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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended:
March 31, 2004
--------------
Commission File Number 0-13358
-------
CAPITAL CITY BANK GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2273542
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
217 North Monroe Street, Tallahassee, Florida 32301
(Address of principal executive offices)
Registrant's telephone number, including area code:
(850) 671-0300
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of April 30, 2004, there were issued and outstanding 13,274,579 shares of
the registrant's common stock.
1
CAPITAL CITY BANK GROUP, INC.
FORM 10-Q I N D E X
ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER
- ---- ----------------------------- -----------
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
3. Qualitative and Quantitative Disclosure of
Market Risk 24
4. Controls and Procedures 26
ITEM PART II. OTHER INFORMATION
- ---- --------------------------
1. Legal Proceedings Not Applicable
2. Changes in Securities and Use of Proceeds Not Applicable
3. Defaults Upon Senior Securities Not Applicable
4. Submission of Matters to a Vote of
Security Holders Not Applicable
5. Other Information 27
6. Exhibits and Reports on Form 8-K 27
Signatures 27
INTRODUCTORY NOTE
This Report and other Company communications and statements may contain
"forward-looking statements," including statements about our beliefs, plans,
objectives, goals, expectations, estimates and intentions. These statements
are subject to significant risks and uncertainties and are subject to change
based on various factors, many of which are beyond our control. For
information concerning these factors and related matters, see Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
(Dollars In Thousands, Except Per Share Data) 2004 2003
- ------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $ 21,272 $ 22,164
Investment Securities:
U. S. Treasury 229 136
U. S. Government Agencies and Corporations 329 866
States and Political Subdivisions 541 631
Other Securities 77 178
Funds Sold 222 352
---------- ----------
Total Interest Income 22,670 24,327
---------- ----------
INTEREST EXPENSE
Deposits 2,394 3,226
Short-Term Borrowings 287 329
Long-Term Debt 497 545
---------- ----------
Total Interest Expense 3,178 4,100
---------- ----------
Net Interest Income 19,492 20,227
Provision for Loan Losses 961 779
---------- ----------
Net Interest Income After
Provision for Loan Losses 18,531 19,448
---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 3,944 3,967
Data Processing 633 558
Asset Management Fees 741 605
Securities Transactions - 11
Mortgage Banking Revenues 694 1,344
Other 3,869 3,460
---------- ----------
Total Noninterest Income 9,881 9,945
---------- ----------
NONINTEREST EXPENSE
Salaries and Associate Benefits 10,740 10,128
Occupancy, Net 1,617 1,369
Furniture and Equipment 2,063 1,795
Conversion/Merger Expense 42 -
Other 6,613 6,136
---------- ----------
Total Noninterest Expense 21,075 19,428
---------- ----------
Income Before Income Taxes 7,337 9,965
Income Taxes 2,490 3,604
---------- ----------
NET INCOME $ 4,847 $ 6,361
========== ==========
Basic Net Income Per Share $ .37 $ .48
========== ==========
Diluted Net Income Per Share $ .37 $ .48
========== ==========
Cash Dividends Per Share $ .180 $ .136
========== ==========
Average Basic Shares Outstanding 13,262,094 13,206,924
========== ==========
Average Diluted Shares Outstanding 13,285,579 13,253,424
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
(Unaudited)
March 31, December 31,
(Dollars In Thousands, Except Per Share Data) 2004 2003
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 93,427 $ 93,140
Funds Sold 90,469 125,452
---------- ----------
Total Cash and Cash Equivalents 183,896 218,592
Investment Securities, Available-for-Sale 188,763 181,734
Loans, Net of Unearned Interest 1,465,804 1,341,632
Allowance for Loan Losses (13,720) (12,429)
---------- ----------
Loans, Net 1,452,084 1,329,203
Premises and Equipment, Net 56,394 54,011
Intangibles 41,512 25,792
Other Assets 34,604 37,170
---------- ----------
Total Assets $1,957,253 $1,846,502
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 482,703 $ 455,550
Interest Bearing Deposits 1,088,963 1,018,655
---------- ----------
Total Deposits 1,571,666 1,474,205
Short-Term Borrowings 112,343 108,184
Long-Term Debt 49,950 46,475
Other Liabilities 16,366 14,829
---------- ----------
Total Liabilities 1,750,325 1,643,693
SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value, 3,000,000
shares authorized; no shares outstanding - -
Common Stock, $.01 par value; 90,000,000 shares
authorized; 13,273,497 and 13,236,462 shares
issued and outstanding at March 31, 2004 and
December 31, 2003, respectively 133 132
Additional Paid-In Capital 17,787 16,157
Retained Earnings 187,592 185,134
Accumulated Other Comprehensive Income, Net of Tax 1,416 1,386
---------- ----------
Total Shareowners' Equity 206,928 202,809
---------- ----------
Total Liabilities and Shareowners' Equity $1,957,253 $1,846,502
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
(Dollars in Thousands) 2004 2003
- -------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,847 $ 6,361
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 961 779
Depreciation 1,284 1,151
Net Securities Amortization 651 532
Amortization of Intangible Assets 826 811
Gain on Sale of Investment Securities - (11)
Non-Cash Compensation 1,588 228
Net Decrease in Other Assets 2,751 202
Net Increase in Other Liabilities 1,600 2,191
-------- --------
Net Cash Provided by Operating Activities 14,508 12,244
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Payments/Maturities/Sales of
Investment Securities Available-for-Sale 47,347 35,464
Purchase of Investment Securities Available-for-Sale (38,829) (46,554)
Net Increase in Loans (35,324) (27,222)
Net Cash Received From Acquisition (18,055) -
Purchase of Premises & Equipment (1,682) (3,739)
Sales of Premises & Equipment 25 1
-------- --------
Net Cash Used In Investing Activities (46,518) (42,050)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Deposits (4,973) 24,870
Net Increase in Short-Term Borrowings 4,158 6,463
Borrowing of Long-Term Debt 737 2,560
Repayment of Long-Term Debt (261) (653)
Dividends Paid (2,389) (1,796)
Issuance of Common Stock 43 7
-------- --------
Net Cash (Used In) Provided By Financing Activities (2,685) 31,451
-------- --------
Net (Decrease) Increase in Cash and
Cash Equivalents (34,695) 1,645
Cash and Cash Equivalents at Beginning of Period 218,592 260,759
-------- --------
Cash and Cash Equivalents at End of Period $183,897 $262,404
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 735 $ 3,008
======== ========
Interest Paid on Debt $ 292 $ 886
======== ========
Transfer of Loans to ORE $ 210 $ 50
======== ========
Income Taxes Paid $ 27 $ 948
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 1,588 $ 333
======== ========
Transfer of Current Portion of Long-Term Debt to
Short-Term Borrowings $ - $ 20,000
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
CAPITAL CITY BANK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, including Regulation S-X. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations. Prior period financial statements
have been reformatted and/or amounts reclassified, as necessary, to conform
with the current presentation.
