UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission File Number 0-13358
CAPITAL CITY BANK GROUP, INC.
Incorporated in the State of Florida
I.R.S. Employer Identification Number 59-2273542
Address: 217 North Monroe Street, Tallahassee, Florida 32301
Telephone: (850) 671-0300
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock - $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of June 30, 2004, there were issued and outstanding 13,274,585 shares of
the registrant's common stock. The registrant's voting stock is listed on
the National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market under the symbol "CCBG." The aggregate market value of the
voting stock held by nonaffiliates of the registrant, based on the average of
the bid and asked prices of the registrant's common stock as quoted on Nasdaq
on June 30, 2004, was $251.4 million.
As of February 28, 2005, 14,162,103 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement (pursuant to
Regulation 14A), to be filed not more than 120 days after the end of the
fiscal year covered by this report, are incorporated by reference into Part
III.
1
Explanatory Note
The purpose of this Amendment No. 1 on Form 10-K/A is to amend our Annual
Report on Form 10-K for the fiscal year ended December 31, 2004, which was
filed on March 16, 2005. This Amendment is being filed to correct the
following:
(i) the Contractual Cash Obligations (Table 13), included in Part II,
Item 7, Management Discussion and Analysis of Financial Condition and Results
of Operations, on page 42 of the original filing of the Form 10-K Report.
The total dollar value of the column with the heading "1-3 Years" had an
incorrect total;
(ii) the unaudited pro forma financial information for 2004 and 2003
presenting the consolidated operations of the Company as if the Farmers and
Merchants Bank and Quincy State Bank acquisitions had been made on January 1,
2003, included in Part II, Item 8, Financial Statements and Supplementary
Data, on page 65 of the original filing of the Form 10-K Report. Note 2,
"Acquisitions," of the Notes to Consolidated Financial Statements has been
amended to correct the noninterest expense, net income, income tax expense,
and earnings per share information to properly reflect the after tax effect of
intangible amortization (2003 - $868,000, 2004 - $580,000) related to the two
acquisitions. The original information did not include the amortization in
noninterest expense, income tax expense, and net income, but did reflect the
before-tax effect of the amortization in earnings per share;
(iii) Management's Report on Internal Control Over Financial Reporting
(the "Report"), included in Part II, Item 9A, Controls and Procedures, on
page 84 of the original filing of the Form 10-K Report. The Report has been
amended to reflect the fact that internal control over financial reporting
associated with a recent acquisition, Farmers and Merchants Bank, was
excluded from its assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004; and
(iv) Exhibit 23, Consent of Independent Registered Public Accounting
Firm (the "Consent"), included in Part IV, Item 15, Exhibits and Financial
Schedules, of the original filing of the Form 10-K Report. The Consent has
been amended to reflect the correct registration statements to be
incorporated by reference.
In addition, as required by Rule 12b-15 under the Securities Exchange
Act of 1934, this Amendment contains the complete text of Items 7, 8, 9A, and
15, and our principal executive officer and principal financial officer are
providing re-executed Rule 13a-14 certifications dated as of the date of this
Amendment and are also furnishing written statements pursuant to Title 18
United States Code, as added by Section 906 of the Sarbanes-Oxley Act of
2002. The certifications are attached as Exhibits 31.1, 31.2, 32.1 and 32.2
to this Amendment. For ease of reference, we are re-filing all items of
Form 10-K.
Except as described above, no other changes have been made to the
original Form 10-K and this Form 10-K/A does not amend, update or change the
financial statements or any other items or disclosures in the original Form
10-K. The Form 10-K/A does not reflect events occurring after the filing of
the Form 10-K or modify or update those disclosures, including any exhibits
to the Form 10-K affected by subsequent events. Information not affected by
the changes described above are unchanged and reflects the disclosures made
at the time of the original filing of the Form 10-K on March 16, 2005.
Accordingly, this Form 10-K/A should be read in conjunction with our filings
made with the Securities and Exchange Commission subsequent to the filing of
the original Form 10-K, including any amendments to those filings.
2
CAPITAL CITY BANK GROUP, INC.
ANNUAL REPORT FOR 2004 ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 4
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Registrant's Common Equity, Related Shareowner
Matters, and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 48
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 85
Item 9A. Controls and Procedures 85
Item 9B. Other Information 89
PART III
Item 10. Directors and Executive Officers of the Registrant 89
Item 11. Executive Compensation 89
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareowners Matters 89
Item 13. Certain Relationships and Related Transactions 89
Item 14. Principal Accountants Fees and Services 89
PART IV
Item 15. Exhibits and Financial Statement Schedules 89
Signatures 92
INTRODUCTORY NOTE
This Report and other Company communications and statements may contain
"forward-looking statements," including statements about our beliefs, plans,
objectives, goals, expectations, estimates and intentions. These statements
are subject to significant risks and uncertainties and are subject to change
based on various factors, many of which are beyond our control. For
information concerning these factors and related matters, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
3
PART I
Item 1. Business
General
Capital City Bank Group, Inc. ("CCBG" or the "Company"), is a financial
holding company registered under the Gramm-Leach-Bliley Act of 1999 ("Gramm-
Leach-Bliley Act") and is subject to the Bank Holding Company Act of 1956.
CCBG was organized under Florida law on December 13, 1982, to acquire five
national banks and one state bank that all subsequently became part of CCBG's
bank subsidiary, Capital City Bank ("CCB" or the "Bank").
At December 31, 2004, the Company had consolidated total assets of $2.4
billion and shareowners' equity of $256.8 million. Its principal asset is the
capital stock of the Bank. CCB accounted for approximately 100% of the
consolidated assets at December 31, 2004, and 100% of consolidated net income
of the Company for the year ended December 31, 2004. In addition to its
banking subsidiary, the Company has seven other indirect subsidiaries,
Capital City Trust Company, Capital City Mortgage Company (inactive), Capital
City Securities, Inc., Capital City Services Company, First Insurance Agency
of Grady County, Inc., Southern Oaks, Inc., and FNB Financial Services, Inc.,
all of which are wholly-owned subsidiaries of Capital City Bank, and one
additional direct subsidiary, CCBG Capital Trust I, a wholly-owned subsidiary
of Capital City Bank Group, Inc.
Pending Acquisitions. On February 3, 2005, the Company announced the signing
of a definitive agreement to acquire First Alachua Banking Corporation
("FABC"), headquartered in Alachua, Florida. FABC's wholly-owned subsidiary,
First National Bank of Alachua ("FNBA") has $229 million in assets, seven
offices located in Alachua County -- Gainesville (three), Alachua, High
Springs, Jonesville, Newberry -- and an eighth office in Hastings, Florida,
which is located in St. Johns County. FABC also has a mortgage lending
office in Gainesville and a financial services division. Subject to certain
potential adjustments, FABC shareowners will receive $2,847.04 in cash and
71.176 shares of CCBG common stock for each of the 10,186 shares of FABC
common stock outstanding. Based on Capital City's closing market price on
Nasdaq on February 3, 2005, this cash and stock combination equaled aggregate
consideration of $58.0 million. Closing is anticipated for mid-year 2005.
Previous Acquisitions. On March 19, 2004, the Company's subsidiary, Capital
City Bank, completed its merger with Quincy State Bank, a former subsidiary
of Synovus Financial Corp. Quincy State Bank had $116.6 million in assets
with one office in Quincy, Florida and one office in Havana, Florida. Both
markets adjoin Leon County, home to the Company's Tallahassee headquarters.
The purchase price was $26.1 million in cash.
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.
Dividends and management fees received from the Bank are the Company's only
source of income. Dividend payments by the Bank to CCBG depend on the
capitalization, earnings and projected growth of the Bank, and are limited by
various regulatory restrictions. See the section entitled "Regulatory
Considerations" in this Item 1 and Note 15 in the Notes to Consolidated
Financial Statements for additional information. The Company had a total of
926 (full-time equivalent) associates at February 28, 2005. Page 18 contains
other financial and statistical information about the Company.
The Company has one reportable segment with the following principal services:
Banking Services, Data Processing Services, Trust and Asset Management
Services, and Brokerage Services.
4
Banking Services
CCB is a Florida chartered full-service bank engaged in the commercial and
retail banking business.
Significant services offered by the Bank include:
* Business Banking - The Bank provides banking services to corporations
and other business clients. Loans are made for a wide variety of
general business purposes, including financing for commercial business
properties, equipment, inventories and accounts receivable, as well as
commercial leasing, letters of credit, treasury management services,
and merchant credit card transaction processing.
* Commercial Real Estate Lending - The Bank provides a wide range of
products to meet the financing needs of commercial developers and
investors, residential builders and developers, and community
development.
* Residential Real Estate Lending - The Bank provides products to help
meet the home financing needs of consumers, including conventional
permanent and construction/ permanent (fixed or adjustable rate)
financing arrangements, and FHA/VA loan products.
The Bank offers these products through its existing network of branch
offices. Geographical expansion of the delivery of this product line
has occurred over the past three years through the opening of four
mortgage lending offices in Gainesville (Alachua County), Lakeland
(Polk County), Panacea (Wakulla County), Steinhatchee (Taylor County),
and one in Thomasville, Georgia (Thomas County).
* Retail Credit - The Bank provides a full range of loan products to meet
the needs of consumers, including personal loans, automobile loans,
boat/RV loans, home equity loans, and credit card programs.
* Institutional Banking - The Bank provides banking services to meet the
needs of state and local governments, public schools and colleges,
charities, membership and not-for-profit associations including
customized checking and savings accounts, cash management systems, tax-
exempt loans, lines of credit, and term loans.
* Retail Banking - The Bank provides a full range of consumer banking
services, including checking accounts, savings programs, automated
teller machines, overdraft facilities, debit/credit cards, night
deposit services, safe deposit facilities, and PC/Internet banking.
Customers can use the "Star-Line" system to gain 24-hour access to
their deposit and loan account information, and transfer funds between
linked accounts. The Bank is a member of the "Star" ATM Network that
permits banking customers to access cash at automatic teller machines
("ATMs") or point of sale merchants at locations throughout the United
States.
Data Processing Services
Capital City Services Company provides data processing services to financial
institutions (including CCB), government agencies and commercial customers
located throughout North Florida and South Georgia. As of February 28, 2005,
the Services Company is providing computer services to six correspondent
banks, which have relationships with CCB.
5
Trust Services and Asset Management
Capital City Trust Company is the investment management arm of Capital City
Bank. The Trust Company provides asset management for individuals through
agency, personal trust, IRA's and personal investment management accounts.
Administration of pension, profit sharing and 401(k) plans is a significant
product line. Associations, endowments and other non-profit entities hire the
Trust Company to manage their investment portfolios. Individuals requiring
the services of a trustee, personal representative or a guardian are served
by a staff of well trained professionals. The market value of trust assets
under discretionary management exceeded $652 million as of December 31, 2004,
with total assets under administration exceeding $728 million.
Brokerage Services
The Company offers access to retail investment products through Capital City
Securities, Inc., a wholly-owned subsidiary of Capital City Bank. These
products are offered through INVEST Financial Corporation, a member of NASD
and SIPC. Non-deposit investment and insurance products are: (1) not FDIC
insured; (2) not deposits, obligations, or guaranteed by any bank; and (3)
subject to investment risk, including the possible loss of principal amount
invested. Capital City Securities, Inc.'s brokers are licensed through INVEST
Financial Corporation, and offer a full line of retail securities products,
including U.S. Government bonds, tax-free municipal bonds, stocks, mutual
funds, unit investment trusts, annuities, life insurance and long-term health
care. CCBG and its subsidiary are not affiliated with INVEST Financial
Corporation.
Expansion of Business
Since 1984, the Company has completed fourteen acquisitions totaling $1.6
billion in deposits within existing and new markets. In addition, in 2003,
the Company opened four new offices - two in Tallahassee and one each in
Springhill and Starke (replacement office) - to improve service and product
delivery within these Florida markets, and plans to open one new office in
Crawfordville in 2005. Plans are currently being developed for new office
sites in Macon, Georgia, Keystone Heights, Florida, and Springhill, Florida.
Pursuant to the Company's "Project 2010", the Company plans to continue its
expansion, emphasizing a combination of growth in existing markets and
acquisitions. Acquisitions will be focused on a three state area including
Florida, Georgia, and Alabama with a particular focus on acquiring banks and
banking offices, which are $100 million to $400 million in asset size,
located on the outskirts of major metropolitan areas. The Company will
evaluate de novo expansion opportunities in attractive new markets in the
event that acquisition opportunities are not feasible. Other expansion
opportunities that will be evaluated include asset management, insurance, and
mortgage banking. Management anticipates that roughly half of the Company's
future earnings growth will be generated through growth in existing markets
and half through acquisitions.
Competition
The banking business is rapidly changing and CCBG and its subsidiary operate
in a highly competitive environment, especially with respect to services and
pricing. The on-going consolidation of the banking industry has altered and
continues to significantly alter the competitive environment within the
Florida, Georgia, and Alabama markets. Management believes this
consolidation further enhances the Company's competitive position and
opportunities in many of its markets. CCBG's primary market area is 17
counties in Florida, four counties in Georgia and one county in Alabama. In
these markets, the Bank competes against a wide range of banking and
nonbanking institutions including savings and loan associations, credit
unions, money market funds, mutual fund advisory companies, mortgage banking
companies, investment banking companies, finance companies and other types of
financial institutions.
6
All of Florida's major banking concerns have a presence in Leon County.
Capital City Bank's Leon County deposits totaled $602.5 million, or 31.1%, of
the Company's consolidated deposits at December 31, 2004.
The following table depicts CCBG's market share percentage within each
respective county, based on total commercial bank deposits within the county.
