UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended: September 30, 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 office) (Zip Code) (850) 671-0300 -------------- Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] At October 29, 2004, 14,139,369 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 13 3. Quantitative and Qualitative Disclosures About Market Risk 25 4. Controls and Procedures 27 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 Not Applicable 6. Exhibits 28 Signatures 28 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 Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003, and the Company's other filings with the Securities and Exchange Commission. 2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED SEPTEMBER 30 (Unaudited) (Dollars In Thousands, Except Per Share Amounts) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2004 2003 2004 2003 - -------------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans $23,316 $21,747 $67,510 $66,036 Investment Securities: U.S. Treasury 167 147 619 433 U.S. Govt. Agencies and Corporations 507 554 1,298 2,048 States and Political Subdivisions 468 592 1,491 1,833 Other Securities 55 141 191 470 Funds Sold 147 303 486 987 ------- ------- ------- ------- Total Interest Income 24,660 23,484 71,595 71,807 INTEREST EXPENSE Deposits 2,434 2,729 7,213 9,008 Short-Term Borrowings 332 282 868 951 Long-Term Debt 642 495 1,726 1,541 ------- ------- ------- ------- Total Interest Expense 3,408 3,506 9,807 11,500 ------- ------- ------- ------- Net Interest Income 21,252 19,978 61,788 60,307 Provision for Loan Losses 300 921 1,841 2,586 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 20,952 19,057 59,947 57,721 NONINTEREST INCOME Service Charges on Deposit Accounts 4,487 4,123 12,858 12,164 Data Processing 652 578 1,988 1,747 Asset Management Fees 1,035 660 2,726 1,915 (Loss) Gain on Sale of Investment Securities (13) (22) 7 1 Mortgage Banking Revenues 806 2,066 2,486 4,950 Gain on Sale of Credit Card Portfolio 6,857 - 6,857 - Other 3,897 3,547 11,711 10,548 ------- ------- ------- ------- Total Noninterest Income 17,721 10,952 38,633 31,325 ------- ------- ------- ------- NONINTEREST EXPENSE Salaries and Associate Benefits 10,966 10,551 32,515 30,444 Occupancy, Net 1,828 1,589 5,194 4,468 Furniture and Equipment 2,174 2,048 6,214 5,717 Conversion/Merger Expense 68 - 114 - Other 6,597 5,996 20,272 18,498 ------- ------- ------- ------- Total Noninterest Expense 21,633 20,184 64,309 59,127 ------- ------- ------- ------- Income Before Income Taxes 17,040 9,825 34,271 29,919 Income Taxes 6,221 3,529 12,162 10,822 ------- ------- ------- ------- NET INCOME $10,819 $ 6,296 $22,109 $19,097 ======= ======= ======= ======= Basic Net Income Per Share $ .82 $ .47 $ 1.67 $ 1.44 ======= ======= ======= ======= Diluted Net Income Per Share $ .82 $ .47 $ 1.67 $ 1.44 ======= ======= ======= ======= Cash Dividends Per Share $ .1800 $ .1700 $ .5400 $ .4760 ======= ======= ======= ======= Basic Average Shares Outstanding 13,282,945 13,221,264 13,272,125 13,221,114 ========== ========== ========== ========== Diluted Average Shares Outstanding 13,286,945 13,260,140 13,275,172 13,255,047 ========== ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (Unaudited) (Dollars In Thousands, Except Per Share Amounts) September 30, December 31, 2004 2003 - ------------------------------------------------------------------------------------ ASSETS Cash and Due From Banks $ 90,458 $ 93,140 Funds Sold 47,352 125,452 ---------- ---------- Total Cash and Cash Equivalents 137,810 218,592 Investment Securities, Available-for-Sale 156,675 181,734 Loans, Net of Unearned Interest 1,540,650 1,341,632 Allowance for Loan Losses (12,328) (12,429) ---------- ---------- Loans, Net 1,528,322 1,329,203 Premises and Equipment 56,281 54,011 Intangibles 39,720 25,792 Other Assets 32,985 37,170 ---------- ---------- Total Assets $1,951,793 $1,846,502 ========== ========== LIABILITIES Deposits: Noninterest Bearing Deposits $ 518,352 $ 455,550 Interest Bearing Deposits 1,052,195 1,018,655 ---------- ---------- Total Deposits 1,570,547 1,474,205 Short-Term Borrowings 76,216 108,184 Long-Term Debt 62,930 46,475 Other Liabilities 23,031 14,829 ---------- ---------- Total Liabilities 1,732,724 1,643,693 SHAREOWNERS' EQUITY Preferred Stock, $.01 par value, 3,000,000 shares authorized, no shares issued and outstanding - - Common Stock, $.01 par value; 90,000,000 shares authorized; 13,285,380 shares outstanding at September 30, 2004 and 13,236,462 shares outstanding at December 31, 2003 133 132 Additional Paid-In Capital 18,411 16,157 Retained Earnings 200,073 185,134 Accumulated Other Comprehensive Income, Net of Tax 452 1,386 ---------- ---------- Total Shareowners' Equity 219,069 202,809 ---------- ---------- Total Liabilities and Shareowners' Equity $1,951,793 $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 NINE MONTH PERIODS ENDED SEPTEMBER 30 (Unaudited) (Dollars In Thousands) 2004 2003 - ----------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 22,109 $ 19,097 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 1,841 2,586 Depreciation 3,877 3,543 Net Securities Amortization 1,673 1,545 Amortization of Intangible Assets 2,673 2,431 Gain on Sale of Investment Securities (7) (1) Non-Cash Compensation 1,686 850 Net Decrease in Other Assets 5,762 2,799 Net Increase in Other Liabilities 8,265 1,200 -------- -------- Net Cash Provided by Operating Activities 47,879 34,050 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Payments/Maturities/Sales of Investment Securities Available-for-Sale 119,650 76,114 Purchase of Investment Securities Available-for-Sale (81,594) (62,184) Net Increase in Loans (113,296) (41,599) Net Cash Used in Acquisition (18,079) - Purchase of Premises & Equipment (5,145) (10,051) Sales of Premises & Equipment 1,010 57 -------- -------- Net Cash Used in Investing Activities (97,454) (37,663) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net (Decrease) Increase in Deposits (6,093) 51,241 Net Decrease in Short-Term Borrowings (46,968) (41,746) Borrowing of Long-Term Debt 29,737 7,612 Repayment of Long-Term Debt (1,281) (1,015) Dividends Paid (7,169) (6,289) Issuance of Common Stock 569 37 -------- -------- Net Cash (Used In) Provided by Financing Activities (31,205) 9,840 -------- -------- Net (Decrease) Increase in Cash and Cash Equivalents (80,780) 6,227 Cash and Cash Equivalents at Beginning of Period 218,592 260,759 -------- -------- Cash and Cash Equivalents at End of Period $137,810 $266,986 ======== ======== Supplemental Disclosure: Interest Paid on Deposits $ 7,263 $ 9,455 ======== ======== Interest Paid on Debt $ 2,616 $ 2,499 ======== ======== Transfer of Loans to ORE $ 1,063 $ 