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: March 31, 2001 -------------- 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) 671-0610 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes[X] No [ ] At April 30, 2001, 10,749,093 shares of the Registrant's Common Stock, $.01 par value, were outstanding. 1 CAPITAL CITY BANK GROUP, INC. FORM 10-Q I N D E X ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER - ---- ----------------------------- ----------- 1. Consolidated Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 3. Qualitative and Quantitative Disclosure of Market Risk 18 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 20 6. Exhibits and Reports on Form 8-K 20 Signatures 20 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 (Dollars in Thousands, Except Per Share Amounts)
2001 2000 (Unaudited) (Unaudited) ----------- ------- - ---- INTEREST INCOME - --------------- Interest and Fees on Loans $ 24,672 $ 21,119 Investment Securities: U. S. Treasury 128 248 U. S. Government Agencies and Corporations 2,042 2,269 States and Political Subdivisions 883 1,081 Other Securities 607 604 Funds Sold 804 389 ---------- ------ - ---- Total Interest Income 29,136 25,710 ---------- ------ - ---- INTEREST EXPENSE - ---------------- Deposits 11,787 9,175 Short-Term Borrowings 1,111 784 Long-Term Debt 245 217 ---------- ------ - ---- Total Interest Expense 13,143 10,176 ---------- ------ - ---- Net Interest Income 15,993 15,534 Provision for Loan Losses 822 610 ---------- ------ - ---- Net Interest Income After Provision for Loan Losses 15,171 14,924 ---------- ------ - ---- NONINTEREST INCOME - ------------------ Service Charges on Deposit Accounts 2,422 2,336 Data Processing 501 680 Income from Fiduciary Activities 638 660 Securities Transactions - 2 Mortgage Banking Revenues 565 138 Other 3,203 2,586 ---------- ------ - ---- Total Noninterest Income 7,329 6,402 ---------- ------ - ---- NONINTEREST EXPENSE - ------------------- Salaries and Associate Benefits 8,434 7,555 Occupancy, Net 1,219 1,096 Furniture and Equipment 1,498 1,392 Other 4,689 4,309 ---------- ------ - ---- Total Noninterest Expense 15,840 14,352 ---------- ------ - ---- Income Before Income Taxes 6,660 6,974 Income Taxes 2,311 2,361 ---------- ------ - ---- NET INCOME $ 4,349 $ 4,613 ========== ========== Basic Net Income Per Share $ .42 $ .45 ========== ========== Diluted Net Income Per Share $ .42 $ .45 ========== ========== Cash Dividends Per Share $ .1475 $ .1325 ========== ========== Average Shares Outstanding - Basic 10,296,732 10,195,261 ========== ========== Average Shares Outstanding - Diluted 10,304,756 10,210,774 ========== ========== 3
CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 (Dollars In Thousands, Except Per Share Amounts)
March 31, December 31, 2001 2000 (Unaudited) (Audited) ----------- ------- - ----- ASSETS - ----- Cash and Due From Banks $ 73,499 $ 73,367 Funds Sold 153,910 40,623 Investment Securities, Available-for-Sale 265,741 276,839 Loans, Net of Unearned Interest 1,164,298 1,051,832 Allowance for Loan Losses (11,780) (10,564) ---------- ------ - ---- Loans, Net 1,152,518 1,041,268 Premises and Equipment, Net 43,056 37,023 Intangibles 39,146 22,293 Other Assets 36,932 36,047 ---------- ------ - ---- Total Assets $1,764,802 $1,527,460 ========== ========== LIABILITIES - --------- Deposits: Noninterest Bearing Deposits $ 339,073 $ 292,656 Interest Bearing Deposits 1,177,553 975,711 ---------- ------ - ---- Total Deposits 1,516,626 1,268,367 Short-Term Borrowings 48,538 83,472 Long-Term Debt 14,018 11,707 Other Liabilities 17,636 16,307 ---------- ------ - ---- Total Liabilities 1,596,818 1,379,853 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; 10,749,090 issued and outstanding at March 31, 2001 and 10,108,454 issued and outstanding at December 31, 2000 107 101 Additional Paid-In Capital 22,520 7,369 Retained Earnings 144,421 141,659 Accumulated Other Comprehensive Income (Loss), Net of Tax 936 (1,522) ---------- ------ - ---- Total Shareowners' Equity 167,984 147,607 ---------- ------ - ---- Total Liabilities and Shareowners' Equity $1,764,802 $1,527,460 ========== ========== 4
CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED MARCH 31 (Dollars in Thousands)
2001 2000 (Unaudited) (Unaudited) ----------- ------- - ---- CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------- Net Income $ 4,349 $ 4,613 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses 822 610 Depreciation 961 983 Net Securities Amortization 274 363 Amortization of Intangible Assets 828 705 Gain on Sale of Investment Securities - (2) Non-Cash Compensation Expense 738 157 Net Increase in Other Assets 588 (1,833) Net (Decrease) Increase in Other Liabilities (568) 1,344 -------- ----- - --- Net Cash Provided by Operating Activities 7,992 6,940 -------- ----- - --- CASH FLOWS FROM INVESTING ACTIVITIES: - ------------------------------------- Proceeds from Payments/Maturities of Investment Securities Available-for-Sale 63,588 19,237 Purchase of Investment Securities (449) (492) Net Increase in Loans (21,144) (35,900) Purchase of Premises & Equipment (81) (488) Sales of Premises & Equipment 330 6 Cash & Cash Equivalents from Acquisition 80,435 - - -------- ----- - --- Net Cash Provided by (Used In) Investing Activities 122,679 (17,637) -------- ----- - --- CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Net Increase in Deposits 44,369 48,814 Net (Decrease) Increase in Short-Term Borrowings (59,934) 12,357 Borrowing of Long-Term Debt 2,196 928 Repayment of Long-Term Debt (156) (1,130) Dividends Paid (1,587) (1,351) Repurchase of Common Stock (2,183) - - Issuance of Common Stock 43 30 -------- ----- - --- Net Cash (Used In) Provided by Financing Activities (17,252) 59,648 -------- ----- - --- Net Increase in Cash and Cash Equivalents 113,419 48,951 Cash and Cash Equivalents at Beginning of Period 113,990 93,072 -------- ----- - --- Cash and Cash Equivalents at End of Period $227,409 $142,023 ======== ======== Supplemental Disclosure: Interest Paid on Deposits $ 12,782 $ 9,170 ======== ======== Interest Paid on Debt $ 1,218 $ 1,090 ======== ======== Transfer of Loans to ORE $ 305 $ 363 ======== ======== Income Taxes Paid $ 539 $ 1,865 ======== ======== 5
CAPITAL CITY BANK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES -------------------------------------------- The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of S-X and S-K of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. Prior year financial statements have been reformatted and/or amounts reclassified, as necessary, to conform with the current year 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, 2001 and December 31, 2000, the results of operations, and cash flows for the three month periods ended March 31, 2001 and 2000. The Company and its subsidiaries follow accounting principles generally accepted in the United States and reporting practices applicable to the banking industry. The principles which materially affect its financial position, results of operations and cash flows are set forth in Notes to Consolidated Financial Statements which are included in the Company's 2000 Annual Report and Form 10-K. (2) INVESTMENT SECURITIES --------------------- The carrying values and related market value of investment securities at March 31, 2001 and December 31, 2000 were as follows (dollars in thousands): March 31, 2001 ------------------------------------------- Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value - ------------------ --------- ---------- ---------- ------- U. S. Treasury $ 8,011 $ 57 $ - $ 8,068 U. S. Government Agencies and Corporations 56,658 468 2 57,124 States and Political Subdivisions 82,762 781 17 83,526 Mortgage-Backed Securities 75,343 312 309 75,346 Other Securities 41,489 212 24 41,677 -------- ------ ---- -------- Total $264,263 $1,830 $352 $265,741 ======== ====== ==== ========
December 31, 2000 Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value - ------------------ --------- ---------- ---------- -------- U. S. Treasury $ 10,016 $ 5 $ - $ 10,021 U. S. Government Agencies and Corporations 69,683 49 516 69,216 States and Political Subdivisions 85,744 192 695 85,241 Mortgage-Backed Securities 73,741 134 1,126 72,749 Other Securities 40,058 7 453 39,612 -------- ---- ------ -------- Total $279,242 $387 $2,790 $276,839 ======== ==== ====== ========
6 (3) LOANS ----- The composition of the Company's loan portfolio at March 31, 2001 and December 31, 2000 was as follows (dollars in thousands): March 31, 2001 December 31, 2000 -------------- ----------------- Commercial, Financial and Agricultural $ 119,457 $ 108,340 Real Estate - Construction 83,556 84,133 Real Estate - Mortgage 257,787 231,099 Real Estate - Residential 504,412 444,489 Consumer 199,086 183,771 ---------- ---------- Loans, Net of Unearned Interest $1,164,298 $1,051,832 ========== ========== (4) ALLOWANCE FOR LOAN LOSSES ------------------------- An analysis of the changes in the allowance for loan losses for the three month period ended March 31, 2001 and 2000, was as follows (dollars in thousands): March 31, -------------------------- 2001 2000 ------- ------- Balance, Beginning of the Period $10,564 $ 9,929 Acquired Reserves 1,206 - Provision for Loan Losses 822 610 Recoveries on Loans Previously Charged-Off 252 184 Loans Charged-Off (1,064) (497) ------- ------- Balance, End of Period $11,780 $10,226 ======= ======= Impaired loans are primarily defined as all nonaccruing loans for the loan categories which are included within the scope of SFAS 114. Selected information pertaining to impaired loans is depicted in the table below (dollars in thousands): March 31, ---------------------------------------------- 2001 2000 --------------------- -------------------- Impaired Loans: Valuation Valuation Balance Allowance Balance Allowance --------------------- -------------------- With Related Valuation Allowance $ - $ - $ - $ - Without Related Valuation Allowance 951 - 1,604 - Average Recorded Investment for the Period 951 * 1,602 * Interest Income: Recognized $ 4 $ - Collected $ 4 $ - * 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.