In the opinion of management, the consolidated financial statements contain
all adjustments, which are those of a recurring nature, and disclosures
necessary to present fairly the financial position of the Company as of March
31, 2004 and December 31, 2003, the results of operations for the three month
periods ended March 31, 2004 and 2003, and cash flows for the three month
periods ended March 31, 2004 and 2003.
The Company and its subsidiary follow accounting principles generally
accepted in the United States of America and reporting practices applicable
to the banking industry. The principles that materially affect its financial
position, results of operations and cash flows are set forth in Notes to
Consolidated Financial Statements which are included in the Company's 2003
Annual Report on Form 10-K.
Stock-based Compensation
- ------------------------
As of March 31, 2004, 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
executive incentive stock option arrangement effective January 1, 2004. 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 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 were accounted for under APB 25. The cost
related to all stock-based associate compensation included in net income is
accounted for under the fair value based method during 2004 as all awards
granted now have effective dates after January 1, 2003.
6
Period Ended March 31,
------------------------
(Dollars in Thousands, Except Per Share Data) 2004 2003
- ------------------------------------------------------------------------------
Net income, as reported $4,847 $6,361
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 119 141
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related tax effects (119) (99)
------ ------
Pro forma net income $4,847 $6,403
====== ======
Earnings per share:
Basic-as reported $ .37 $ .48
====== ======
Basic-pro forma $ .37 $ .49
====== ======
Diluted-as reported $ .37 $ .48
====== ======
Diluted-pro forma $ .37 $ .48
====== ======
(2) ACQUISITIONS
------------
On March 19, 2004, the Company completed its merger with Quincy State Bank
("QSB"), an affiliate of Synovus Financial Corp. Results of QSB's operations
have been included in the Company's consolidated financial statements since
March 20, 2004. Quincy State Bank had $116.6 million in assets with one
office in Quincy, Florida and one office in Havana, Florida. The transaction
was accounted for as a purchase and resulted in approximately $14.9 million
of intangible assets, including approximately $12.5 million in goodwill and a
core deposit intangible of $2.4 million. The core deposit intangible is
being amortized over a 7-year period.
The information below lists the consolidated assets and liabilities of Quincy
State Bank as of March 19, 2004, along with the consideration paid:
(Dollars in Thousands) Quincy State Bank
- ------------------------------------------------------------
Cash and Due From Banks $ 2,295
Funds Sold 6,949
--------
Total Cash and Cash Equivalents 9,244
Investment Securities, Available-for-Sale 16,150
Loans, Net of Unearned Interest 88,727
Intangible Asset 14,915
Other Assets 2,498
--------
Total Assets $131,534
Total Deposits $102,434
Short-Term Borrowings 3,000
--------
Total Liabilities $105,434
Consideration Paid to Quincy State Bank
Shareowners $ 26,100
========
7
The following unaudited pro forma financial information for the three months
ended March 31, 2004 and 2003 presents the consolidated operations of the
Company as if the QSB acquisition had been made on January 1, 2003. The
unaudited pro forma financial information is provided for informational
purposes only, should not be construed to be indicative of the Company's
consolidated results of operations had the acquisition of QSB been
consummated on this earlier date, and do not project the Company's results of
operations for any future period:
For 3 Months Ended March 31,
----------------------------
(Dollars in Thousands, Except Per Share Data) 2004 2003
- -----------------------------------------------------------------------------
Interest Income $24,376 $26,125
Interest Expense 3,407 4,458
------- -------
Net Interest Income 20,969 21,667
Provision for Loan Losses 991 824
------- -------
Net Interest Income After
Provision for Loan Losses 19,978 20,843
Noninterest Income 10,259 10,480
Noninterest Expense 21,931 20,273
------- -------
Income Before Income Taxes 8,306 11,050
Income Taxes 2,829 3,983
------- -------
Net Income $ 5,477 $ 7,067
======= =======
Basic Net Income Per Share $ .41 $ .54
======= =======
Diluted Net Income Per Share $ .41 $ .53
======= =======
On March 19, 2004, the Company completed its purchase of fiduciary assets
from Synovus Trust Company for $2.0 million. This purchase is subject to a
$800,000 earn-out agreement and, as a result, a $1.2 million intangible was
recorded with the balance, to the extent earned, to be recorded in the fourth
quarter of 2004. This intangible is being amortized over a 10-year period.
(3) INVESTMENT SECURITIES
---------------------
The carrying values and related market value of investment securities at
March 31, 2004 and December 31, 2003 were as follows:
March 31, 2004
-------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------
U.S. Treasury $ 61,707 $ 203 $ - $ 61,910
U.S. Government Agencies and Corporations 51,520 237 - 51,757
States and Political Subdivisions 50,830 1,385 3 52,212
Mortgage-Backed Securities 15,775 412 - 16,187
Other Securities 6,695 2 - 6,697
-------- ------ --- --------
Total Investment Securities $186,527 $2,239 $ 3 $188,763
======== ====== === ========
December 31, 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
======== ====== === ========
8
(4) LOANS
-----
The composition of the Company's loan portfolio at March 31, 2004 and
December 31, 2003 was as follows:
(Dollars in Thousands) March 31, 2004 December 31, 2003
- -------------------------------------------------------------------------------
Commercial, Financial and Agricultural $ 185,237 $ 160,048
Real Estate - Construction 96,285 89,149
Real Estate - Commercial Mortgage 449,677 391,250
Real Estate - Residential 336,826 327,212
Real Estate - Home Equity 119,496 116,810
Real Estate - Loans Held-for-Sale 3,903 4,240
Consumer 243,392 233,395
Other 30,988 19,528
---------- ----------
Loans, Net of Unearned Interest $1,465,804 $1,341,632
========== ==========
(5) ALLOWANCE FOR LOAN LOSSES
-------------------------
An analysis of the changes in the allowance for loan losses for the three-
month periods ended March 31, 2004 and 2003, was as follows:
March 31,
--------------------------
(Dollars in Thousands) 2004 2003
- -------------------------------------------------------------------
Balance, Beginning of Period $12,429 $12,495
Provision for Loan Losses 961 779
Recoveries on Loans Previously
Charged-Off 359 211
Loans Charged-Off (1,336) (1,048)
Acquired Reserves 1,307 -
------- -------
Balance, End of Period $13,720 $12,437
======= =======
Impaired loans are primarily defined as all nonaccruing loans for the loan
categories which are included within the scope of SFAS 114. Selected
information pertaining to impaired loans is depicted in the table below:
March 31,
------------------------------------------------
2004 2003
-------------------- ---------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- --------------------------------------------------------------------------------------
Impaired Loans:
With Related Valuation Allowance $1,066 $350 $ 641 $227
Without Related Valuation Allowance 437 - 732 -
Average Recorded Investment
for the Period 1,811 * 1,451 *
* Not Applicable
The Company recognizes income on impaired loans primarily on the cash basis.