1,275 ======== ======== Income Taxes Paid $ 6,786 $ 12,560 ======== ======== Issuance of Common Stock as Non-Cash Compensation $ 1,686 $ 850 ======== ======== Transfer of Current Portion of Long-Term Debt to Short-Term Borrowings $ 15,000 $ 40,326 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 CAPITAL CITY BANK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES Basis of Presentation - --------------------- The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, including Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Prior period financial statements have been reformatted and/or amounts reclassified, as necessary, to conform with the current presentation. In the opinion of management, the consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of September 30, 2004 and December 31, 2003, the results of operations for the three and nine month periods ended September 30, 2004 and 2003, and cash flows for the nine month periods ended September 30, 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 September 30, 2004, the Company had three stock-based compensation plans, consisting of the Associate Stock Incentive Plan ("AIP"), the Associate Stock Purchase Plan and the Director Stock Purchase Plan. Pursuant to the AIP, the Company 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 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 have grant dates after January 1, 2003. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation. 6 THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- --------------------- (Dollars in Thousands, Except Per Share Data) 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------- Net income, as reported $10,819 $6,296 $22,109 $19,097 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 78 320 258 541 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (78) (104) (258) (334) ------- ------ ------- ------- Pro forma net income $10,819 $6,512 $22,109 $19,304 ------- ------ ------- ------- Earnings per share: Basic-as reported $ .82 $ .47 $ 1.67 $ 1.44 ------- ------ ------- ------- Basic-pro forma $ .82 $ .49 $ 1.67 $ 1.46 ------- ------ ------- ------- Diluted-as reported $ .82 $ .47 $ 1.67 $ 1.44 ------- ------ ------- ------- Diluted-pro forma $ .82 $ .49 $ 1.67 $ 1.46 ------- ------ ------- -------
(2) ACQUISITIONS On March 19, 2004, the Company's subsidiary, Capital City Bank, completed its merger with Quincy State Bank, a subsidiary of Synovus Financial Corp. Results of Quincy State Bank'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 $15.4 million of intangible assets, including approximately $13.0 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 Long-Term Debt 3,000 -------- Total Liabilities $105,434 Consideration Paid to Quincy State Bank Shareowners $ 26,100 ========
The following unaudited pro forma financial information for the three and nine months ended September 30, 2004 and 2003 presents the consolidated operations of the Company as if the Quincy State Bank 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 Quincy State Bank been consummated on this earlier date, and does not project the Company's results of operations for any future period: 7 For 3 Months Ended For 9 Months Ended September 30, September 30, (Dollars in Thousands, -------------------- --------------------- Except Per Share Data) 2004 2003 2004 2003 - ------------------------------------------------------------------------------------ Interest Income $24,660 $25,153 $73,064 $77,030 Interest Expense 3,408 3,801 10,012 12,494 ------- ------- ------- ------- Net Interest Income 21,252 21,352 63,052 64,536 Provision for Loan Losses 300 966 1,871 2,721 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 20,952 20,386 61,181 61,815 Noninterest Income 17,721 11,303 38,972 32,666 Noninterest Expense 21,633 20,953 65,130 61,955 ------- ------- ------- ------- Income Before Income Taxes 17,040 10,736 35,023 32,526 Income Taxes 6,221 3,848 12,425 11,899 ------- ------- ------- ------- Net Income $10,819 $ 6,888 $22,598 $20,627 ======= ======= ======= ======= Basic Net Income Per Share $ .82 $ .52 $ 1.70 $ 1.56 ======= ======= ======= ======= Diluted Net Income Per Share $ .82 $ .52 $ 1.70 $ 1.56 ======= ======= ======= =======
On March 19, 2004, the Company completed its purchase of fiduciary assets from Synovus Trust Company for $2.0 million. This purchase was subject to a $800,000 earn-out agreement of which $634,000 was paid in October 2004. Subsequently, the intangible asset associated with this transaction was increased to $1.8 million. This intangible is being amortized over a 10-year period. On October 15, 2004, the Company completed its acquisition of Farmers and Merchants Bank in Dublin, Georgia, a $395 million asset institution with three offices in Laurens County. The Company issued 17.08 shares and $666.50 in cash for each of the 50,000 shares of Farmers and Merchants Bank, resulting in the issuance of 854,000 shares of Company common stock and the payment of $33.3 million in cash for a total purchase price of approximately $66.7 million. (3) INVESTMENT SECURITIES The carrying value and related market value of investment securities at September 30, 2004 and December 31, 2003 were as follows (dollars in thousands): September 30, 2004 ------------------------------------------- Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value - -------------------------------------------------------------------------------------- U.S. Treasury $ 31,189 $ 3 $118 $ 31,074 U.S. Govt. Agencies and Corporations 58,488 63 201 58,350 States and Political Subdivisions 49,711 764 18 50,457 Mortgage-Backed Securities 10,869 219 11 11,077 Other Securities 5,717 - - 5,717 Total $155,974 $1,049 $348 $156,675
December 31, 2003 ------------------------------------------- Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value - -------------------------------------------------------------------------------------- U.S. Treasury $ 78,498 $ 105 $ 1 $ 78,602 U.S. Govt. 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 $179,546 $2,189 $ 1 $181,734
8 (4) LOANS The composition of the Company's loan portfolio at September 30, 2004 and December 31, 2003 was as follows (dollars in thousands): September 30, 2004 December 31, 2003 ------------------ ----------------- Commercial, Financial and Agricultural $ 187,862 $ 160,048 Real Estate - Construction 119,248 89,149 Real Estate - Commercial Mortgage 473,874 391,250 Real Estate - Residential 369,473 327,212 Real Estate - Home Equity 145,408 116,810 Real Estate - Loans Held-for-Sale 5,636 4,240 Consumer 217,619 233,395 Other Loans(1) 21,530 19,528 ---------- ---------- Loans, Net of Unearned Interest $1,540,650 $1,341,632 ========== ========== (1) Consists primarily of loans-in-process.