7 (5) DEPOSITS -------- The composition of the Company's interest bearing deposits at March 31, 2001 and December 31, 2000 were as follows (dollars in thousands): March 31, 2001 December 31, 2000 -------------- ----------------- NOW Accounts $ 219,282 $207,978 Money Market Accounts 212,676 156,590 Savings Deposits 114,594 104,035 Other Time Deposits 631,001 507,108 ---------- -------- Total Interest Bearing Deposits $1,177,553 $975,711 ========== ======== (6) ACCOUNTING PRONOUNCEMENTS ------------------------- In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", a replacement of SFAS No. 125. The statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The statement is effective for fiscal years ending after December 15, 2000. The adoption of this standard did not have a material impact on reported results of operations of the Company. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended. The statement establishes accounting and reporting standards for derivative instruments (including certain derivative instruments imbedded in other contracts). The statement is effective for fiscal years beginning after June 15, 2000. The adoption of this standard did not have a material impact on reported results of operations of the Company. (7) COMPREHENSIVE INCOME -------------------- Total comprehensive income is defined as net income and all other changes in equity which, for Capital City Bank Group, consists solely of changes in unrealized gains (losses) on available-for-sale securities. The Company reported total comprehensive income, net of tax, for the three month periods ended March 31, 2001 and 2000, as follows (dollars in thousands): THREE MONTHS ENDED MARCH 31 ----------------- 2001 2000 ------ ------ Net Income $4,349 $4,613 Other Comprehensive Income, Net of Tax Unrealized Gains (Losses) on Securities: Unrealized Gains (Losses) on Securities Arising During the Period 2,458 (844) Less: Reclassification Adjustments for Gains (Losses) Included in Net Income - 2 ------ ------ Total Unrealized Gains (Losses) On Securities, Net of Tax 2,458 (842) ------ ------ Total Comprehensive Income, Net of Tax $6,807 $3,771 ====== ====== 8 (8) ACQUISITIONS ------------ On March 9, 2001, the Company completed its purchase and assumption agreement with First Union National Bank ("First Union") and acquired six of First Union's offices which included real estate, loans and deposits. The transaction created approximately $11.5 million in intangible assets and is being amortized over 10 years. The Company purchased $18 million in loans and assumed deposits of $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. First National Bank of West Point is a $155 million financial institution with offices located in West Point, Georgia, and two offices in the Greater Valley area of Alabama. First Bankshares of West Point, Inc., merged with CCBG, and First National Bank of West Point merged with CCB. The Company issued 3.6419 shares and $17.7543 in cash for each of the 192,481 shares of First Bankshares of West Point, Inc. The transaction was accounted for as a purchase and resulted in approximately $5.5 million of intangibles, primarily goodwill. These intangible assets are being amortized over fifteen years. (9) CONTINGENCIES ------------- As part of its card processing services operation, the Bank has relationships with several Independent Sales Organizations ("ISOs"). A small number of one ISO's merchants have generated large amounts of charge-backs, and have not reimbursed the ISO for this charge-back activity. Should these charge-backs exceed the financial capacity of the ISO, the Bank could face related exposure. In addition, the ISO and certain merchants may have disputes about reserves placed with the ISO. The Bank is currently involved in a workout strategy with the ISO related to charge-back issues, which management believes substantially mitigates the Bank's potential exposure. The issues are still in their earliest stages and the Bank cannot reasonably estimate potential exposure for losses, if any, at this time. Management does not believe the ultimate resolution of these issues will have a material impact on the Company's financial position or results of operations. 9 QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in Thousands, Except Per Share Data)
2001 2000 1999 ---------- ---------------------------------------------- - -------------------------------- First Fourth Third Second First Fourth Third Second ---------- ---------- ---------- ---------- ---------- - ---------- ---------- ---------- Summary of Operations: Interest Income $ 29,136 $ 28,717 $ 28,018 $ 26,889 $ 25,710 $ 25,366 $ 25,236 $ 24,816 Interest Expense 13,143 12,949 12,039 11,070 10,176 10,171 10,287 10,476 ---------- ---------- ---------- ---------- ---------- - ---------- ---------- ---------- Net Interest Income 15,993 15,768 15,979 15,819 15,534 15,195 14,949 14,340 Provision for Loan Loss 822 825 735 950 610 510 610 580 Net Interest Income After Provision for Loan Loss 15,171 14,943 15,244 14,869 14,924 14,685 14,339 13,760 Noninterest Income 7,329 7,046 6,646 6,675 6,402 6,655 6,719 6,634 Merger Expense - 12 (2) 751 - 10 74 1,277 Noninterest Expense 15,840 14,847 14,684 14,503 14,352 14,463 14,522 15,040 ---------- ---------- ---------- ---------- ---------- - ---------- ---------- ---------- Income