Market Share as of
-------------------------------------
June 30, September 30,
2004(1) 2003(2) 2002(2)
- ------------------------------------------------------------------------
Florida(3)
Bradford County 37.1% 35.1% 38.4%
Citrus County 3.6% 3.5% 3.3%
Clay County 2.4% 2.7% 3.2%
Dixie County 16.9% 15.5% 17.5%
Gadsden County(4) 77.7% 31.1% 29.4%
Gilchrist County 49.4% 41.8% 38.5%
Gulf County 22.1% 28.5% 23.5%
Hernando County 1.3% 1.8% 1.0%
Jefferson County 24.0% 27.0% 27.1%
Leon County 17.2% 17.9% 18.4%
Levy County 34.1% 33.3% 34.0%
Madison County 17.8% 18.1% 19.0%
Pasco County 0.4% 0.4% 0.4%
Putnam County 12.5% 12.8% 12.5%
Suwannee County 7.7% 8.6% 9.1%
Taylor County 27.4% 27.7% 29.0%
Washington County 20.0% 25.6% 20.4%
Georgia(5)
Bibb County 2.8% 3.1% 3.1%
Burke County 10.3% 11.0% 12.4%
Grady County 23.6% 24.5% 31.5%
Laurens County(6) 41.8% - -
Troup County 8.2% 10.0% 10.9%
Alabama:
Chambers County 4.4% 4.1% 4.1%
(1) Obtained from the June 30 FDIC/OTS Summary of Deposits Report.
(2) Florida 2003 and 2002 data obtained from the September 30 Office Level
Report published by the Florida Bankers Association. Georgia and
Alabama data obtained from the June 30 FDIC/OTS Summary of Deposits
Report.
(3) Does not include Alachua, Marion, Polk and Wakulla counties where Capital
City Bank maintains residential mortgage lending offices only.
(4) Acquired Quincy State Bank (March 24, 2004) which was located in an
existing CCB market.
(5) Does not include Thomas county where Capital City Bank maintains a
residential mortgage lending office only.
(6) CCB entered market in November 2004.
7
The following table sets forth the number of commercial banks and offices,
including the Company and its competitors, within each of the respective
counties.
Number of Number of Commercial
County Commercial Banks Bank Offices
- --------------------------------------------------------------
Florida:
Bradford 3 3
Citrus 14 43
Clay 11 27
Dixie 3 4
Gadsden 3 5
Gilchrist 3 5
Gulf 5 7
Hernando 12 36
Jefferson 2 2
Leon 14 76
Levy 3 13
Madison 5 6
Pasco 23 104
Putnam 6 15
Suwannee 5 9
Taylor 3 4
Washington 4 4
Georgia:
Bibb 10 52
Burke 5 10
Grady 5 8
Laurens 8 18
Troup 9 20
Alabama:
Chambers 5 10
Data obtained from the June 30, 2004 FDIC/OTS Summary of Deposits Report.
REGULATORY CONSIDERATIONS
The Company and the Bank must comply with state and federal banking laws and
regulations that control virtually all aspects of operations. These laws and
regulations generally aim to protect depositors, not shareholders. Any
changes in applicable laws or regulations may materially affect the business
and prospects of the Company. Such legislative or regulatory changes may also
affect the operations of the Company and the Bank. The following description
summarizes some of the laws and regulations to which the Company and the Bank
are subject. References to applicable statutes and regulations are brief
summaries, do not purport to be complete, and are qualified in their entirety
by reference to such statutes and regulations.
The Company
The Company is registered with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") as a financial holding company under the
Gramm-Leach-Bliley Act and is registered with the Federal Reserve as a bank
holding company under the Bank Holding Company Act of 1956 ("BHCA"). As a
result, the Company is subject to supervisory regulation and examination by
the Federal Reserve. The Gramm-Leach-Bliley Act, the BHCA, and other federal
laws subject financial holding companies to particular restrictions on the
types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations.
Permitted Activities. The Gramm-Leach-Bliley Act, enacted on November 12,
1999, amended the BHCA by (i) allowing bank holding companies that qualify as
"financial holding companies" to engage in a broad range of financial and
related activities; (ii)
8
allowing insurers and other financial service companies to acquire banks;
(iii) removing restrictions that applied to bank holding company ownership of
securities firms and mutual fund advisory companies; and (iv) establishing
the overall regulatory scheme applicable to bank holding companies that also
engage in insurance and securities operations. The general effect of the law
was to establish a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers. Activities that are financial in nature are broadly
defined to include not only banking, insurance, and securities activities,
but also merchant banking and additional activities that the Federal Reserve,
in consultation with the Secretary of the Treasury, determines to be
financial in nature, incidental to such financial activities, or
complementary activities that do not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally.
In contrast to financial holding companies, bank holding companies are
limited to managing or controlling banks, furnishing services to or
performing services for its subsidiaries, and engaging in other activities
that the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Except for
the activities relating to financial holding companies permissible under the
Gramm-Leach-Bliley Act, these restrictions will apply to the Company. In
determining whether a particular activity is permissible, the Federal Reserve
must consider whether the performance of such an activity reasonably can be
expected to produce benefits to the public that outweigh possible adverse
effects. Possible benefits include greater convenience, increased
competition, and gains in efficiency. Possible adverse effects include undue
concentration of resources, decreased or unfair competition, conflicts of
interest, and unsound banking practices. Despite prior approval, the Federal
Reserve may order a bank holding company or its subsidiaries to terminate any
activity or to terminate ownership or control of any subsidiary when the
Federal Reserve has reasonable cause to believe that a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that bank
holding company may result from such an activity.
Changes in Control. Subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank or
bank holding company. A conclusive presumption of control exists if an
individual or company acquires the power, directly or indirectly, to direct
the management or policies of an insured depository institution or to vote
25% or more of any class of voting securities of any insured depository
institution. A rebuttable presumption of control exists if a person or
company acquires 10% or more but less than 25% of any class of voting
securities of an insured depository institution and either the institution
has registered securities under Section 12 of the Securities Exchange Act of
1934 (the "Exchange Act"), or no other person will own a greater percentage
of that class of voting securities immediately after the acquisition.
As a bank holding company, the Company is required to obtain prior approval
from the Federal Reserve before (i) acquiring all or substantially all of the
assets of a bank or bank holding company, (ii) acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any
bank or bank holding company (unless it owns a majority of such bank's voting
shares), or (iii) merging or consolidating with any other bank or bank
holding company. In determining whether to approve a proposed bank
acquisition, federal bank regulators will consider, among other factors, the
effect of the acquisition on competition, the public benefits expected to be
received from the acquisition, the projected capital ratios and levels on a
post-acquisition basis, and the acquiring institution's record of addressing
the credit needs of the communities it serves, including the needs of low and
moderate income neighborhoods, consistent with the safe and sound operation
of the bank, under the Community Reinvestment Act of 1977 ("CRA").
9
Under Florida law, a person or entity proposing to directly or indirectly
acquire control of a Florida bank must first obtain permission from the State
of Florida. Florida statutes define "control" as either (a) indirectly or
directly owning, controlling or having power to vote 25% or more of the
voting securities of a bank; (b) controlling the election of a majority of
directors of a bank; (c) owning, controlling, or having power to vote 10% or
more of the voting securities as well as directly or indirectly exercising a
controlling influence over management or policies of a bank; or (d) as
determined by the Florida Department of Financial Services (the "Florida
Department"). These requirements will affect the Company because the Bank is
chartered under Florida law and changes in control of the Company are
indirect changes in control of the Bank.
Tying. Financial holding companies and their affiliates are prohibited from
tying the provision of certain services, such as extending credit, to other
services offered by the holding company or its affiliates.
Capital; Dividends; Source of Strength. The Federal Reserve imposes certain
capital requirements on the Company under the BHCA, including a minimum
leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted
assets. These requirements are described below under "Capital Regulations."
Subject to its capital requirements and certain other restrictions, the
Company is able to borrow money to make a capital contribution to the Bank,
and such loans may be repaid from dividends paid from the Bank to the
Company.
The ability of the Bank to pay dividends, however, will be subject to
regulatory restrictions which are described below under "Dividends." The
Company is also able to raise capital for contributions to the Bank by
issuing securities without having to receive regulatory approval, subject to
compliance with federal and state securities laws.
In accordance with Federal Reserve policy, the Company is expected to act as
a source of financial strength to the Bank and to commit resources to support
the Bank in circumstances in which the Company might not otherwise do so. In
furtherance of this policy, the Federal Reserve may require a financial
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious
risk to the financial soundness or stability of any subsidiary depository
institution of the financial holding company. Further, federal bank
regulatory authorities have additional discretion to require a financial
holding company to divest itself of any bank or nonbank subsidiary if the
agency determines that divestiture may aid the depository institution's
financial condition.
Capital City Bank
The Bank is a banking institution that is chartered by and headquartered in
the State of Florida, and it is subject to supervision and regulation by the
Florida Department. The Florida Department supervises and regulates all areas
of the Bank's operations including, without limitation, the making of loans,
the issuance of securities, the conduct of the Bank's corporate affairs, the
satisfaction of capital adequacy requirements, the payment of dividends, and
the establishment or closing of branches. The Bank is also a member bank of
the Federal Reserve System, which makes the Bank's operations subject to
broad federal regulation and oversight by the Federal Reserve. In addition,
the Bank's deposit accounts are insured by the FDIC to the maximum extent
permitted by law, and the FDIC has certain enforcement powers over the Bank.
As a state chartered banking institution in the State of Florida, the Bank is
empowered by statute, subject to the limitations contained in those statutes,
to take and pay interest on savings and time deposits, to accept demand
deposits, to make loans on residential and other real estate, to make
consumer and commercial loans, to invest, with certain limitations, in equity
securities and in debt obligations of banks and corporations and to provide
various other banking services on behalf of the Bank's
10
customers. Various consumer laws and regulations also affect the operations
of the Bank, including state usury laws, laws relating to fiduciaries,
consumer credit and equal credit opportunity laws, and fair credit reporting.
In addition, the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") prohibits insured state chartered institutions from
conducting activities as principal that are not permitted for national banks.
A bank, however, may engage in an otherwise prohibited activity if it meets
its minimum capital requirements and the FDIC determines that the activity
does not present a significant risk to the deposit insurance funds.
Reserves. The Federal Reserve requires all depository institutions to
maintain reserves against some transaction accounts (primarily NOW and Super
NOW checking accounts). The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy liquidity
requirements. An institution may borrow from the Federal Reserve Bank
"discount window" as a secondary source of funds, provided that the
institution meets the Federal Reserve Bank's credit standards.
Dividends. The Bank is subject to legal limitations on the frequency and
amount of dividends that can be paid to the Company. The Federal Reserve may
restrict the ability of the Bank to pay dividends if such payments would
constitute an unsafe or unsound banking practice. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank
for its cash needs, including funds for acquisitions and the payment of
dividends, interest, and operating expenses.
In addition, Florida law also places certain restrictions on the declaration
of dividends from state chartered banks to their holding companies. Pursuant
to Section 658.37 of the Florida Banking Code, the board of directors of
state chartered banks, after charging off bad debts, depreciation and other
worthless assets, if any, and making provisions for reasonably anticipated
future losses on loans and other assets, may quarterly, semi-annually or
annually declare a dividend of up to the aggregate net profits of that period
combined with the bank's retained net profits for the preceding two years
and, with the approval of the Florida Department, declare a dividend from
retained net profits which accrued prior to the preceding two years. Before
declaring such dividends, 20% of the net profits for the preceding period as
is covered by the dividend must be transferred to the surplus fund of the
bank until this fund becomes equal to the amount of the bank's common stock
then issued and outstanding. A state chartered bank may not declare any
dividend if (i) its net income from the current year combined with the
retained net income for the preceding two years is a loss or (ii) the payment
of such dividend would cause the capital account of the bank to fall below
the minimum amount required by law, regulation, order or any written
agreement with the Florida Department or a federal regulatory agency.
Insurance of Accounts and Other Assessments. The deposit accounts of the
Bank are insured by the Bank Insurance Fund of the FDIC generally up to a
maximum of $100,000 per separately insured depositor, and the Bank is subject
to FDIC deposit insurance assessments. Federal banking agencies may prohibit
any FDIC-insured institution from engaging in any activity they determine by
regulation or order poses a serious threat to the insurance fund. Pursuant to
FDICIA, the FDIC adopted a risk-based system for determining deposit
insurance assessments under which all insured institutions were placed into
one of nine categories and assessed insurance premiums, ranging from 0.0% to
0.27% of insured deposits, based upon their level of capital and supervisory
evaluation. Because the FDIC sets the assessment rates based upon the level
of assets in the insurance fund, premium rates rise and fall as the number
and size of bank failures increase and decrease, respectively. Under the
system, institutions are assigned to one of three capital categories based
solely on the level of an institution's capital, "well capitalized,"
"adequately capitalized", and "undercapitalized." These three groups are then
divided into three subgroups that reflect varying levels of supervisory
concern, from those that are considered to be healthy to those that are
considered to be of substantial supervisory concern. Furthermore, the
Economic Growth and Regulatory Paperwork Act of 1996 requires Bank Insurance
Fund insured banks to participate in the payment of interest due on Financing
Corporation bonds used to finance the thrift bailout.
11
Transactions With Affiliates. Pursuant to Sections 23A and 23B of the
Federal Reserve Act ("FRA") and Regulation W, the authority of the Bank to
engage in transactions with related parties or "affiliates" or to make loans
to insiders is limited. Loan transactions with an "affiliate" generally must
be collateralized and certain transactions between the Bank and its
"affiliates", including the sale of assets, the payment of money or the
provision of services, must be on terms and conditions that are substantially
the same, or at least as favorable to the Bank, as those prevailing for
comparable nonaffiliated transactions. In addition, the Bank generally may
not purchase securities issued or underwritten by affiliates.
Loans to executive officers, directors or to any person who directly or
indirectly, or acting through or in concert with one or more persons, owns,
controls or has the power to vote more than 10% of any class of voting
securities of a bank ("10% Shareholders"), or to any political or campaign
committee the funds or services of which will benefit such executive
officers, directors, or 10% Shareholders or which is controlled by such
executive officers, directors or 10% Shareholders, are subject to Sections
22(g) and 22(h) of the FRA and the regulations promulgated thereunder
(Regulation O) and Section 13(k) of the Exchange Act relating to the
prohibition on personal loans to executives which exempts financial
institutions in compliance with the insider lending restrictions of Section
22(h) of the FRA. Among other things, these loans must be made on terms
substantially the same as those prevailing on transactions made to
unaffiliated individuals and certain extensions of credit to such persons
must first be approved in advance by a disinterested majority of the entire
board of directors. Section 22(h) of the FRA prohibits loans to any such
individuals where the aggregate amount exceeds an amount equal to 15% of an
institution's unimpaired capital and surplus plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully secured by
readily marketable collateral, or when the aggregate amount on all such
extensions of credit outstanding to all such persons would exceed the bank's
unimpaired capital and unimpaired surplus. Section 22(g) identifies limited
circumstances in which the Bank is permitted to extend credit to executive
officers.