(5) ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the nine month periods ended September 30, 2004 and 2003, is as follows (dollars in thousands): September 30, ---------------------------- 2004 2003 -------- -------- Balance, Beginning of the Period $12,429 $12,495 Provision for Loan Losses 1,841 2,586 Recoveries on Loans Previously Charged-Off 1,267 724 Loans Charged-Off (3,722) (3,381) Acquired Reserves 1,313 - Reserve Reversal - Credit Card Portfolio Sale (800) - Balance, End of Period $12,328 $12,424
Impaired loans are primarily defined as all nonaccruing loans for the loan categories which are included within the scope of SFAS 114. Selected information pertaining to impaired loans is depicted in the table below (dollars in thousands): September 30, --------------------------------------------- 2004 2003 Impaired Loans: -------------------- -------------------- Valuation Valuation Balance Allowance Balance Allowance -------------------- -------------------- With Related Credit Allowance $ 940 $429 $4,112 $605 Without Related Credit Allowance 3,266 - 1,017 - Average Recorded Investment for the Period 5,080 * 7,091 * * 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 September 30, 2004 and 2003, the Company recognized $107,000 and $148,000, respectively, in interest income on impaired loans, all of which was collected in cash. (6) DEPOSITS The composition of the Company's interest bearing deposits at September 30, 2004 and December 31, 2003 was as follows (dollars in thousands): September 30, 2004 December 31, 2003 ------------------ ----------------- NOW Accounts $ 285,851 $ 276,934 Money Market Accounts 209,262 207,934 Savings Deposits 129,461 110,834 Other Time Deposits 427,621 422,953 ---------- ---------- Total Interest Bearing Deposits $1,052,195 $1,018,655 ========== ==========
9 (7) INTANGIBLE ASSETS The Company had intangible assets of $39.7 million and $25.8 million at September 30, 2004 and December 31, 2003, respectively. Intangible assets were as follows (dollars in thousands): September 30, 2004 December 31, 2003 ----------------------- ----------------------- Gross Accumulated Gross Accumulated Amount Amortization Amount Amortization ----------------------- ----------------------- Core Deposits Intangibles $36,144 $17,247 $33,752 $14,640 Goodwill 23,442 3,786 10,466 3,786 Other 1,233 66 - - ------- ------- ------- ------- Total Intangible Assets $60,819 $21,099 $44,218 $18,426 ======= ======= ======= =======
Net Core Deposit Intangibles: As of September 30, 2004 and December 31, 2003, the Company had core deposit intangibles of $18.9 million and $19.1 million, respectively. Amortization expense for the first nine months of 2004 and 2003 was $2.6 million and $2.4 million, respectively. Goodwill: As of September 30, 2004 and December 31, 2003, the Company had goodwill, net of accumulated amortization, of $19.7 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 No. 142. Other: As of September 30, 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 nine months of 2004 was $66,000. Estimated annual amortization expense is $120,000 based on use of a 10 year useful life. (8) EMPLOYEE BENEFIT PLANS The components of the net periodic benefit costs for the Company's qualified benefit pension plan were as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- (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% 8.00% 8.25% Service cost $ 950 $ 826 $2,850 $2,478 Interest cost 725 642 2,175 1,926 Expected return on plan assets (675) (542) (2,025) (1,626) Transition obligation amortization - 1 - 1 Prior service cost amortization 50 54 150 162 Net loss amortization 300 282 900 846 ------ ------ ------ ------ Net periodic benefit cost $1,350 $1,263 $4,050 $3,787 ====== ====== ====== ======
10 The components of the net periodic benefit costs for the Company's Supplemental Executive Retirement Plan ("SERP") were as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- (Dollars in Thousands) 2004 2003 2004 2003 - --------------------------------------------------------------------------------------- Discount rate 6.25% 6.75% 6.25% 6.75% Long-term rate of return on assets N/A N/A N/A N/A Service cost $ 48 $20 $144 $ 60 Interest cost 65 28 195 84 Expected return on plan assets N/A N/A N/A N/A Prior service cost amortization 30 15 90 45 Net loss amortization (18) (11) (54) (33) ---- --- ---- ---- Net periodic benefit cost $125 $52 $375 $156 ==== === ==== ====
(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 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 $431,000 and $(934,000), respectively, for the three and nine months ended September 30, 2004, and $(743,000) and $(1.3 million), respectively, for the three and nine months ended September 30, 2003. Reclassification adjustments consist only of realized gains on sales of investment securities and were not material for the nine months ended September 30, 2004 and 2003. 11 QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in Thousands, Except Per Share Data) 2004 2003 2002 ---------------------------------- ---------------------------------------------- ---------- Third Second First Fourth Third Second First Fourth - --------------------------------------------------------------------------------------------------------------------- Summary of Operations: Interest Income $ 24,660 $ 24,265 $ 22,670 $ 23,022 $ 23,484 $ 23,997 $ 24,327 $ 25,272 Interest Expense 3,408 3,221 3,178 3,339 3,506 3,894 4,099 4,667 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Interest Income 21,252 21,044 19,492 19,683 19,978 20,103 20,227 20,605 Provision for Loan Losses 300 580 961 850 921 886 779 863 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 20,952 20,464 18,531 18,833 19,057 19,217 19,448 19,742 Gain on Sale of Credit Card Portfolio 6,857 - - - - - - - Noninterest Income 10,864 11,031 9,881 10,614 10,952 10,428 9,945 10,898 Conversion/ Merger Expense 68 4 42 - - - - 59 Noninterest Expense 21,565 21,597 21,033 20,593 20,184 19,516 19,428 20,191 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income Before Provision for Income Taxes 17,040 9,894 7,337 8,854 9,825 10,129 9,965 10,390 Provision for Income Taxes 6,221 3,451 2,490 2,758 3,529 3,689 3,604 3,668 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income $ 10,819 $ 6,443 $ 4,847 $ 6,096 $ 6,296 $ 6,440 $ 6,361 $ 6,722 ========== ========== ========== ========== ========== ========== ========== ========== Net Interest Income (FTE) $ 21,528 $ 21,333 $ 19,811 $ 20,020 $ 20,332 $ 20,456 $ 20,597 $ 21,006 Per Common Share: Net Income Basic $ .82 $ .48 $ .37 $ .47 $ .47 $ .49 $ .48 $ .51 Net Income Diluted .82 .48 .37 .46 .47 .49 .48 .51 Dividends Declared .180 .180 .180 .180 .170 .170 .136 .136 Diluted Book Value 16.48 15.80 15.54 15.27 15.00 14.73 14.42 14.08 Market Price: High 41.20 43.15 45.55 46.83 40.93 36.43 32.32 32.04 Low 33.33 35.50 39.05 36.62 35.00 29.74 26.81 22.26 Close 38.71 39.59 41.25 45.99 38.16 36.08 31.29 31.35 Selected Average Balances: Loans $1,524,401 $1,491,142 $1,357,206 $1,329,673 $1,336,139 $1,316,705 $1,289,161 $1,292,892 Earning Assets 1,734,708 1,721,655 1,634,468 1,636,269 1,634,689 1,612,133 1,615,287 1,591,535 Assets 1,941,372 1,929,485 1,830,496 1,819,552 1,816,005 1,786,991 1,796,657 1,762,174 Deposits 1,545,224 1,538,630 1,457,160 1,451,095 1,451,879 1,415,798 1,407,763 1,404,818 Shareowners' Equity 217,273 210,211 206,395 201,939 199,060 194,781 190,416 185,412 Common Equivalent Average Shares: Basic 13,283 13,274 13,262 13,223 13,221 13,209 13,207 13,189 Diluted 13,287 13,277 13,286 13,265 13,260 13,255 13,253 13,238 Ratios: ROA 2.22% 1.34% 1.06% 1.33% 1.38% 1.45% 1.44% 1.51% ROE 19.81% 12.33% 9.45% 11.98% 12.55% 13.26% 13.55% 14.38% Net Interest Margin (FTE) 4.94% 4.99% 4.88% 4.85% 4.94% 5.09% 5.17% 5.24% Efficiency Ratio 52.60%(1) 63.87% 68.06% 64.58% 61.93% 60.57% 60.96% 60.75% (1) Includes $4.2 million (after-tax) one-time gain on sale of credit card portfolio.