Before Provision for Income Taxes 6,660 7,130 7,208 6,290 6,974 6,867 6,462 4,077 Provision for Income Taxes 2,311 2,478 2,487 2,123 2,361 2,548 2,089 1,182 ---------- ---------- ---------- ---------- ---------- - ---------- ---------- ---------- Net Income $ 4,349 $ 4,652 $ 4,721 $ 4,167 $ 4,613 $ 4,319 $ 4,373 $ 2,895 ========== ========== ========== ========== ========== ========== ========== =========== Net Interest Income (FTE) $ 16,440 $ 16,134 $ 16,364 $ 16,217 $ 15,962 $ 15,521 $ 15,435 $ 14,822 Per Common Share: Net Income Basic $ .42 $ .46 $ .46 $ .41 $ .45 $ .42 $ .43 $ .28 Net Income Diluted .42 .46 .46 .41 .45 .42 .43 .28 Dividends Declared .1475 .1475 .1325 .1325 .1325 .1325 .12 .12 Book Value 15.62 14.56 14.08 13.51 13.20 12.96 12.78 12.56 Market Price: High 26.13 26.75 20.50 20.50 23.00 25.00 30.00 25.00 Low 23.13 18.88 18.75 18.00 15.00 20.19 21.00 20.25 Close 25.19 24.81 19.56 19.50 19.63 21.50 22.75 25.00 Selected Average Balances: Loans $1,082,960 $1,053,675 $1,025,943 $ 989,695 $ 938,351 $ 915,194 $ 892,161 $ 878,976 Earning Assets 1,416,968 1,359,345 1,318,698 1,303,633 1,277,894 1,280,746 1,297,481 1,304,093 Total Assets 1,570,673 1,503,811 1,465,455 1,454,098 1,430,620 1,446,815 1,446,505 1,452,215 Total Deposits 1,301,194 1,223,642 1,203,254 1,202,770 1,198,608 1,235,002 1,234,360 1,247,452 Total Shareowners' Equity 155,393 146,161 141,847 137,014 133,836 131,932 130,134 131,234 Common Equivalent Shares: Basic 10,297 10,162 10,192 10,196 10,195 10,179 10,179 10,172 Diluted 10,305 10,186 10,208 10,211 10,211 10,201 10,195 10,187 Ratios: ROA 1.12% 1.23% 1.28% 1.15% 1.30% 1.18% 1.20% .80% ROE 11.35% 12.66% 13.24% 12.23% 13.86% 12.99% 13.33% 8.85% Net Interest Margin (FTE) 4.69% 4.73% 4.94% 5.00% 5.02% 4.82% 4.73% 4.56% Efficiency Ratio 63.16% 61.03% 60.64% 60.30% 60.91% 60.67% 62.30% 66.70% 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis reviews important factors affecting the financial condition and results of operations of Capital City Bank Group, Inc., for the periods shown below. The Company, has made, and may continue to make, various forward-looking statements with respect to financial and business matters that involve numerous assumptions, risks and uncertainties. The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements: general and local economic conditions, competition for the Company's customers from other banking and financial institutions, government legislation and regulation, changes in interest rates, the impact of rapid growth, significant changes in the loan portfolio composition, and other risks described in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. The following discussion 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 accompanying financial statements. The year-to-date averages used in this report are based on daily balances for each respective period. The Financial Review is divided into three subsections entitled "Earnings Analysis", "Financial Condition", and "Liquidity and Capital Resources". Information therein should facilitate a better understanding of the major factors and trends which affect the Company's earnings performance and financial condition, and how the Company's performance during 2001 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and its subsidiaries, collectively, are referred to as "CCBG" or the "Company." Capital City Bank is referred to as "CCB" and First National Bank of Grady County is referred to as "FNBGC", or collectively as the "Banks". On March 9, 2001, the Company completed its purchase and assumption agreement with First Union National Bank ("First Union") and acquired six of First Union's offices which included real estate, loans and deposits. The transaction created approximately $11.5 million in intangible assets and is being amortized over 10 years. The Company purchased $18 million in loans and assumed deposits of $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. First National Bank of West Point is a $155 million financial institution with offices located in West Point, Georgia, and two offices in the Greater Valley area of Alabama. First Bankshares of West Point, Inc., merged with CCBG, and First National Bank of West Point merged with CCB. The Company issued 3.6419 shares and $17.7543 in cash for each of the 192,481 shares of First Bankshares of West Point, Inc. The transaction was accounted for as a purchase and resulted in approximately $5.5 million of intangibles, primarily goodwill. These intangible assets are being amortized over fifteen years. RESULTS OF OPERATIONS Net Income - ---------- Earnings, including the effects of intangible amortization, were $4.3 million, or $.42 per diluted share, for the first quarter of 2001. This compares to $4.6 million, or $.45 per diluted share for the first quarter of 2000. Amortization of intangible assets, net of taxes, totaled $566,000 and $479,000, or $.06 per diluted share and $.05 per diluted share, respectively, for the first quarter in 2001 and 2000. The Company experienced an increase in noninterest expense, attributable to continued geographic expansion and ongoing operating costs. This increase was the most significant factor contributing to the decline in net income. 