Any change in the present value of expected cash flows is recognized through
the allowance for loan losses. For the periods ended March 31, 2004 and
2003, the Company recognized $11,000 and $5,000, respectively, in interest
income on impaired loans, all of which was collected in cash.
9
(6) DEPOSITS
--------
The composition of the Company's interest-bearing deposits at March 31, 2004
and December 31, 2003 was as follows:
(Dollars in Thousands) March 31, 2004 December 31, 2003
- ------------------------------------------------------------------------
NOW Accounts $ 294,726 $ 276,934
Money Market Accounts 222,298 207,934
Savings Deposits 128,767 110,834
Time Deposits 443,172 422,953
---------- ----------
Total Interest Bearing Deposits $1,088,963 $1,018,655
========== ==========
(7) INTANGIBLE ASSETS
-----------------
The Company had intangible assets of $41.5 million and $25.8 million at March
31, 2004 and December 31, 2003, respectively. Intangible assets were as
follows (dollars in thousands):
March 31, 2004 December 31, 2003
----------------------- -----------------------
Gross Accumulated Gross Accumulated
Amount Amortization Amount Amortization
- -------------------------------------------------------------------------------------
Core Deposit Intangibles $36,149 $15,466 $33,752 $14,640
Goodwill 23,419 3,786 10,466 3,786
Other Identifiable Intangibles 1,200 4 - -
------- ------- ------- -------
Total Intangible Assets $60,768 $19,256 $44,218 $18,426
======= ======= ======= =======
Net Core Deposit Intangibles:
As of March 31, 2004 and December 31, 2003, the Company had net core deposit
intangibles of $20.7 million and $19.1 million, respectively. Amortization
expense for the first three months of 2004 and 2003 was $822,000 and
$811,000, respectively.
Goodwill:
As of March 31, 2004 and December 31, 2003, the Company had goodwill, net of
accumulated amortization, of $19.6 million and $6.7 million, respectively.
The increase in goodwill is due to the acquisition of Quincy State Bank in
March 2004. Goodwill is the Company's only intangible asset that is no
longer subject to amortization under the provisions of SFAS 142.
Other :
As of March 31, 2004, the Company had a customer relationship intangible, net
of accumulated amortization, of $1.2 million. This intangible was booked as
a result of the March 2004 acquisition of trust customer relationships from
Synovus Trust Company. Amortization expense for the first quarter of 2004
was $4,000. Estimated annual amortization expense is $120,000 based on use
of a 10 year useful life.
10
(8) EMPLOYEE BENEFIT PLANS
----------------------
The components of the net periodic benefit costs for the Company's qualified
benefit pension plan and Supplemental Executive Retirement Plan ("SERP") were
as follows:
Three months ended March 31,
------------------------------------------
Qualified Plan SERP
------------------ ------------------
(Dollars in Thousands) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 6.25% 6.75%
Long-term rate of return on assets 8.00% 8.25% N/A N/A
Service cost $ 925 $ 825 $24 $20
Interest cost 700 642 32 28
Expected return on plan assets (650) (542) N/A N/A
Transition obligation/(asset) amortization 0 1 0 0
Prior service cost amortization 50 54 15 15
Net loss/(gain) amortization 300 282 (9) (11)
------ ------ --- ---
Net periodic benefit cost $1,325 $1,262 $62 $52
====== ====== === ===
(9) 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. The Company's comprehensive income
(loss) consists of net income (loss) and changes in unrealized gains on
securities available-for-sale, net of income taxes. Changes in unrealized
gains (losses), net of taxes, on securities are reported as other
comprehensive income (loss) and totaled $30,000 and $(485,000) for the three
months ended March 31, 2004 and 2003, respectively. Reclassification
adjustments consist only of realized gains on sales of investment securities
and were not material for the three months ended March 31, 2004 and 2003.
11
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
2004 2003 2002
---------- ---------------------------------------------- ----------------------------------
First Fourth Third Second First Fourth Third Second
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 22,670 $ 23,022 $ 23,484 $ 23,997 $ 24,327 $ 25,272 $ 25,555 $ 25,752
Interest Expense 3,178 3,339 3,506 3,894 4,099 4,667 4,946 5,693
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 19,492 19,683 19,978 20,103 20,227 20,605 20,609 20,059
Provision for
Loan Losses 961 850 921 886 779 863 992 641
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 18,531 18,833 19,057 19,217 19,448 19,742 19,617 19,419
Noninterest Income 9,881 10,614 10,952 10,428 9,945 10,898 8,810 8,333
Conversion/
Merger Expense 42 - - - - 59 - 39
Noninterest Expense 21,033 20,593 20,184 19,516 19,428 20,191 19,400 19,228
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 7,337 8,854 9,825 10,129 9,965 10,390 9,027 8,485
Provision for
Income Taxes 2,490 2,758 3,529 3,689 3,604 3,668 3,226 3,037
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 4,847 $ 6,096 $ 6,296 $ 6,440 $ 6,361 $ 6,722 $ 5,801 $ 5,448
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 19,811 $ 20,020 $ 20,332 $ 20,456 $ 20,597 $ 21,006 $ 21,026 $ 20,484
Per Common Share:
Net Income Basic $ .37 $ .47 $ .47 $ .49 $ .48 $ .51 $ .44 $ .41
Net Income Diluted .37 .46 .47 .49 .48 .51 .44 .41
Dividends Declared .180 .180 .170 .170 .136 .136 .122 .122
Diluted Book Value 15.54 15.27 15.00 14.73 14.42 14.08 13.75 13.39
Market Price:
High 45.55 46.83 40.93 36.43 32.32 32.04 29.55 27.84
Low 39.05 36.62 35.00 29.74 26.81 22.26 22.32 20.60
Close 41.25 45.99 38.16 36.08 31.29 31.35 26.45 27.62
Selected Average
Balances:
Loans $1,357,206 $1,329,673 $1,336,139 $1,316,705 $1,289,161 $1,292,892 $1,266,591 $1,234,787
Earning Assets 1,634,468 1,636,269 1,634,689 1,612,133 1,615,287 1,591,535 1,511,485 1,547,603
Assets 1,830,496 1,819,552 1,816,005 1,786,991 1,796,657 1,762,174 1,678,620 1,720,095
Deposits 1,457,160 1,451,095 1,451,879 1,415,798 1,407,763 1,404,818 1,388,396 1,440,615
Shareowners' Equity 206,395 201,939 199,060 194,781 190,416 185,412 180,910 176,678
Common Equivalent
Average Shares:
Basic 13,262 13,223 13,221 13,209 13,207 13,189 13,189 13,219
Diluted 13,286 13,265 13,260 13,255 13,253 13,238 13,238 13,257
Ratios:
ROA 1.06% 1.33% 1.38% 1.45% 1.44% 1.51% 1.37% 1.27%
ROE 9.45% 11.98% 12.55% 13.26% 13.55% 14.38% 12.72% 12.37%
Net Interest
Margin (FTE) 4.88% 4.85% 4.94% 5.09% 5.17% 5.24% 5.52% 5.30%
Efficiency Ratio 68.06% 64.58% 61.93% 60.57% 60.96% 60.75% 62.31% 63.91%
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis ("MD&A") provides supplemental
information, which sets forth the major factors that have affected the
Company's financial condition and results of operations and should be read in
conjunction with the Consolidated Financial Statements and related notes.