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 "Results of Operations," "Financial Condition," "Liquidity and Capital Resources," "Legal Developments," 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, are 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; * Worldwide political and social unrest, including acts of war and terrorism; * The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; * Inflation, interest rate, market and monetary fluctuations; * Adverse conditions in the stock market and other capital markets and the impact of those conditions on our capital markets and capital management activities, including our investment and wealth management advisory businesses and brokerage activities; * Changes in U.S. foreign or military policy; * The timely development of competitive new products and services by us and the acceptance of those products and services by new and existing customers; * The willingness of customers to accept third-party products marketed by us; * The willingness of customers to substitute competitors' products and services for our products and services and vice versa; * The impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); * Technological changes; 13 * Changes in consumer spending and saving habits; * The effect of corporate restructuring, acquisitions or dispositions, including the actual restructuring and other related charges and the failure to achieve the expected gains, revenue growth or expense savings from such corporate restructuring, acquisitions or dispositions; * The growth and profitability of our noninterest or fee income being less than expected; * Unanticipated regulatory or judicial proceedings; * The impact of changes in accounting policies by the Securities and Exchange Commission; * Adverse changes in the financial performance and/or condition of our borrowers, which could impact the repayment of those borrowers' outstanding loans; and * Our success at managing the risks involved in the foregoing. We caution that the foregoing list of important factors is not exhaustive. Also, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf. The Company is headquartered in Tallahassee, Florida and as of September 30, 2004 had 57 banking offices, six residential lending offices, 73 ATMs and 11 Bank'N Shop locations in Florida, Georgia and Alabama. On October 15, 2004, the Company completed its acquisition of Farmers and Merchants Bank in Dublin, Georgia, a $395 million asset institution with three offices in Laurens County. The Company issued 17.08 shares and $666.50 in cash for each of the 50,000 shares of Farmers and Merchants Bank, resulting in the issuance of 854,000 shares of Company common stock and the payment of $33.3 million in cash for a total purchase price of approximately $66.7 million. RESULTS OF OPERATIONS Net Income Earnings for the three and nine months ended September 30, 2004 were $10.8 million, or $0.82 per diluted share, and $22.1 million, or $1.67 per diluted share, respectively. This compares to $6.3 million, or $0.47 per diluted share, and $19.1 million, or $1.44 per diluted share in 2003. The Company sold its $22.7 million credit card portfolio during the third quarter resulting in a one-time after-tax gain of $4.2 million, or $.32 per diluted share. Core earnings (reported earnings excluding the gain) for the three and nine months ended September 30, 2004 were $6.6 million, or $.50 per diluted share, and $17.9 million, or $1.35 per diluted share, respectively. Growth in core earnings for the third quarter of $310,000, or 3.1%, was primarily attributable to a $1.3 million, or 6.4% increase in net interest income and a $621,000, or 67.4% decrease in the loan loss provision offset by a $1.4 million, or 7.2% increase in operating expenses, and $211,000, or 6.0% increase in income taxes. Core earnings for the nine month period declined by $1.2 million, or 6.3% primarily attributable to higher operating expenses of $5.2 million, or 8.8%, that were partially offset by a $1.5 million, or 2.5% increase in net interest income, a $745,000, or 28.8% decrease in the loan loss provision, a $451,000, or 1.4% increase in noninterest income, and lower taxes of $1.3 million, or 12.1%. A condensed earnings summary is presented below. 14 Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- (Dollars in Thousands) 2004 2003 2004 2003 - -------------------------------------------------------------------------- Interest and Dividend Income $24,660 $23,484 $71,595 $71,807 Taxable-Equivalent Adjustment(1) 276 354 884 1,079 ------- ------- ------- ------- Interest Income (FTE) 24,936 23,838 72,479 72,886 Interest Expense 3,408 3,506 9,807 11,500 ------- ------- ------- ------- Net Interest Income (FTE) 21,528 20,332 62,672 61,386 Provision for Loan Losses 300 921 1,841 2,586 Taxable-Equivalent Adjustment 276 354 884 1,079 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 20,952 19,057 59,947 57,721 Noninterest Income 17,721 10,952 38,633 31,325 Merger/Conversion Expense 68 - 114 - Noninterest Expense 21,565 20,184 64,195 59,127 ------- ------- ------- ------- Income Before Income Taxes 17,040 9,825 34,271 29,919 Income Taxes 6,221 3,529 12,162 10,822 ------- ------- ------- ------- Net Income $10,819 $ 6,296 $22,109 $19,097 ======= ======= ======= ======= Percent Change(2) 71.82% 8.53% 15.77% 16.73% Return on Average Assets(3) 2.22% 1.38% 1.55% 1.42% Return on Average Equity(3) 19.81% 12.55% 13.98% 13.11% (1) Computed using a federal statutory tax rate of 35% (2) From prior comparable period (3) Annualized
Net Interest Income - ------------------- Net interest income represents the Company's single largest source of earnings and is equal to interest income and fees generated by earning assets, less interest expense paid on interest bearing liabilities. Third quarter of 2004 taxable-equivalent net interest income increased $1.2 million, or 5.9%, over the comparable quarter in 2003. For the nine month period, taxable-equivalent net interest income increased $1.3 million, or 2.1%, over the comparable period in 2003. The favorable impact of lower funding costs, an improved earning asset mix and the first quarter acquisition of Quincy State Bank was partially offset by declining asset yields attributable to the low interest rate environment. Table I on page 24 provides a comparative analysis of the Company's average balances and interest rates. For the three month period ended September 30, 2004, taxable-equivalent interest income increased $1.1 million, or 4.6%, over the comparable period in 2003. For the nine month period ended September 30, 2004, taxable-equivalent interest income decreased $407,000, or .56%, over the comparable period in 2003. For the third quarter, growth in earning assets resulting from strong loan demand and the acquisition of Quincy State Bank drove the increase in interest income. For the nine month period, lower yields for new loan production and the repricing of existing earning assets drove the decline in interest income. The Federal Reserve increased interest rates slightly during the second quarter of 2004 which should begin to have a favorable impact on new loan production. Repricing of existing assets (at current rate levels) will continue to put pressure on earning asset yields. Interest expense for the three and nine month periods ended September 30, 2004 declined $98,000, or 2.8%, and $1.7 million, or 14.7%, respectively, from the comparable periods in 2003. The favorable variances were primarily attributable to lower rates and were further enhanced by a favorable shift in mix (i.e. increase in lower cost noninterest bearing non-maturity deposits and a decrease in higher cost certificates of deposit). The year-to-date average rate paid on interest bearing liabilities in 2004 declined 21 basis points from 2003, to a level of 1.09%. 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) was 4.60% and 4.61% for the three and nine months ended September 30, 2004, respectively, compared to 4.61% and 4.71% for the comparable periods in 2003. 