11 For The Three Months Ended March 31, ------------------------------------ (Dollars in Thousands) 2001 2000 - ---------------------- ------- ------- Interest Income $29,136 $25,710 Taxable Equivalent Adjustment(1) 447 428 ------- ------- Interest Income (FTE) 29,583 26,138 Interest Expense 13,143 10,176 ------- ------- Net Interest Income (FTE) 16,440 15,962 Provision for Loan Losses 822 610 Taxable Equivalent Adjustment 346 428 ------- ------- Net Int. Inc. After Provision 15,171 14,924 Noninterest Income 7,329 6,402 Merger Expense - - Noninterest Expense 15,840 14,352 ------- ------- Income Before Income Taxes 6,660 6,974 Income Taxes 2,311 2,361 ------- ------- Net Income $ 4,349 $ 4,613 ======= ======= Percent Change (5.72)% 25.86% Return on Average Assets(2) 1.12% 1.30% Return on Average Equity(2) 11.35% 13.86% (1) Computed using a statutory tax rate of 35% (2) Annualized Net Interest Income - ------------------- First quarter taxable equivalent net interest income increased $377,000, or 2.4%, over the comparable period for 2000. This increase is attributable to higher loan volume and yields. Table I on page 17 provides a comparative analysis of the Company's average balances and interest rates. Taxable equivalent interest income increased $3.3 million, or 12.8%, due to growth in the loan portfolio and higher yields. Average loans, which represent the Company's highest yielding asset, increased $144.6 million, or 15.4%, and represented 76.4% of total earning assets in the first quarter of 2001 versus 73.4% for the comparable quarter in 2000. Interest on funds sold increased $415,000, or 106.7%, reflecting higher liquidity levels attributable to the recent Georgia acquisitions. Partially offsetting these increases was a decline in income from investment securities as maturities were used to fund the Company's loan growth. The loan growth and favorable shift in mix of earning assets contributed to an increase of 23 basis points in the yield on earning assets which improved from 8.22% in the first quarter of 2000 to 8.45% in 2001. Interest expense increased $3.0 million, or 29.2%, due to an increase in average deposits and higher rates paid on interest bearing liabilities. The recent Georgia acquisitions added approximately $217 million in deposits. Rising interest rates during 2000 and competitive pressures contributed to a 70 basis point increase in the average rate paid on interest bearing liabilities. The Company continues to experience competition for deposits in terms of both rate and product. Based on averages, certificates as a percent of average deposits increased from 41.5% in the first quarter of 2000 to 42.2% in the first quarter of 2001. The Company's interest rate spread (defined as the average taxable equivalent yield on earning assets less the average rate paid on interest bearing liabilities) decreased from 4.18% in the first quarter of 2000 to 3.71% in the comparable quarter for 2001 due to higher rates paid on interest bearing liabilities. The Company's net interest margin percentage (defined as taxable-equivalent net interest income divided by average earning assets) was 5.02% in the first quarter of 2000 versus 4.69% in the first quarter of 2001. The decline in the margin reflects the higher cost of funds partially offset by increased yields on earning assets. 12 Provisions for Loan Losses - -------------------------- The provision for loan losses for the three months ended March 31, 2001, was $822,000 versus $610,000 for the first quarter of 2000. While still at historically low levels, the Company did experience slight deterioration in credit quality. Net charge- offs increased over the comparable period in 2000, but declined relative to the fourth quarter of 2000. Nonperforming loans increased $849,000, or 28.9%, during the first quarter. The Company's nonperforming asset ratio increased slightly from .37% at year-end to .42%. As compared to year-end, the reserve for loan losses increased to $11.8 million and represented 1.01% of total loans versus 1.00%. For a discussion of the Company's nonperforming assets, see the section entitled "Financial Condition." Based on current economic conditions, the low level of nonperforming loans and net charge-offs, it is management's opinion that the allowance for loan losses as of March 31, 2001, is sufficient to provide for losses inherent in the portfolio as of that date. Charge-off activity for the respective periods is set forth below. Three Months Ended March 31, --------------------------- 2001 2000 -------- -------- Net Charge-Offs $811,766 $312,875 Net Charge-Offs (Annualized) as a Percent of Average Loans Outstanding, Net of Unearned Interest .30% .13% Noninterest Income - ------------------ Noninterest income increased $928,000, or 14.5%, over the first quarter of 2000, which included increases in service charges on deposit accounts, mortgage banking revenues and other income items discussed below. Service charges on deposit accounts increased $86,000, or 3.7%. 