 $22,547 $7,879 $19,874 $53,285
====== ======= ====== ======= =======
Capital
The Company continues to maintain a strong capital position. The ratio of
shareowners' equity to total assets at year-end was 10.98%, 10.22% and 9.43%,
in 2003, 2002 and 2001, respectively.
The Company is subject to risk-based capital guidelines that measure capital
relative to risk weighted assets and off-balance sheet financial instruments.
Capital guidelines issued by the Federal Reserve Board require bank holding
companies to have a minimum total risk-based capital ratio of 8.00%, with at
least half of the total capital in the form of Tier 1 capital. As of
December 31, 2003, the Company exceeded these capital guidelines with a total
risk-based capital ratio of 13.79% and a Tier 1 ratio of 12.88%, compared to
13.00% and 12.03%, respectively, in 2002.
In addition, a tangible leverage ratio is now being used in connection with
the risk-based capital standards and is defined as Tier 1 capital divided by
average assets. The minimum leverage ratio under this standard is 3% for the
highest-rated bank holding companies which are not undertaking significant
expansion programs. An additional 1% to 2% may be required for other
companies, depending upon their regulatory ratings and expansion plans. On
December 31, 2003, the Company had a leverage ratio of 9.51% compared to
8.46% in 2002. See Note 14 in the Notes to Consolidated Financial Statements
for additional information as to the Company's capital adequacy.
40
Shareowners' equity as of December 31, for each of the last three years is
presented below:
Shareowners' Equity
(Dollars in Thousands)
2003 2002 2001
- ------------------------------------------------------------------------
Common Stock $ 132 $ 132 $ 132
Additional Paid-in Capital 16,157 14,691 17,152
Retained Earnings 185,134 168,587 152,149
-------- -------- --------
Subtotal 201,423 183,410 169,433
-------- -------- --------
Accumulated Other Comprehensive
Income, Net of Tax 1,386 3,121 2,350
-------- -------- --------
Total Shareowners' Equity $202,809 $186,531 $171,783
======== ======== ========
At December 31, 2003, the Company's common stock had a book value of $15.27
per diluted share compared to $14.08 in 2002. Beginning in 1994, book value
has been impacted by the net unrealized gains and losses on investment
securities available-for-sale. At December 31, 2003, the net unrealized gain
was $1.4 million compared to a net unrealized gain in 2002 of $3.1 million.
The decrease in unrealized gain is a result of changes in the portfolio due
to securities which have matured or been called and a slight increase in
interest rates.
On March 30, 2000, the Company's Board of Directors authorized the repurchase
of up to 625,000 shares of its outstanding common stock. The purchases are
made in the open market or in privately negotiated transactions. The Company
acquired 155,775 shares during 2002 and 267,500 shares during 2001. On
January 24, 2002, the Company's Board of Directors authorized the repurchase
of an additional 312,500 shares of its outstanding common stock. From March
30, 2000 through February 27, 2004, the Company repurchased 572,707 shares at
an average purchase price of $19.18 per share.
The Company offers an Associate Incentive Plan under which certain associates
are eligible to earn shares of CCBG stock based upon achieving established
performance goals. In 2003, the Company issued 10,596 shares, valued at
approximately $332,000 under this plan.
The Company also offers stock purchase plans, whereby employees and directors
may purchase shares at a 10% discount. In 2003, 30,095 shares, valued at
approximately $904,000, were issued under these plans.
Dividends
Adequate capital and financial strength is paramount to the stability of the
Company and its subsidiary bank. Cash dividends declared and paid should not
place unnecessary strain on the Company's capital levels. When determining
the level of dividends the following factors are considered:
* Compliance with state and federal laws and regulations;
* The Company's capital position and its ability to meet its financial
obligations;
* Projected earnings and asset levels; and
* The ability of the Bank and CCBG to fund dividends.
Although a consistent dividend payment is believed to be favorably viewed by
the financial markets and shareowners, the Board of Directors will declare
dividends only if the Company is considered to have adequate capital. Future
capital requirements and corporate plans are considered when the Board
considers a dividend payment.
41
Dividends declared and paid totaled $.656 per share in 2003. During the
second quarter of 2003 the Company declared a dividend of $.170 per share, an
increase of 25.0% from $.136 per share paid in the first quarter. The
dividend was raised 6.0% in the fourth quarter of 2003 from $.170 per share
to $.180 per share. The Company declared dividends of $.502 per share in
2002 and $.476 per share in 2001. The dividend payout ratio was 34.51%,
28.87% and 37.48% for 2003, 2002 and 2001, respectively. Total cash
dividends declared per share in 2003 represented a 30.7% increase over 2002.
All share and per share data has been adjusted to reflect the five-for-four
stock dividend paid on June 13, 2003.
Legal Developments
Prior to 2002, the Bank maintained relationships with a small number of
Independent Service Organizations ("ISO"s) 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 two lawsuits brought against the ISO by
merchants. Management does not believe that the ultimate resolution of these
lawsuits 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not currently engage in the use of derivative instruments to
hedge interest rate risks. However, the Company is a party to financial
instruments with off-balance sheet risks in the normal course of business to
meet the financing needs of its customers.
At December 31, 2003, the Company had $290.3 million in commitments to extend
credit and $6.3 million in standby letters of credit. Commitments to extend
credit are agreements to lend to a customer so long as there is no violation
of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. The Company uses the same credit policies in establishing commitments
and issuing letters of credit as it does for on-balance sheet instruments.
If commitments arising from these financial instruments continue to require
funding at historical levels, management does not anticipate that such
funding will adversely impact its ability to meet on-going obligations. In
the event these
commitments require funding in excess of historical levels, management
believes current liquidity, available lines of credit from the Federal Home
Loan Bank, investment security maturities and the Company's $25.0 million
credit facility provide a sufficient source of funds to meet these
commitments.
ACCOUNTING POLICIES
Critical Accounting Policies
The consolidated financial statements and accompanying Notes to Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require the Company
to make various estimates and assumptions (see Note 1 in the Notes to
Consolidated Financial Statements). The Company believes that, of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.
42
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.
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. The Company has determined that no impairment
existed at December 31, 2003. 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 7-10 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.
Pension Assumptions: The Company has a trusteed defined benefit pension plan
for the benefit of substantially all employees of the Company and its
subsidiary. The Company's funding policy with respect to the pension plan is
to contribute amounts to the plan sufficient to meet minimum funding
requirements as set by law. Pension expense, reflected in the Consolidated
Statements of Income in noninterest expense as "Salaries and Associate
Benefits", is determined by an external actuarial valuation based on
assumptions that are evaluated annually as of December 31, the measurement
date for the pension obligation. The Consolidated Balance Sheets reflect a
prepaid pension benefit cost due to funding levels and unrecognized actuarial
amounts. The most significant assumptions used in calculating the pension
obligation are the weighted-average discount rate used to determine the
present value of the pension obligation, the weighted-average expected long-
term rate of return on plan assets, and the assumed rate of annual
compensation increases. These assumptions are re-evaluated annually with the
external actuaries, taking into consideration both current market conditions
and anticipated long-term market conditions.
The weighted-average discount rate is determined by matching anticipated
Retirement Plan cash flows for a 30-year period to long-term corporate Aa-
rated bonds and solving for the underlying rate of return which investing in
such securities would generate. This methodology is applied consistently
from year-to-year. The discount rate utilized in 2003 was 6.75%. The
estimated impact to 2003 pension expense of a 25 basis point increase or
decrease in the discount rate would have been a decrease of approximately
$175,000 and an increase of approximately $185,000, respectively. The
discount rate to be used in 2004 will be 6.25%.
The weighted-average expected long-term rate of return on plan assets is
determined based on the current and anticipated future mix of assets in the
plan. The assets currently consist of equity securities, U.S. Government and
Government agency debt securities, and other securities (typically temporary
liquid funds awaiting
43
investment). The weighted-average expected long-term rate of return on plan
assets utilized in 2003 was 8.25%. The estimated impact to pension expense of
a 25 basis point increase or decrease in the rate of return would have been
an approximate $66,000 decrease or increase, respectively. The rate of return
on plan assets for 2004 will be 8.0%.
The assumed rate of annual compensation increases (5.50% in 2003) is based on
expected trends in salaries and the employee base. This assumption is not
expected to change materially in 2004.
Detailed information on the pension plan, the actuarially determined
disclosures, and the assumptions used are provided in Note 12 of the Notes to
Consolidated Financial Statements.
Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46 ("FIN46") (revised
December 2003 ("FIN46R")), "Consolidation of Variable Interest Entities,"
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN46R replaces FIN46,
which was issued in January 2003. FIN46R applies immediately to a variable
interest entity created after January 31, 2003 and as of the first interim
period ending after March 15, 2004 to those variable interest entities
created before February 1, 2003 and not already consolidated under FIN46 in
previously issued financial statements. The Company does not hold any
interest in variable interest entities that would require accounting
treatment prescribed by this pronouncement.
In May 2003, the FASB issued SFAS No. 150 ("SFAS 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS 150 modifies 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. SFAS 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.
In November 2002, the FASB issued Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which addresses the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. The Interpretation also
requires the recognition of a liability by a guarantor at the inception of
certain guarantees.
FIN45 requires the guarantor to recognize a liability for the non-contingent
component of the guarantee; this is the obligation to stand ready to perform
in the event that specified triggering events or conditions occur. The
initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even it is not
probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements. The Company has adopted the disclosure requirements of
FIN45 and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. To date, the
Company has not entered into or modified any guarantees pursuant to the
provisions of FIN45.
In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" ("SFAS 147"). SFAS 147
removes financial institutions (with the exception of combinations of mutual
enterprises) from the scope of both SFAS No. 72 ("SFAS 72"), "Accounting for
Certain Acquisitions of
44
Banking or Thrift Institutions" and FASB Interpretation No. 9, applying APB
Opinions No. 16 and 17, "When a Savings and Loan Association or a Similar
Institution is Acquired in a Business Combination Accounted for by the
Purchase Method" and requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." As a result, the requirement under
SFAS 72 to recognize (and subsequently amortize) any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of SFAS 147. In addition, SFAS 147
amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. The adoption of
SFAS 147 has not had a material impact on the reported results of operations
of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Overview
Market risk management arises from changes in interest rates, exchange rates,
commodity prices, and equity prices. The Company has risk management
policies to monitor and limit exposure to market risk and does not
participate in activities that give rise to significant market risk involving
exchange rates, commodity prices, or equity prices. In asset and liability
management activities, policies are in place that are designed to minimize
structural interest rate risk.
Interest Rate Risk Management
The normal course of business activity exposes CCBG to interest rate risk.
Fluctuations in interest rates may result in changes in the fair market value
of the Company's financial instruments, cash flows and net interest income.