15 The Company's net interest margin percentage (defined as taxable-equivalent net interest income divided by average earning assets) was 4.94% and 4.93% for the three and nine months ended September 30, 2004, respectively, compared to 4.94% and 5.06% for the comparable periods in 2003. The reduction in the spread and margin for the nine month period reflects lower yields. The bank is asset-sensitive, which should result in improvement in the net interest margin as rates rise. However, management expects the improvement to be gradual, and could be further impacted by increasing competition for deposits. Provision for Loan Losses - ------------------------- The provision for loan losses was $300,000 and $1.8 million, respectively, for the three and nine month periods ended September 30, 2004, compared to $921,000 and $2.6 million for the same periods in 2003. The provision decrease for both periods was due primarily to lower projected credit card charge-offs due to the sale of the portfolio in August. Net charge-offs totaled $829,000, or .22% of average loans for the quarter compared to $931,000, or .28% for the third quarter of 2003. The primary reason for the decrease in net charge-offs for the third quarter was the higher level of consumer loan recoveries. Net charge-offs totaled $2.5 million, or .22% of average loans, for the first nine months of 2004, compared to $2.7 million, or .27%, for the comparable period in 2003. Charge-off activity for the respective periods is set forth below: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2004 2003 2004 2003 ------ ------ ------ ------ CHARGE-OFFS Commercial, Financial and Agricultural $ 187 $ 61 $ 640 $ 379 Real Estate - Construction - - - - Real Estate - Commercial Mortgage - 91 39 91 Real Estate - Residential 19 119 113 172 Consumer 998 937 2,930 2,739 ------ ------ ------ ------ Total Charge-offs 1,204 1,208 3,722 3,381 ------ ------ ------ ------ RECOVERIES Commercial, Financial and Agricultural 10 73 47 129 Real Estate - Construction - - - - Real Estate - Commercial Mortgage 14 - 14 - Real Estate - Residential 1 - 176 1 Consumer 350 204 1,030 594 ------ ------ ------ ------ Total Recoveries 375 277 1,267 724 ------ ------ ------ ------ Net Charge-offs $ 829 $ 931 $2,455 $2,657 ====== ====== ====== ====== Net Charge-offs (Annualized) as a Percent of Average Loans Outstanding, Net of Unearned Interest .22% .28% .22% .27% ====== ====== ====== ======
Noninterest Income Noninterest income increased $6.8 million, or 61.8%, and $7.3 million, or 23.3%, respectively, over the comparable three and nine month periods in 2003, primarily reflecting the $6.9 million one-time gain on the sale of the credit card portfolio in the third quarter. Noninterest income (excluding the one- time gain) was flat for the third quarter compared to the same period in 2003, but increased $451,000, or 1.4% over the nine month period in 2003, primarily reflecting higher deposit, asset management, and data processing fees, and other income. These improvements more than offset a $2.5 million reduction in mortgage banking revenues. Excluding the one-time gain on the sale of the credit card portfolio, noninterest income represented 33.8% and 34.0% of operating revenue for the three and nine month periods of 2004 compared to 35.4% and 34.2% for the same periods in 2003. Service charges on deposit accounts increased $364,000, or 8.8%, and $694,000, or 5.7%, respectively, over the comparable three and nine month periods 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 increase was 16 attributable to higher NSF/overdraft fees, partially attributable to a recent change in fee structure and lower NSF/overdraft charge-offs. Data processing revenues of $652,000 and $2.0 million for the three and nine month periods ended September 30, 2004, respectively, reflect an increase of 12.8% and 13.8% over the comparable periods in 2003. The increase in both periods was primarily a result of higher processing revenues from existing financial clients. The Company currently provides data processing services for six financial clients and contract processing services for four non- financial clients. During the first nine months of 2004 and 2003, financial clients represented approximately 66.2% and 60.6% of total processing revenues, respectively. Income from asset management activities increased $375,000, or 56.8%, and $811,000, or 42.4%, respectively, over the comparable three and nine month periods in 2003. This increase was due primarily to the acquisition of $208 million in managed trust accounts from Synovus Trust Company in connection with the Quincy State Bank acquisition during the first quarter, and further enhanced by growth of new business in existing markets. At September 30, 2004, assets under management totaled $611.7 million, representing an increase of $236.9 million, or 63.2% from the comparable period in 2003. Mortgage banking revenues declined $1.3 million, or 61.0%, and $2.5 million, or 49.8%, respectively, over the comparable three and nine month periods in 2003. This decline reflects a slow-down in residential lending markets, which began during the latter part of the fourth quarter of 2003 and has continued through the current reporting period. This declining trend stabilized in the second quarter as revenues improved $292,000, or 42.1% over the first quarter. Third quarter revenues declined $180,000, or 18.3% from the second quarter partially attributable to the impact of the September hurricanes that slowed insurance underwriting and loan closings. Other income increased $350,000, or 9.9%, and $1.2 million, or 11.0%, respectively, over the comparable three and nine month periods in 2003. For the nine month period, the Company experienced increases in retail brokerage fees of $256,000, merchant card processing fees of $515,000, miscellaneous recoveries of $265,000, and gain on sale of other real estate of $185,000. Noninterest income as a percent of average assets was 2.72% and 2.33%, respectively, for the first nine months of 2004 and 2003. The increase was due to the $6.9 million one-time gain on sale of the credit card portfolio recorded in the third quarter. Excluding the one-time gain, the ratio for 2004 was 2.23%. The decrease was primarily attributable to the decline in mortgage banking revenues. Noninterest Expense - ------------------- Noninterest expense increased $1.5 million, or 7.2%, and $5.2 million, or 8.8%, respectively, over the comparable three and nine month periods in 2003. Factors impacting the Company's noninterest expense during the first nine months of 2004 are discussed below. Compensation expense increased $415,000, or 3.9%, and $2.1 million, or 6.8% over the comparable three and nine month periods in 2003. For the nine month period, the Company experienced increases in associate salaries of $1.9 million, payroll tax expense of $134,000, pension plan expense of $325,000, and associate insurance expense of $225,000. These increases were partially offset by lower expense of $536,000 for other compensation, primarily related to the company's stock incentive plan. The increases in associate salaries and payroll tax were reflective of normal merit raises and the late first quarter integration of Quincy State Bank associates. The higher pension costs were due primarily to a lower discount rate and rate of return on plan assets used for the 2004 expense projection. The increase in associate insurance expense was attributable to additional participants and higher healthcare insurance premiums. Occupancy expense, including premises, furniture, fixtures and equipment increased $365,000, or 10.0%, and $1.2 million, or 12.0%, respectively, over the comparable three and nine month periods in 2003. For the nine month period, the Company experienced increases in depreciation of $333,000, maintenance and repairs of $224,000, premises rental of $162,000, utilities of $140,000, property taxes of $60,000, and other FF&E expense of $272,000 from the comparable period in 2003. The increase in depreciation, utilities, and property tax expense was primarily attributable to the addition of three new banking offices in the second half of 2003. Higher maintenance and repairs expense was driven by upgrades and repairs to existing banking offices and incremental expense 17 incurred with the addition of three new banking offices in the second half of 2003. The increase in premises rental expenses was due to a lease renewal. Other FF&E expense increased primarily due to higher expenses for software license fees associated with various core processing applications. Other noninterest expense increased $669,000, or 11.2%, and $1.9 million, or 10.2%, respectively, over the comparable three and nine month periods in 2003. For the nine month period, the increase was primarily attributable to: 1) higher professional fees of $618,000; 2) higher advertising expense of $584,000; 3) higher telephone expense of $154,000; 4) higher commission/service fees of $145,000; 5) higher intangible amortization expense of $242,000; and 6) higher merger expenses of $114,000. Higher professional fees was due to the increased cost of the company's external audit and consulting projects, which may vary as to their magnitude and timing. Advertising expense will fluctuate consistent with advertising strategies planned throughout the year. The increase in commission/service fees was attributable to higher interchange service fees associated with increased merchant card processing volume, and was offset by higher merchant card processing fees reflected in other income. The increase in telephone, intangible amortization, and merger expenses were due to the late first quarter integration of Quincy State Bank. Annualized net noninterest expense (noninterest income minus noninterest expense, excluding intangible amortization and one-time merger expenses) as a percent of average assets was 1.61% for the first nine months of 2004 compared to 1.88% in 2003. The Company's efficiency ratio (noninterest expense, excluding intangible amortization and one-time merger expense, expressed as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 60.73% for