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 increase in the first quarter of 2001, compared to the comparable quarter in 2000, reflects an increase in number of accounts partially attributable to the Georgia acquisitions. Data processing revenues decreased $179,000, or 26.3%, over the first quarter of 2000. The decrease primarily reflects a reduction in the number of processing clients. Income from fiduciary activities decreased $22,000, or 3.4%, over the comparable quarter in 2000. Assets generated through new production were partially offset by declining stock market values. At March 31, 2001, assets under management totaled $327.3 million compared to $323.3 million at March 31, 2000. Mortgage banking revenues increased $427,000, or 308.8%, over the comparable quarter in 2000. The increase was due to the lower interest rate environment, resulting in fixed rate loans being originated and sold in the secondary market. Other income increased $618,000, or 23.9%, over the comparable quarter of 2000. The increase is partially attributable to the gain on the sale of bank owned properties of $157,000, credit card merchant fees of $105,000 and merchant and ATM interchange fees of $134,000. Noninterest income as a percent of average assets was 1.89% for the first quarter of 2001 versus 1.66% for the comparable quarter in 2000. 13 Noninterest Expense - ------------------- Noninterest expense in the first quarter of 2001 increased $1.5 million, or 10.4%, over the first quarter of 2000, spread across all expense categories. Compensation expense increased $878,000, or 11.63%, over the first quarter of 2000 reflecting the addition of associates through the Georgia acquisitions, annual raises, and increased pension and insurance costs for associates. Occupancy expense, including premises, furniture, fixtures and equipment increased $229,000, or 9.2%, over the first quarter of 2000. The increase was partially due to the addition of nine offices acquired with the Georgia acquisitions. Office leases, maintenance/repairs and other FF&E increased $55,000, $128,000 and $43,000, respectively. Other noninterest expense increased $380,000, or 8.8%. The increase is attributable to higher intangible amortization resulting from acquisitions of $123,000, credit card and ATM interchange costs of $83,000, legal costs of $102,000 and advertising of $72,000. Net noninterest expense (noninterest income minus noninterest expense, net of intangible amortization) as a percent of average assets was 1.98% in the first quarter of 2001 compared to 2.04% in 2000. The Company's efficiency ratio (noninterest expense, net of intangible amortization, expressed as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 63.43% in the first quarter 2001 compared to 60.16% for the comparable quarter in 2000. The increase in the efficiency ratio is attributable to higher operating costs. Income Taxes - ------------ The provision for income taxes decreased $49,000, or 2.1%, over the first quarter of 2000 reflecting lower taxable income. The Company's effective tax rate for the first quarter of 2001 was 34.7% compared to 33.9% for the same quarter in 2000. The increase in the effective tax rate is attributable to a reduction in nontaxable municipal interest. FINANCIAL CONDITION The Company's average assets were $1.6 billion in the first quarter of 2001 and $1.4 billion for the comparable period in 2000. Average earning assets were $1.4 billion for the three months ended March 31, 2001, compared to $1.3 billion for the first quarter of 2000. The change in the mix of earning assets reflects the recent Georgia acquisitions and continued loan generation, partially offset by a decline in investment securities. Table I on page 17 presents average balances for the three months ended March 31, 2001 and 2000. Average loans increased $144.6 million, or 15.4%, over the comparable period in 2000. Price and product competition remain strong. With the recent rate decline, there is an increased demand for fixed-rate, longer term financing. Loan growth has occurred in all categories, with the most significant increase in real estate. Loans as a percent of average earning assets increased to 76.4% for the first quarter of 2001, compared to 73.4% for the first quarter of 2000. 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, 2001, the average investment portfolio decreased $38.9 million, or 12.5%, from the first quarter of 2000. The decrease in the investment portfolio was used to fund the growth in loans. Securities in the available-for-sale portfolio are recorded at fair value and unrealized gains and losses associated with these securities are recorded, net of tax, as a separate component of shareowners' equity. At March 31, 2001, shareowners' equity included a net unrealized gain of $936,000 million compared to a loss of $1.5 million at December 31, 2000. The increase in value reflects a decrease in interest rates during the first quarter. 14 At March 31, 2001, the Company's nonperforming loans were $3.8 million versus $2.9 million at year-end 2000. As a percent of nonperforming loans, the allowance for loan losses represented 311% at March 31, 2001 versus 360% at December 31, 2000 and 563% at March 31, 2000. 