Community Reinvestment Act. The CRA and the regulations issued thereunder
are intended to encourage banks to help meet the credit needs of their
service area, including low and moderate income neighborhoods, consistent
with the safe and sound operations of the banks. These regulations provide
for regulatory assessment of a bank's record in meeting the needs of its
service area. Federal banking agencies are required to make public a rating
of a bank's performance under the CRA. The Federal Reserve considers a bank's
CRA when the bank submits an application to establish branches, merge, or
acquire the assets and assume the liabilities of another bank. In the case of
a financial holding company, the CRA performance record of all banks involved
in the merger or acquisition are reviewed in connection with the filing of an
application to acquire ownership or control of shares or assets of a bank or
to merge with any other financial holding company. An unsatisfactory record
can substantially delay or block the transaction.
Capital Regulations. The Federal Reserve has adopted risk-based, capital
adequacy guidelines for financial holding companies and their subsidiary
state-chartered banks that are members of the Federal Reserve System. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
financial holding companies, to account for off-balance sheet exposure, to
minimize disincentives for holding liquid assets and to achieve greater
consistency in evaluating the capital adequacy of major banks throughout the
world. Under these guidelines assets and off-balance sheet items are assigned
to broad risk categories each with designated weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The current guidelines require all financial holding companies and federally
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier I Capital. Tier I Capital, which includes
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock and trust preferred
securities, less certain goodwill items and other
12
intangible assets, is required to equal at least 4% of risk-weighted assets.
The remainder ("Tier II Capital") may consist of (i) an allowance for loan
losses of up to 1.25% of risk-weighted assets, (ii) excess of qualifying
perpetual preferred stock, (iii) hybrid capital instruments, (iv) perpetual
debt, (v) mandatory convertible securities, and (vi) subordinated debt and
intermediate-term preferred stock up to 50% of Tier I Capital. Total capital is
the sum of Tier I and Tier II Capital less reciprocal holdings of other banking
organizations' capital instruments, investments in unconsolidated subsidiaries
and any other deductions as determined by the appropriate regulator (determined
on a case by case basis or as a matter of policy after formal rule making).
In computing total risk-weighted assets, bank and financial holding company
assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain
off-balance sheet items are given similar credit conversion factors to
convert them to asset equivalent amounts to which an appropriate risk-weight
will apply. Most loans will be assigned to the 100% risk category, except for
performing first mortgage loans fully secured by 1- to 4-family and certain
multi-family residential property, which carry a 50% risk rating. Most
investment securities (including, primarily, general obligation claims on
states or other political subdivisions of the United States) will be assigned
to the 20% category, except for municipal or state revenue bonds, which have
a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations
backed by the full faith and credit of the U.S. Government, which have a 0%
risk-weight. In covering off-balance sheet items, direct credit substitutes,
including general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction-related
contingencies such as bid bonds, standby letters of credit backing non-
financial obligations, and undrawn commitments (including commercial credit
lines with an initial maturity of more than one year) have a 50% conversion
factor. Short-term commercial letters of credit are converted at 20% and
certain short-term unconditionally cancelable commitments have a 0% factor.
The federal bank regulatory authorities have also adopted regulations which
supplement the risk-based guideline. These regulations generally require
banks and financial holding companies to maintain a minimum level of Tier I
Capital to total assets less goodwill of 4% (the "leverage ratio"). The
Federal Reserve permits a bank to maintain a minimum 3% leverage ratio if the
bank achieves a 1 rating under the CAMELS rating system in its most recent
examination, as long as the bank is not experiencing or anticipating
significant growth. The CAMELS rating is a non-public system used by bank
regulators to rate the strength and weaknesses of financial institutions. The
CAMELS rating is comprised of six categories: capital adequacy, asset
quality, management, earnings, liquidity, and sensitivity to market risk.
Banking organizations experiencing or anticipating significant growth, as
well as those organizations which do not satisfy the criteria described
above, will be required to maintain a minimum leverage ratio ranging
generally from 4% to 5%. The bank regulators also continue to consider a
"tangible Tier I leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier I leverage ratio is the ratio of a banking
organization's Tier I Capital, less deductions for intangibles otherwise
includable in Tier I Capital, to total tangible assets.
Federal law and regulations establish a capital-based regulatory scheme
designed to promote early intervention for troubled banks and require the
FDIC to choose the least expensive resolution of bank failures. The capital-
based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized"
institution, a bank must have a leverage ratio of no less than 5%, a Tier I
risk-based ratio of no less than 6%, and a total risk-based capital ratio of
no less than 10%, and the bank must not be under any order or directive from
the appropriate regulatory agency to meet and maintain a specific capital
level. Generally, a financial institution must be "well capitalized" before
the Federal Reserve will approve an application by a financial holding
company to acquire or merge with a bank or bank holding company.
13
Under the regulations, the applicable agency can treat an institution as if
it were in the next lower category if the agency determines (after notice and
an opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or a part of
their operations. Financial holding companies controlling financial
institutions can be called upon to boost the institutions' capital and to
partially guarantee the institutions' performance under their capital
restoration plans.
It should be noted that the minimum ratios referred to above are merely
guidelines and the bank regulators possess the discretionary authority to
require higher ratios.
The Company and the Bank currently exceed the requirements contained in the
applicable regulations, policies and directives pertaining to capital
adequacy, and management of the Company and the Bank is unaware of any
material violation or alleged violation of these regulations, policies or
directives.
Interstate Banking and Branching. The BHCA was amended in September 1994 by
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The Interstate Banking Act provides that
adequately capitalized and managed financial holding companies are permitted
to acquire banks in any state.
State laws prohibiting interstate banking or discriminating against out-of-
state banks are preempted. States were not permitted to enact laws opting out
of this provision; however, states were allowed to adopt a minimum age
restriction requiring that target banks located within the state be in
existence for a period of years, up to a maximum of five years, before such
bank may be subject to the Interstate Banking Act. The Interstate Banking Act
establishes deposit caps which prohibit acquisitions that result in the
acquiring company controlling 30% or more of the deposits of insured banks
and thrift institutions held in the state in which the target maintains a
branch or 10% or more of the deposits nationwide. States have the authority
to waive the 30% deposit cap. State-level deposit caps are not preempted as
long as they do not discriminate against out-of-state companies, and the
federal deposit caps apply only to initial entry acquisitions.
The Interstate Banking Act also provides that adequately capitalized and
managed banks are able to engage in interstate branching by merging with
banks in different states. States were permitted to enact legislation
authorizing interstate mergers earlier than June 1, 1997, or, unlike the
interstate banking provision discussed above, states were permitted to opt
out of the application of the interstate merger provision by enacting
specific legislation before June 1, 1997.
Florida responded to the enactment of the Interstate Banking Act by enacting
the Florida Interstate Branching Act (the "Florida Branching Act"). The
purpose of the Florida Branching Act was to permit interstate branching
through merger transactions under the Interstate Banking Act. Under the
Florida Branching Act, with the prior approval of the Florida Department, a
Florida bank may establish, maintain and operate one or more branches in a
state other than the State of Florida pursuant to a merger transaction in
which the Florida bank is the resulting bank. In addition, the Florida
Branching Act provides that one or more Florida banks may enter into a merger
transaction with one or more out-of-state banks, and an out-of-state bank
resulting from such transaction may maintain and operate the branches of the
Florida bank that participated in such merger. An out-of-state bank, however,
is not permitted to acquire a Florida bank in a merger transaction unless the
Florida bank has been in existence and continuously operated for more than
three years.
14
USA PATRIOT Act of 2001. On October 26, 2001, the USA PATRIOT Act of 2001
(the "Patriot Act") was enacted in response to the terrorist attacks
occurring on September 11, 2001. The Patriot Act is intended to strengthen
the U.S. law enforcement and intelligence communities' ability to work
together to combat terrorism. Title III of the Patriot Act, the International
Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, amended
the Bank Secrecy Act and adopted additional provisions that increased the
obligations of financial institutions, including the Bank, to identify their
customers, watch for and report upon suspicious transactions, respond to
requests for information by federal banking and law enforcement agencies, and
share information with other financial institutions. In addition, the
collected customer identification information must be verified within a
reasonable time after a new account is opened through documentary or non-
documentary methods. All new customers must be screened against any Section
326 government lists of known or suspected terrorists within a reasonable
time after opening an account.
Privacy. Under the Gramm-Leach-Bliley Act, federal banking regulators
adopted rules limiting the ability of banks and other financial institutions
to disclose nonpublic information about consumers to nonaffiliated third
parties. The rules require disclosure of privacy policies to consumers and,
in some circumstances, allow consumers to prevent disclosure of certain
personal information to nonaffiliated third parties.
Consumer Laws and Regulations. The Check Clearing for the 21st Century Act,
or "Check 21" as it is commonly known, became effective October 28, 2004.
Check 21 facilitates check collection by creating a new negotiable instrument
called a "substitute check," which permits, but does not require, banks to
replace original checks with substitute checks or information from the
original check and process check information electronically. Banks that do
use substitute checks must comply with certain notice and recredit rights.
Check 21 is expected to cut the time and cost involved in physically
transporting paper items to reduce float (i.e., the time between the deposit
of a check in a bank and payment) especially in cases in which items were not
already being delivered same-day or overnight.
The Bank is also subject to other federal and state consumer laws and
regulations that are designed to protect consumers in transactions with
banks. While the list set forth below is not exhaustive, these laws and
regulations include the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Fair
Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Housing Act,
the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures
Act, among others. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must
deal with customers when taking deposits or making loans to such customers.
The Bank must comply with the applicable provisions of these consumer
protection laws and regulations as part of its ongoing customer relations.
Future Legislative Developments
Various legislation, including proposals to modify the bank regulatory
system, expand the powers of banking institutions and financial holding
companies and limit the investments that a depository institution may make
with insured funds, is from time to time introduced in Congress and the
Florida legislature. Such legislation may change banking statutes and the
environment in which the Company and its banking subsidiary operate in
substantial and unpredictable ways. We cannot determine the ultimate effect
that potential legislation, if enacted, or implementing regulations with
respect thereto, would have upon our financial condition or results of
operations or that of our banking subsidiary.
15
Expanding Enforcement Authority
One of the major additional burdens imposed on the banking industry by the
FDICIA is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve and FDIC possess extensive authority to police unsafe or unsound
practices and violations of applicable laws and regulations by depository
institutions and their holding companies. For example, the FDIC may terminate
the deposit insurance of any institution which it determines has engaged in
an unsafe or unsound practice. The agencies can also assess civil money
penalties, issue cease and desist or removal orders, seek injunctions, and
publicly disclose such actions. FDICIA, the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 and other laws have expanded the
agencies' authority in recent years, and the agencies have not yet fully
tested the limits of their powers.
Effect of Governmental Monetary Policies
The commercial banking business in which the Bank engages is affected not
only by general economic conditions, but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the "discount window," open market operations,
the imposition of changes in reserve requirements against member banks'
deposits and assets of foreign branches and the imposition of and changes in
reserve requirements against certain borrowings by banks and their affiliates
are some of the instruments of monetary policy available to the Federal
Reserve. These monetary policies are used in varying combinations to
influence overall growth and distributions of bank loans, investments and
deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve have had a significant
effect on the operating results of commercial banks and are expected to do so
in the future. The monetary policies of the Federal Reserve are influenced by
various factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and in the fiscal policies of the
U.S. Government. Future monetary policies and the effect of such policies on
the future business and earnings of the Bank cannot be predicted.
Website Access to Company's Reports
The Company's internet website is www.ccbg.com. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including
any amendments to those reports filed or furnished pursuant to section 13(a)
or 15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the
Exchange Act are available free of charge through our website as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission.
Item 2. Properties
Capital City Bank Group, Inc., is headquartered in Tallahassee, Florida. The
Company's executive office is in the Capital City Bank building located on
the corner of Tennessee and Monroe Streets in downtown Tallahassee. The
building is owned by the Bank, but is located, in part, on land leased under
a long-term agreement.
The Bank's Parkway Office is located on land leased from the Smith Interests
General Partnership L.L.P. in which several directors and officers have an
interest. The annual lease provides for payments of approximately $91,000,
to be adjusted for inflation in future years.
As of February 28, 2005, the Bank had 60 banking locations. Of the 60
locations, the Bank leases the land, buildings, or both at 11 locations and
owns the land and buildings at the remaining 49.
16
Item 3. Legal Proceedings
The Company is a party to lawsuits and claims arising out of the normal
course of business. In management's opinion, there are no known pending
claims or litigation, the outcome of which would, individually or in the
aggregate, have a material effect on the consolidated results of operations,
financial position, or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Registrant's Common Equity, Related Shareowner Matters,
and Issuer Purchases of Equity Securities
Common Stock Market Prices and Dividends
The Company's common stock trades on the Nasdaq National Market under the
symbol "CCBG."
The following table presents the range of high and low closing sales prices
reported on the Nasdaq National Market and cash dividends declared for each
quarter during the past two years, as adjusted for the Company's stock split
on June 13, 2003. The Company had a total of 1,598 shareowners of record as
of February 28, 2005.
2004 2003
------------------------------ -------------------------------
Fourth Third Second First Fourth Third Second First
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------------------------------------------------
Common stock price:
High $45.98 $41.20 $43.15 $45.55 $46.83 $40.93 $36.43 $32.32
Low 37.71 33.33 35.50 39.05 36.62 35.00 29.74 26.81
Close 41.80 38.71 39.59 41.25 45.99 38.16 36.08 31.29
Cash dividends
declared per share .190 .180 .180 .180 .180 .170 .170 .136
Future payment of dividends will be subject to determination and
declaration by the Board of Directors. Florida law limits the payment of
dividends by the Company. There are also legal limits on the frequency and
amount of dividends that can be paid by CCB to the Company. See subsection
entitled "Dividends" in the Business section on page 11, in the
Management's Discussion and Analysis of Financial Condition and Operating
Results on page 44 and Note 15 in the Notes to Consolidated Financial
Statements. These restrictions may limit the Company's ability to pay
dividends to its shareowners. As of February 28, 2005, the Company does
not believe these restrictions will impair the Company's ability to declare
and pay its routine and customary dividends.