the first nine months of 2004 compared to 61.15% for the comparable period in 2003. Both of the above mentioned metrics were significantly impacted by the $6.9 million one-time gain on sale of the credit card portfolio recorded in the third quarter of 2004. Excluding the one-time gain, these metrics adjust to 2.09% and 65.14%, respectively. Income Taxes - ------------ The provision for income taxes increased $2.7 million, or 76.3%, during the third quarter and $1.3 million, or 12.4%, during the first nine months of 2004, relative to the comparable prior year periods, reflecting higher taxable income. The Company's effective tax rate for the first nine months of 2004 was 35.5% versus 36.2% for the comparable period in 2003. The decline in the effective tax rate was 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 as of September 30, 2004 include those of Quincy State Bank, which was acquired on March 19, 2004. The Company's average assets increased $125.4 million, or 6.9%, to $1.94 billion for the quarter-ended September 30, 2004 from $1.82 billion in the comparable quarter of 2003. Average earning assets of $1.7 billion increased $100.0 million, or 6.1%, from the comparable quarter of 2003 driven by a $188.3 million, or 14.1%, increase in average loans. Offsetting the increase in average loans was a decrease in short-term investments of $90.4 million, or 69.5%. Table I on page 24 presents average balances for the three and nine month periods ended September 30, 2004 and 2003. Average net overnight funds for the third quarter of 2004 were approximately $10.5 million. This represented a decline of $105.9 million, or 91.0% from the 2003 level of $116.4 million. For a further discussion on liquidity see the section "Liquidity and Capital Resources." The investment portfolio functions as a key element of liquidity and asset/liability management. For the quarter ended September 30, 2004, the average investment portfolio increased $2.1 million, or 1.3%, from the third quarter of 2003. U.S. Agency security balances increased by $21.2 million from third quarter of 2003 offset by a decrease in mortgage-backed, municipal, and other security balances of $19.3 million. Management will continue to evaluate the need to purchase securities for the investment portfolio for the remainder of 2004, taking into consideration the bank's liquidity position and pledging requirements. 18 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 September 30, 2004, shareowners' equity included a net unrealized gain of $452,000 compared to a gain of $1.4 million at December 31, 2003. The decrease in value reflects the slight increase in interest rates during the first nine months of 2004. Average loans grew $188.3 million, or 14.1%, and $143.7 million, or 10.9%, for the three and nine months ended September 30, 2004. The increase in average loans was driven by strong loan production in existing markets, and $85.0 million in loans acquired in the Quincy State Bank merger late in the first quarter. For the third quarter, the Company realized strong gains in all loan categories. For the nine month period, strong gains were realized in the commercial, real estate (construction, commercial mortgage, and home equity), and indirect consumer loan categories. Management expects loan growth to continue into the fourth quarter. The Company's nonperforming loans (including nonaccruing and restructured loans) were $4.7 million at September 30, 2004, versus $2.3 million at year- end and $6.8 million for the same period in 2003. The increase in nonaccruing loans over year-end was due to the addition of one large commercial real estate loan for $2.1 million to nonaccrual status. Management expects no loss associated with the resolution of this loan. Other real estate, which includes property acquired either through foreclosure or by receiving a deed in lieu of foreclosure, was $894,000 at September 30, 2004, versus $5.0 million at December 31, 2003 and $1.6 million at September 30, 2003. The $4.1 million decrease in other real estate since year-end was primarily attributable to the resolution of one large commercial real estate loan for $3.9 million. The ratio of nonperforming assets as a percent of loans plus other real estate was .36% at September 30, 2004 compared to .54% at December 31, 2003 and .63% at September 30, 2003. The Company expects strong credit quality to continue into the fourth quarter. Management maintains the allowance for loan losses at a level sufficient to provide for the estimated credit losses inherent in the loan portfolio as of the balance sheet date. Credit losses arise from the borrowers' ability and willingness to repay, and from other risks inherent in the lending process, including collateral risk, operations risk, concentration risk and economic risk. All related risks of lending are considered when assessing the adequacy of the loan loss reserve. The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance for loan losses is based on management's judgment of overall loan quality. This is a significant estimate based on a detailed analysis of the loan portfolio. The balance can and will change based on changes in the assessment of the portfolio's overall credit quality. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses at September 30, 2004 was $12.3 million, a decrease of $101,000 from December 31, 2003, and $96,000 from September 30, 2003. At quarter-end 2004, the allowance represented 0.80% of total loans compared to 0.93% at December 31, 2003, and 0.94% at September 30, 2003. The decline in this metric reflects the reversal of $800,000 in reserves allocated to credit cards due to the sale of the portfolio during the third quarter, and a lower loan loss provision during the third quarter due to lower projected credit card charge-offs. As a percent of nonperforming loans, the allowance for loan losses represented 262% at September 30, 2004 versus 530% at December 31, 2003 and 183% at September 30, 2003. 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 September 30, 2004 is adequate to absorb losses inherent in the loan portfolio at quarter-end. Average total deposits increased $93.3 million, or 6.4%, to $1.55 billion for the quarter-ended September 30, 2004 from $1.45 billion in the comparable quarter of 2003. The increase was driven by a $70.8 million increase in noninterest bearing deposits and $27.1 million increase in interest bearing nonmaturity deposits. These increases were primarily reflective of the deposit accounts acquired from Quincy State Bank late in the first quarter. The ratio of average noninterest bearing deposits to total deposits was 31.9% for the third quarter of 2004 compared to 29.0% for the third quarter of 2003. For the same 19 periods, the ratio of average interest bearing liabilities to average earning assets was 69.7% compared to 71.9%. LIQUIDITY AND CAPITAL RESOURCES Liquidity - --------- Liquidity for a banking institution is the availability of funds to meet increased loan demand and/or excessive deposit withdrawals. Management monitors the Company's financial position in an effort to ensure the Company has ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of investment opportunities and cover unforeseen liquidity demands. In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities (i.e., collection of interest and fees), federal funds sold, loan and investment maturities, bank lines of credit for the Company, approved lines for the purchase of federal funds by CCB and Federal Home Loan Bank advances. The Company maintains a revolving line of credit. As of September 30, 2004, the Company had no borrowings under the revolving line of credit. On October 15, 2004, the Company obtained an increase in the line of credit to $36.0 million, and subsequently obtained an advance of $30.0 million to facilitate the payment of cash consideration for the Farmers and Merchants Bank of Dublin, Georgia closing. Terms of repayment require interest payable at LIBOR plus 60 basis points. Effective January 1, 2005, the maximum available line will be reduced from $36.0 million to $25.0 million. The revolving line of credit facility expires October 2007. On November 1, 2004, the Company completed a trust preferred financing in the amount of $30.0 million. The proceeds from this financing were used to pay off the $30.0 million advance obtained on the line of credit. During the first nine months of 2004, the Company increased borrowings by $32.7 million due primarily to the assumption of $3.0 million in FHLB advances from the Quincy State Bank acquisition, two advances totaling $9.7 million from the FHLB to match fund loan growth, and one advance for $20.0 million to replace a maturing advance for the same amount. For the first nine months of the year, the Bank made scheduled FHLB advance payments totaling $1.3 million and repaid two advances totaling $40 million. These two advances were repaid in March of 2004 and September of 2004. Both advances originated during the third quarter of 2002, when $75 million was borrowed from the FHLB to fund growth in loan demand and mitigate the reduction in liquidity caused by a decline in certificates of deposit. Capital - ------- The Company's equity capital was $219.1 million as of September 30, 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 its "well-capitalized" designation. The leverage ratio was 9.17% at September 30, 2004 compared to 9.51% at December 31, 2003. Further, the Company's risk-adjusted capital ratio of 11.81% at September 30, 2004 exceeds the 8.0% minimum requirement under risk-based regulatory guidelines. During the first nine months of 2004, shareowners' equity increased $16.3 million. Growth in equity during the first nine months of the year was positively impacted by net income of $22.1 million and the issuance of common stock of $2.3 million. Equity was reduced by dividends paid during the first half of $7.2 million, or $.540 per share, and a decrease in the net unrealized gain on available-for-sale securities of $934,000. At September 30, 2004, the Company's common stock had a book value of $16.48 per diluted share compared to $15.27 at December 31, 2003. 