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, 2001 and 2000, versus $971,000 at December 31, 2000. The ratio of nonperforming assets as a percent of loans plus other real estate was .42% at March 31, 2001 compared to .37% at December 31, 2000 and .30% at March 31, 2000. Average deposits increased 8.6% from $1.2 billion in the first quarter of 2000, to $1.3 billion in the first quarter of 2001. The increase in deposits is partially attributable to the Georgia acquisitions. Excluding acquisitions, existing markets realized growth primarily in certificates of deposit and noninterest bearing demand accounts. The Company is continuing to experience a notable increase in competition for deposits, in terms of both rate and product. The ratio of average noninterest bearing deposits to total deposits was 21.1% for the first quarter of 2001 compared to 22.3% for the first quarter of 2000. For the same periods, the ratio of average interest bearing liabilities to average earning assets was 79.3%. LIQUIDITY AND CAPITAL RESOURCES Liquidity, for a financial institution, is the availability of funds to meet increased loan demand and/or excessive deposit withdrawals. Management has implemented a financial structure that provides ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of investment opportunities and cover unforeseen liquidity demands. In addition to core deposit growth, sources of funds available to meet liquidity demands for the subsidiary banks include federal funds sold, near-term loan maturities, securities held in the available-for-sale portfolio, and the ability to purchase funds through established lines of credit with correspondent banks and the Federal Home Loan Bank. Additionally, the parent company maintains a $25.0 million revolving line of credit. As of March 31, 2001, there was $2.3 million outstanding under this facility. During the first quarter of 2001, the Company did not make a principal reduction on the line of credit. The Company's equity capital was $168.0 million as of March 31, 2001 compared to $147.6 million as of December 31, 2000. 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 7.25% at March 31, 2001 compared to 8.30% at December 31, 2000. The lower ratio reflects the recent Georgia acquisitions. Further, the Company's risk-adjusted capital ratio of 11.58% at March 31, 2001, exceeds the 8.0% minimum requirement under the risk-based regulatory guidelines. 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 its subsidiary banks. At March 31, 2001, these regulations and covenants did not impair the Company's (or its subsidiaries') ability to declare and pay dividends or to meet other existing obligations in the normal course of business. During the first three months of 2001, shareowners' equity increased $20.4 million, or 56.0%, on an annualized basis. Growth in equity during the first quarter was positively impacted by net income of $4.3 million, issuance of common stock of $15.2 million and a change in the net unrealized gain (loss) on available-for-sale securities from a loss of $1.5 million to a gain of $900,000. Equity was reduced by dividends paid during the first quarter of $1.6 million, or $.1475 per share. 15 At March 31, 2001, the Company's common stock had a book value of $15.62 per diluted share compared to $14.56 at December 31, 2000. On March 30, 2000, the Board of Directors authorized management to repurchase up to 500,000 shares of the Company's outstanding common stock. The purchases will be made in the open market or in privately negotiated transactions. To date, the Company has acquired 210,134 shares. Other Matters As part of its card processing services operation, the Bank has relationships with several Independent Sales Organizations ("ISOs"). A small number of one ISO's merchants have generated large amounts of charge-backs, and have not reimbursed the ISO for this charge-back activity. Should these charge-backs exceed the financial capacity of the ISO, the Bank could face related exposure. In addition, the ISO and certain merchants may have disputes about reserves placed with the ISO. The Bank is currently involved in a workout strategy with the ISO related to charge-back issues, which management believes substantially mitigates the Bank's potential exposure. The issues are still in their earliest stages and the Bank cannot reasonably estimate potential exposure for losses, if any, at this time. Management does not believe the ultimate resolution of these issues will have a material impact on the Company's financial position or results of operations. 16 TABLE I AVERAGES BALANCES & INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands) For Three Months Ended March 31 2001 2000 ----------------------------- --- - -------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate --------- -------- ------- --- - ------ -------- ------- ASSETS - ------ Loans, Net of Unearned Interest(1)(2) $1,082,960 $24,733 9.26% $ 938,351 $21,161 9.07% Taxable Investment Securities 189,530 2,777 5.94% 213,136 3,121 5.89% Tax-Exempt Investment Securities(2) 83,701 1,269 6.06% 99,000 1,467 5.93% Funds Sold 60,777 804 5.30% 27,407 389 5.71% ---------- ------- ---- --- - ------- ------- ---- Total Earning Assets 1,416,968 29,583 8.45% 1,277,894 26,138 8.22% Cash & Due From Banks 64,724 65,326 Allowance for Loan Losses (11,080) (10,085) Other Assets 100,061 97,485 ---------- --- - ------- TOTAL ASSETS $1,570,673 $1,430,620 ========== =========== LIABILITIES - ----------- NOW Accounts $ 203,842 $ 1,400 2.79% $ 167,862 $ 948 2.27% Money Market Accounts 169,221 1,706 4.09% 162,129 1,592 3.95% Savings Accounts 105,895 612 2.34% 103,817 536 2.07% Other Time Deposits 548,757 8,069 5.96% 497,296 6,099 4.93% ---------- ------- ---- --- - ------- ------- ---- Total Interest Bearing Deposits 1,027,715 11,787 4.65% 931,104 9,175 3.96% Short-Term Borrowings 78,981 1,111 5.70% 67,502 