The Company seeks to avoid fluctuations in its net interest margin and to
maximize net interest income within acceptable levels of risk through periods
of changing interest rates. Accordingly, the Company's interest rate
sensitivity and liquidity are monitored on an ongoing basis by its Asset and
Liability Committee ("ALCO"), which oversees market risk management and
establishes risk measures, limits and policy guidelines for managing the
amount of interest rate risk and its effects on net interest income and
capital. A variety of measures are used to provide for a comprehensive view
of the magnitude of interest rate risk, the distribution of risk, the level
of risk over time and the exposure to changes in certain interest rate
relationships.
ALCO continuously monitors and manages the balance between interest rate-
sensitive assets and liabilities. ALCO's objective is to manage the impact
of fluctuating market rates on net interest income within acceptable levels.
In order to meet this objective, management may adjust the rates charged/paid
on loans/deposits or may shorten/lengthen the duration of assets or
liabilities within the parameters set by ALCO.
The financial assets and liabilities of the Company are classified as other-
than-trading. An analysis of the other-than-trading financial components,
including the fair values, are presented in Table 14. This table presents
the Company's consolidated interest rate sensitivity position as of year-end
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 14 may not necessarily be
indicative of the Company's interest rate sensitivity over an extended period
of time.
45
The Company expects rising rates to have a favorable impact on the net
interest margin, subject to the magnitude and timeframe over which the rate
changes occur. However, as general interest rates rise or fall, other
factors such as current market conditions and competition may impact how the
Company responds to changing rates and thus impact the magnitude of change in
net interest income. Nonmaturity deposits offer management greater
discretion as to the direction, timing, and magnitude of interest rate
changes and can have a material impact on the Company's interest rate
sensitivity. In addition, the relative level of interest rates as compared
to the current yields/rates of existing assets/liabilities can impact both
the direction and magnitude of the change in net interest margin as rates
rise and fall from one period to the next.
Inflation
The impact of inflation on the banking industry differs significantly from
that of other industries in which a large portion of total resources are
invested in fixed assets such as property, plant and equipment.
Assets and liabilities of financial institutions are virtually all monetary in
nature, and therefore are primarily impacted by interest rates rather than
changing prices. While the general level of inflation underlies most interest
rates, interest rates react more to changes in the expected rate of inflation
and to changes in monetary and fiscal policy. Net interest income and the
interest rate spread are good measures of the Company's ability to react to
changing interest rates and are discussed in further detail in the section
entitled "Earnings Analysis."
46
Table 14
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS
Other Than Trading Portfolio
Maturing or Repricing in:
---------------------------------------------------------------------------------- Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- ----------------------------------------------------------------------------------------------------------------------------------
Loans:
Fixed Rate $ 189,937 $109,418 $ 66,709 $28,405 $18,281 $24,039 $ 436,189 $ 443,801
Average Interest Rate 7.28% 7.55% 7.29% 7.64% 7.26% 6.70% 7.34%
Floating Rate 561,911 134,646 168,809 18,042 6,163 15,872 905,443 921,740
Average Interest Rate 5.61% 6.80% 6.47% 7.37% 7.24% 6.97% 5.78%
Investment Securities:
Fixed Rate 111,775 48,948 7,935 2,016 1,409 8,104 180,187 181,719
Average Interest Rate 2.00% 3.20% 4.75% 4.98% 5.54% 4.24% 2.55%
Floating Rate 1,547 - - - - - 1,547 15
Average Interest Rate 4.15% - - - - - 4.15%
Other Earning Assets:
Floating Rate 125,452 - - - - - 125,452 125,452
Average Interest Rate 0.92% - - - - - 0.92%
Total Financial Assets $ 990,022 $293,012 $243,453 $48,463 $25,853 $48,015 $1,648,818 $1,672,727
Average Interest Rate 4.91% 6.48% 6.64% 7.43% 7.16% 6.89% 5.47%
Deposits:
Fixed Rate $ 327,213 $ 64,891 $ 22,590 $ 8,466 $ 1,815 $ 6 $ 424,981 $ 426,406
Average Interest Rate 1.69% 2.79% 3.16% 3.60% 2.92% 4.85% 1.98%
Floating Rate 595,001 - - - - - 595,001 595,001
Average Interest Rate 0.27% - - - - - 0.27%
Other Interest Bearing Liabilities:
Fixed Rate Debt 2,886 18,123 2,619 2,713 2,772 17,344 46,475 47,078
Average Interest Rate 4.80% 3.32% 4.58% 4.60% 4.60% 4.92% 4.23%
Floating Rate Debt 108,184 - - - - - 108,184 108,184
Average Interest Rate 0.96% - - - - - 0.96%
Total Financial Liabilities $1,033,284 $ 83,014 $ 25,209 $11,197 $ 4,587 $17,350 $1,174,641 $1,176,669
Average Interest Rate 1.04% 2.90% 3.31% 3.85% 3.94% 4.92% 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. Time deposit balances are classified according to maturity.
47
Item 8. Financial Statements and Supplementary Data
Table 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
2003 2002
---------------------------------------------- ----------------------------------------------
Fourth Third Second First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 24,113 $ 24,803 $ 25,234 $ 25,337 $ 26,052 $ 26,403 $ 26,599 $ 27,041
Interest Expense 3,339 3,506 3,894 4,100 4,667 4,946 5,693 7,197
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 20,774 21,297 21,340 21,237 21,385 21,457 20,906 19,844
Provision for
Loan Losses 850 921 886 779 863 991 641 802
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 19,924 20,376 20,454 20,458 20,522 20,466 20,265 19,042
Noninterest Income 10,614 10,952 10,428 9,945 10,898 8,810 8,334 8,061
Conversion/
Merger Expense - - - - 59 - 39 114
Noninterest Expense 21,684 21,503 20,753 20,438 20,971 20,249 20,075 19,118
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 8,854 9,825 10,129 9,965 10,390 9,027 8,485 7,871
Provision for
Income Taxes 2,758 3,529 3,689 3,604 3,668 3,226 3,037 2,760
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 6,096 $ 6,296 $ 6,440 $ 6,361 $ 6,722 $ 5,801 $ 5,448 $ 5,111
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 21,111 $ 21,650 $ 21,693 $ 21,607 $ 21,786 $ 21,873 $ 21,332 $ 20,284
Per Common Share:
Net Income Basic $ .47 $ .47 $ .49 $ .48 $ .51 $ .44 $ .41 $ .39
Net Income Diluted .46 .47 .49 .48 .51 .44 .41 .38
Dividends Declared .1800 .1700 .1700 .1360 .1360 .1220 .1220 .1220
Diluted Book Value 15.27 15.00 14.73 14.42 14.08 13.75 13.39 13.10
Market Price:
High 46.83 40.93 36.43 32.32 32.04 29.55 27.84 22.00
Low 36.62 35.00 29.74 26.81 22.26 22.32 20.60 18.12
Close 45.99 38.16 36.08 31.29 31.35 26.45 27.62 21.60
Selected Average
Balances:
Loans $1,329,673 $1,336,139 $1,316,705 $1,289,161 $1,292,892 $1,266,591 $1,234,787 $1,229,344
Earning Assets 1,636,269 1,634,689 1,612,133 1,615,287 1,591,535 1,511,485 1,547,603 1,575,698
Assets 1,819,552 1,816,005 1,786,991 1,796,657 1,762,174 1,678,620 1,720,095 1,748,211
Deposits 1,451,095 1,451,879 1,415,798 1,407,763 1,404,818 1,388,396 1,440,615 1,467,257
Shareowners' Equity 201,939 199,060 194,781 190,416 185,412 180,910 176,678 175,485
Common Equivalent
Average Shares:
Basic 13,223 13,221 13,209 13,207 13,189 13,189 13,219 13,305
Diluted 13,265 13,260 13,255 13,253 13,238 13,238 13,257 13,343
Ratios:
ROA 1.33% 1.38% 1.45% 1.44% 1.51% 1.37% 1.27% 1.19%
ROE 11.98% 12.55% 13.26% 13.55% 14.38% 12.72% 12.37% 11.81%
Net Interest
Margin (FTE) 5.12% 5.26% 5.40% 5.42% 5.44% 5.74% 5.52% 5.22%
Efficiency Ratio 65.80% 63.47% 62.09% 62.21% 61.68% 63.35% 64.81% 64.19%
All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13, 2003.
48
CONSOLIDATED FINANCIAL STATEMENTS
50 Independent Auditors' Report
51 Report of Independent Public Accountants
52 Consolidated Statements of Income
53 Consolidated Statements of Financial Condition
54 Consolidated Statements of Changes in Shareowners' Equity
55 Consolidated Statements of Cash Flows
56 Notes to Consolidated Financial Statements
Independent Auditors' Report
The Board of Directors
Capital City Bank Group, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Capital City Bank Group, Inc. and subsidiary as of December 31,
2003 and 2002 and the related consolidated statements of income, changes in
shareowners' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated statements of
income, changes in shareowners' equity and cash flows of Capital City Bank
Group, Inc. and subsidiary for the year ended December 31, 2001 were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those consolidated financial statements, before the
revision described in Note 6 to the consolidated financial statements, in
their report dated January 24, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Capital City Bank Group, Inc. and subsidiary as of December 31, 2003 and
2002, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of recording stock-based compensation in 2003, and as
discussed in Note 6 to the consolidated financial statements, changed its
method of accounting for goodwill and other intangible assets in 2002.
As discussed above, the consolidated statements of income, changes in
shareowners' equity and cash flows of Capital City Bank Group, Inc. and
subsidiary for the year ended December 31, 2001 were audited by other
auditors who have ceased operations. As described in Note 6, these
consolidated financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by
the Company as of January 1, 2002. In our opinion, the disclosures for 2001
in Note 6 are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 consolidated financial statements of Capital
City Bank Group, Inc. and subsidiary other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form
of assurance on the 2001 consolidated financial statements taken as a whole.
KPMG LLP
March 8, 2004
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Capital City Bank Group, Inc.:
We have audited the accompanying consolidated statements of financial
condition of CAPITAL CITY BANK GROUP, INC. (a Florida corporation) AND
SUBSIDIARIES as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in shareowners' equity, and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital City Bank Group,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 24, 2002
This report is a copy of a previously issued report and the predecessor
auditor has not reissued the report.