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 viewed favorably 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 nine months of 2004 totaled $.540 per share compared to $.476 per share for same period in 2003, an increase 20 of 13.5%. The dividend payout ratios for the third quarter of 2004 and 2003 were 22.1% and 36.9%, respectively. State and federal regulations as well as the Company's long-term debt agreements place certain restrictions on the payment of dividends by both the Company and the Bank. At September 30, 2004, these regulations and covenants did not impair the Company's (or the Bank's) ability to declare and pay dividends or to meet other existing obligations in the normal course of business. On March 30, 2000, the Company's Board of Directors authorized the repurchase of up to 625,000 shares of its outstanding common stock. On January 24, 2002, the Company's Board of Directors authorized the repurchase of an additional 312,500 shares of its outstanding common stock. The purchases will be made in the open market or in privately negotiated transactions. The Company did not purchase any shares in the first nine months of 2004. From March 30, 2000 through September 30, 2004, the Company repurchased 572,707 shares at an average purchase price of $19.18 per share. Other Commitments and Contingencies - ----------------------------------- Financial Instruments with Off-Balance-Sheet Risk. 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 September 30, 2004, the Company had $244.0 million in commitments to extend credit and $16.5 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. Contractual Cash Obligations. The Company maintains certain debt and operating lease commitments that require cash payments. The table below details those future cash commitments as of September 30, 2004: Payments Due After September 30, 2004 ------------------------------------------------------------ 2004 (remaining (Dollars in Thousands) 3 months) 2005 2006 2007 2008 Thereafter Total - ------------------------------------------------------------------------------------ Short-Term Debt $ 24 $15,000 $ - $ - $ - $ - $15,024 Long-Term Debt 504 3,139 22,342 5,387 4,369 27,189 62,930 Operating Leases 316 1,092 1,092 1,092 1,055 2,122 6,769 ------ ------- ------- ------ ------ ------- ------- Total Contractual Cash Obligations $ 844 $19,231 $23,434 $6,479 $5,424 $29,311 $84,723 ====== ======= ======= ====== ====== ======= =======
21 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. The Company makes provisions to reserve for estimated losses in loan balances. The allowance for loan losses is a significant estimate and is evaluated quarterly by the Company for adequacy. The use of different estimates or assumptions could produce a different required allowance, and thereby a larger or smaller provision recognized as expense in any given reporting period. A further discussion of the allowance for loan losses can be found in the section entitled "Allowance for Loan Losses" and Note 1 in the Notes to Consolidated Financial Statements in the Company's 2003 Form 10-K. Intangible Assets: Intangible assets primarily consist of goodwill and core deposit assets that were recognized in connection with various acquisitions. Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets. The Company performs an impairment review on an annual basis to determine if there has been impairment of its goodwill. The Company has determined that no impairment existed at December 31, 2003. Impairment testing requires management to make significant judgments and estimates relating to the fair value of its identified reporting units. Significant changes to these estimates may have a material impact on the Company's reported results. Core deposit assets represent the premium the Company paid for core deposits. Core deposit intangibles are amortized on the straight-line method over various periods ranging from 7-10 years, with the majority being amortized over approximately 10 years. Generally, core deposits refer to nonpublic, nonmaturing deposits including noninterest-bearing deposits, NOW, money market and savings. The Company makes certain estimates relating to the useful life of these assets, and rate of run-off based on the nature of the specific assets and the customer bases acquired. If there is a reason to believe there has been a permanent loss in value, management will assess these assets for impairment. Any changes in the original estimates may materially affect reported earnings. Pension Assumptions: The Company has a 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 22 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 in the Company's 2003 Form 10-K. New Accounting Pronouncements - ----------------------------- In March 2004, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment; and (b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment's cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began presenting the new disclosure requirement in its consolidated financial statements for the year ended December 31, 2003. The recognition and impairment provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September, 2004, the effective date of these provisions was delayed until the finalization of the FASB Staff Position (FSP) to provide additional implementation guidance. Currently, the FASB expects to issue the FSP no later than December 2004. The Company is continuing to evaluate the impact of EITF 03-1. The amount of other-than- temporary impairment the Company will recognize, if any, will be dependent on market conditions and management's intent and ability at the time of the evaluation to hold investments with unrealized losses until a forecasted recovery in the fair value up to and beyond the adjusted cost. 23 TABLE I AVERAGES BALANCES & INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands) FOR THREE MONTHS ENDED SEPTEMBER 30, 2004 2003 ----------------------- ---------------------- Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ASSETS Loans, Net of Unearned Interest(1) $1,524,401 $23,345 6.09% $1,336,139 $21,796 6.47% Taxable Investment Securities 118,903 729 2.45% 108,234 841 3.09% Tax-Exempt Investment Securities(2) 51,768 715 5.53% 60,306 898 5.96% Funds Sold 39,636 147 1.44% 130,010 303 0.91% ---------- ------- ---------- ------- Total Earning Assets 1,734,708 24,936 5.72% 1,634,689 23,838 5.79% Cash & Due From Banks 90,010 80,246 Allowance for Loan Losses (13,029) (12,534) Other Assets 129,683 113,604 ---------- ---------- TOTAL ASSETS $1,941,372 $1,816,005 ========== ========== LIABILITIES NOW Accounts $ 280,630 $ 153 0.22% $ 263,729 $ 151 0.23% Money Market Accounts 212,426 245 0.46% 220,924 257 0.46% Savings Accounts 130,330 32 0.10% 111,644 28 0.10% Other Time Deposits 429,702 2,004 1.86% 434,206 2,293 2.10% ---------- ------- ---------- ------- Total Int. Bearing Deposits 1,053,088 2,434 0.92% 1,030,503 2,729 1.05% Short-Term Borrowings 96,146 332 1.37% 92,316 282 1.21% Long-Term Debt 59,837 642 4.27% 53,041 495 3.70% ---------- ------- ---------- ------- Total Interest Bearing Liabilities 1,209,071 3,408 1.12% 1,175,860 3,506 1.18% Noninterest Bearing Deposits 492,136 ------- 421,376 ------- Other Liabilities 22,892 19,709 ---------- ---------- TOTAL LIABILITIES 1,724,099 1,616,945 SHAREOWNERS' EQUITY Common Stock 133 132 Surplus 18,167 15,465 Other Comprehensive Income 244 2,144 Retained Earnings 198,729 181,319 ---------- ---------- TOTAL SHAREOWNERS' EQUITY 217,273 199,060 ---------- ---------- TOTAL LIABILITIES & EQUITY $1,941,372 $1,816,005 ========== ========== Interest Rate Spread 4.60% 4.61% ==== ==== Net Interest Income $21,528 $20,332 ======= ======= Net Yield on Earning Assets 4.94% 4.94% ==== ==== (1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $336,000 and $1.2 million for the three and nine months ended September 30, 2004, versus $417,000 and $1.5 million, for the comparable periods ended September 30, 2003. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% federal tax rate.