17
Item 6. Selected Financial Data
For the Years Ended December 31,
----------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)(1) 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
Interest Income $ 101,525 $ 94,830 $ 104,165 $ 117,156 $ 107,720
Net Interest Income 86,084 79,991 81,662 68,907 61,486
Provision for Loan Losses 2,141 3,436 3,297 3,983 3,120
Net Income 29,371 25,193 23,082 16,866 18,153
Per Common Share:
Basic Net Income $ 2.18 $ 1.91 $ 1.75 $ 1.27 $ 1.43
Diluted Net Income 2.18 1.90 1.74 1.27 1.43
Cash Dividends Declared .730 .656 .502 .476 .436
Book Value 18.13 15.27 14.08 12.86 11.61
Key Performance Ratios:
Return on Average Assets 1.46% 1.40% 1.34% 0.99% 1.24%
Return on Average Equity 13.31 12.82 12.85 10.00 12.99
Net Interest Margin (FTE) 4.88 5.01 5.35 4.61 4.80
Dividend Pay-Out Ratio 33.42 34.51 28.87 37.48 30.49
Equity to Assets Ratio 10.86 10.98 10.22 9.43 9.66
Asset Quality:
Allowance for Loan Losses $ 16,037 $ 12,429 $ 12,495 $ 12,096 $ 10,564
Allowance for Loan Losses to Loans 0.88% 0.93% 0.97% 0.98% 1.00%
Nonperforming Assets 5,271 7,301 3,843 3,940 3,909
Nonperforming Assets to Loans + ORE 0.29 0.54 0.30 0.32 0.37
Allowance to Nonperforming Loans 345.18 529.80 497.72 496.96 359.57
Net Charge-Offs to Average Loans 0.22 0.27 0.23 0.31 0.25
Averages for the Year:
Loans, Net $1,538,744 $1,318,080 $1,256,107 $1,184,290 $1,002,122
Earning Assets 1,789,843 1,624,680 1,556,500 1,534,548 1,315,024
Total Assets 2,006,745 1,804,895 1,727,180 1,704,167 1,463,612
Deposits 1,599,201 1,431,808 1,424,999 1,442,916 1,207,103
Subordinated Note 5,155 - - - -
Long-Term Borrowings 59,462 55,594 30,423 15,308 13,070
Shareowners' Equity 220,731 196,588 179,652 168,652 139,738
Year-End Balances:
Loans, Net $1,828,825 $1,341,632 $1,285,221 $1,243,351 $1,051,832
Earning Assets 2,113,571 1,648,818 1,636,472 1,626,841 1,369,294
Total Assets 2,364,013 1,846,502 1,824,771 1,821,423 1,527,460
Deposits 1,894,886 1,474,205 1,434,200 1,550,101 1,268,367
Subordinated Note 30,928 - - - -
Long-Term Borrowings 68,453 46,475 71,745 13,570 11,707
Shareowners' Equity 256,800 202,809 186,531 171,783 147,607
Other Data:
Basic Average Shares Outstanding 13,443,753 13,222,487 13,225,285 13,241,957 12,732,749
Diluted Average Shares Outstanding 13,447,937 13,251,189 13,274,355 13,292,435 12,768,553
Shareowners of Record(2) 1,598 1,512 1,457 1,473 1,599
Banking Locations(2) 60 57 54 56 56
Full-Time Equivalent Associates(2) 926 795 781 787 791
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13, 2003.
(2) As of the record date. The record date is on or about March 1st of the following year.
18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's discussion and analysis ("MD&A") provides supplemental
information, which sets forth the major factors that have affected the
Company's financial condition and results of operations and should be read in
conjunction with the Consolidated Financial Statements and related notes.
The MD&A is divided into subsections entitled "Business Overview," "Financial
Overview," "Results of Operations," "Financial Condition," "Liquidity and
Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting
Policies." Information therein should facilitate a better understanding of
the major factors and trends that affect the Company's earnings performance
and financial condition, and how the Company's performance during 2004
compares with prior years. Throughout this section, Capital City Bank Group,
Inc., and its subsidiary, collectively, are referred to as "CCBG" or the
"Company." Capital City Bank is referred to as "CCB" or the "Bank."
The period-to-date averages used in this report are based on daily balances
for each respective period. In certain circumstances, comparing average
balances for the fourth quarters of consecutive years may be more meaningful
than simply analyzing year-to-date averages. Therefore, where appropriate,
quarterly averages have been presented for analysis and have been noted as
such. See Table 2 for annual averages and Table 15 for financial information
presented on a quarterly basis.
This Report including the MD&A section, and other Company written and oral
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," "target," "goal," and similar expressions are
intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. The Company's actual future results may differ materially
from those set forth in its forward-looking statements. Factors that might
cause the future financial performance to vary from that described in its
forward-looking statements include the credit, market, operational,
liquidity, interest rate and other risks discussed in the MD&A section of
this report and in other periodic reports filed with the SEC. In addition,
the following discussion sets forth certain risks and uncertainties that the
Company believes could cause its actual future results to differ materially
from expected results. However, other factors besides those listed below or
discussed in the Company's reports to the SEC also could adversely affect the
Company's results, and the reader should not consider any such list of
factors to be a complete set of all potential risks or uncertainties. This
discussion is provided as permitted by the Private Securities Litigation
Reform Act of 1995. The following factors, among others, could cause our
financial performance to differ materially from what is contemplated in those
forward-looking statements.
* Our ability to integrate the business and operations of companies and
banks that we have acquired and that we may acquire in the future. For
example, the Company may fail to realize the growth opportunities and
cost savings anticipated to be derived from our acquisitions. In
addition, it is possible that during the integration process of our
acquisitions, the Company could lose key employees or the ability to
maintain relationships with customers.
* 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;
19
* Worldwide political and social unrest, including acts of war and
terrorism;
* The effects of harsh weather conditions, including hurricanes;
* 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;
* Changes in consumer spending and saving habits;
* 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. Any
forward-looking statements made by or on behalf of the Company speak only as of
the date they are made. 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 may make further disclosures of a forward-looking
nature in its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q
and its current report on Form 8-K.
BUSINESS OVERVIEW
The Company is a financial holding company headquartered in Tallahassee,
Florida and is the parent of its wholly-owned subsidiary, Capital City Bank.
The Bank offers a broad array of products and services through a total of 60
full-service offices located in 17 Florida counties, five Georgia counties, and
one Alabama county. The Bank also has mortgage lending offices in four
additional Florida communities, and one
20
Georgia community. The Bank offers commercial and retail banking services, as
well as trust and asset management, brokerage, and data processing services.
From an industry and national perspective, the Company's profitability, like
most financial institutions, is dependent to a large extent upon net interest
income, which is the difference between the interest received on earning
assets, such as loans and securities, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings. Results of operations are
also affected by the provision for loan losses, operating expenses such as
salaries and employee benefits, occupancy and other operating expenses,
including income taxes, and, non-interest income such as service charges on
deposit accounts, trust service fees, mortgage banking revenues, and data
processing revenues. Economic conditions, competition and the monetary and
fiscal policies of the Federal government, in general, significantly affect
financial institutions, including the Company. During 2004, the Federal
government's monetary and fiscal policy was marked by a steady increase in
short-term interest rates to curb the potential for inflationary pressures.
Lending activities are also significantly influenced by regional and local
economic factors. Some specific factors may include the demand for and supply
of housing, competition among lenders, interest rate conditions and prevailing
market rates on competing investments, customer preferences and levels of
personal income and savings in the Company's primary market area.
The Company philosophy is to grow and prosper, building long-term relationships
based on quality service, high ethical standards, and safe and sound banking
practices. The Company is a super-community bank in the relationship banking
business with a locally oriented, community-based focus, which is augmented by
experienced, centralized support in select specialized areas. The Company's
local market orientation is reflected in its network of banking office
locations, experienced community executives, and community advisory boards
which support the Company's focus of responding to local banking needs. The
Company strives to offer a broad array of sophisticated products and to provide
quality service by empowering associates to make decisions in their local
markets.
Pursuant to "Project 2010", the Company plans to continue its expansion,
emphasizing a combination of growth in existing markets and acquisitions.
Acquisitions will be focused on a three state area including Florida,
Georgia, and Alabama with a particular focus on acquiring banks and banking
offices, which are $100 million to $400 million in asset size, located on the
outskirts of major metropolitan areas. The Company will evaluate de novo
expansion opportunities in attractive new markets in the event that
acquisition opportunities are not feasible. Other expansion opportunities
that will be evaluated include asset management, insurance, and mortgage
banking. Management anticipates that roughly half of the Company's future
earnings growth will be generated through growth in existing markets and half
through acquisitions.
Pending Acquisition. On February 3, 2005, the Company announced the signing
of a definitive agreement to acquire First Alachua Banking Corporation
("FABC"), headquartered in Alachua, Florida. FABC's wholly-owned subsidiary,
First National Bank of Alachua ("FNBA") has $229 million in assets, seven
offices located in Alachua County -- Gainesville (three), Alachua, High
Springs, Jonesville, Newberry -- and an eighth office in Hastings, Florida,
which is located in St. Johns County. FABC also has a mortgage lending
office in Gainesville and a financial services division. Subject to certain
potential adjustments, FABC shareowners will receive $2,847.04 in cash and
71.176 shares of CCBG common stock for each of the 10,186 shares of FABC
common stock outstanding. Based on Capital City's closing market price on
Nasdaq on February 3, 2005, this cash and stock combination equaled aggregate
consideration of $58.0 million. Closing is anticipated for mid-year 2005.
Previous Acquisitions. On March 19, 2004, the Company's subsidiary, Capital
City Bank, completed its merger with Quincy State Bank, a former subsidiary
of Synovus Financial Corp. Quincy State Bank had $116.6 million in assets
with one office in Quincy, Florida and one office in Havana, Florida. Both
markets adjoin Leon County,
21
home to the Company's Tallahassee headquarters. The purchase price was $26.1
million in cash.
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.
FINANCIAL OVERVIEW
The Company's net income for 2004 totaled $29.4 million, or $2.18 per diluted
share. This compares to $25.2 million, or $1.90 per diluted share in 2003.
Key factors impacting the Company's financial condition and results of
operations for 2004 are summarized below.
* Total assets of the Company increased to $2.4 billion at the end of
2004, or 28.0%, from $1.8 billion at the end of 2003. This strong
growth is primarily reflective of increases in earning assets obtained
through the two acquisitions during 2004 and strong loan production in
existing markets.
* Shareowners' equity for the same periods improved from $202.8 million
at the end of 2003 to $256.8 million at the end of 2004. The Company
continues to be well capitalized with a Tier 1 capital ratio of 11.4%.
* Net interest income in 2004 grew $6.1 million, or 7.6% over 2003 due to
higher interest income reflective of earning asset growth through
acquisitions and strong organic loan growth, and an improved deposit mix,
partially offset by declining asset yields primarily attributable to
earning asset re-pricing. The full year net interest margin of 4.88%
declined 13 basis points from the comparable period in 2003 reflective of
an 18 basis point decline in earning asset yield partially offset by a 5
basis point decline in the cost of funds.
* Noninterest income increased $8.6 million, or 20.5%, over 2003 due
primarily to the $6.9 million one-time gain on the sale of the bank's
credit card portfolio recognized in the third quarter. Gains were also
realized in deposit service fees, data processing fees, asset
management fees, and merchant fees that were partially offset by a
decline in mortgage banking revenues.
* Noninterest expense grew by $9.5 million, or 11.9% over 2003. Higher
expense for compensation, occupancy, professional fees, advertising,
and intangibles were the primary reasons for the increase. The
integration of two acquisitions during the year, expansion of banking
office locations, and the implementation of Sarbanes-Oxley Section
404 compliance and testing were the primary contributing factors
driving the increase.
* Provision for loan losses for the year totaled $2.1 million compared to
$3.4 million in 2003. The lower provision is reflective of continued
strong credit quality and lower inherent risk in the loan portfolio due
to the sale of the credit card portfolio. Net charge-offs totaled $3.4
million, or .22% of average loans for the year compared to $3.5
million, or .27% for 2003. At year-end the allowance for loan losses
was .88% of outstanding loans and provided coverage of 345% of
nonperforming loans.
* Nonperforming assets totaled $5.3 million, or .29% of total loans and
other real estate at year-end. This compares to .36% for the third
quarter of 2004, and .54% for the year ended 2003. Asset quality
continues to be strong and a key driver in bank performance and growth.
22
The year 2004 set the stage for the start of the Company's "Project 2010",
a strategic initiative aimed at achieving $50.0 million in annual earnings
by 2010. Key parts of the initiative include the continued building of the
Company's franchise through acquisitions and/or construction of offices in
five targeted geographic areas (Hernando/Pasco, Ocala, Gainesville, west
Florida, and middle Georgia), and organic growth in existing markets
through the continued emphasis on relationship banking, quality service,
and offering a broad array of sophisticated banking services.
RESULTS OF OPERATIONS
Net income for 2004 totaled $29.4 million, or $2.18 per diluted share.
This compares to $25.2 million, or $1.90 per diluted share in 2003, and
$23.1 million, or $1.74 per diluted share in 2002. Net income in 2004
included a one-time, after-tax gain of $4.2 million, or $.32 per diluted
share, from the sale of the Bank's credit card portfolio.
The increase in 2004 net income was primarily attributable to growth in
operating revenues (defined as the total of net interest income and
noninterest income) of 12.1%, driven by a 7.6% increase in net interest
income and a 20.5% increase in noninterest income. A lower loan loss
provision also enhanced net income. The increase in net interest income
primarily reflects growth in earning assets and an improved deposit mix. The
increase in noninterest income reflects higher deposit service fees, asset
management fees, and a one-time gain on the sale of the credit card
portfolio. The lower loan loss provision is reflective of a reduction in the
overall risk of the loan portfolio due to the sale of the credit card
portfolio. A condensed earnings summary for the last three years is
presented in Table 1.