The MD&A is divided into subsections entitled "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 2004 compares with prior years. Throughout this
section, Capital City Bank Group, Inc., and its subsidiary, collectively, is
referred to as "CCBG" or the "Company." Capital City Bank and its
subsidiaries are referred to as "CCB" or the "Bank."
The period-to-date averages used in this report are based on daily balances
for each respective period. In certain circumstances, comparing average
balances for the comparable quarters of consecutive years may be more
meaningful than simply analyzing year-to-date averages. Therefore, where
appropriate, quarterly averages have been presented for analysis and have
been noted as such. See Table I for average balances and interest rates
presented on a quarterly basis.
This Report and other Company communications and statements may contain
"forward-looking statements." These forward-looking statements include,
among others, statements about our beliefs, plans, objectives, goals,
expectations, estimates and intentions that are subject to significant risks
and uncertainties and are subject to change based on various factors, many of
which are beyond our control. The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify forward-looking statements. The
following factors, among others, could cause our financial performance to
differ materially from what is contemplated in those forward-looking
statements:
* The strength of the United States economy in general and the strength
of the local economies in which we conduct operations may be different
than expected resulting in, among other things, a deterioration in
credit quality or a reduced demand for credit, including the resultant
effect on our loan portfolio and allowance for loan losses;
* The effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the
Federal Reserve System;
* Inflation, interest rate, market and monetary fluctuations;
* Adverse conditions in the stock market and other capital markets and
the impact of those conditions on our capital markets and capital
management activities, including our investment and wealth management
advisory businesses and brokerage activities;
* Changes in U.S. foreign or military policy;
* The timely development of competitive new products and services by us
and the acceptance of those products and services by new and existing
customers;
* The willingness of customers to accept third-party products marketed by
us;
* The willingness of customers to substitute competitors' products and
services for our products and services and vice versa;
13
* The impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities and insurance);
* Technological changes;
* Changes in consumer spending and saving habits;
* The effect of corporate restructuring, acquisitions or dispositions,
including the actual restructuring and other related charges and the
failure to achieve the expected gains, revenue growth or expense
savings from such corporate restructuring, acquisitions or
dispositions;
* The growth and profitability of our noninterest or fee income being
less than expected;
* Unanticipated regulatory or judicial proceedings;
* The impact of changes in accounting policies by the Securities and
Exchange Commission;
* Adverse changes in the financial performance and/or condition of our
borrowers, which could impact the repayment of those borrowers'
outstanding loans; and
* Our success at managing the risks involved in the foregoing.
We caution that the foregoing list of important factors is not exhaustive.
Also, we do not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by us or on our behalf.
The Company is headquartered in Tallahassee, Florida and as of March 31, 2004
had 58 banking offices, 73 ATMs and 11 Bank 'N Shop locations in 22 counties
in Florida, Georgia and Alabama. The Company also has four mortgage lending
offices located in four additional Florida communities.
RESULTS OF OPERATIONS
Net Income
- ----------
Earnings were $4.8 million, or $.37 per diluted share, for the first quarter
of 2004. This compares to $6.4 million, or $.48 per diluted share for the
first quarter of 2003, a decrease of 23.8% and 22.9%, respectively.
The decrease in earnings was primarily attributable to a decline in the net
interest margin of 5.6% and an increase in noninterest expense of 8.5%. The
decline in the net interest margin primarily reflects lower earning asset
yields. Higher expense for associate salaries, occupancy, and professional
fees drove the increase in noninterest expense. Mortgage banking revenues
declined during the first quarter due to a decline in local real estate
market activity, but were partially offset by higher trust fees, data
processing fees, and other income.
14
A condensed earnings summary is presented below:
For the Three Months
Ended March 31,
----------------------------
(Dollars in Thousands) 2004 2003
- -----------------------------------------------------------------
Interest Income $22,670 $24,327
Taxable Equivalent Adjustment 319 370
------- -------
Interest Income (FTE) 22,989 24,697
Interest Expense 3,178 4,100
------- -------
Net Interest Income (FTE) 19,811 20,597
Provision for Loan Losses 961 779
Taxable Equivalent Adjustment 319 370
------- -------
Net Int. Inc. After Provision 18,531 19,448
Noninterest Income 9,881 9,945
Merger Expense 42 -
Noninterest Expense 21,033 19,428
------- -------
Income Before Income Taxes 7,337 9,965
Income Taxes 2,490 3,604
------- -------
Net Income $ 4,847 $ 6,361
======= =======
Percent Change (23.80)% 24.46%
Return on Average Assets 1.06% 1.44%
Return on Average Equity 9.45% 13.55%
Computed using a statutory tax rate of 35%
Annualized
Net Interest Income
- -------------------
Net interest income represents the Company's single largest source of
earnings and is equal to interest income and fees generated by earning
assets, less interest expense paid on interest bearing liabilities. First
quarter taxable-equivalent net interest income decreased $786,000, or 3.8%,
over the comparable quarter in 2003. The unfavorable impact was a result of
declining earning asset yields driven by the continued low rate environment.