51
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
For the Years Ended December 31,
---------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $92,092 $ 94,921 $102,473
Investment Securities:
U.S. Treasury 664 2 367
U.S. Government Agencies/Corporations 2,486 5,366 6,933
States and Political Subdivisions 2,409 2,752 3,281
Other Securities 575 1,573 2,319
Funds Sold 1,261 1,481 3,610
------- -------- --------
Total Interest Income 99,487 106,095 118,983
------- -------- --------
INTEREST EXPENSE
Deposits 11,567 20,551 45,214
Short-Term Borrowings 1,270 767 2,164
Long-Term Debt 2,002 1,185 871
------- -------- --------
Total Interest Expense 14,839 22,503 48,249
------- -------- --------
Net Interest Income 84,648 83,592 70,734
Provision for Loan Losses 3,436 3,297 3,983
------- -------- --------
Net Interest Income After Provision for
Loan Losses 81,212 80,295 66,751
------- -------- --------
NONINTEREST INCOME
Service Charges on Deposit Accounts 16,319 12,749 10,647
Data Processing 2,403 2,006 2,079
Asset Management Fees 2,650 2,521 2,556
Securities Transactions 1 10 4
Mortgage Banking Revenues 6,090 5,502 3,138
Other 14,476 13,315 12,735
------- -------- --------
Total Noninterest Income 41,939 36,103 31,159
------- -------- --------
NONINTEREST EXPENSE
Salaries and Associate Benefits 45,118 42,142 36,808
Occupancy, Net 5,972 5,719 5,497
Furniture and Equipment 7,840 7,677 7,173
Other 25,448 25,087 22,448
------- -------- --------
Total Noninterest Expense 84,378 80,625 71,926
------- -------- --------
Income Before Income Taxes 38,773 35,773 25,984
Income Taxes 13,580 12,691 9,118
------- -------- --------
NET INCOME $25,193 $ 23,082 $ 16,866
======= ======== ========
BASIC NET INCOME PER SHARE $ 1.91 $ 1.75 $ 1.27
======= ======== ========
DILUTED NET INCOME PER SHARE $ 1.90 $ 1.74 $ 1.27
======= ======== ========
Average Basic Common Shares Outstanding 13,222 13,225 13,242
======= ======== ========
Average Diluted Common Shares Outstanding 13,251 13,274 13,292
======= ======== ========
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.
52
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
As of December 31,
-----------------------------
2003 2002
- ----------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 93,140 $ 89,823
Funds Sold 125,452 170,936
---------- ----------
Total Cash and Cash Equivalents 218,592 260,759
Investment Securities, Available-for-Sale 181,734 180,315
Loans, Net of Unearned Interest 1,341,632 1,285,221
Allowance for Loan Losses (12,429) (12,495)
---------- ----------
Loans, Net 1,329,203 1,272,726
Premises and Equipment, Net 54,011 48,897
Intangibles 25,792 29,034
Other Assets 37,170 33,040
---------- ----------
Total Assets $1,846,502 $1,824,771
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 455,550 $ 406,081
Interest Bearing Deposits 1,018,655 1,028,119
---------- ----------
Total Deposits 1,474,205 1,434,200
Short-Term Borrowings 108,184 113,675
Long-Term Debt 46,475 71,745
Other Liabilities 14,829 18,620
---------- ----------
Total Liabilities 1,643,693 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; 90,000,000 shares
authorized; 13,236,462 and 13,196,211 shares
issued and outstanding at December 31, 2003
and December 31, 2002, respectively 132 132
Additional Paid-In Capital 16,157 14,691
Retained Earnings 185,134 168,587
Accumulated Other Comprehensive Income, Net of Tax 1,386 3,121
---------- ----------
Total Shareowners' Equity 202,809 186,531
---------- ----------
Commitments and Contingencies (See Note 18)
Total Liabilities and Shareowners' Equity $1,846,502 $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.
53
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
Accumulated Other
Additional Comprehensive
Common Paid-In Retained Income (Loss),
Stock Capital Earnings Net of Taxes Total
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $126 $ 7,343 $141,659 $(1,522) $147,607
Comprehensive Income:
Net Income - - 16,866
Net Change in Unrealized Gain (Loss)
On Available-for-Sale Securities - - - 3,872
Total Comprehensive Income - - - 20,738
Cash Dividends ($.476 per share) - - (6,376) - (6,376)
Issuance of Common Stock 8 14,749 - - 14,757
Repurchase and Retirement of Common Stock (2) (4,940) - - (4,942)
---- ------- -------- ------ --------
Balance, December 31, 2001 132 17,152 152,149 2,350 171,783
Comprehensive Income:
Net Income - - 23,082
Net Change in Unrealized Gain (Loss)
On Available-for-Sale Securities - - - 771
Total Comprehensive Income - - - - 23,853
Cash Dividends ($.502 per share) - - (6,644) - (6,644)
Issuance of Common Stock - 934 - - 934
Repurchase and Retirement of Common Stock - (3,395) - - (3,395)
---- ------- -------- ------ --------
Balance, December 31, 2002 132 14,691 168,587 3,121 186,531
Comprehensive Income:
Net Income - - 25,193
Net Change in Unrealized (Loss) Gain
On Available-for-Sale Securities - - - (1,735)
Total Comprehensive Income - - - - 23,458
Cash Dividends ($.656 per share) - - (8,646) - (8,646)
Executive Stock Performance Plan Compensation - 62 - - 62
Issuance of Common Stock - 1,421 - - 1,421
Repurchase and Retirement of Common Stock - (17) - - (17)
---- ------- -------- ------ --------
Balance, December 31, 2003 $132 $16,157 $185,134 $1,386 $202,809
==== ======= ======== ====== ========
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.
54
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
----------------------------------
(Dollars in Thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 25,193 $ 23,082 $ 16,866
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan Losses 3,436 3,297 3,983
Depreciation 4,857 4,897 4,373
Loss on Disposal of Fixed Assets 91 32 108
Net Securities Amortization 2,180 889 1,173
Amortization of Intangible Assets 3,242 3,242 3,772
Gain on Sale of Investment Securities (1) (10) (4)
Non-Cash Compensation 508 892 489
Deferred Income Taxes 755 (1,479) 7
Net Decrease in Other Assets 1,385 4,183 1,744
Net (Decrease) Increase in Other Liabilities (3,791) (953) 967
-------- -------- --------
Net Cash Provided by Operating Activities 37,855 38,062 33,478
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Payments/Maturities/Sales of
Investment Securities Available-for-Sale 101,359 82,466 117,198
Purchase of Investment Securities Available-for-Sale (107,695) (43,370) (6,053)
Net Increase in Loans (65,180) (46,006) (103,042)
Net Cash Received From Acquisitions - - 81,390
Purchase of Premises & Equipment (11,152) (6,868) (7,671)
Proceeds From Sales of Premises & Equipment 1,090 89 418
-------- -------- --------
Net Cash (Used in) Provided by Investing Activities (81,578) (13,689) 82,240
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits 40,005 (115,901) 77,844
Net (Decrease) Increase in Short-Term Borrowings (45,913) 46,633 (41,431)
Borrowing from Long-Term Debt 16,564 62,058 7,861
Repayment of Long-Term Debt (1,412) (3,883) (6,269)
Dividends Paid (8,646) (6,644) (6,376)
Repurchase of Common Stock (17) (3,395) (4,942)
Issuance of Common Stock 975 688 435
-------- -------- --------
Net Cash Provided By (Used in) Financing Activities 1,556 (20,444) 27,122
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (42,167) 3,929 142,840
Cash and Cash Equivalents at Beginning of Year 260,759 256,830 113,990
-------- -------- --------
Cash and Cash Equivalents at End of Year $218,592 $260,759 $256,830
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest Paid on Deposits $ 11,999 $ 23,694 $ 44,990
======== ======== ========
Interest Paid on Debt $ 3,238 $ 1,825 $ 2,883
======== ======== ========
Taxes Paid $ 16,303 $ 13,175 $ 9,290
======== ======== ========
Loans Transferred to Other Real Estate $ 5,267 $ 1,238 $ 2,149
======== ======== ========
Issuance of Common Stock as Non-cash Compensation $ 508 $ 246 $ 785
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
55
Notes to Consolidated Financial Statements
Note 1
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Capital City
Bank Group, Inc. ("CCBG" or collectively the "Company"), and its wholly-owned
subsidiary, Capital City Bank ("CCB" or the "Bank"). All material inter-
company transactions and accounts have been eliminated.
The Company, which operates in a single reportable business segment comprised
of commercial banking within the states of Florida, Georgia and Alabama,
follows accounting principles generally accepted in the United States of
America and reporting practices applicable to the banking industry. The
principles which materially affect the financial position, results of
operations and cash flows are summarized below.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could vary
from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits in other banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods and all other cash equivalents
have a maturity of 90 days or less.
Investment Securities
Investment securities available-for-sale are carried at fair value and
represent securities that are available to meet liquidity and/or other needs
of the Company. Gains and losses are recognized and reported separately in
the Consolidated Statements of Income upon realization or when impairment of
values is deemed to be other than temporary. Gains or losses are recognized
using the specific identification method. Unrealized holding gains and losses
for securities available-for-sale are excluded from the Consolidated
Statements of Income and reported net of taxes in the accumulated other
comprehensive income (loss) component of shareowners' equity until realized.
Accretion and amortization are recognized on the effective yield method over
the life of the securities.
Loans
Loans are stated at the principal amount outstanding, net of unearned income.
Interest income is generally accrued on the effective yield method based on
outstanding balances. Fees charged to originate loans and direct loan
origination costs are deferred and amortized over the life of the loan as a
yield adjustment. Loans held for sale are valued at lower of cost or market
value based on information obtained from third party investors.
56
Allowance for Loan Losses
The allowance for loan losses is that amount considered adequate to absorb
losses inherent in the portfolio based on management's evaluation of the
current risk characteristics of the loan portfolio as of the reporting date.
The allowance is a significant estimate recorded by management and is based
on the credit quality of the portfolio.
The evaluation of credit quality begins with the review for impairment of
commercial purpose loans with balances exceeding $25,000. Impaired loans are
defined as those in which the full collection of principal and interest in
accordance with the contractual terms is improbable. Impaired loans
typically include those that are in nonaccrual status or classified as
doubtful as defined by the Company's internal risk rating system. Generally,
loans are placed on nonaccrual status when interest becomes past due 90 days
or more, or management deems the ultimate collection of principal and
interest is in doubt. A specific allowance for loss is made for impaired
loans based on a comparison of the recorded investment in the loan to either
the present value of the loan's expected cash flow, the loan's estimated
market price or the estimated fair value of the underlying collateral less
costs to sell the collateral.
Commercial purpose loans exceeding $100,000 that are not impaired, but have
weaknesses requiring closer management attention, are analyzed to determine
if an allowance is required. This analysis is based primarily on the
underlying value of the collateral. If the value of the collateral is
considered insufficient, an allowance is made for the deficiency. The value
of the collateral is dependent on current economic conditions in the
communities we serve and is subject to change. In addition, the analysis
includes changes in risk ratings that are assigned based on the Bank's Asset
Classification Policy, and for the ultimate disposition of the loan. The
ultimate disposition may include upgrades in risk ratings, payoff of the
loan, or charge-off of the loan. This migration analysis results in a
charge-off ratio by loan pool of classified loans that is applied to the
balance of the pool to determine general reserves for specifically identified
problem loans. This charge-off ratio is adjusted for various environmental
factors including past due and nonperforming trends in the loan portfolio,
the micro-and macro-economic outlook, and credit administration practices as
determined by independent parties.