Table 1
CONDENSED SUMMARY OF EARNINGS
For the Years Ended December 31,
--------------------------------------
(Dollars in Thousands, Except Per Share Data) 2004 2003 2002
- -------------------------------------------------------------------------------------
Interest Income $101,525 $ 94,830 $104,165
Taxable Equivalent Adjustments 1,207 1,414 1,682
-------- -------- --------
Total Interest Income (FTE) 102,732 96,244 105,847
Interest Expense 15,441 14,839 22,503
-------- -------- --------
Net Interest Income (FTE) 87,291 81,405 83,344
Provision for Loan Losses 2,141 3,436 3,297
Taxable Equivalent Adjustments 1,207 1,414 1,682
-------- -------- --------
Net Interest Income After Provision
for Loan Losses 83,943 76,555 78,365
Noninterest Income 43,372 41,939 36,103
Gain on Sale of Credit Card Portfolio 7,181 - -
Noninterest Expense 89,226 79,721 78,695
-------- -------- --------
Income Before Income Taxes 45,270 38,773 35,773
Income Taxes 15,899 13,580 12,691
-------- -------- --------
Net Income $ 29,371 $ 25,193 $ 23,082
======== ======== ========
Basic Net Income Per Share $ 2.18 $ 1.91 $ 1.75
======== ======== ========
Diluted Net Income Per Share $ 2.18 $ 1.90 $ 1.74
======== ======== ========
23
Net Interest Income
Net interest income represents the Company's single largest source of
earnings and is equal to interest income and fees generated by earning
assets, less interest expense paid on interest bearing liabilities. An
analysis of the Company's net interest income, including average yields and
rates, is presented in Tables 2 and 3. This information is presented on a
"taxable equivalent" basis to reflect the tax-exempt status of income
earned on certain loans and investments, the majority of which are state
and local government debt obligations.
In 2004, taxable equivalent net interest income increased $5.9 million, or
7.2%. This follows a decrease of $1.9 million, or 2.3%, in 2003, and an
increase of $10.8 million, or 14.9%, in 2002. The favorable impact
resulted from an improved earning asset mix, lower funding costs, and two
acquisitions; and was partially offset by declining asset yields
attributable to the continued low interest rate environment.
24
Table 2
AVERAGE BALANCES AND INTEREST RATES
2004
----------------------------
Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate
- ----------------------------------------------------------------------------------
Assets:
Loans, Net of Unearned Interest(1)(2) $1,538,744 $ 95,796 6.23%
Taxable Investment Securities 131,842 3,138 2.38
Tax-Exempt Investment Securities(2) 51,979 2,965 5.70
Funds Sold 67,278 833 1.24
---------- -------- ----
Total Earning Assets 1,789,843 102,732 5.74
Cash & Due From Banks 93,070
Allowance For Loan Losses (13,846)
Other Assets 137,678
----------
TOTAL ASSETS $2,006,745
==========
Liabilities:
NOW Accounts $ 292,492 $ 733 0.25%
Money Market Accounts 227,808 1,190 0.52
Savings Accounts 130,282 164 0.13
Time Deposits 459,464 9,228 2.01
---------- -------- ----
Total Interest Bearing Deposits 1,110,046 11,315 1.02
Short-Term Borrowings 100,582 1,270 1.26
Long-Term Borrowings 59,462 2,562 4.31
Subordinate Debentures 5,155 294 5.71
---------- -------- ----
Total Interest Bearing Liabilities 1,275,245 15,441 1.21
Noninterest Bearing Deposits 489,155 -------- ----
Other Liabilities 21,614
----------
TOTAL LIABILITIES 1,786,014
Shareowners' Equity:
Common Stock 135
Additional Paid-In Capital 24,586
Retained Earnings 196,010
----------
TOTAL SHAREOWNERS' EQUITY 220,7312
----------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $2,006,745
==========
Interest Rate Spread 4.53%
====
Net Interest Income $ 87,291
========
Net Interest Margin(3) 4.88%
====
2003
----------------------------
Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate
- ----------------------------------------------------------------------------------
Assets:
Loans, Net of Unearned Interest(1)(2) $1,318,080 $ 87,608 6.65%%
Taxable Investment Securities 124,541 3,725 2.98
Tax-Exempt Investment Securities(2) 61,387 3,650 5.95
Funds Sold 120,672 1,261 1.03
---------- -------- ----
Total Earning Assets 1,624,680 96,244 5.92
Cash & Due From Banks 79,625
Allowance For Loan Losses (12,544)
Other Assets 113,134
----------
TOTAL ASSETS $1,804,895
==========
Liabilities:
NOW Accounts $ 264,159 $ 676 0.26%
Money Market Accounts 215,597 1,312 0.61
Savings Accounts 109,837 189 0.17
Time Deposits 433,176 9,390 2.17
---------- -------- ----
Total Interest Bearing Deposits 1,022,769 11,567 1.13
Short-Term Borrowings 101,274 1,270 1.25
Long-Term Borrowings 55,594 2,002 3.60
Subordinate Debentures - - -
---------- -------- ----
Total Interest Bearing Liabilities 1,179,637 14,839 1.26
Noninterest Bearing Deposits 409,039 -------- ----
Other Liabilities 19,631
----------
TOTAL LIABILITIES 1,608,307
Shareowners' Equity:
Common Stock 132
Additional Paid-In Capital 15,272
Retained Earnings 181,184
----------
TOTAL SHAREOWNERS' EQUITY 196,588
----------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $1,804,895
==========
Interest Rate Spread 4.66%
====
Net Interest Income $ 81,405
========
Net Interest Margin(3) 5.01%
====
2002
----------------------------
Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate
- ----------------------------------------------------------------------------------
Assets:
Loans, Net of Unearned Interest(1)(2) $1,256,107 $ 93,293 7.43%
Taxable Investment Securities 135,865 6,941 5.11
Tax-Exempt Investment Securities(2) 68,915 4,133 6.00
Funds Sold 95,613 1,481 1.53
---------- -------- ----
Total Earning Assets 1,556,500 105,848 6.80
Cash & Due From Banks 72,960
Allowance For Loan Losses (12,409)
Other Assets 110,129
----------
TOTAL ASSETS $1,727,180
==========
Liabilities:
NOW Accounts $ 241,873 $ 1,272 0.53%
Money Market Accounts 224,275 2,904 1.30
Savings Accounts 104,967 500 0.48
Time Deposits 493,956 15,875 3.21
---------- -------- ----
Total Interest Bearing Deposits 1,065,071 20,551 1.93
Short-Term Borrowings 72,594 767 1.06
Long-Term Borrowings 30,423 1,185 3.90
Subordinate Debentures - - -
---------- -------- ----
Total Interest Bearing Liabilities 1,168,088 22,503 1.93
Noninterest Bearing Deposits 359,928 -------- ----
Other Liabilities 19,512
----------
TOTAL LIABILITIES 1,547,528
Shareowners' Equity:
Common Stock 132
Additional Paid-In Capital 15,386
Retained Earnings 164,184
----------
TOTAL SHAREOWNERS' EQUITY 179,652
----------
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $1,727,180
==========
Interest Rate Spread 4.87%
====
Net Interest Income $ 83,345
========
Net Interest Margin(3) 5.35%
====
(1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately
$1.7 million, $1.8 million and $2.7 million in 2004, 2003 and 2002, respectively.
(2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust
interest on tax-exempt loans and securities to a taxable equivalent basis.
(3) Taxable equivalent net interest income divided by average earning assets.
25
Table 3
RATE/VOLUME ANALYSIS(1)
2004 Changes from 2003 2003 Changes from 2002
------------------------------------- -----------------------------
Due To Due To
Average Average
----------------------------- ------------------------------
(Taxable Equivalent Basis - Dollars in Thousands) Total Calendar(3) Volume Rate Total Volume Rate
- --------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Loans, Net of Unearned Interest(2) $8,188 $240 $13,939 $(5,991) $(5,685) $3,189 $ (8,874)
Investment Securities:
Taxable(2) (587) 3 68 (658) (3,217) (2,448) (769)
Tax-Exempt (685) - (558) (127) (482) (450) (32)
Funds Sold (428) 3 (558) 127 (220) 389 (609)
------ ---- ------- ------- ------- ------ --------
Total 6,488 246 12,891 (6,649) (9,604) 680 (10,284)
------ ---- ------- ------- ------- ------ --------
Interest Bearing Liabilities:
NOW Accounts 55 2 73 (20) (596) 117 (713)
Money Market Accounts (121) 4 74 (199) (1,592) (111) (1,481)
Savings Accounts (25) - 35 (60) (311) 23 (334)
Time Deposits (161) 26 568 (755) (6,485) (1,953) (4,532)
Short-Term Borrowings - 3 (197) 194 503 578 (75)
Subordinated Note Payable 294 - 294 - - - -
Long-Term Borrowings 560 5 139 416 817 981 (164)
------ ---- ------- ------- ------- ------ --------
Total 602 40 986 (424) (7,664) (365) (7,299)
------ ---- ------- ------- ------- ------ --------
Changes in Net Interest Income $5,886 $206 $11,905 $(6,225) $(1,940) $1,045 $ (2,985)
====== ==== ======= ======= ======= ====== ========
(1) This table shows the change in taxable equivalent net interest income for comparative periods based on
either changes in average volume or changes in average rates for earning assets and interest bearing
liabilities. Changes which are not solely due to volume changes or solely due to rate changes have been
attributed to rate changes.
(2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust
interest on tax-exempt loans and securities to a taxable equivalent basis.
(3) Reflects difference in 366 day year (2004) versus 365 day year (2003).
26
For the year 2004, taxable equivalent interest income increased $6.5
million, or 6.7%, over 2003, and decreased $9.6 million, or 9.1%, in 2003
over 2002. Growth resulting from strong loan demand and two acquisitions
was partially offset by lower yields on earning assets and a decline in
short-term funds and investment securities. New loan production and
repricing of existing earning assets produced a 18 basis point reduction in
the yield on earning assets, which declined from 5.92% for 2003 to 5.74%
for 2004. This compares to an 88 basis point reduction in 2003 over 2002.
As shown in Table 3, the loan portfolio was a significant contributor to
the net increase in interest income.
Interest expense increased $.6 million, or 4.0%, over 2003, and decreased
$7.7 million, or 34.1%, in 2003 over 2002. The increase in 2004 was
primarily a result of higher interest bearing liabilities attributable to
the acquisitions and offset partially by the lower costs of funds. The
lower cost of funds resulted from a favorable shift in mix, as certificates
of deposit (generally a higher cost deposit product) declined relative to
total deposits. Certificates of deposit, as a percent of total average
deposits, declined from 30.2% in 2003 to 28.7% in 2004. The average rate
paid on interest bearing liabilities in 2004 declined 5 basis points
compared to 2003, primarily attributable to the favorable shift in mix.
The Company's interest rate spread (defined as the taxable equivalent yield
on average earning assets less the average rate paid on interest bearing
liabilities) decreased 13 basis points in 2004 and decreased 21 basis
points in 2003. The decrease in 2004 was primarily attributable to the
decline in the earning asset yield.
The Company's net interest margin (defined as taxable equivalent interest
income less interest expense divided by average earning assets) was 4.88%
in 2004, compared to 5.01% in 2003 and 5.35% in 2002. In 2004, the lower
yields on earning assets (partially offset by lower rates paid on interest
bearing liabilities) resulted in the 13 basis point decline in the margin.
Loan growth is anticipated to have a favorable impact on net interest
income during the upcoming year along with any favorable changes in the
Federal Reserve's target rate on overnight funds. However, depending on
the magnitude of the loan growth, the improvement attributable to growth
may be partially or completely offset by unfavorable repricing variances
associated with deposits. A further discussion of the Company's earning
assets and funding sources can be found in the section entitled "Financial
Condition."
Provision for Loan Losses
The provision for loan losses was $2.1 million in 2004, compared to $3.4
million in 2003 and $3.3 million in 2002. The decrease in the 2004
provision reflects continued strong credit quality and lower inherent risk
in the loan portfolio due to the sale of the credit card portfolio, which
previously accounted for approximately one-third of net charge-offs.
Net charge-offs for 2004 were comparable to 2003, and remain at
historically low levels relative to the size of the portfolio. Net charge-
offs for 2004 totaled $3.4 million, or .22% of average loans. This
compares to $3.5 million, or .27% for 2003. Excluding credit card charge-
offs, net charge-offs increased $500,000 due to a higher level of
commercial loan and consumer indirect auto loan charge-offs.
At December 31, 2004, the allowance for loan losses totaled $16.0 million
compared to $12.4 million in 2003. At year-end 2004, the allowance
represented 0.88% of total loans and provided coverage of 345% of
nonperforming loans. Management considers the allowance to be adequate
based on the current level of nonperforming loans and the estimate of
losses inherent in the portfolio at year-end. See the section entitled
"Financial Condition" and Tables 7 and 8 for further information regarding
the allowance for loan losses.
27
Noninterest Income
In 2004, noninterest income increased $8.6 million, or 20.5%, compared to
an increase of $5.8 million, or 16.2% in 2003. The increase in the level
of noninterest income is attributable primarily to a one-time $7.2 million
gain recognized from the sale of the credit card portfolio. Higher deposit
service fees, asset management fees, data processing fees, and merchant
service fees also contributed to the increase, but were partially offset by
a decrease in mortgage banking revenues. Excluding the one-time gain on
the sale of the credit card portfolio, noninterest income represented 33.5%
of operating revenue in 2004 compared to 34.4% in 2003. The increase in
noninterest income in 2003 was attributable to growth in deposit service
charge fees, merchant service fee income, and mortgage banking revenues.
Factors affecting noninterest income are discussed below.
Service charge fees on deposit accounts increased $1.3 million, or 7.7%, in
2004, compared to an increase of $3.6 million, or 28.0%, in 2003. Deposit
service charge revenues in any one year are dependent on the number of
accounts, primarily transaction accounts, the level of activity subject to
service charges, and the collection rate. The increase in service charge
revenues in 2004 was primarily attributable to growth in NSF/overdraft fees
associated with a revised fee structure implemented in mid-2004 and
implementation of improved processing efficiencies in late 2004. The
increase in deposit service charge fees in 2003 was primarily attributable
to growth in NSF/overdraft fees associated with a new overdraft protection
program implemented in late 2002.