Partially offsetting this unfavorable variance were lower funding costs and a
shift in earning assets mix. Margin pressure experienced in 2003 began to
stabilize in the first quarter of 2004. Table I on page 23 provides a
comparative analysis of the Company's average balances and interest rates.
For the first quarter of 2004, taxable-equivalent interest income decreased
$1.7 million, or 6.9% from the comparable quarter in 2003. Earning assets
yields declined to 5.66% in the first quarter of 2004 from 6.20% for the
first quarter of 2003 due primarily to repricing of existing earning assets.
The yield in 2004 remained constant with the fourth quarter of 2003, as
margin pressure began to stabilize. Income on earning assets is expected to
increase during the second quarter due to the change in earning asset mix
driven by strong loan growth and the recent acquisition of Quincy State
Bank..
Interest expense for the first quarter declined $922,000, or 22.5%, from the
comparable prior-year period. The favorable variance attributable to lower
rates continued to be enhanced by a favorable shift in mix, as certificates of
deposit, generally a higher cost deposit product, declined relative to total
deposits. Certificates of deposit, as a percent of year-to-date average
deposits, declined from 30.9% in first quarter 2003 to 28.9% in 2004. The
average rate paid on interest bearing liabilities in the first quarter of 2004
declined 30 basis points over the comparable period in 2003, to 1.09%.
15
The Company's interest rate spread (defined as the average federal taxable-
equivalent yield on earning assets less the average rate paid on interest
bearing liabilities) decreased from 4.81% in the first quarter of 2003 to
4.57% in the comparable period of 2004, reflecting the lower yield on earning
assets.
The Company's net interest margin percentage (defined as taxable-equivalent
net interest income divided by average earning assets) was 4.88% in the first
three months of 2004, versus 5.17% in the first three months of 2003. The
decrease in margin reflects the repricing of earning assets. The margin, in
terms of amount, should increase over the next quarter reflecting the Quincy
State Bank acquisition and a shift in earning asset mix.
Provisions for Loan Losses
- --------------------------
The provision for loan losses of $961,000 for the quarter was slightly higher
than the first quarter of 2003 due to an increase in net charge-offs.
Net charge-offs totaled $977,000, or .29% of average loans for the quarter
compared to $837,000, or .26% for the first quarter of 2003. Net charge-offs
remain at historically low levels.
Charge-off activity for the respective periods is set forth below:
Three Months Ended
March 31,
--------------------
(Dollars in Thousands) 2004 2003
- ------------------------------------------------------------------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 167 $ 142
Real Estate - Construction - -
Real Estate - Commercial Mortgage 39 -
Real Estate - Residential 83 19
Consumer 1,047 887
------ ------
Total Charge-offs 1,336 1,048
------ ------
RECOVERIES
Commercial, Financial and Agricultural 12 14
Real Estate - Construction - -
Real Estate - Commercial Mortgage - -
Real Estate - Residential - -
Consumer 347 197
------ ------
Total Recoveries 359 211
------ ------
Net Charge-offs $ 977 $ 837
====== ======
Net Charge-Offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .29% .26%
====== ======
Noninterest Income
- ------------------
Noninterest income declined $64,000, or .65%, from the first quarter of 2003
due primarily to lower mortgage banking revenues. This decline was partially
offset by higher fees for trust services, data processing, and other income.
Noninterest income represented 33.6% of operating revenue for the first
quarter of 2004, compared to 33.0% for the first quarter of 2003.
Service charges on deposit accounts declined $23,000, or .58%, from the
comparable period in 2003. Service charge revenues in any one period are
dependent on the number of accounts, primarily transaction accounts, and the
level of activity subject to service charges. The decline is due to slightly
lower monthly service charge fees, overdraft fees, and account analysis fees,
offset by a lower level of deposit account charge-offs. Management
anticipates that planned revisions to deposit account fees
16
during the second quarter and the recent integration of Quincy State Bank
will have a favorable impact on service charge revenues for the remainder of
the year.
Data processing revenues of $633,000 for the first quarter of 2004 reflect an
increase of $75,000, or 13.4%, over the comparable period in 2003. The
Company currently provides data processing services for six financial clients
and contract processing services for four non-financial clients. During both
the first quarter of 2004 and 2003, financial clients represented
approximately 63.0% of total processing revenues. Management believes
quarterly revenues for the remainder of 2004 will remain consistent with the
revenues generated in the first quarter of 2004.
Income from asset management activities increased $136,000, or 22.5%, over
the comparable quarter in 2003. This increase is due primarily to new
business generated in existing markets. At March 31, 2004, assets under
management totaled $631.5 million, representing an increase of $295.9
million, or 88.1% from the comparable period in 2003. The recent acquisition
of trust accounts from Synovus Trust Company added an additional $216.0
million (as of March 31, 2004) in managed trust assets and is expected to
enhance trust service fees for the remainder of the year.
Mortgage banking revenues declined $650,000, or 48.4%, over the comparable
quarter in 2003. Revenues were below expectations, reflecting a slow-down in
residential lending markets, which occurred during the latter part of the
fourth quarter and has continued through the first quarter of 2004. This
declining trend stabilized in March as production improved consistent with
management expectations and the residential pipeline increased 70% over year-
end. With the residential pipeline growing, management expects mortgage
revenues to improve in the second quarter.
Other income increased $409,000, or 11.8%, over the comparable quarter of
2003 driven primarily by a $190,000 increase in merchant fees and a $233,000
gain on sale of other real estate.
Noninterest income as a percent of average assets was 2.16% for the first
quarter of 2004, compared to 2.21% for the first quarter of 2003. This
decline is due primarily to the decrease in mortgage banking revenues.
Noninterest Expense
- -------------------
Noninterest expense in the first quarter of 2004 increased $1.6 million, or
8.5%, over the first quarter of 2003. Factors impacting the Company's
noninterest expense during the first quarter of 2004 are discussed below.
Compensation expense increased $612,000, or 6.0%, over the first quarter of
2003. This increase is due primarily to higher associate salaries of
$481,000, higher payroll taxes of $82,000, and higher pension plan expense of
$122,000. The increase in associate salaries and payroll taxes is reflective
of annual merit raises for associates. The higher pension plan expense is
due primarily to a lower discount rate used for the 2004 expense projection.
Occupancy expense, including premises, furniture, fixtures and equipment
increased $516,000, or 16.3%, over the first quarter of 2003. The Company
experienced increases in depreciation of $133,000, maintenance and repairs of
$161,000, premises rental of $72,000, and other FF&E expense of $133,000 from
the comparable period in 2003. The increase in depreciation is primarily
attributable to the addition of four new banking offices during 2003. Higher
maintenance and repairs expense was driven by upgrades and repairs to
existing banking offices and incremental expense incurred with the addition
of four new banking offices during 2003. The increase in premises rental
expenses is due primarily to the increase in the property lease for one
banking office. Other FF&E expense increased due to higher software license
expenses and noncapitalized FF&E expenses.