Larger commercial purpose loans that show no signs of weakness are assigned
an allowance based on the historical loss ratios in pools of loans with
similar characteristics. The historical loss ratios are determined by
analyzing losses over the prior twelve quarters, with more emphasis being
placed on the recent four quarters. The historical loss ratios are then
adjusted for certain external factors, including micro- and macro-economic
outlook, past due and nonperforming trends within the portfolio, loan growth,
and credit administration practices.
Large groups of smaller balance homogeneous loans are collectively evaluated
to determine the allowance required for loan losses. These small balance
homogenous loans include commercial purpose loans less than $100,000,
consumer installment loans, credit card loans and residential mortgage loans.
Historical loss ratios are determined for these smaller balance loan pools
and applied to the balance of the related pool of loans to determine the
allowance needed. The historical loss ratios are adjusted for external
factors as described above.
Long-Lived Assets
Premises and equipment are stated at cost less accumulated depreciation,
computed on the straight-line method over the estimated useful lives for each
type of asset with premises being depreciated over a range of 10 to 40 years,
and equipment being depreciated over a range of 3 to 10 years. Major
additions are capitalized and depreciated in the same manner. Repairs and
maintenance are charged to noninterest expense as incurred.
57
Intangible assets, other than goodwill, consist of core deposit assets that
were recognized in connection with various acquisitions. Core deposit
intangible assets are amortized on the straight-line method over various
periods, with the majority being amortized over an average of 10 years.
Long-lived assets are evaluated for impairment if circumstances suggest that
their carrying value may not be recoverable, by comparing the carrying value
to estimated undiscounted cash flows. If the asset is deemed impaired, an
impairment charge is recorded equal to the carrying value less the fair
value.
Goodwill
As of January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangibles" ("SFAS 142").
The adoption of SFAS 142 required the Company to discontinue goodwill
amortization and identify reporting units to which the goodwill related for
purposes of assessing potential impairment of goodwill on an annual basis, or
more frequently, if events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. In accordance with the
guidelines in SFAS 142, the Company determined it has one reporting unit with
goodwill. As of December 31, 2003, the Company performed its annual
impairment review and concluded that no impairment adjustment was necessary.
Income Taxes
The Company files consolidated federal and state income tax returns. In
general, the parent company and its subsidiary compute their tax provisions
as separate entities prior to recognition of any tax expense or benefits
which may accrue from filing a consolidated return.
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
carrying amounts of existing assets and liabilities on the Company's
consolidated statement of financial position and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Stock Based Compensation
As of December 31, 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 associate 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 Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"),
and related interpretations. Stock-based employee compensation cost is
reflected in 2001 and 2002 net income for only the AIP, as the ASPP and DSPP
were considered non-compensatory under the provisions of APB 25. As a result
of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," the Company adopted the fair value recognition provisions of
SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation,"
prospectively to all associate 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 associate compensation included in the determination of net income for
2003 is different than that which would have been
58
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 non-compensatory, 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.
(Dollars in Thousands, Except Per Share Data) 2003 2002 2001
- ----------------------------------------------------------------------------------
Net income, as reported $25,193 $23,082 $16,866
Add: Stock based compensation included
in reported net income, net of tax 634 553 302
Deduct: Stock based compensation
determined under fair value based method
for all awards, net of tax (348) (388) (344)
------- ------- -------
Pro forma net income $25,479 $23,247 $16,824
======= ======= =======
Earnings per share:
Basic-as reported $ 1.91 $ 1.75 $ 1.27
======= ======= =======
Basic-pro forma $ 1.93 $ 1.76 $ 1.27
======= ======= =======
Diluted-as reported $ 1.90 $ 1.74 $ 1.27
======= ======= =======
Diluted-pro forma $ 1.92 $ 1.75 $ 1.26
======= ======= =======
Director Stock Purchase Plan ("DSPP")
The Company's DSPP allows the directors to purchase common stock at a price
equal to 90% of the closing price on the date of purchase. The DSPP has
187,500 shares reserved for issuance. In 2003, 2002 and 2001, CCBG issued
4,861, 4,438, and 4,344 shares, respectively, under this plan. A total of
47,019 shares have been issued to directors since the inception of this plan.
Prior to 2003, the DSPP plan was accounted for under the provisions of APB 25
and no compensation expense was recognized. In accordance with the Company's
adoption of SFAS 123, compensation expense has been recognized for the
Company's purchase plan activity in 2003.
Associate Stock Purchase Plan ("ASPP")
Under the Company's ASPP, substantially all associates may purchase common
stock through payroll deductions at a price equal to 90% of the lower of the
fair market value at the beginning or end of each six-month offering period.
Stock purchases under the ASPP are limited to 10% of an associate's eligible
compensation, up to a maximum of $25,000 (fair market value on each
enrollment date) in any plan year. The ASPP has 562,500 shares of common
stock reserved for issuance. CCBG issued 25,234, 31,588, and 18,755 shares
under the plan in 2003, 2002, and 2001, respectively. A total of 301,693
shares have been issued since inception of this plan. Prior to 2003, the
ASPP was accounted for under the provisions of APB 25 and no compensation
expense was recognized. In accordance with the Company's adoption of SFAS
123, compensation expense has been recognized for the Company's purchase plan
activity in 2003.
59
Transactions under the ASPP were as follows:
Purchase Price
Number of Shares per Share
- ---------------------------------------------------------------------------
Available at December 31, 2000 336,384
Purchased (18,755) $17.63
-------
Available at December 31, 2001 317,629
Purchased (31,588) $18.90
-------
Available at December 31, 2002 286,041
Purchased (25,234) $30.46
-------
Available at December 31, 2003 260,807
=======
Weighted Average Price for two annual offering periods
Based on the Black-Scholes option pricing model, the weighted average
estimated fair value of the purchase rights granted under the ASPP was $6.65
for 2003, $3.96 for 2002, and $3.50 for 2001. In calculating pro forma
compensation at December 31, the fair value of each stock purchase right is
estimated on the date of grant using the following weighted average
assumptions:
2003 2002 2001
- -------------------------------------------------------
Dividend yield 1.8% 2.4% 2.4%
Expected volatility 34.5% 33.0% 26.0%
Risk-free interest rate 1.1% 1.7% 4.6%
Expected life (in years) 0.5 0.5 0.5
Associate Stock Incentive Plan ("AIP")
Under the Company's AIP shares are granted to participants based upon the
achievement of performance goals established by the Board of Directors at the
beginning of each award period. A total of 937,500 shares of common stock
have been reserved for issuance under this Plan. Award periods are either
one year for the short-term plan, or three years for the long-term plan. The
short-term plan was accounted for under SFAS 123 for 2003 and compensation
expense was measured under the fair value method as of the grant date and
recognized over the service period. The long-term plan was accounted for as
a variable plan under APB 25 for stock grants prior to 2003, and compensation
expense was measured under the intrinsic value method as of the measurement
date and recognized over the related service period. CCBG issued 10,596,
12,618, and 35,861 shares under the plan in 2003, 2002, and 2001,
respectively. A total of 242,057 shares have been issued since inception of
this plan.
Executive Stock Option Agreement
On January 23, 2003, the Company's Board of Directors approved a stock option
agreement for a key executive officer (William G. Smith, Jr. - Chairman,
President and CEO, CCBG) under the provisions of the 1996 Associate Stock
Incentive Plan. This agreement grants a non-qualified stock option award
upon achieving certain earnings per share conditions set by the Board,
subject to certain vesting requirements. The options granted under the
agreement have a term of ten years and vest at a rate of one-third on each of
the first, second, and third anniversaries of the date of grant. As of
December 31, 2003, no option shares had been issued or exercised. Effective
January 29, 2004, the earnings per share conditions were analyzed resulting
in economic value earned by the executive of approximately $269,000, for
which the Company will issue option shares equal to that value. During 2003,
the Company recognized $61,658 of expense related to this agreement in
accordance with the provisions of SFAS 123.
60
Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46 ("FIN46") (revised
December 2003 ("FIN46R")), "Consolidation of Variable Interest Entities,"
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN46R replaces FIN46,
which was issued in January 2003. FIN46R applies immediately to a variable
interest entity created after January 31, 2003 and as of the first interim
period ending after March 15, 2004 to those variable interest entities
created before February 1, 2003 and not already consolidated under FIN46 in
previously issued financial statements. The Company does not hold any
interest in variable interest entities that would require accounting
treatment prescribed by this pronouncement.
In May 2003, the FASB issued SFAS No. 150 ("SFAS 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS 150 modifies 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. SFAS 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.
In November 2002, the FASB issued Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (the "Interpretation"), which
addresses the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. The
Interpretation also requires the recognition of a liability by a guarantor at
the inception of certain guarantees.
FIN45 requires the guarantor to recognize a liability for the non-contingent
component of the guarantee; this is the obligation to stand ready to perform
in the event that specified triggering events or conditions occur. The
initial measurement of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even it is not
probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements. The Company has adopted the disclosure requirements of
FIN45 and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. To date, the
Company has not entered into or modified any guarantees pursuant to the
provisions of FIN45.
In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" ("SFAS 147"). SFAS 147
removes financial institutions (with the exception of combinations of mutual
enterprises) from the scope of both SFAS No. 72 ("SFAS 72"), "Accounting for
Certain Acquisitions of Banking or Thrift Institutions" and FASB
Interpretation No. 9, applying APB Opinions No. 16 and 17, "When a Savings
and Loan Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method" and requires that those
transactions be accounted for in accordance with SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." As
a result, the requirement under SFAS 72 to recognize (and subsequently
amortize) any excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS 147. In addition, SFAS 147 amends SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," to include in its scope
long-term customer-relationship intangible assets of financial institutions
such as
61
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. The adoption of SFAS 147 has not had a material impact on
the reported results of operations of the Company.
Note 2
ACQUISITIONS
Subsequent to December 31, 2003, the Company entered into an agreement to
acquire Quincy State Bank, an affiliate bank of Synovus Financial Corp
("Synovus"). Quincy State Bank is a $127 million (as of December 31, 2003)
state chartered financial institution with offices located in Quincy and
Havana, Florida. The Company will pay approximately $26.1 million in cash to
Synovus in consideration for Synovus merging Quincy State Bank into CCB. The
transaction will be accounted for as a purchase and result in approximately
$15 million of intangibles (goodwill and core deposit). An appraisal
will be conducted to determine the amount and life of the core deposit
intangible.
On March 9, 2001, the Company completed a purchase and assumption transaction
with Wachovia Bank, NA, formerly First Union National Bank ("Wachovia") and
acquired six of Wachovia's offices in Georgia which included real estate,
loans and deposits. The transaction resulted in approximately $11.3 million
in intangible assets, primarily core deposit intangibles, which are being
amortized over a 10-year period. The Company purchased approximately $18
million in loans and assumed deposits of approximately $105 million.
On March 2, 2001, the Company completed its acquisition of First Bankshares
of West Point, Inc., and its subsidiary, First National Bank of West Point.