Data processing revenues increased $225,000, or 9.4%, in 2004 versus an
increase of $397,000, or 19.8%, in 2003. The data processing center
provides computer services to both financial and non-financial clients in
North Florida and South Georgia. The increase in 2004 was driven by an
increase in revenues from financial clients. The Company currently
provides data processing services for six financial clients and contract
processing services for six non-financial clients. In 2004, processing
revenues for financial clients increased 16.6% and represented 66.3% of
total processing revenues. Processing revenues for non-financial clients
decreased 8.7% in 2004 due to slightly lower processing volume for one
government client. In 2003, processing revenues for financial clients
represented 60.7% of total processing revenues. The increase in processing
revenues for 2003 was due to higher revenues from both financial clients
and government contract processing.
In 2004, asset management fees increased $1.4 million, or 51.2%, versus an
increase of $129,000, or 5.1%, in 2003. At year-end 2004, assets under
management totaled $653.0 million, reflecting growth of $249.0 million, or
61.6% over 2003. This growth is due to the purchase of $208 million in
trust and investment management accounts from Synovus Trust Company in
connection with the Quincy State Bank acquisition, growth in new business,
and increased fee revenues from managed accounts due to improved asset
returns. At year-end 2003, assets under management totaled $404 million,
reflecting growth of $61.0 million, or 17.8% over 2002.
The Company continues to be among the leaders in the production of
residential mortgage loans in many of its markets. In 2004, mortgage
banking revenues decreased $2.9 million, or 47.3%, compared to an increase
of $588,000, or 10.7% in 2003. The decrease in 2004 was due to a decline
in fixed rate mortgage production that was affected by a general slow-down
in residential lending markets. The Company generally sells all fixed rate
residential loan production into the secondary market. Management expects
2005 mortgage banking revenues to remain near the levels experienced in
2004. The increase in revenue in 2003 was due to a high level of fixed
rate mortgage production driven by a historically low interest rate
environment. The level of interest rates, origination volume and percent
of fixed rate production have significant impacts on the Company's mortgage
banking revenues.
28
Other noninterest income increased $1.5 million, or 10.2%, in 2004 versus
an increase of $1.2 million, or 8.7% in 2003. The increase in 2004 was
attributable primarily to an increase in merchant service fee income,
retail brokerage fees, and miscellaneous income. Merchant service fee
income increased $572,000, or 12.5%, due to increased transaction volume
and was partially offset with higher interchange service fees, which is
reflected in noninterest expense. Retail brokerage fees increased
$189,000, or 15.6% due to increased commission fees driven by higher trade
volume and the number of accounts. Miscellaneous income increased $592,000
due primarily to one-time gains realized from the sale of two parcels of
other real estate. The 2003 increase in noninterest income was
attributable primarily to higher merchant service fees and miscellaneous
recoveries.
Noninterest income as a percent of average assets increased to 2.52% in
2004, compared to 2.32% in 2003, and 2.09% in 2002, driven primarily by the
one-time gain on sale of the credit card portfolio, higher deposit service
charge fees, and asset management fees.
Noninterest Expense
Noninterest expense for 2004 was $89.2 million, an increase of $9.5
million, or 11.9%, over 2003, compared with an increase of $1.0 million, or
1.3%, in 2003. Factors impacting the Company's noninterest expense during
2004 and 2003 are discussed below.
The Company's aggregate compensation expense in 2004 totaled $44.3 million,
an increase of $3.9 million, or 9.6%, over 2003. The increase is primarily
attributable to higher associate salary expense, higher performance-based
compensation, increased pension costs, and higher healthcare insurance
premiums. The increase in associate salary expense reflects normal merit
and market based increases, the integration of two acquired banks, and
higher performance-based compensation, which is primarily reflective of
higher incentive payments to loan production associates. The higher
pension cost is a result of an increase in the number of plan participants,
slightly lower than expected return on plan assets, and use of a slightly
lower discount rate. Pension costs in 2005 are expected to be higher due
to the increase in the number of plan participants associated with the two
acquisitions during the year. Healthcare premiums are expected to continue
to increase due to additional participants and rising costs from healthcare
providers. In 2003, aggregate compensation increased $250,000, or .62%,
over 2002. The increase was primarily attributable to higher pension
costs, healthcare insurance premiums, and stock based compensation,
partially offset by higher deferred loan costs, which is accounted for as a
reduction to associate salary expense.
Occupancy expense (including furniture, fixtures and equipment) increased
by $1.7 million, or 12.0%, in 2004, compared to $416,000, or 3.1% in 2003.
The increase in 2004 was primarily due to higher expense for utilities,
property taxes, depreciation, and premises rental attributable to the
increase in banking offices. The increase in 2003 was primarily due to
higher furniture/fixture, utility, and building depreciation expenses
associated with the addition of four new banking offices.
Other noninterest expense increased $4.0 million, or 15.6%, in 2004,
compared to $360,000, or 1.4%, in 2003. The increase in 2004 was
attributable primarily to: (1) higher professional fees of $940,000; (2)
higher director fees of $101,000; (3) higher advertising expense of
$742,000; (4) increased interchange service fees of $560,000; (5) higher
contribution expense of $132,000; (6) higher telephone expense of $176,000;
(7) higher intangible amortization expense of $583,000; and (8) higher
merger expenses of $550,000. The increase in professional fees is
primarily reflective of the cost of Sarbanes-Oxley Section 404 compliance
and testing work. The increase in director fees is reflective of an
increase in the number of directors, higher fee structure, and number of
committees and meetings. Higher advertising expense is due to an increased
level of marketing initiatives aimed at
29
supporting two new acquisitions during the year and an increased level of
product and market support activities. The increase in interchange service
fees is reflective of increased merchant card processing volume, and was
offset by higher merchant service fees reflected in other income. The
increase in contribution expense is due primarily to an increase in
contributions made to local non-profit scholarship funding organizations.
The increase in telephone, intangible amortization, and merger expenses
were due to the integration of two acquisitions during the year.
The increase in 2003 was attributable to: (1) higher legal costs of
$106,000 primarily resulting from corporate governance compliance work
associated with the Sarbanes-Oxley Act; (2) increased processing expenses
of $272,000 associated with implementation of new database systems in human
resources, and custom programming work performed by the bank's core
processing system vendor to facilitate the implementation of new
applications (platform automation and home banking); and (3) increased
interchange service fees of $717,000 associated with higher merchant card
processing volume. These increases were partially offset with
approximately $617,000 lower expense for legal reserves, and lower
seminar/education expense of $123,000.
The net noninterest expense ratio (defined as noninterest income minus
noninterest expense, net of intangible amortization and conversion/merger-
related expenses, as a percent of average assets) was 1.71% in 2004
compared to 1.91% in 2003, and 2.27% in 2002. The Company's efficiency
ratio (expressed as noninterest expense, net of intangible amortization and
conversion/merger-related expenses, as a percent of taxable equivalent net
interest income plus noninterest income) was 61.6%, 62.0%, and 63.0% in
2004, 2003 and 2002, respectively. Excluding the effect of the one-time
gain realized from the sale of the credit card portfolio, the above
mentioned metrics adjust to and 2.07% and 64.9%, respectively, for 2004.
Income Taxes
The consolidated provision for federal and state income taxes was $15.9
million in 2004, compared to $13.6 million in 2003, and $12.7 million in
2002. The increase in each of the three respective years was due to higher
taxable income and lower tax exempt income.
The effective tax rate was 35.1% in 2004, 35.0% in 2003, and 35.5% in 2002.
These rates differ from the combined federal and state statutory tax rates
due primarily to tax-exempt income. The decrease in the effective tax rate
in 2003 was due to an adjustment in federal income tax expense in the
amount of $500,000 made during the fourth quarter of 2003. Following an
IRS examination in 2003, the Company performed an evaluation of all its tax
accounts. Upon completion of the analysis, the Company adjusted certain
tax accounts to more appropriately reflect its current and deferred assets
and liabilities.
FINANCIAL CONDITION
The Company's 2004 balance sheet reflects growth from within its existing
markets plus the integration of two acquisitions during the year. Average
assets totaled $2.0 billion, an increase of $201.9 million, or 11.2%, in
2004 versus the comparable period in 2003. Average earning assets for 2004
were $1.8 billion, representing an increase of $165.2 million, or 10.2%,
over 2003. Loan growth, in existing markets and from acquisitions, fueled
the earning asset increase in 2004 as average loans increased $220.7
million, or 16.7%. Partially offsetting the increase was a decrease in
average funds sold of $53.4 million, or 44.2% and a slight decline in
investment securities of $2.1 million, or 1.1%. Funding of 2004 earning
asset growth is discussed in more detail under the section entitled
"Liquidity".
Table 2 provides information on average balances and rates, Table 3
provides an analysis of rate and volume variances, while Table 4 highlights
the changing mix of the Company's earning assets over the last three years.
30
Loans
Average loans increased $220.7 million, or 16.7%, over the comparable
period in 2003. Loans as a percent of average earning assets increased to
86.0% for the year, compared to 81.1% for 2003. Loan growth occurred in
all loan categories during the year as noted in Table 4 below.
Approximately $103.2 million, or 46.8% of the growth in average loans was
from loan production in existing markets, and approximately $117.5 million,
or 53.2% was from acquisitions.
Although management is continually evaluating alternative sources of
revenue, lending is a major component of the Company's business and is key
to profitability. While management strives to identify opportunities to
increase loans outstanding and enhance the portfolio's overall contribution
to earnings, it can do so only by adhering to sound lending principles
applied in a prudent and consistent manner. Thus, management will not
relax its underwriting standards in order to achieve designated growth
goals.
Table 4
SOURCES OF EARNING ASSET GROWTH
Components
2003 to Percentage of Average Earning Assets
2004 of Total -------------------------
(Average Balances - Dollars in Thousands) Change Change 2004 2003 2002
- ----------------------------------------------------------------------------------------
Loans:
Commercial, Financial
and Agricultural $ 35,032 21.2% 10.3% 9.2% 8.6%
Real Estate - Construction 19,291 11.7 6.2 5.5 5.3
Real Estate - Commercial Mortgage 109,503 66.3 27.3 23.4 20.7
Real Estate - Residential 48,529 29.4 29.1 29.1 32.6
Consumer 8,309 5.0 13.1 13.9 13.5
-------- ----- ----- ----- -----
Total Loans 220,664 133.6 86.0 81.1 80.7
-------- ----- ----- ----- -----
Securities:
Taxable 7,301 4.4 7.4 7.7 8.8
Tax-Exempt (9,408) (5.7) 2.9 3.8 4.4
-------- ----- ----- ----- -----
Total Securities (2,107) (1.3) 10.3 11.5 13.2
-------- ----- ----- ----- -----
Funds Sold (53,394) (32.3) 3.7 7.4 6.1
-------- ----- ----- ----- -----
Total Earning Assets $165,163 100.0% 100.0% 100.0% 100.0%
======== ===== ===== ===== =====
The Company's average loan-to-deposit ratio increased to 96.2% in 2004 from
92.1% in 2003. This compares to an average loan-to-deposit ratio in 2002
of 88.1%. The higher average loan-to-deposit ratio in 2004 primarily
reflects higher loan growth as discussed above.
Real estate loans, combined, represented 76.1% of total loans at December
31, 2004, versus 70.7% in 2003. This increase is reflective of increases
in all real estate loan categories as noted above. See the section
entitled "Risk Element Assets" for a discussion concerning loan
concentrations.
The composition of the Company's loan portfolio at December 31, for each of
the past five years is shown in Table 5. Table 6 arrays the Company's
total loan portfolio as of December 31, 2004, based upon maturities. As a
percent of the total portfolio, loans with fixed interest rates represent
36.6% as of December 31, 2004, versus 32.5% at December 31, 2003. The
increase from 2003 is reflective of the integration of loans acquired from
Farmers and Merchants Bank of Dublin, which maintained a high number of
fixed rate loans with one to three year stated maturities.
31
Table 5
LOANS BY CATEGORY
As of December 31,
----------------------------------------------------------
(Dollars in Thousands) 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------
Commercial, Financial and
Agricultural $ 206,474 $ 160,048 $ 141,459 $ 128,480 $ 108,340
Real Estate - Construction 140,190 89,149 91,110 72,778 84,133
Real Estate - Commercial
Mortgage 655,426 391,250 356,807 302,239 231,099
Real Estate - Residential 600,375 467,790 474,069 530,546 444,489
Consumer 226,360 233,395 221,776 209,308 183,771
---------- ---------- ---------- ---------- ----------
Total Loans, Net of
Unearned Interest $1,828,825 $1,341,632 $1,285,221 $1,243,351 $1,051,832
========== ========== ========== ========== ==========
Table 6
LOAN MATURITIES
Maturity Periods
------------------------------------------------
Over One Over
One Year Through Five
(Dollars in Thousands) or Less Five Years Years Total
- --------------------------------------------------------------------------------
Commercial, Financial and
Agricultural $ 92,626 $ 89,045 $ 24,802 $ 206,474
Real Estate 338,244 287,113 770,634 1,395,991
Consumer(1) 37,436 183,657 5,267 226,360
-------- -------- -------- ----------
Total $468,306 $559,816 $800,703 $1,828,825
======== ======== ======== ==========
Loans with Fixed Rates $336,290 $311,011 $ 21,637 $ 668,938
Loans with Floating or
Adjustable Rates 132,016 248,805 779,066 1,159,887
-------- -------- -------- ----------
Total $468,306 $559,816 $800,703 $1,828,825
======== ======== ======== ==========
(1) Demand loans and overdrafts are reported in the category of one year or less.
Allowance for Loan Losses
Management maintains the allowance for loan losses at a level sufficient to
provide for the estimated credit losses inherent in the loan portfolio as
of the balance sheet date. Credit losses arise from the borrowers'
inability and unwillingness to repay, and from other risks inherent in the
lending process including collateral risk, operations risk, concentration
risk and economic risk. As such, all related risks of lending are
considered when assessing the adequacy of the loan loss reserve. The
allowance for loan losses is established through a provision charged to
expense. Loans are charged against the allowance when management believes
collection of the principal is unlikely. The allowance for loan losses is
based on management's judgment of overall loan quality. This is a
significant estimate based on a detailed analysis of the loan portfolio.