784 4.67% Long-Term Debt 17,013 245 5.83% 14,169 217 6.16% ---------- ------- ---- --- - ------- ------- ---- Total Int. Bearing Liabilities 1,123,709 13,143 4.74% 1,012,775 10,176 4.04% Noninterest Bearing Deposits 273,479 267,504 Other Liabilities 18,092 16,505 ---------- --- - ------- TOTAL LIABILITIES 1,415,280 1,296,784 SHAREOWNERS' EQUITY Common Stock 103 102 Surplus 12,010 9,316 Other Comprehensive Income (566) (6,935) Retained Earnings 143,846 131,353 ---------- --- - ------- TOTAL SHAREOWNERS' EQUITY 155,393 133,836 ---------- --- - ------- TOTAL LIABILITIES & EQUITY $1,570,673 $1,430,620 ========== ========== Net Interest Rate Spread 3.71% 4.18% ==== ==== Net Interest Income $16,440 $15,962 ======= ======= Net Interest Margin 4.69% 5.02% ==== ==== (1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $0.9 million and $1.0 million, for the three months ended March 31, 2001 and 2000, respectively. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate. 17
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. Capital City Bank Group does not actively participate in exchange rates, commodities or equities. In asset and liability management activities, policies are in place that are designed to minimize structural interest rate risk. Interest Rate Risk Management - ----------------------------- The normal course of business activity exposes Capital City Bank Group to interest rate risk. Fluctuations in interest rate risk may result in changes in the fair market value of the Company's financial instruments, cash flows and net interest income. Capital City Bank Group's asset/liability management process manages the Company's interest rate risk. The financial assets and liabilities of the Company are classified as other-than-trading. An analysis of the other- than-trading financial components, including the fair values, are presented in Table II on page 18. This table presents the Company's consolidated interest rate sensitivity position as of March 31, 2001, based upon certain assumptions as set-forth in the Notes to the Table. The objective of interest rate sensitivity analysis is to measure the impact on the Company's net interest income due to fluctuations in interest rates. The asset and liability fair values presented in Table II may not necessarily be indicative of the Company's interest rate sensitivity over an extended period of time. The Company is currently liability sensitive which generally indicates that in a period of rising interest rates the net interest margin will be adversely impacted as the velocity and/or volume of liabilities being repriced exceeds assets. 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. 18 Table II FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS (Dollars in Thousands)
Other Than Trading Portfolio March 31, 2001 - ---------------------------- --------------------------------------------------- - --- Fair Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value -------- -------- -------- -------- ----- - --- -------- ---------- ---------- Loans Fixed Rate $ 93,583 $ 62,182 $ 52,255 $ 48,660 $ 44,414 $ 98,237 $ 399,331 $ 365,420 Average Interest Rate 9.07% 9.47% 8.97% 9.02% 9.54% 8.05% 9.05% Floating Rate(2) 426,295 53,096 62,512 50,014 89,007 84,043 764,967 828,763 Average Interest Rate 9.27% 8.54% 8.36% 8.25% 8.10% 7.60% 8.76% Investment Securities(3) Fixed Rate 61,410 48,639 30,323 14,302 21,912 76,936 253,522 253,522 Average Interest Rate 5.92% 5.59% 5.36% 5.40% 5.84% 5.71% 5.71% Floating Rate - - 4,289 7,427 - - 503 12,219 12,219 Average Interest Rate - - 6.35% 6.73% - - 6.05% 6.57% Other Earning Assets Fixed Rates - - - - - - - - - Average Interest Rates - - - - - - - - Floating Rates 153,910 - - - - - - 153,910 153,910 Average Interest Rates 5.21% - - - - - - 5.21% Total Financial Assets $ 735,198 $163,917 $149,379 $120,403 $155,333 $259,719 $1,583,949 $1,613,834 Average Interest Rates 8.12% 8.02% 7.91% 8.13% 8.19% 7.21% 7.98% Deposits(4) Fixed Rate Deposits $ 534,362 $ 70,617 $ 18,249 $ 5,509 $ 2,084 $ 180 $ 631,001 $ 638,227 Average Interest Rates 5.60% 5.82% 5.33% 5.52% 5.27% 6.56% 5.62% Floating Rate Deposits 546,552 - - - - - - 546,552 546,552 Average Interest Rates 3.36% - - - - - - 3.36% Other Interest Bearing Liabilities Fixed Rate Debt 1,108 842 857 870 863 7,203 11,743 11,743 Average Interest Rate 6.22% 6.09% 6.08% 6.08% 6.09% 6.04% 6.07% Floating Rate Debt 50,813 - - - - - - 50,813 50,813 Average Interest Rate 5.51% - - - - - - 5.51% Total Financial Liabilities $1,132,835 $ 71,459 $ 19,106 $ 6,379 $ 2,947 $ 7,383 $1,240,109 $1,247,335 Average interest Rate 4.52% 5.82% 5.36% 5.60% 5.51% 6.05% 4.62% (1) Based upon expected cashflows, unless otherwise indicated. (2) Based upon a combination of expected maturities and repricing opportunities. (3) Based upon contractual maturity, except for callable and floating rate securities, which are based on expected maturity and weighted average life, respectively. (4) Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as floating rates deposits in Year 1. Other time deposit balances are classified according to maturity. 19
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 Not applicable (B) Reports on Form 8-K Capital City Bank Group, Inc., filed no Form 8-K during the first quarter 2001. 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 14, 2001 20