Other noninterest expense increased $519,000, or 8.5%, over the first quarter
of 2003. The increase was primarily the result of higher professional fees
of $382,000 and advertising expense of $126,000. Consulting projects, which
may vary as to their
17
magnitude and timing, led to higher professional fees. Advertising was
within budgeted amounts for the first quarter of 2004, but reflects an
increase over the first quarter of 2003 due to the timing of advertising
efforts throughout the year.
Net noninterest expense (noninterest income minus noninterest expense,
excluding intangible amortization) as a percent of average assets was 2.27%
in the first quarter of 2004 compared to 1.96% in 2003. The Company's
efficiency ratio (noninterest expense, excluding intangible amortization,
expressed as a percent of the sum of taxable-equivalent net interest income
plus noninterest income) was 68.06% in the first quarter 2004 compared to
60.96% for the comparable quarter in 2003. This unfavorable variance is due
to the lower level of operating revenue and increase in noninterest expense.
Income Taxes
- ------------
The provision for income taxes decreased $1.1 million, or 30.9%, over the
first quarter of 2003, reflecting lower taxable income and a decline in the
effective tax rate. The Company's effective tax rate for the first quarter
of 2004 was 33.9% compared to 36.2% for the same quarter in 2003. The
decline in the effective tax rate is primarily attributable to a modification
of the Company's tax structure enabling the Company to more effectively
manage its tax position.
FINANCIAL CONDITION
Asset and liability balances include Quincy State Bank, which was acquired on
March 19, 2004. The impact on average balances was not material due to the
size of the acquisition and the limited time it was on the books during the
first quarter.
The Company's average assets increased $33.8 million, or 1.9%, to $1.83
billion for the quarter-ended March 31, 2004 from $1.80 billion in the
comparable quarter of 2003. Average earning assets of $1.6 billion increased
$19.2 million, or 1.2%, from the comparable quarter of 2003 driven by a $68.0
million, or 5.3%, increase in average loans. Offsetting the increase in
average loans were decreases in short-term investments of $21.4 million, or
17.5%, and investment securities of $27.4 million, or 13.5%. Table I on page
23 presents average balances for the three-month periods ended March 31, 2004
and 2003.
The increase in average loans was primarily driven by strong gains in the
commercial and real estate loan (commercial mortgage and home equity)
categories of $16.7 million, or 11.7%, and $48.2 million, or 5.4%,
respectively. Loan growth was realized in all loan categories except
residential 1-4 family which declined $15.5 million, or 4.5%, from the
comparable period in 2003, primarily reflecting pay-offs due to refinancings
in the current low interest rate environment. The first quarter ended with
loans outstanding on budget.
Although management is continually evaluating alternative sources of revenue,
lending is a major component of the Company's business and is key to
profitability. While management strives to identify opportunities to
increase loans outstanding and enhance the portfolio's overall contribution
to earnings, it can do so only by adhering to sound lending principles
applied in a prudent and consistent manner. Thus, management will not relax
its underwriting standards in order to achieve designated growth goals.
Management maintains the allowance for loan losses at a level sufficient to
provide for the estimated credit losses inherent in the loan portfolio as of
the balance sheet date. Credit losses arise from the borrowers' ability and
willingness to repay, and from other risks inherent in the lending process,
including collateral risk, operations risk, concentration risk and economic
risk. All related risks of lending are considered when assessing the
adequacy of the loan loss reserve. The allowance for loan losses is
established through a provision charged to expense. Loans are charged
against the allowance when management believes collection of the principal is
unlikely. The allowance for loan losses is based on management's judgment of
overall loan quality. This is a significant estimate based on a detailed
analysis of the loan portfolio. The balance can and will change based on
changes in the assessment of the
18
portfolio's overall credit quality. Management evaluates the adequacy of the
allowance for loan losses on a quarterly basis.
The allowance for loan losses at March 31, 2004 was $13.7 million, an
increase of $1.3 million over year-end 2003. The increase reflects the
integration of acquired loan reserves from Quincy State Bank during the first
quarter. At quarter-end 2004, the allowance represented 0.94% of total
loans. While there can be no assurance that the Company will not sustain
loan losses in a particular period that are substantial in relation to the
size of the allowance, management's assessment of the loan portfolio does not
indicate a likelihood of this occurrence. It is management's opinion that
the allowance at March 31, 2004 is adequate to absorb losses inherent in the
loan portfolio at quarter-end.
The Company ended the first quarter of 2004 with approximately $84.3 million
in average net overnight funds. This represents a decline of $25.0 million,
or 22.9% from the 2003 level of $109.3 million. For a further discussion on
liquidity see the section "Liquidity and Capital Resources."
The investment portfolio is a significant component of the Company's
operations and, as such, it functions as a key element of liquidity and
asset/liability management. As of March 31, 2004, the average investment
portfolio decreased $27.4 million, or 13.5%, from the first quarter of 2003.
U.S. Agency, mortgage-backed, municipal, and corporate security balances
declined by $57.4 million from the first quarter of 2003 offset by an
increase in U.S. treasury balances of $30.0 million, reflecting the use of
maturity proceeds to fund loan growth. Management will continue to evaluate
the need to purchase securities for the investment portfolio throughout 2004,
taking into consideration liquidity needed to fund planned loan growth and
pledging requirements.
Securities are recorded at fair value and unrealized gains and losses
associated with these securities are recorded, net of tax, as a separate
component of shareowners' equity. At March 31, 2004 and December 31, 2003,
shareowners' equity included a net unrealized gain of $1.4 million.
The Company's nonperforming loans were $1.9 million at March 31, 2004, versus
$2.6 million for the same period in 2003. As a percent of nonperforming
loans, the allowance for loan losses represented 717% at March 31, 2004
versus 530% at December 31, 2003 and 485% at March 31, 2003. Nonperforming
loans include nonaccruing and restructured loans. Other real estate, which
includes property acquired either through foreclosure or by receiving a deed
in lieu of foreclosure, was $1.1 million at March 31, 2004, versus $5.0
million at December 31, 2003 and $1.2 million at March 31, 2003. The ratio
of nonperforming assets as a percent of loans plus other real estate was .20%
at March 31, 2004 compared to .54% at December 31, 2003 and .29% at March 31,
2003. The improvement in the ratio for the first quarter of 2004 reflects
the resolution of one $3.9 million problem asset that resulted in a gain on
the sale of real estate of $211,000.