The balance can and will change based on changes in the assessment of the
portfolio's overall credit quality.
Management evaluates the adequacy of the allowance for loan losses on a
quarterly basis. Loans that have been identified as impaired are reviewed
for adequacy of collateral, with a specific reserve assigned to those loans
when necessary. Impaired loans are defined as those in which the full
collection of principal and interest in accordance with the contractual
terms is improbable. Impaired loans generally include those that are past
due for 90 days or more and those classified as doubtful in accordance with
the Company's risk rating system. Loans classified as doubtful have a high
possibility of loss, but because of certain factors that may work to
strengthen the loan, its classification as a loss is deferred until a more
exact status may be determined. Not all loans are considered in the review
for impairment; only loans that are for business purposes exceeding $25,000
are considered. The evaluation is based on current financial condition of
the borrower or current payment status of the loan.
32
The method used to assign a specific reserve depends on whether repayment
of the loan is dependent on liquidation of collateral. If repayment is
dependent on the sale of collateral, the reserve is equivalent to the
recorded investment in the loan less the fair value of the collateral after
estimated sales expenses. If repayment is not dependent on the sale of
collateral, the reserve is equivalent to the recorded investment in the
loan less the estimated cash flows discounted using the loan's effective
interest rate. The discounted value of the cash flows is based on the
anticipated timing of the receipt of cash payments from the borrower.
The reserve allocations assigned to impaired loans are sensitive to the
extent market conditions or the actual timing of cash receipts change.
Once specific reserves have been assigned to impaired loans, general
reserves are assigned to the remaining portfolio. General reserves are
assigned to commercial purpose loans exceeding $100,000 that are not
impaired. Finally, general reserves are assigned to large groups of
smaller-balance homogenous loans, including commercial purpose loans less
than $100,000 which are not deemed to be impaired, consumer loans, and
residential mortgage loans.
Large commercial purpose loans exhibiting specific weaknesses are detailed
in a monthly Problem Loan Report. These loans are divided into seven
different pools based on various risk characteristics and the underlying
value of collateral taken to secure specific loans within the pools. These
classified loans are monitored for changes in risk ratings that are
assigned based on the Bank's Asset Classification Policy, and for the
ultimate disposition of the loan. The ultimate disposition may include
upgrades in risk ratings, payoff of the loan, or charge-off of the loan.
This migration analysis results in a charge-off ratio by loan pool of
classified loans that is applied to the balance of the pool to determine
general reserves for specifically identified pools of problem loans. This
charge-off ratio is adjusted for various environmental factors including
past due and nonperforming trends in the loan portfolio, the micro-and
macro-economic outlook, and credit administration practices as determined
by independent parties.
General reserves are assigned to large commercial purpose loans exceeding
$100,000 that do not exhibit weaknesses and pools of smaller-balance
homogenous loans based on calculated overall charge-off ratios over the
past three years. The charge-off ratios applied are adjusted as detailed
above, with further consideration given to the highest charge-off
experience of the Bank dating back to the recession of the late 1980s.
The allowance for loan losses is compared against the sum of the specific
reserves assigned to problem loans plus the general reserves assigned to
pools of loans that are not specific problem loans. Adjustments are made
when appropriate. A most likely reserve value is determined within the
computed range of required calculated reserve, with the actual allowance
for loan losses compared to the most likely reserve value. The unallocated
reserve is monitored on a regular basis and adjusted based on qualitative
factors. Table 7 analyzes the activity in the allowance over the past five
years.
33
Table 7
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
For the Years Ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------
Balance at Beginning of Year $12,429 $12,495 $12,096 $10,564 $ 9,929
Acquired Reserves 5,713 - - 1,206 -
Reserve Reversal(1) (800) - - - -
Charge-Offs:
Commercial, Financial
and Agricultural 873 426 818 483 626
Real Estate - Construction - - - - 7
Real Estate - Mortgage 48 91 - 32 -
Real Estate - Residential 191 228 175 159 168
Consumer 3,946 3,794 3,279 3,976 2,387
------- ------- ------- ------- -------
Total Charge-Offs 5,058 4,539 4,272 4,650 3,188
------- ------- ------- ------- -------
Recoveries:
Commercial, Financial
and Agricultural 81 142 136 44 52
Real Estate - Construction - - - - 11
Real Estate - Mortgage 14 - 20 65 73
Real Estate - Residential 188 18 37 116 54
Consumer 1,329 877 1,181 768 513
------- ------- ------- ------- -------
Total Recoveries 1,612 1,037 1,374 993 703
------- ------- ------- ------- -------
Net Charge-Offs 3,446 3,502 2,898 3,657 2,485
------- ------- ------- ------- -------
Provision for Loan Losses 2,141 3,436 3,297 3,983 3,120
------- ------- ------- ------- -------
Balance at End of Year $16,037 $12,429 $12,495 $12,096 $10,564
======= ======= ======= ======= =======
Ratio of Net Charge-Offs
to Average Loans Outstanding .22% .27% .23% .31% .25%
======= ======= ======= ======= =======
Allowance for Loan Losses as a
Percent of Loans at End of Year .88% .93% .97% .97% 1.00%
======= ======= ======= ======= =======
Allowance for Loan Losses as a
Multiple of Net Charge-Offs 4.65x 3.55x 4.31x 3.31x 4.25x
======= ======= ======= ======= =======
(1) Reflects recapture of reserves allocated to the credit card portfolio, which
was sold in August 2004.
The allowance for loan losses at December 31, 2004 of $16.0 million
compares to $12.4 million at year-end 2003. The allowance as a percent of
total loans was 0.88% in 2004 and 0.93% in 2003. The allowance for loan
losses as a percentage of loans reflects management's current estimation of
the credit quality of the Company's loan portfolio. While there can be no
assurance that the Company will not sustain loan losses in a particular
period that are substantial in relation to the size of the allowance,
management's assessment of the loan portfolio does not indicate a
likelihood of this occurrence. It is management's opinion that the
allowance at December 31, 2004 is adequate to absorb losses inherent in the
loan portfolio at year-end.
Table 8 provides an allocation of the allowance for loan losses to specific
loan types for each of the past five years. The reserve allocations, as
calculated using the above methodology, are assigned to specific loan
categories corresponding to the type represented within the components
discussed. The greatest losses experienced by the Company have
historically occurred in the consumer loan
34
portfolio, including credit cards. As such, the greatest amount of the
allowance has been allocated to consumer loans despite its relatively small
balance. The credit card portfolio was sold in 2004, thus the allowance
amount allocated to consumer loans declined noticeably as of December 31,
2004. Compared to December 31, 2003, the increase in reserve allocated to
commercial real estate mortgage loans is reflective of the large increase
in this category due to loans acquired from Farmers and Merchants Bank of
Dublin. Management has implemented credit risk management procedures to
closely monitor all segments of its loan portfolio, including the ongoing
review of the delivery, underwriting and collection practices to reduce
loan losses.
35
Table 8
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
2004 2003 2002 2001 2000
---------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Allow- Category Allow- Category Allow- Category Allow- Category Allow- Category
ance To Total ance To Total ance To Total ance To Total ance To Total
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ---------------------------------------------------------------------------------------------------------------------
Commercial, Financial
and Agricultural $ 4,341 11.3% $ 2,824 11.9% $ 2,740 11.0% $ 3,257 10.3% $ 1,423 10.3%
Real Estate:
Construction 578 7.7 313 6.6 348 7.1 600 5.9 424 8.0
Commercial Mortgage 6,296 35.8 2,831 29.2 2,559 27.8 3,098 24.3 3,157 22.0
Residential 705 32.8 853 34.9 1,021 36.9 947 42.7 922 42.3
Consumer 2,966 12.4 4,169 17.4 4,210 17.2 4,194 16.8 3,423 17.4
Not Allocated 1,151 - 1,439 - 1,617 - - - 1,215 -
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $16,037 100.0% $12,429 100.0% $12,495 100.0% $12,096 100.0% $10,564 100.0%
36
Risk Element Assets
Risk element assets consist of nonaccrual loans, renegotiated loans, other
real estate, loans past due 90 days or more, potential problem loans and
loan concentrations. Table 9 depicts certain categories of the Company's
risk element assets as of December 31 for each of the last five years.
Potential problem loans and loan concentrations are discussed within the
narrative portion of this section.
The Company's nonperforming loans increased $2.3 million, or 98.1% from a
level of $2.3 million at December 31, 2003, to $4.6 million at December 31,
2004. The increase from 2003 is primarily reflective of one large
commercial real estate loan added to nonaccrual status in the amount of
$2.1 million. During 2004 loans totaling approximately $7.8 million were
added, while loans totaling $5.5 million were removed from nonaccruing
status. Of the $5.5 million removed, $2.4 million consisted of principal
reductions and loan payoffs, $811,000 represented loans transferred to
other real estate, $2.0 million consisted of loans brought current and
returned to an accrual status, and $284,000 was charged off. Where
appropriate, management has allocated specific reserves to absorb
anticipated losses. The majority (76%) of the Company's net charge-offs in
2004 were in the consumer portfolio where loans are charged off based on
past due status and are not recorded as nonaccruing loans.
All nonaccrual loans exceeding $25,000 not secured by 1-4 family
residential properties are reviewed quarterly for impairment. A loan is
considered impaired when the full collection of principal and interest in
accordance with the contractual terms is in doubt. When a loan is
considered impaired, it is reviewed for exposure to credit loss. If credit
loss is probable, a specific reserve is allocated to absorb the anticipated
loss. The Company had $3.7 million in loans considered impaired at
December 31, 2004. The anticipated loss in those impaired loans is
$313,000.
Table 9
RISK ELEMENT ASSETS
As of December 31,
-----------------------------------------------
(Dollars in Thousands) 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------
Nonaccruing Loans $ 4,646 $ 2,346 $ 2,510 $ 2,414 $ 2,919
Restructured - - - 20 19
------- ------- ------- ------- -------
Total Nonperforming Loans 4,646 2,346 2,510 2,434 2,938
Other Real Estate 625 4,955 1,333 1,506 971
------- ------- ------- ------- -------
Total Nonperforming Assets $ 5,271 $ 7,301 $ 3,843 $ 3,940 $ 3,909
======= ======= ======= ======= =======
Past Due 90 Days or More $ 605 $ 328 $ 2,453 $ 1,065 $ 1,102
======= ======= ======= ======= =======
Nonperforming Loans/Loans .25% .17% .20% .20% .28%
======= ======= ======= ======= =======
Nonperforming Assets/Loans
Plus Other Real Estate .29% .54% .30% .32% .37%
======= ======= ======= ======= =======
Nonperforming Assets/Capital(1) 1.93% 3.39% 1.93% 2.14% 2.47%
======= ======= ======= ======= =======
Allowance/Nonperforming Loans 345.18% 529.80% 497.72% 496.96% 359.57%
======= ======= ======= ======= =======
(1) For computation of this percentage, "capital" refers to shareowners' equity
plus the allowance for loan losses.
Interest on nonaccrual loans is generally recognized only when received.
Cash collected on nonaccrual loans is applied against the principal balance
or recognized as interest income based upon management's expectations as to
the ultimate collectibility of principal and interest in full. If interest
on nonaccruing loans had been recognized on a fully accruing basis,
interest income recorded would have been $189,000 higher for the year ended
December 31, 2004.
Other real estate totaled $625,000 at December 31, 2004, versus $5.0
million at December 31, 2003. This category includes property owned by
Capital City Bank that was acquired either through foreclosure procedures
or by receiving a deed in lieu of foreclosure. During 2004, the Company
added properties totaling $1.4 million, and
37
partially or completely liquidated properties totaling $5.7 million,
resulting in a net decrease in other real estate of approximately $4.3
million. The majority of the decrease is due to the resolution of a large
commercial real estate loan in the amount of $3.9 million during the first
quarter of 2004.
Potential problem loans are defined as those loans which are now current
but where management has doubt as to the borrower's ability to comply with
present loan repayment terms. Potential problem loans totaled $7.1 million
at December 31, 2004.
Loans past due 90 days or more totaled $605,000 at year-end, up from
$328,000 at the previous year-end. This is primarily the result of the
addition of several smaller consumer loans.
Loan concentrations are considered to exist when there are amounts loaned
to a multiple number of borrowers engaged in similar activities which cause
them to be similarly impacted by economic or other conditions and such
amount exceeds 10% of total loans. Due to the lack of diversified industry
within the markets served by the Bank and the relatively close proximity of
the markets, the Company has both geographic concentrations as well as
concentrations in the types of loans funded. Specifically, due to the
nature of the Company's markets, a significant portion of the portfolio has
historically been secured with real estate.
While the Company has a majority of its loans (76.3%) secured by real
estate, the primary types of real estate collateral are commercial
properties and 1-4 family residential properties. At December 31, 2004,
commercial real estate mortgage loans and residential real estate mortgage
loans accounted for 35.8% and 32.8% of the loan portfolio, respectively.
The real estate portfolio, while subject to cyclical pressures, is not
typically speculative in nature and is originated at amounts that are
within or below regulatory guidelines for collateral values. Management
anticipates no significant reduction in the percentage of real estate loans
to total loans outstanding.
Management is continually analyzing its loan portfolio in an effort to
identify and resolve its problem assets as quickly and efficiently as
possible. As of December 31, 2004, management believes it has identified
and adequately reserved for such problem assets. However, management
recognizes that many factors can adversely impact various segments of its
markets, creating financial difficulties for certain borrowers. As such,
management continues to focus its attention on promptly identifying and
providing for potential losses as they arise.
Investment Securities
In 2004, the Company's average investment portfolio decreased $2.1 million,
or 1.1%, from 2003 and $18.9 million, or 9.2%, from 2003 to 2002. As a
percentage of average earning assets, the investment portfolio represented
10.3% in 2004, compared to 11.4% in 2003. In 2004, the decline was due to
maturities in the portfolio partially offset by the addition of $75.6 million
in investment securities obtained in the two acquisitions. In 2003, the
decline in the portfolio was attributable to the maturities of investment
securities in most categories, which in anticipation of future loan growth,
were only partially replaced during the period. Throughout 2005, the Company
will closely monitor liquidity levels to determine if the Company should
purchase additional investments.