At the time of the acquisition, First National Bank of West Point had
approximately $144 million in assets with one office in West Point, Georgia,
and two offices in the Greater Valley area of Alabama. First Bankshares of
West Point, Inc., merged with the Company, and First National Bank of West
Point merged with Capital City Bank. The Company issued 3.6419 shares and
$17.7543 in cash for each of the 192,481 outstanding shares of First
Bankshares of West Point, Inc., resulting in the issuance of 701,000 shares
of Company common stock and the payment of $3.4 million in cash for a total
purchase price of approximately $17.0 million. The transaction was accounted
for as a purchase and resulted in approximately $2.5 million of intangible
assets, primarily goodwill.
Note 3
INVESTMENT SECURITIES
The amortized cost and related market value of investment securities
available-for-sale at December 31, were as follows:
2003
----------------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury $ 78,498 $ 105 $ 1 $ 78,602
U.S. Government Agencies
and Corporations 26,862 133 - 26,995
States and Political
Subdivisions 55,641 1,511 - 57,152
Mortgage-Backed Securities 11,618 427 - 12,045
Other Securities 6,927 13 - 6,940
-------- ------ --- --------
Total Investment
Securities $179,546 $2,189 $ 1 $181,734
======== ====== === ========
62
2002
----------------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury $ 10,438 $ 5 $ - $ 10,443
U.S. Government 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 Investment
Securities $175,389 $4,928 $ 2 $180,315
======== ====== === ========
The total proceeds from the sale of investment securities and the gross
realized gains and losses from the sale of such securities for each of the
last three years are as follows: (Dollars in Thousands)
Total Gross Gross
Year Proceeds Realized Gains Realized Losses
- -------------------------------------------------------------
2003 $48,922 $24 $23
2002 $44,576 $10 $ -
2001 $84,794 $ 4 $ -
Total proceeds do not include principal reductions in mortgage-backed
securities and proceeds from securities which were called of $52.4 million,
$37.9 million, and $33.0 million in 2003, 2002 and 2001, respectively.
As of December 31, 2003, the Company's investment securities had the
following maturity distribution based on contractual maturities:
(Dollars in Thousands) Amortized Cost Market Value
- -----------------------------------------------------------------
Due in one year or less $103,031 $103,331
Due after one through five years 69,919 71,771
Due after five through ten years 674 710
Over ten years 5,922 5,922
-------- --------
Total Investment Securities $179,546 $181,734
======== ========
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Securities with an amortized cost of $73.9 million and $115.4 million at
December 31, 2003 and 2002, respectively, were pledged to secure public
deposits and for other purposes.
Securities with unrealized losses at year-end 2003 not recognized in income
by period of time unrealized losses have existed are as follows:
Less Than Greater Than
12 months 12 Months Total
------------------ ------------------ ------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(Dollars in Thousands) Value Loss Value Loss Value Loss
- -----------------------------------------------------------------------------------
U.S. Treasury $15,025 $ 1 $ - $ - $15,025 $ 1
------- --- --- --- ------- ---
Total Investment
Securities $15,025 $ 1 $ - $ - $15,025 $ 1
======= === === === ======= ===
63
Note 4
LOANS
At December 31, the composition of the Company's loan portfolio was as
follows:
(Dollars in Thousands) 2003 2002
- ----------------------------------------------------------------------
Commercial, Financial and Agricultural $ 160,048 $ 141,459
Real Estate - Construction 89,149 91,110
Real Estate - Commercial Mortgage 391,250 356,807
Real Estate - Residential 346,170 359,338
Real Estate - Home Equity 116,810 92,277
Real Estate - Loans Held-for-Sale 4,810 22,454
Consumer 233,395 221,776
---------- ----------
Total Loans, Net of
Unearned Interest $1,341,632 $1,285,221
========== ==========
Nonaccruing loans amounted to $2.3 million and $2.5 million, at December 31,
2003 and 2002, respectively. There were no restructured loans at December
31, 2003 or 2002. Interest on nonaccrual loans is generally recognized only
when received. Cash collected on nonaccrual loans is applied against the
principal balance or recognized as interest income based upon management's
expectations as to the ultimate collectibility of principal and interest in
full. If interest on nonaccruing loans had been recognized on a fully
accruing basis, interest income recorded would have been $166,000, $116,000,
and $122,000 higher for the years ended December 31, 2003, 2002, and 2001,
respectively.
Note 5
ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the years
ended December 31, is as follows:
(Dollars in Thousands) 2003 2002 2001
- ------------------------------------------------------------------------
Balance, Beginning of Year $12,495 $12,096 $10,564
Acquired Reserves - - 1,206
Provision for Loan Losses 3,436 3,297 3,983
Recoveries on Loans
Previously Charged-Off 1,037 1,374 993
Loans Charged-Off (4,539) (4,272) (4,650)
------- ------- -------
Balance, End of Year $12,429 $12,495 $12,096
======= ======= =======
Selected information pertaining to impaired loans, at December 31, is as
follows:
2003 2002
------------------------------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- -----------------------------------------------------------------------------
With Related Credit Allowance $ 810 $ 178 $ 412 $ 219
Without Related Credit Allowance 477 - 722 -
Average Recorded Investment
for the Period 6,737 * 2,544 *
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 years ended December 31, 2003, 2002,
and 2001, the Company recognized $194,000, $169,000 and $36,000, in interest
income on impaired loans, all of which was collected in cash.
64
Note 6
INTANGIBLE ASSETS
The Company had intangible assets of $25.8 million and $29.0 million at
December 31, 2003 and December 31, 2002, respectively. Intangible assets at
December 31, were as follows:
2003 2002
----------------------- -----------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------
Core Deposits Intangibles $33,752 $14,640 $33,752 $11,398
Goodwill 10,466 3,786 10,466 3,786
------- ------- ------- -------
Total Intangible Assets $44,218 $18,426 $44,218 $15,184
======= ======= ======= =======
Net Core Deposit Intangibles
As of December 31, 2003 and December 31, 2002, the Company had net core
deposit intangibles of $19.1 million and $22.4 million, respectively.
Amortization expense for the twelve months of 2003, 2002 and 2001 was $3.2
million, $3.2 million and $3.8 million, respectively. The estimated annual
amortization expense for the next five years is expected to be approximately
$3.2 million per year.
Goodwill
As of December 31, 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. On December 31, 2003, the Company performed its
annual impairment review and concluded that no impairment adjustment was
necessary.
Transitional Disclosures:
The pro forma effects, net of tax, of the adoption of SFAS No. 142 for the
year ended December 31, were as follows:
(Dollars in Thousands, Except Per Share Data) 2001
- ----------------------------------------------------------
Reported Net Income $16,866
Goodwill Amortization 707
-------
Adjusted Net Income $17,573
=======
Basic Earnings Per Share:
Reported Net Income $ 1.27
Goodwill Amortization .05
-------
Adjusted Net Income $ 1.32
=======
Diluted Earnings Per Share:
Reported Net Income $ 1.27
Goodwill Amortization .05
-------
Adjusted Net Income $ 1.32
=======
No goodwill amortization was recorded in 2003 and 2002 due to the
discontinuance of amortization under the provisions of SFAS 142.
65
Note 7
PREMISES AND EQUIPMENT
The composition of the Company's premises and equipment at December 31, was
as follows:
(Dollars in Thousands) 2003 2002
- ------------------------------------------------------------
Land $ 12,152 $ 11,239
Buildings 51,577 46,131
Fixtures and Equipment 43,623 44,242
-------- --------
Total 107,352 101,612
Accumulated Depreciation (53,341) (52,715)
-------- --------
Premises and Equipment, Net $ 54,011 $ 48,897
======== ========
Note 8
DEPOSITS
Interest bearing deposits, by category, as of December 31, were as follows:
(Dollars in Thousands) 2003 2002
- ----------------------------------------------------
NOW Accounts $ 276,934 $ 276,487
Money Market Accounts 207,934 209,508
Savings Accounts 110,834 104,053
Time Deposits 422,953 438,071
---------- ----------
Total $1,018,655 $1,028,119
========== ==========
Time deposits in denominations of $100,000 or more totaled $107.2 million and
$92.0 million at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of time deposits were as
follows: (Dollars in Thousands)
2004 $325,091
2005 64,891
2006 22,589
2007 8,466
2008 and thereafter 1,916
--------
Total $422,953
========
The balances maintained on deposit with the Federal Reserve Bank as of
December 31, 2003 and 2002, were $57.1 million and $56.9 million,
respectively.
Interest expense on deposits for the three years ended December 31, was as
follows:
(Dollars in Thousands) 2003 2002 2001
- ----------------------------------------------------------------
NOW Accounts $ 678 $ 1,272 $ 4,046
Money Market Accounts 1,310 2,904 6,237
Savings Accounts 189 500 1,865
Time Deposits < $100,000 7,007 12,060 26,046
Time Deposits > $100,000 2,383 3,815 7,020
------- ------- -------
Total $11,567 $20,551 $45,214
======= ======= =======
66
Note 9
SHORT-TERM BORROWINGS
Short-term borrowings included the following:
Securities
Federal Sold Under Other
Funds Repurchase Short-Term
(Dollars in Thousands) Purchased Agreements Borrowings
- ---------------------------------------------------------------------------------
2003
- ----
Balance at December 31, $12,624 $53,223 $42,337
Maximum indebtedness at any month end 23,930 90,209 44,226
Daily average indebtedness outstanding 14,768 49,785 36,721
Average rate paid for the year 0.94% 0.59% 2.28%
Average rate paid on period-end borrowings 0.68% 0.31% 2.50%
2002
- ----
Balance at December 31, $14,120 $77,318 $22,237
Maximum indebtedness at any month end 17,395 77,318 22,237
Daily average indebtedness outstanding 9,079 55,679 7,836
Average rate paid for the year 1.46% 0.87% 1.89%
Average rate paid on period-end borrowings 0.55% 0.83% 2.32%
67
Note 10
LONG-TERM DEBT
Long-term debt included the following at December 31:
(Dollars in Thousands) 2003 2002
- --------------------------------------------------------------------------------
Federal Home Loan Bank Notes,
Due on March 8, 2004, fixed rate of 6.64% $ - $ 113
Due on March 10, 2004, fixed rate of 2.22% - 20,000
Due on September 10, 2004, fixed rate of 2.48% - 20,000
Due on December 16, 2004, fixed rate of 6.52% - 116
Due on December 16, 2004, fixed rate of 6.52% - 69
Due on September 12, 2005, fixed rate of 3.06% 15,000 15,000
Due on December 19, 2005, fixed rate of 6.04% 1,103 1,222
Due on February 15, 2006, fixed rate of 3.00% 86 120
Due on April 24, 2007, fixed rate of 7.30% - 249
Due on May 30, 2008, fixed rate of 2.50% 168 -
Due on June 13, 2008, fixed rate of 5.40% 643 786
Due on November 10, 2008, fixed rate of 4.12% 2,419 -
Due on October 19, 2009, fixed rate of 3.69% 906 993
Due on November 10, 2010, fixed rate of 4.72% 798 -
Due on December 31, 2010, fixed rate of 3.85% 1,115 -
Due on December 18, 2012, fixed rate of 4.84% 631 650
Due on March 18, 2013, fixed rate of 6.37% 755 807
Due on June 17, 2013, fixed rate of 3.85% 98 -
Due on June 17, 2013, fixed rate of 3.53% 1,060 -
Due on June 17, 2013, fixed rate of 4.11% 1,877 -
Due on September 23, 2013, fixed rate of 5.64% 1,076 1,148
Due on January 27, 2014, fixed rate of 5.79% 1,344 1,387
Due on May 27, 2014, fixed rate of 5.92% 569 609
Due on July 20, 2016, fixed rate of 6.27% 1,489 1,607
Due on October 31, 2017, fixed rate of 4.79% 1,160 1,236
Due on December 11, 2017, fixed rate of 4.78% 1,021 1,093
Due on December 20, 2017, fixed rate of 5.37% 1,003 1,025
Due on February 26, 2018, fixed rate of 4.36% 2,418 -
Due on September 18, 2018, fixed rate of 5.15% 708 -
Due on November 5, 2018, fixed rate of 5.10% 3,866 -
Due on December 3, 2018, fixed rate of 4.87% 737 -
Due on December 17, 2018, fixed rate of 6.33% 1,710 1,776
Due on December 24, 2018, fixed rate of 6.29% 769 794
Due on February 16, 2021, fixed rate of 3.00% 915 945
Due on May 30, 2023, fixed rate of 2.50% 1,031 -
------- -------
Total outstanding $46,475 $71,745
======= =======
The contractual maturities of long-term debt for the five years succeeding
December 31, 2003, are as follows:
(Dollars in Thousands)
- ----------------------------------
2004 $ 1,878
2005 17,859
2006 1,931
2007 1,983
2008 and thereafter 22,824
-------
Total $46,475
=======
The Federal Home Loan Bank advances are collateralized with 1-4 family
residential mortgage loans. Interest on the Federal Home Loan Bank advances
is paid on a monthly basis.