Average total deposits increased $49.4 million from $1.4 billion in the first
quarter of 2003, to $1.5 billion in the first quarter of 2004. The increase
was driven by a $63.7 million increase in nonmaturity deposits and was
partially offset by a $14.3 million decline in higher cost certificates of
deposit which created a favorable shift in the deposit mix and a positive
impact on the Bank's cost of funds.
The ratio of average noninterest bearing deposits to total deposits was 29.8%
for the first quarter of 2004 compared to 27.7% for the first quarter of
2003. For the same periods, the ratio of average interest bearing
liabilities to average earning assets was 71.9% compared to 74.1%.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a banking institution is the availability of funds to meet
increased loan demand and/or excessive deposit withdrawals. Management
monitors the Company's financial position in an effort to ensure the Company
has ready access to sufficient liquid funds to meet normal transaction
requirements, take advantage of investment
19
opportunities and cover unforeseen liquidity demands. In addition to core
deposit growth, sources of funds available to meet liquidity demands include
cash received through ordinary business activities (i.e., collection of
interest and fees), federal funds sold, loan and investment maturities, bank
lines of credit for the Company, approved lines for the purchase of federal
funds by CCB and Federal Home Loan Bank advances. The Company maintains a
$25.0 million revolving line of credit. As of March 31, 2004, the Company
had no borrowings under the revolving line of credit.
During the first quarter of 2004, the Company increased borrowings by $3.7
million due primarily to the assumption of $3.0 million in FLHB advances from
the Quincy State Bank acquisition and $737,000 from the FHLB to match fund
loan growth. In the first quarter of 2004, the Bank made scheduled FHLB
advance payments totaling $563,000 and in March of 2004 repaid a $20 million
advance from the FLHB with a rate of 2.22%. This advance originated during
the third quarter of 2002, when $75 million was borrowed from the FHLB to
fund growth in loan demand and the decline in certificates of deposit.
The Company's equity capital was $206.9 million as of March 31, 2004 compared
to $202.8 million as of December 31, 2003. Management continues to monitor
its capital position in relation to its level of assets with the objective of
maintaining a strong capital position. The leverage ratio was 8.38% at March
31, 2004 compared to 9.51% at December 31, 2003. Further, the Company's
risk-adjusted capital ratio of 11.09% at March 31, 2004 exceeds the 8.0%
minimum requirement under risk-based regulatory guidelines.
Adequate capital and financial strength is paramount to the stability of CCBG
and its subsidiary bank. Cash dividends declared and paid should not place
unnecessary strain on the Company's capital levels. Although a consistent
dividend payment is believed to be favorably viewed by the financial markets
and shareowners, the Board of Directors will declare dividends only if the
Company is considered to have adequate capital. Future capital requirements
and corporate plans are considered when the Board considers a dividend
payment. Dividends declared and paid during the first quarter of 2004
totaled $.1800 per share compared to $.136 per share for the first quarter of
2003, an increase of 32.4%. The dividend payout ratios for the first quarter
ended 2004 and 2003 were 48.4% and 28.0%, respectively.
State and federal regulations as well as the Company's long-term debt
agreements place certain restrictions on the payment of dividends by both the
Company and the Bank. At March 31, 2004, these regulations and covenants did
not impair the Company's (or its subsidiary's) ability to declare and pay
dividends or to meet other existing obligations in the normal course of
business.
During the first three months of 2004, shareowners' equity increased $4.1
million, or 8.2%, on an annualized basis. Growth in equity during the first
quarter was positively impacted by net income of $4.8 million and the
issuance of common stock of $1.6 million. Equity was reduced by dividends
paid during the first quarter of $2.4 million, or $.1800 per share and an
increase in the net unrealized gain on available-for-sale securities of
$30,000. At March 31, 2004, the Company's common stock had a book value of
$15.54 per diluted share compared to $15.27 at December 31, 2003.
On March 30, 2000, the Company's Board of Directors authorized the repurchase
of up to 625,000 shares of its outstanding common stock. On January 24,
2002, the Company's Board of Directors authorized the repurchase of an
additional 312,500 shares of its outstanding common stock. The purchases
will be made in the open market or in privately negotiated transactions. The
Company did not purchase any shares in the first quarter of 2004. From March
30, 2000 through March 31, 2004, the Company repurchased 572,707 shares at an
average purchase price of $19.18 per share.
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
20
financial reserves placed with the ISO. The Bank is currently named as a co-
defendant in one lawsuit brought against the ISO by a merchant. Management
does not believe that the ultimate resolution of this lawsuit 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 March 31, 2004, the Company had $340.4 million in commitments to extend
credit and $8.0 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
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.
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
21
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 associates 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 for 2004 is 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 investment). The weighted-average expected long-term
rate of return on plan assets utilized for 2004 is 8.0%.
The assumed rate of annual compensation increases of 5.5% in 2004 is based on
expected trends in salaries and the associate base. This assumption is not
expected to change materially in 2004.
Detailed information on components of the Company's net benefit cost is
provided in Note 8 of the Notes to Consolidated Financial Statements.
22
TABLE I
AVERAGE BALANCES & INTEREST RATES
(Taxable Equivalent Basis - Dollars in Thousands)
For Three Months Ended March 31,
------------------------------------------------------------------
2004 2003
--------------------------- ---------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------
ASSETS
Loans, Net of Unearned Interest $1,357,206 $21,310 6.32% $1,289,161 $22 ,210 6.99%
Taxable Investment Securities 121,702 635 2.09% 138,646 1,180 3.41%
Tax-Exempt Investment Securities 54,274 822 6.06% 64,772 955 5.89%
Funds Sold 101,286 222 0.87% 122,708 352 1.15%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 1,634,468 22,989 5.66% 1,615,287 24,697 6.20%
Cash & Due From Banks 90,327 82,453
Allowance for Loan Losses (12,725) (12,619)
Other Assets 118,426 111,536
---------- ----------
TOTAL ASSETS $1,830,496 $1,796,657
========== ==========
LIABILITIES
NOW Accounts $ 271,878 $ 124 0.18% $ 262,618 $ 202 0.31%
Money Market Accounts 215,078 239 0.45% 214,539 420 0.79%
Savings Accounts 115,985 28 0.10% 106,241 65 0.25%
Other Time Deposits 420,501 2,003 1.92% 434,825 2,539 2.37%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Deposits 1,023,442 2,394 0.94% 1,018,223 3,226 1.29%
Short-Term Borrowings 104,406 287 1.11% 106,798 329 1.25%
Long-Term Debt 47,023 497 4.25% 72,372 545 3.05%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Liabilities 1,174,871 3,178 1.09% 1,197,393 4,100 1.39%
Noninterest Bearing Deposits 433,718 389,540
Other Liabilities 15,512 19,308
---------- ----------
TOTAL LIABILITIES 1,624,101 1,606,241
SHAREOWNERS' EQUITY
Common Stock 133 106
Surplus 17,248 14,862
Other Comprehensive Income 1,403 3,006
Retained Earnings 187,611 172,442
---------- ----------
TOTAL SHAREOWNERS' EQUITY 206,395 190,416
---------- ----------
TOTAL LIABILITIES & EQUITY $1,830,496 $1,796,657
========== ==========
Net Interest Rate Spread 4.57% 4.81%
==== ====
Net Interest Income $19,811 $20,597
======= =======
Net Interest Margin 4.88% 5.17%
==== ====
Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $346,000
and $601,000, for the three months ended March 31, 2004 and 2003, respectively.
Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.
23
Item 3. Qualitative and Quantitative Disclosure for Market Risk
Overview
Market risk management arises from changes in interest rates, exchange rates,
commodity prices, and equity prices. The Company has risk management
policies to monitor and limit exposure to market risk 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 II. This table presents
the Company's consolidated interest rate sensitivity position as of March 31,
2004 based upon certain assumptions as set forth in the Notes to the Table.
The objective of interest rate sensitivity analysis is to measure the impact
on the Company's net interest income due to fluctuations in interest rates.
The asset and liability values presented in Table II may not necessarily be
indicative of the Company's interest rate sensitivity over an extended period
of time.
The Company expects rising rates to have a favorable impact on the net
interest margin, subject to the magnitude and timeframe over which the rate
changes occur. However, as general interest rates rise or fall, other
factors such as current market conditions and competition may impact how the
Company responds to changing rates and thus impact the magnitude of change in
net interest income. Nonmaturity deposits offer management greater
discretion as to the direction, timing, and magnitude of interest rate
changes and can have a material impact on the Company's interest rate
sensitivity. In addition, the relative level of interest rates as compared
to the current yields/rates of existing assets/liabilities can impact both
the direction and magnitude of the change in net interest margin as rates
rise and fall from one period to the next.
25
Table II - FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS
Other Than Trading Portfolio
As of March 31, 2004
-------------------------------------------------------------------------------- Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- ------------------------------------------------------------------------------------------------------------------------
Loans:
Fixed Rate $ 207,109 $123,423 $ 70,774 $32,972 $16,115 $17,169 $ 467,561 $ 471,420
Average Interest Rate 7.00% 7.19% 7.21% 7.40% 7.27% 7.67% 7.14%
Floating Rate 693,275 151,780 124,710 13,804 4,449 10,225 998,243 1,006,383
Average Interest Rate 5.54% 6.62% 6.37% 4.41% 6.30% 6.77% 5.81%
Investment Securities:
Fixed Rate 101,560 61,743 17,811 2,509 1,119 1,359 186,103 186,762
Average Interest Rate 2.47% 2.68% 3.21% 4.71% 5.73% 6.01% 2.69%
Floating Rate 2,660 - - - - - 2,660 2,660
Average Interest Rate 4.30% - - - - - 4.30%
Other Earning Assets:
Floating Rates 90,469 - - - - - 90,469 90,469
Average Interest Rate 0.93% - - - - - 0.93%
Total Financial Assets $1,095,074 $336,946 $213,295 $49,285 $26,683 $28,753 $1,745,036 $1,757,694
Average Interest Rate 4.91% 6.11% 6.39% 6.42% 6.99% 6.89% 5.42%
Deposits:
Fixed Rate Deposits $ 353,473 $ 57,171 $ 23,859 $ 8,279 $ 1,535 3 $ 444,320 $ 447,974
Average Interest Rate 1.61% 2.65% 3.05% 3.49% 2.68% 4.75% 1.86%
Floating Rate Deposits 645,115 - - - - - 645,115 645,115
Average Interest Rate 0.26% - - - - - 0.26%
Other Interest Bearing Liabilities
Fixed Rate Debt 4,479 19,480 3,702 2,799 2,580 16,910 49,950 51,426
Average Interest Rate 4.34% 3.35% 4.25% 4.63% 4.66% 4.88% 4.16%
Floating Rate Debt 112,343 - - - - - 112,343 112,343
Average Interest Rate 0.54% - - - - - 0.54%
Total Financial Liabilities $1,115,409 $ 76,651 $ 27,562 $11,077 $ 4,116 $16,913 $1,251,728 $1,256,858
Average interest Rate 1.04% 2.83% 3.21% 3.78% 3.92% 4.88% 1.29%
Based upon expected cashflows, unless otherwise indicated.
Based upon a combination of expected maturities and repricing opportunities.
Based upon contractual maturity, except for callable and floating rate securities, which are based on expected
maturity and weighted average life, respectively.
Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as
floating rates deposits in Year 1. Other time deposit balances are classified according to maturity.
25
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended, are recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that the information is accumulated and
communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognized that any
disclosure controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired objectives,
and management was required to apply its judgment in evaluating the cost-
benefit relationship of possible disclosure controls and procedures. The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures as
of the end of the period covered by this report. Based upon that evaluation
and subject to the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of the Company's
disclosure controls and procedures provided reasonable assurance that the
disclosure controls and procedures are effective to accomplish their
objectives.
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.
26
PART II. OTHER INFORMATION
ITEMS 1-4.
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
31.1 Certification of William G. Smith, Jr., Chairman, President and Chief
Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief
Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32.1 Certification of William G. Smith, Jr., Chairman, President and Chief
Executive Officer of Capital City Bank Group, Inc., Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief
Financial Officer of Capital City Bank Group, Inc., Pursuant to 18
U.S.C. Section 1350.
(B) Reports on Form 8-K
On January 13, 2004, the Company furnished an 8-K to report the issuance of a
press release to announce an agreement and plan of merger, by and among the
Company, Capital City Bank, Synovus Financial Corp., and Quincy State Bank.
On January 29, 2004, the Company furnished an 8-K to report the issuance of a
press release to announce the earnings for the year-ended December 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned Chief Financial Officer hereunto duly authorized.
CAPITAL CITY BANK GROUP, INC.
(Registrant)
/s/ J. Kimbrough Davis
- --------------------------------
J. Kimbrough Davis
Executive Vice President and
Chief Financial Officer
Date: May 10, 2004
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