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 2003 ----------------------- ---------------------- Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ASSETS Loans, Net of Unearned Interest(1) $1,457,826 $67,616 6.20% $1,314,173 $66,172 7.09% Taxable Investment Securities 125,057 2,109 2.25% 121,680 2,951 3.24% Tax-Exempt Investment Securities(2) 52,077 2,267 5.81% 62,527 2,776 5.92% Funds Sold 62,121 486 1.03% 122,394 987 1.06% ---------- ------- ---------- ------- Total Earning Assets 1,697,081 72,478 5.70% 1,620,774 72,886 6.31% Cash & Due From Banks 90,086 79,071 Allowance for Loan Losses (13,185) (12,561) Other Assets 126,619 112,671 ---------- ---------- TOTAL ASSETS $1,900,601 $1,799,955 ========== ========== LIABILITIES NOW Accounts $ 278,609 $ 398 0.19% $ 261,011 $ 546 0.28% Money Market Accounts 214,410 723 0.45% 215,616 1,069 0.66% Savings Accounts 125,351 92 0.10% 109,123 161 0.20% Other Time Deposits 427,913 6,000 1.87% 434,513 7,232 2.23% ---------- ------- ---------- ------- Total Int. Bearing Deposits 1,046,283 7,213 0.92% 1,020,263 9,008 1.18% Short-Term Borrowings 103,398 868 1.12% 100,488 951 1.27% Long-Term Debt 53,560 1,726 4.30% 59,878 1,541 3.44% ---------- ------- ---------- ------- Total Interest Bearing Liabilities 1,203,241 9,807 1.09% 1,180,629 11,500 1.30% Noninterest Bearing Deposits 467,504 ------- 405,045 ------- Other Liabilities 18,541 19,497 ---------- ---------- TOTAL LIABILITIES 1,689,286 1,605,171 SHAREOWNERS' EQUITY Common Stock 133 117 Surplus 17,757 15,171 Other Comprehensive Income 819 2,570 Retained Earnings 192,606 176,926 ---------- ---------- TOTAL SHAREOWNERS' EQUITY 211,315 194,784 ---------- ---------- TOTAL LIABILITIES & EQUITY $1,900,601 $1,799,955 ========== ========== Interest Rate Spread 4.61% 4.71% ==== ==== Net Interest Income $62,671 $61,386 ======= ======= Net Yield on Earning Assets 4.93% 5.06% ==== ==== (1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $336,000 and $1.2 million for the three and nine months ended September 30, 2004, versus $417,000 and $1.5 million, for the comparable periods ended September 30, 2003. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% federal tax rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Overview - -------- Market risk management arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company has risk management policies to monitor and limit exposure to market risk and does not actively 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 on page 26. This table presents the Company's consolidated interest rate sensitivity position as of September 30, 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(1) (Dollars in Thousands) Other Than Trading Portfolio September 30, 2004 - ---------------------------- ---------------------------------------------------------------------------------- Market Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value -------- -------- -------- -------- -------- -------- ---------- ---------- Loans Fixed Rate $ 252,429 $122,220 $ 51,922 $31,813 $16,498 $ 9,198 $ 484,080 $ 491,264 Average Interest Rate 6.73% 7.03% 7.28% 5.97% 5.95% 4.75% 6.75% Floating Rate(2) 833,831 153,527 60,377 6,813 1,617 405 1,056,570 1,072,276 Average Interest Rate 5.86% 6.29% 6.26% 7.09% 6.14% 5.74% 5.95% Investment Securities(3) Fixed Rate 51,551 81,052 15,496 2,910 928 3,564 155,501 155,501 Average Interest Rate 3.19% 2.44% 3.45% 3.46% 3.88% 3.41% 2.84% Floating Rate 1,174 - - - - - 1,174 1,174 Average Interest Rate 3.84% - - - - - 3.84% Other Earning Assets Floating Rates 47,353 - - - - - 47,353 47,353 Average Interest Rates 1.52% - - - - - 1.52% Total Financial Assets $1,186,338 $356,799 $127,795 $41,536 $19,043 $13,167 $1,744,678 $1,767,568 Average Interest Rates 5.75% 5.67% 6.34% 5.98% 5.87% 4.42% 5.77% Deposits(4) Fixed Rate Deposits $ 326,226 $ 60,121 $ 36,236 $ 4,160 $ 1,829 $ 9 $ 428,581 $ 428,261 Average Interest Rates 1.58% 2.65% 3.14% 3.04% 2.70% - 1.88% Floating Rate Deposits 623,922 - - - - - 623,922 623,456 Average Interest Rates 0.26% - - - - - 0.26% Other Interest Bearing Liabilities Fixed Rate Debt 4,946 24,498 3,673 3,203 2,685 23,926 62,931 63,895 Average Interest Rate 4.56% 3.19% 4.54% 4.77% 4.90% 5.24% 4.31% Floating Rate Debt 76,216 - - - - - 76,216 76,216 Average Interest Rate 0.85% - - - - - 0.85% Total Financial Liabilities $1,031,310 $ 84,619 $ 39,909 $ 7,363 $ 4,514 $23,935 $1,191,650 $1,191,828 Average interest Rate 0.74% 2.81% 3.27% 3.79% 4.01% 5.24% 1.10% (1) Based upon expected cash-flows, 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 rate deposits in Year 1. Other time deposit balances are classified according to maturity.
26 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. 27 PART II. OTHER INFORMATION Items 1-5. - ---------- Not applicable Item 6. 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. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized. CAPITAL CITY BANK GROUP, INC. (Registrant) /s/ J. Kimbrough Davis - ------------------------------------ J. Kimbrough Davis Executive Vice President and Chief Financial Officer Date: November 9, 2004 28 22 42