68
The Company has the ability to draw on a Revolving Credit Note, due on May 16,
2004. Upon expiration of this note, the outstanding balance may be converted
to a term loan and repaid over a period of seven years. The Company, at its
option, may select from various loan rates including the following: Prime,
LIBOR, or the lender's cost of funds rate, plus or minus increments thereof.
The LIBOR or cost of funds rates may be fixed for a period up to six months.
The revolving credit is unsecured, but upon conversion is to be collateralized
by common stock of the subsidiary bank equal in value to 125% of the principal
balance of the loan. The existing loan agreement places certain restrictions
on the amount of capital which must be maintained by the Company. At December
31, 2003, the Company was in compliance with all of the terms of the agreement
and had $25 million available under a $25 million line of credit facility.
Note 11
INCOME TAXES
The provision for income taxes reflected in the statement of income is
comprised of the following components:
(Dollars in Thousands) 2003 2002 2001
- ----------------------------------------------------------------
Current:
Federal $10,876 $12,123 $7,709
State 1,949 2,047 1,402
Deferred:
Federal 682 (1,337) 6
State 73 (142) 1
------- ------- ------
Total $13,580 $12,691 $9,118
======= ======= ======
The net deferred tax assets and the temporary differences comprising that
balance at December 31, 2003 and 2002, are as follows:
(Dollars in Thousands) 2003 2002
- --------------------------------------------------------------------
Deferred Tax Assets attributable to:
Allowance for Loan Losses $4,216 $4,028
Accrued Pension/SERP 985 1,144
Interest on Nonperforming Loans - 44
Acquired Deposits 1,524 1,165
Accrued Estimated Outstanding Expense 461 386
Other 871 564
------ ------
Total Deferred Tax Assets $8,057 $7,331
Deferred Tax Liabilities attributable to:
Associate Benefits $ - $ 167
Unrealized Gains on Investment Securities 802 1,805
Depreciation on Premises and Equipment 2,852 2,051
Deferred Loan Fees 3,041 2,098
Securities Accretion 65 171
Other 150 140
------ ------
Total Deferred Tax Liabilities 6,910 6,432
------ ------
Net Deferred Tax Assets $1,147 $ 899
====== ======
Income taxes provided were different than the tax expense computed by
applying the statutory federal income tax rate of 35% to pre-tax income as a
result of the following:
(Dollars in Thousands) 2003 2002 2001
- --------------------------------------------------------------------------
Tax Expense at Federal Statutory Rate $13,571 $12,521 $9,094
Increases (Decreases) Resulting From:
Tax-Exempt Interest Income (957) (1,084) (1,179)
State Taxes, Net of Federal Benefit 1,314 1,238 913
Other (348) 16 290
------- ------- ------
Actual Tax Expense $13,580 $12,691 $9,118
======= ======= ======
69
Note 12
EMPLOYEE BENEFIT PLANS
Pension Plan
The Company sponsors a noncontributory pension plan covering substantially
all of its associates. Benefits under this plan generally are based on the
associate's years of service and compensation during the years immediately
preceding retirement. The Company's general funding policy is to contribute
amounts deductible for federal income tax purposes.
The following table details the components of pension expense, the funded
status of the plan, amounts recognized in the Company's consolidated
statements of financial condition, and major assumptions used to determine
these amounts.
(Dollars in Thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------------
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year $ 37,941 $ 33,642 $26,811
Service Cost 3,302 2,842 2,732
Interest Cost 2,571 2,348 2,122
Actuarial Loss 3,196 1,671 2,052
Amendments to Plan - - 1,553
Benefits Paid (1,061) (2,385) (1,362)
Expenses Paid (236) (177) (266)
Plan Change 514 - -
-------- -------- -------
Projected Benefit Obligation at End of Year $ 46,227 $ 37,941 $33,642
-------- -------- -------
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year $ 27,423 $ 30,113 $31,319
Actual Return on Plan Assets 4,915 (3,357) (1,493)
Employer Contributions 3,744 3,229 524
Amendments to Plan - - 1,391
Benefits Paid (1,061) (2,385) (1,362)
Expenses Paid (237) (177) (266)
-------- -------- -------
Fair Value of Plan Assets at End of Year $ 34,784 $ 27,423 $30,113
-------- -------- -------
Reconciliation of Funded Status:
Funded Status $(11,443) $(10,518) $(3,529)
Unrecognized Net Losses 9,993 10,672 3,557
Unrecognized Prior Service Cost 1,732 1,434 1,718
Unrecognized Net Transition Obligation - 1 2
-------- -------- -------
Prepaid Benefit Cost $ 282 $ 1,589 $ 1,748
-------- -------- -------
Components of Net Periodic Benefit Costs:
Service Cost $ 3,302 $ 2,842 $ 2,732
Interest Cost 2,571 2,348 2,122
Expected Return on Plan Assets (2,168) (2,404) (2,629)
Amortization of Prior Service Cost 216 284 327
Transition Obligation Recognition 1 1 (231)
Recognized Net Actuarial Loss (Gain) 1,127 317 (168)
-------- -------- -------
Net Periodic Benefit Cost $ 5,049 $ 3,388 $ 2,153
======== ======== =======
Assumptions:
Weighted-average used to determine benefit obligations:
Discount Rate 6.25% 6.75% 7.25%
Expected Return on Plan Assets 8.25% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
Weighted-average used to determine net cost:
Discount Rate 6.75% 7.25% 7.25%
Expected Return on Plan Assets 8.25% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
The amendments to the plan are a result of acquisitions and the IRS regulation
regarding the change from the PBGC mortality table to the GATT mortality table.
Represents a change in mortality assumptions set forth in IRC 417(e).
70
Return on Plan Assets
The overall expected long-term rate of return on assets is a weighted-average
expectation for the return on plan assets. The Company considers historical
performance and current benchmarks to arrive at expected long-term rates of
return in each asset category. The Company assumed that 65% of its portfolio
would be invested in equity securities, with the remainder invested in debt
securities.
Plan Assets
The Company's pension plan asset allocation at year-end 2003 and 2002, and
the target asset allocation for 2004 are as follows:
Percentage of Plan
Target Allocation Assets at Year-End
----------------- ------------------
2004 2003 2002
- ---------------------------------------------------------------
Equity Securities 65% 60% 50%
Debt Securities 35% 28% 31%
Real Estate - - -
Other - 12% 19%
--- --- ---
Total 100% 100% 100%
The Company's pension plan assets are managed by the Investment Committee of
Capital City Trust Company. The Company's investment strategy is to maximize
return on investments while minimizing risk. The Company believes the best
way to accomplish this goal is to take a conservative approach to its
investment strategy by investing in high-grade equity and debt securities.
Contributions
The following table details the amounts contributed to the pension plan in
2003 and 2002, and the expected amount to be contributed in 2004.
Expected
2003 2002 2004
---------- ---------- ----------
Actual Contributions $3,743,763 $3,229,278 $4,000,000
Supplemental Executive Retirement Plan
- --------------------------------------
The Company has a Supplemental Executive Retirement Plan ("SERP") covering
selected executives. Benefits under this plan generally are based on the
executive's years of service and compensation during the years immediately
preceding retirement. The Company recognized expense during 2003, 2002 and
2001 of approximately $208,000, $393,000, and $214,000, respectively, and no
minimum liability, at December 31, 2003, 2002 and 2001.
The following table details the components of the Supplemental Executive
Retirement Plan's periodic benefit cost, the funded status of the plan,
amounts recognized in the Company's consolidated statements of financial
condition, and major assumptions used to determine these amounts.
71
(Dollars in Thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year $ 2,770 $ 1,458 $ 1,255
Service Cost 80 118 73
Interest Cost 111 169 102
Plan Participants Contributions - - (111)
Actuarial (Gain) Loss (1,107) 1,025 139
Plan Change 26 - -
------- ------- -------
Projected Benefit Obligation at End of Year $ 1,880 $ 2,770 $ 1,458
------- ------- -------
Reconciliation of Funded Status:
Funded Status $(1,880) $(2,770) $(1,458)
Unrecognized Net Actuarial (Gain) Loss (418) 645 (333)
Unrecognized Prior Service Cost 511 546 605
------- ------- -------
Accrued Benefit Cost $(1,787) $(1,579) $(1,186)
======= ======= =======
Components of Net Periodic Benefit Costs:
Service Cost $ 80 $ 118 $ 73
Interest Cost 111 169 102
Amortization of Prior Service Cost 61 59 59
Recognized Net Actuarial (Gain) Loss (44) 47 (20)
------- ------- -------
Net Periodic Benefit Cost $ 208 $ 393 $ 214
======= ======= =======
Assumptions:
Weighted-average used to determine the benefit obligations:
Discount Rate 6.25% 6.75% 7.25%
Expected Return on Plan Assets 8.25% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
Weighted-average used to determine the net cost:
Discount Rate 6.75% 7.25% 7.25%
Expected Return on Plan Assets 8.25% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
Represents a change in mortality assumptions set forth in IRC 417(e).
401(k) Plan
- -----------
The Company has a 401(k) Plan which enables associates to defer a portion of
their salary on a pre-tax basis. A total of 50,000 shares have been reserved
for issuance. The plan covers substantially all associates of the Company
who meet minimum age requirements. The plan is designed to enable
participants to elect to have an amount from 1% to 15% of their compensation
withheld in any plan year placed in the 401(k) Plan trust account. Matching
contributions from the Company are made up to 6% of the participant's
compensation for some qualifying associates. During 2003, the Company made
matching contributions of $32,258. There were no contributions made by the
Company for 2002 and 2001. The participant may choose to invest their
contributions into fifteen investment funds available to CCBG participants,
including CCBG's common stock.
Other Plans
- -----------
The Company has a Dividend Reinvestment and Optional Stock Purchase Plan. A
total of 250,000 shares have been reserved for issuance. In recent years,
shares for the Dividend Reinvestment and Optional Stock Purchase Plan have
been acquired in the open market and, thus, CCBG did not issue any shares
under this plan in 2003, 2002 and 2001.
72
Note 13
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
(Dollars in Thousands, Except Per Share Data) 2003 2002 2001
- ------------------------------------------------------------------------------------------
Numerator:
Net Income $ 25,193 $ 23,082 $ 16,866
========== ========== ==========
Denominator:
Denominator for Basic Earnings Per Share
Weighted-Average Shares 13,222,487 13,225,285 13,241,957
Effects of Dilutive Securities
Stock Compensation Plans 28,702 49,070 50,478
---------- ---------- ----------
Denominator for Diluted Earnings Per Share
Adjusted Weighted-Average Shares and
Assumed Conversions 13,251,189 13,274,355 13,292,435
========== ========== ==========
Basic Earnings Per Share $ 1.91 $ 1.75 $ 1.27
========== ========== ==========
Diluted Earnings per Share $ 1.90 $ 1.74 $ 1.27
========== ========== ==========
All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective June 13, 2003.
Note 14
CAPITAL
The Company is subject to various regulatory capital requirements which
involve quantitative measures of the Company's assets, liabilities and
certain off-balance sheet items. The Company's capital amounts and
classification are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require that the Company
maintain amounts and ratios (set forth in the table below) of total and Tier
I capital to risk-weighted assets, and of Tier I capital to average assets.
As of December 31, 2003, the Company met all capital adequacy requirements to
which it is subject.
A summary of actual, required, and capital levels necessary to be considered
well-capitalized for Capital City Bank Group, Inc. consolidated and its
banking subsidiary, Capital City Bank, as of December 31, 2003 and December
31, 2002 are as follows:
73
To Be Well-
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in ------------------------------------------------------------
Thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
As of December 31, 2003:
- -----------------------
Tier I Capital:
CCBG $175,631 12.88% $ 54,547 4.00% * *
CCB 167,698 12.32% 54,438 4.00% $ 81,658 6.00%
Total Capital:
CCBG 188,059 13.79% 109,094 8.00% * *
CCB 180,126 13.24% 108,877 8.00% 136,096 10.00%
Tier I Leverage:
CCBG 175,631 9.51% 40,910 3.00% * *
CCB 167,698 9.10% 40,829 3.00% 68,048 5.00%
As of December 31, 2002:
- -----------------------
Tier I Capital:
CCBG $154,376 12.03% $ 51,340 4.00% * *
CCB 150,360 11.73% 51,261 4.00% $ 76,891 6.00%
Total Capital:
CCBG 166,871 13.00% 102,681 8.00% * *
CCB 162,855 12.71% 102,522 8.00% 128,152 10.00%
Tier I Leverage:
CCBG 154,376 8.46% 38,505 3.00% * *
CCB 150,360 8.25% 38,446 3.00% 64,076 5.00%
*Not applicable to bank holding companies.
Note 15
DIVIDEND RESTRICTIONS
Substantially all the Company's retained earnings are undistributed earnings
of its banking subsidiary which are restricted by various regulations
administered by federal and state bank regulatory authorities.
The approval of the appropriate regulatory authority is required if the total
of all dividends declared by a subsidiary bank in any calendar year exceeds
the bank's net profits (as defined) for that year combined with its retained
net profits for the preceding two calendar years. In 2004, the bank
subsidiary may declare dividends without regulatory approval of $24.7 million
plus an additional amount equal to the net profits of the Company's
subsidiary bank for 2004 up to the date of any such dividend declaration.
Note 16
RELATED PARTY INFORMATION
DuBose Ausley, a Director of the Company, is employed by and is the former
Chairman of Ausley & McMullen, the Company's general counsel. Fees paid by
the Company and its subsidiary for legal services, in aggregate, approximated
$765,000, $647,000, and $534,000 during 2003, 2002, and 2001, respectively.
Under a lease agreement expiring in 2024, the Bank subsidiary leases land
from a partnership in which several directors and officers have an interest.
The lease agreement with Smith Interests General Partnership L.L.P., provides
for annual lease payments of approximately $85,000, to be adjusted for
inflation in future years.
74
At December 31, 2003 and 2002, certain officers and directors were indebted
to the Company's bank subsidiary in the aggregate amount of $17.8 million and
$17.6 million, respectively. During 2003, $26.3 million in new loans were
made and repayments totaled $26.1 million. In the opinion of management,
these loans were made on similar terms as loans to other individuals of
comparable creditworthiness and were all current at year-end.
Note 17
SUPPLEMENTARY INFORMATION
Components of other noninterest income and noninterest expense in excess of
1% of the sum of total interest income and noninterest income, which are not
disclosed separately elsewhere, are presented below for each of the
respective years.
(Dollars in Thousands) 2003 2002 2001
- -------------------------------------------------------------------
Noninterest Income:
Merchant Fee Income $4,563 $3,715 $3,612
Interchange Commission Fees 2,183 2,133 2,014
Noninterest Expense:
Professional Fees 1,918 1,895 1,301
Printing & Supplies 1,742 1,772 1,757
Commission/Service Fees 4,181 3,464 2,863
Telephone 1,872 1,832 1,617
Less than 1% of the appropriate threshold.
Note 18
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISKS
The Company is a party to financial instruments with off-balance sheet risks
in the normal course of business to meet the financing needs of its
customers. These financial instruments consist of commitments to extend
credit and standby letters of credit.
The Company's maximum exposure to credit loss under standby letters of credit
and commitments to extend credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in establishing
commitments and issuing letters of credit as it does for on-balance sheet
instruments. As of December 31, 2003, the amounts associated with the
Company's off-balance sheet obligations were as follows:
(Dollars in Thousands) Amount
- ------------------------------------------------------------
Commitments to Extend Credit $290,311
Standby Letters of Credit $ 6,278
Commitments include unfunded loans, revolving lines of credit
(including credit card lines) and other unused commitments.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities. In general, management does not
anticipate any material losses as a result of participating in these types of
transactions. However, any potential losses arising from such transactions
are reserved for in the same manner as management reserves for its other
credit facilities.
For both on- and off-balance sheet financial instruments, the Company
requires collateral to support such instruments when it is deemed necessary.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained upon extension
75
of credit is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include deposits held in financial
institutions; U.S. Treasury securities; other marketable securities; real
estate; accounts receivable; property, plant and equipment; and inventory.
Note 19
FAIR VALUE OF FINANCIAL INSTRUMENTS
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items
include Cash and Due From Banks, Interest Bearing Deposits with Other Banks,
Federal Funds Sold, Federal Funds Purchased, Securities Sold Under Repurchase
Agreements, and Short-Term Borrowings. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. The resulting fair values may be significantly
affected by the assumptions used, including the discount rates and estimates
of future cash flows.
The methods and assumptions used to estimate the fair value of the Company's
other financial instruments are as follows:
Investment Securities - Fair values for investment securities are based on
quoted market prices. If a quoted market price is not available, fair value
is estimated using market prices for similar securities.
Loans - The loan portfolio is segregated into categories and the fair value
of each loan category is calculated using present value techniques based upon
projected cash flows and estimated discount rates. The calculated present
values are then reduced by an allocation of the allowance for loan losses
against each respective loan category.
Deposits - The fair value of Noninterest Bearing Deposits, NOW Accounts,
Money Market Accounts and Savings Accounts are the amounts payable on demand
at the reporting date. The fair value of fixed maturity certificates of
deposit is estimated using present value techniques and rates currently
offered for deposits of similar remaining maturities.
Long-Term Debt - The fair value of each note is calculated using present
value techniques, based upon projected cash flows and estimated discount
rates as well as rates being offered for similar debt.
Commitments to Extend Credit and Standby Letters of Credit - The fair value
of commitments to extend credit is estimated using the fees currently charged
to enter into similar agreements, taking into account the present
creditworthiness of the counterparties. Fair value of these fees is not
material.
76
The Company's financial instruments that have estimated fair values are
presented below:
At December 31,
---------------------------------------------------
2003 2002
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Thousands) Value Value Value Value
- ---------------------------------------------------------------------------------
Financial Assets:
Cash $ 93,140 93,140 $ 89,823 $ 89,823
Short-Term Investments 125,452 125,452 170,936 170,936
Investment Securities 181,734 181,734 180,315 180,315
Loans, Net of Allowance
for Loan Losses 1,329,203 1,365,541 1,272,726 1,331,724
---------- ---------- ---------- ----------
Total Financial Assets $1,729,529 $1,765,867 $1,713,800 $1,772,798
========== ========== ========== ==========
Financial Liabilities:
Deposits $1,474,205 1,486,539 $1,434,200 $1,438,964
Short-Term Borrowings 108,184 108,184 113,675 113,675
Long-Term Debt 46,475 47,270 71,745 72,631
---------- ---------- ---------- ----------
Total Financial Liabilities $1,628,864 $1,641,993 $1,619,620 $1,625,270
========== ========== ========== ==========
Certain financial instruments and all nonfinancial instruments are excluded
from the above table. The disclosures also do not include certain intangible
assets such as customer relationships, deposit base intangibles and goodwill.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Note 20
PARENT COMPANY FINANCIAL INFORMATION
The operating results of the parent company for the three years ended
December 31, are shown below:
Parent Company Statements of Income
(Dollars in Thousands) 2003 2002 2001
- -------------------------------------------------------------------------------
OPERATING INCOME
Income Received from Subsidiary Bank:
Dividends $11,599 $12,678 $12,963
Overhead Fees 2,935 3,061 2,393
Other Income - 59 -
------- ------- -------
Total Operating Income 14,534 15,798 15,356
------- ------- -------
OPERATING EXPENSE
Salaries and Associate Benefits 1,847 2,311 1,878
Interest on Debt - 7 83
Professional Fees 1,104 994 399
Advertising 193 138 132
Legal Fees 374 197 85
Other 404 335 285
------- ------- -------
Total Operating Expense 3,922 3,982 2,862
------- ------- -------
Income Before Income Taxes and Equity
in Undistributed Earnings of Subsidiary Bank 10,612 11,816 12,494
Income Tax Benefit (278) (248) (124)
------- ------- -------
Income Before Equity in Undistributed
Earnings of Subsidiary Bank 10,890 12,064 12,618
Equity in Undistributed Earnings
of Subsidiary Bank 14,303 11,018 4,248
------- ------- -------
Net Income $25,193 $23,082 $16,866
======= ======= =======
77
The following are condensed statements of financial condition of the parent
company at December 31:
Parent Company Statements of Financial Condition
(Dollars in Thousands) 2003 2002
- ----------------------------------------------------------------------------
ASSETS
Cash and Due From Subsidiary Bank $ 7,850 $ 3,970
Investment in Subsidiary Bank 196,316 183,780
Other Assets 1,310 1,148
-------- --------
Total Assets $205,476 $188,898
======== ========
LIABILITIES
Other Liabilities $ 2,667 $ 2,367
-------- --------
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value, 3,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 90,000,000
shares authorized; 13,236,462 and 13,196,211
shares issued and outstanding at December 31,
2003 and December 31, 2002, respectively 132 132
Additional Paid-In Capital 16,157 14,691
Retained Earnings 185,134 168,587
Accumulated Other Comprehensive Income, Net of Tax 1,386 3,121
-------- --------
Total Shareowners' Equity 202,809 186,531
-------- --------
Total Liabilities and Shareowners' Equity $205,476 $188,898
======== ========
All share and per share data have been adjusted to reflect the 5-for-4
stock split effective June 13, 2003.
The cash flows for the parent company for the three years ended December 31,
were as follows:
Parent Company Statements of Cash Flows
(Dollars in Thousands) 2003 2002 2001
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $25,193 $23,082 $16,866
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Equity in Undistributed
Earnings of Subsidiary Bank (14,303) (11,018) (4,248)
Non-Cash Compensation 508 892 489
(Increase) Decrease in Other Assets (130) (256) 206
Increase (Decrease) in Other Liabilities 300 (2,603) 386
------- ------- -------
Net Cash Provided by Operating Activities 11,568 10,097 13,699
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Cash Received From Acquisitions - - 1,471
------- ------- -------
CASH FROM FINANCING ACTIVITIES:
Borrowings of Long-Term Debt - 2,040 1,025
Repayments of Long-Term Debt - (2,040) (2,275)
Payment of Dividends (8,646) (6,644) (6,376)
Repurchase of Common Stock (17) (3,395) (4,942)
Issuance of Common Stock 975 688 435
------- ------- -------
Net Cash Used in Financing Activities (7,688) (9,351) (12,133)
------- ------- -------
Net Increase in Cash 3,880 746 3,037
Cash at Beginning of Period 3,970 3,224 187
------- ------- -------
Cash at End of Period $ 7,850 $ 3,970 $ 3,224
======= ======= =======
78
Note 21
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that certain
transactions and other economic events that bypass the income statement be
displayed as other comprehensive income (loss). The Company's comprehensive
income (loss) consists of net income (loss) and changes in unrealized gains
(losses) on securities available-for-sale, net of income taxes. Changes in
unrealized gains (losses) (net of taxes) on securities are reported as other
comprehensive (loss) income and totaled ($1,735), $771, and $3,872, for 2003,
2002 and 2001, respectively. Reclassification adjustments consist only of
realized gains on sales of investment securities and were not material for
the years ended December 31, 2003, 2002 and 2001.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None
Item 9A. 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
79
controls and procedures provided reasonable assurance that the disclosure
controls and procedures are effective to accomplish their objectives.
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.
Part III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference to the sections entitled "Corporate
Governance," "Nominees for Election as Directors," "Continuing Directors and
Executive Officers" and "Share Ownership" in the Registrant's Proxy Statement
dated April 2, 2004, to be filed on or about April 2, 2004.
Item 11. Executive Compensation
Incorporated herein by reference to the sections entitled "Executive
Compensation Tables," the subsection entitled "Directors' Fees" under the
section entitled "Corporate Governance," "Compensation Committee Report,"
"Retirement Plans," and "Five Year Performance Graph" in the Registrant's
Proxy Statement dated April 2, 2004, to be filed on or about April 2, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the section entitled "Share Ownership"
in the Registrant's Proxy Statement dated April 2, 2004, to be filed on or
about April 2, 2004.
Equity Compensation Plan Information
Incorporated herein by reference to the section entitled "Executive
Compensation Tables" in the Registrant's Proxy Statement dated April 2, 2004,
to be filed on or about April 2, 2004.
For additional information about the Company's equity compensation plans, see
Stock Based Compensation in Note 1 in the Notes to the Consolidated Financial
Statements.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the subsection entitled "Transactions
With Management and Related Parties" under the section entitled "Executive
Officers and Transactions with Management" in the Registrant's Proxy
Statement dated April 2, 2004, to be filed on or about April 2, 2004.
Item 14. Principal Accountant Fees and Services
Incorporated herein by reference to the section entitled "Fees Paid to
Principal Accountants" in the Registrant's Proxy Statement dated April 2,
2004, to be filed on or about April 2, 2004.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Independent Auditors' Report
Report of Independent Public Accountants
Consolidated Statements of Income for Years Ended December 31, 2003,
2002 and 2001
Consolidated Statements of Financial Condition as of December 31,
2003 and 2002
80
Consolidated Statements of Changes in Shareowners' Equity for Years
Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for Years Ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Other schedules and exhibits are omitted because the required
information either is not applicable or is shown in the financial
statements or the notes thereto.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K
Reg. S-K
Exhibit
Table
Item No. Description of Exhibit
2(a) Agreement and Plan of Merger, dated as of September 25, 2000, by
and between Capital City Bank Group, Inc. and First Bankshares of
West Point, Inc. - incorporated herein by reference to Exhibit 2(d)
of the Registrant's Form 10-K (filed 3/30/01)(No. 0-13358).
2(b) Purchase and Assumption Agreement, dated as of October 3, 2000, by
and between Capital City Bank and First Union National Bank -
incorporated herein by reference to Exhibit 2(e) of the
Registrant's Form 10-K (filed 3/30/01)(No. 0-13358).
2(c) Plan of Merger and Merger Agreement, dated August 23, 2001, by and
between Capital City Bank and First National Bank of Grady County -
incorporated herein by reference to Exhibit 2(f) of the
Registrant's Form 10-K (filed 3/28/02)(No. 0-13358).
2(d) Agreement and Plan of Merger, dated as of January 7, 2004, by and
among Capital City Bank Group, Inc., Capital City Bank, Synovus
Financial Corp. and Quincy State Bank - incorporated herein by
reference to the Registrant's Form 8-K (filed 1/13/04)(No. 0-
13358).
3(a) Amended and Restated Articles of Incorporation - incorporated
herein by reference to Exhibit 3 of the Registrant's 1996 Proxy
Statement (filed 4/11/96)(No. 0-13358).
3(b) Amended and Restated Bylaws - incorporated herein by reference to
Exhibit 3(b) of the Registrant's Form 10-Q (filed 1/13/97)(No. 0-
13358).
10(a) Promissory Note and Pledge and Security Agreement evidencing a line
of credit by and between Registrant and SunTrust Bank, dated
November 16, 1995 - incorporated herein by reference to Exhibit
10(b) of the Registrant's Form 10-K (filed 3/29/96)(No. 0-13358).
10(b) Capital City Bank Group, Inc. 1996 Associate Incentive Plan, as
amended - incorporated herein by reference to Exhibit 10 of the
Registrant's Form S-8 (filed 12/23/96)(No. 333-18557).
10(c) Capital City Bank Group, Inc. Amended and Restated Director Stock
Purchase Plan - incorporated herein by reference to Exhibit 10(d)
of the Registrant's Form 10-K (filed 3/30/00)(No. 0-13358).
10(d) Capital City Bank Group, Inc. Supplemental Executive Retirement
Plan - incorporated herein by reference to Exhibit 10(d) of the
Registrant's Form 10-K (filed 3/27/03)(No. 0-13358).
81
14 Capital City Bank Group, Inc. Code of Ethics for the Chief Financial
Officer and Senior Financial Officers - Filed with this report.
21 Subsidiaries of the Registrant - Filed with this report.
23 Consent of Independent Auditors - Filed with this report.
31.1 Certification of CEO pursuant to Securities and Exchange Act
Rule 13a - 14(a) / 15d-14(a) as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 - Filed with this report.
31.2 Certification of CFO pursuant to Securities and Exchange Act
Rule 13a - 14(a) / 15d-14(a) as adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 - Filed with this report.
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Filed
with this report.
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Filed
with this report.
(b) Reports on Form 8-K
On October 27, 2003, the Company furnished a Current Report on Form 8-K,
under Item 12, containing an October 23, 2003 press release announcing
its earnings for the quarter ended September 30, 2003. (Such press
release is not incorporated by reference herein or deemed "filed" within
meaning of Section 18 of the Securities Act.)
On January 13, 2004, the Company furnished a Current Report on Form 8-K,
under Item 5, containing a January 7, 2004 press release announcing a
definitive agreement to acquire Quincy State Bank, a wholly owned
banking subsidiary of Synovus Financial Corp.
On January 29, 2004, the Company furnished a Current Report on Form 8-K,
under Item 12, containing a January 29, 2004 press release announcing
its earnings for the quarter ended December 31, 2003. (Such press
release is not incorporated by reference herein or deemed "filed" within
meaning of Section 18 of the Securities Act.)
82
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on March 12, 2004, on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL CITY BANK GROUP, INC.
/s/ William G. Smith, Jr.
- ------------------------------
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 12, 2004 by the following persons in the
capacities indicated.
/s/ William G. Smith, Jr.
- ------------------------------
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ J. Kimbrough Davis
- ------------------------------
J. Kimbrough Davis
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Directors:
/s/ DuBose Ausley
- ------------------------------
DuBose Ausley
/s/ Thomas A. Barron
- ------------------------------
Thomas A. Barron
/s/ Frederick Carroll, III
- ------------------------------
Frederick Carroll, III
/s/ Cader B. Cox, III
- ------------------------------
Cader B. Cox, III
/s/ J. Everitt Drew
- ------------------------------
J. Everitt Drew
/s/ John K. Humphress
- ------------------------------
John K. Humphress
/s/ Lina S. Knox
- ------------------------------
Lina S. Knox
/s/ Ruth A. Knox
- ------------------------------
Ruth A. Knox
/s/ Henry Lewis III
- ------------------------------
Henry Lewis III
/s/ John R. Lewis
- ------------------------------
John R. Lewis
/s/ William G. Smith, Jr.
- ------------------------------
William G. Smith, Jr.
83
39
7
31
69
71
73