In 2004, average taxable investments increased $7.3 million, or 5.9%,
primarily as a result of the acquisitions, while tax-exempt investments
decreased $9.4 million, or 15.3%. Although the Tax Reform Act of 1986
significantly reduced the tax benefits associated with tax-exempt securities,
management will continue to purchase "bank qualified" municipal issues when
it considers the yield to be attractive and the Company can do so without
adversely impacting its tax position. As of December 31, 2004, the Company
may purchase additional tax-exempt securities without adverse tax
consequences.
38
The investment portfolio is a significant component of the Company's
operations and, as such, it functions as a key element of liquidity and
asset/liability management. As of December 31, 2004, all securities are
classified as available-for-sale. Classifying securities as available-for-
sale offers management full flexibility in managing its liquidity and
interest rate sensitivity without adversely impacting its regulatory capital
levels. Securities in the available-for-sale portfolio are recorded at fair
value with unrealized gains and losses associated with these securities
recorded, net of tax, in the accumulated other comprehensive (loss) income
component of shareowners' equity. At December 31, 2004, shareowners' equity
included a net unrealized loss of $0.4 million, compared to a gain of $1.4
million at December 31, 2003. It is neither management's intent nor practice
to participate in the trading of investment securities for the purpose of
recognizing gains and therefore the Company does not maintain a trading
portfolio.
The average maturity of the total portfolio at December 31, 2004 and 2003, was
1.63 and 0.90 years, respectively. See Table 10 for a breakdown of maturities
by portfolio.
The weighted average taxable equivalent yield of the investment portfolio at
December 31, 2004 was 3.38%, versus 2.69% in 2003. The increase in yield was
due to acquisitions and purchases of securities made throughout the year in a
higher interest rate environment. The quality of the municipal portfolio at
year-end is depicted on page 41. There were no investments in obligations,
other than U.S. Governments, of any one state, municipality, political
subdivision or any other issuer that exceeded 10% of the Company's
shareowners' equity at December 31, 2004.
Table 10 and Note 3 in the Notes to Consolidated Financial Statements
present a detailed analysis of the Company's investment securities as to
type, maturity and yield.
39
Table 10
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
As of December 31,
-------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------
Weighted(1) Weighted(1) Weighted(1)
Amortized Market Average Amortized Market Average Amortized Market Average
(Dollars in Thousands) Cost Value Yield Cost Value Yield Cost Value Yield
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENTS
Due in 1 year or less $ 48,553 $ 48,327 2.08% $ 82,654 $ 82,749 1.26% $ 27,037 $ 27,651 4.57%
Due over 1 year through 5 years 66,863 66,204 2.38 22,706 22,848 2.04 34,476 34,751 3.09
Due over 5 years through 10 years 7,684 7,589 3.75 - - - - - -
Due over 10 years - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 123,100 122,120 2.35 105,360 105,597 1.43 61,513 62,402 3.74
STATE & POLITICAL SUBDIVISIONS
Due in 1 year or less 27,916 28,090 5.94 19,018 19,205 4.18 5,193 5,251 5.48
Due over 1 year through 5 years 21,076 21,200 4.56 36,046 37,337 4.47 56,724 59,264 5.96
Due over 5 years through 10 years 897 916 5.36 577 610 4.36 928 960 6.41
Due over 10 years - - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 49,889 50,206 5.35 55,641 57,152 4.37 62,845 65,475 5.93
MORTGAGE-BACKED SECURITIES(2)
Due in 1 year or less 489 493 5.13 356 361 5.12 10,593 10,707 4.66
Due over 1 year through 5 years 22,719 22,839 3.96 11,167 11,586 5.29 24,048 25,112 5.61
Due over 5 years through 10 years 3,085 3,068 4.83 95 98 3.26 109 111 4.27
Due over 10 years - - - - - - - - -
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 26,293 26,400 4.09 11,618 12,045 5.27 34,750 35,930 5.31
OTHER SECURITIES
Due in 1 year or less - - - 1,003 1,016 6.18 8,515 8,693 5.42
Due over 1 year through 5 years - - - - - - 1,016 1,065 6.18
Due over 5 years through 10 years - - - 2 2 - 127 127 4.45
Due over 10 years(3) 11,514 11,514 4.31 5,922 5,922 3.89 6,623 6,623 5.12
-------- -------- ---- -------- -------- ---- -------- -------- ----
TOTAL 11,514 11,514 4.31 6,927 6,940 4.22 16,281 16,508 5.34
TOTAL INVESTMENT SECURITIES $210,796 $210,240 3.38% $179,546 $181,734 2.69% $175,389 $180,315 4.98%
======== ======== ==== ======== ======== ==== ======== ======== ====
(1) Weighted average yields are calculated on the basis of the amortized cost of the security. The weighted average
yields on tax-exempt obligations are computed on a taxable equivalent basis using a 35% tax rate.
(2) Based on weighted average life.
(3) Federal Home Loan Bank Stock and Federal Reserve Bank Stock are included in this category for weighted average yield,
but do not have stated maturities.
40
AVERAGE MATURITY
As of December 31,
------------------------------
(In Years) 2004 2003 2002
- --------------------------------------------------------------------
U.S. Governments 1.54 .73 .75
States and Political Subdivisions 1.32 1.23 1.99
Mortgage-Backed Securities 2.67 1.56 1.60
Other Securities - .30 .75
---- ---- ----
TOTAL 1.63 .90 1.32
==== ==== ====
MUNICIPAL PORTFOLIO QUALITY
(Dollars in Thousands)
Moody's Rating Amortized Cost Percentage
- ----------------------------------------------
AAA $37,624 75.42%
AA-1 1,850 3.71
AA-2 1,111 2.23
AA-3 1,305 2.62
A-1 374 0.74
A-2 227 0.45
Not Rated(1) 7,398 14.83
------- ------
Total $49,889 100.00%
(1) All of the securities not rated by Moody's are rated "A-" or higher
by S&P.
Deposits and Funds Purchased
Average total deposits of $1.6 billion in 2004 increased $167.4 million, or
11.7% from the prior year. Deposit growth for the year was driven primarily
by the integration of deposits from two bank acquisitions. All deposit
categories grew, with a majority of the growth being realized in noninterest
bearing deposits, thus creating a favorable shift in deposit mix and
positive impact on the Bank's cost of funds. Average noninterest bearing
deposits as a percent of average total deposits improved from 28.6% in 2003
to 30.6% in 2004. This was primarily a result of the high level of core
deposits retained from the two acquisitions during 2004, and the relatively
low level of interest rates.
Table 2 provides an analysis of the Company's average deposits, by
category, and average rates paid thereon for each of the last three years.
Table 11 reflects the shift in the Company's deposit mix over the last
three years and Table 12 provides a maturity distribution of time deposits
in denominations of $100,000 and over.
Average short-term borrowings, which include federal funds purchased,
securities sold under agreements to repurchase, Federal Home Loan Bank
advances, and other borrowings, increased $692,000, or .68%. The slight
increase is attributable to a $7.5 million increase in federal funds
purchased and $4.8 million increase in repurchase agreement balances offset
by a $13.0 million decrease in Federal Home Loan Bank advances. See Note 9
in the Notes to Consolidated Financial Statements for further information on
short-term borrowings.
Table 11
SOURCES OF DEPOSIT GROWTH
Components of
2003 to Percentage Total Deposits
2004 of Total ----------------------
(Average Balances - Dollars in Thousands) Change Change 2004 2003 2002
- --------------------------------------------------------------------------------------
Noninterest Bearing Deposits $ 80,116 47.9% 30.6% 28.6% 25.3%
NOW Accounts 28,333 16.9 18.3 18.4 17.0
Money Market Accounts 12,211 7.3 14.3 15.1 15.7
Savings 20,445 12.2 8.1 7.7 7.4
Time Deposits 26,288 15.7 28.7 30.2 34.7
-------- ----- ----- ----- -----
Total Deposits $167,393 100.0% 100.0% 100.0% 100.0%
======= ===== ===== ===== =====
41
Table 12
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR OVER
December 31, 2004
-----------------------------------------
(Dollars in Thousands) Time Certificates of Deposit Percent
- ------------------------------------------------------------------------
Three months or less $ 57,337 34.38%
Over three through six months 35,816 21.48
Over six through twelve months 44,719 26.82
Over twelve months 28,889 17.32
-------- ------
Total $166,761 100.00%
======== ======
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity for a banking institution is the availability of funds to meet
increased loan demand and/or excessive deposit withdrawals. Management
monitors the Company's financial position in an effort to ensure the
Company has ready access to sufficient liquid funds to meet normal
transaction requirements, can take advantage of investment opportunities
and cover unforeseen liquidity demands. In addition to core deposit
growth, sources of funds available to meet liquidity demands include cash
received through ordinary business activities (e.g., collection of interest
and fees), federal funds sold, loan and investment maturities, bank lines
of credit for the Company, approved lines for the purchase of federal funds
by CCB and Federal Home Loan Bank advances.
The Company ended 2004 with approximately $75 million in liquidity, a
decline of approximately $50.0 million from the previous year-end. The
decline was primarily the result of loan growth and funding of
acquisitions. Management expects liquidity to continue to decline
throughout 2005 as the Company funds future loan growth.
The Company intends to borrow approximately $31.0 million to fund the cash
portion of the consideration paid for the acquisition of First National
Bank of Alachua. Management expects to use a mixture of debt and stock to
fund future acquisition opportunities.
The Company has the ability to draw on a Revolving Credit Note, due on
October 15, 2007. Interest is payable quarterly at LIBOR plus an
applicable margin on advances. The revolving credit is unsecured. The
existing loan agreement contains certain financial covenants that must be
maintained by the Company. At December 31, 2004, the Company was in
compliance with all of the terms of the agreement and had $36.0 million
available under a $36.0 million line of credit facility. Effective January
1, 2005, in accordance with the terms of the agreement which was executed
on October 15, 2004, the amount available under the facility will be
reduced from $36.0 million to $25.0 million.
At December 31, 2004, the Company had $68.5 million in long-term borrowings
outstanding to the Federal Home Loan Bank of Atlanta. The debt consists of
36 loans. The interest rates are fixed and the weighted average rate at
December 31, 2004 was 4.29%. Required annual principal reductions
approximate $2.3 million, with the remaining balances due at maturity
ranging from 2006 to 2024. During 2004, the Company reclassified $16.0
million, consisting of an advance from the Federal Home Loan Bank of Atlanta
("FHLB"), from long-term to short-term borrowings. The Company also
obtained a $20.0 million advance from the FHLB with a fixed rate of 2.93%
and a maturity of September 2006. Additions to long-term borrowings also
consists of $9.7 million primarily used to match-fund longer-term, fixed
rate loan products, which management elected not to fund internally due to
asset/liability management considerations. The remaining increase was
attributable to FHLB debt assumed from the bank acquisitions in 2004. The
debt is secured by 1-4 family residential mortgage loans and selected
investment securities from the portfolio. See Note 10
42
in the Notes to Consolidated Financial Statements for additional information
on these borrowings.
The Company issued a $30.9 million junior subordinated deferrable interest
note in November 2004 to a wholly owned Delaware statutory trust, Capital
City Bank Group Capital Trust I ("CCBG Capital Trust I"). See Note 10 in
the Notes to Consolidated Financial Statements for additional information
on this borrowing. Interest payments are due quarterly at a fixed rate of
5.71% for five years, then adjustable annually to LIBOR plus a margin of
1.90%. The note matures on December 31, 2034. The proceeds of the
borrowing were used to partially fund the Farmers and Merchants Bank of
Dublin acquisition.
It is anticipated that capital expenditures will approximate $10 million
over the next twelve months. These capital expenditures are expected to
consist primarily of several new offices in existing markets, office
equipment and furniture, and technology purchases. Management believes
these capital expenditures can be funded internally without impairing the
Company's ability to meet its on-going obligations.
Table 13
CONTRACTUAL CASH OBLIGATIONS
Table 13 sets forth certain information about contractual cash obligations at
December 31, 2004.
Payments Due By Period
----------------------------------------------
1 Year 1 - 3 4 - 5 After
(Dollars in Thousands) or Less Years Years 5 Years Total
- ------------------------------------------------------------------------------------
Federal Home Loan Bank Advances $18,306 $32,599 $5,325 $28 216 $ 84,446
Subordinated Note Payable - - - 30,928 30,928
Operating Lease Obligations 1,319 3,372 2,110 6,127 12,928
------- ------ ------ ------- --------
Total Contractual Cash Obligations $19,625 $35,971 $7,435 $65,271 $128,302
======= ======= ====== ======= ========
Capital
The Company continues to maintain a strong capital position. The ratio of
shareowners' equity to total assets at year-end was 10.86%, 10.98%, and
10.22%, in 2004, 2003, and 2002, respectively.
The Company is subject to risk-based capital guidelines that measure
capital relative to risk weighted assets and off-balance sheet financial
instruments. Capital guidelines issued by the Federal Reserve Board
require bank holding companies to have a minimum total risk-based capital
ratio of 8.00%, with at least half of the total capital in the form of Tier
1 capital. As of December 31, 2004, the Company exceeded these capital
guidelines with a total risk-based capital ratio of 12.33% and a Tier 1
ratio of 11.44%, compared to 13.79% and 12.88%, respectively, in 2003. As
allowed by Federal Reserve Board capital guidelines the trust preferred
securities issued by CCBG Capital Trust I are included as Tier 1 capital in
the Company's capital calculations previously noted. See Note 10 in the
Notes to Consolidated Financial Statements for additional information on
the trust preferred security offering. See Note 14 in the Notes to
Consolidated Financial Statements for additional information as to the
Company's capital adequacy.
A tangible leverage ratio is also used in connection with the risk-based
capital standards and is defined as Tier 1 capital divided by average
assets. The minimum leverage ratio under this standard is 3% for the
highest-rated bank holding companies which are not undertaking significant
expansion programs. An additional 1% to 2% may be required for other
companies, depending upon their regulatory ratings and expansion plans. On
December 31, 2004, the Company had a leverage ratio of 8.79% compared to
9.51% in 2003.
43
Shareowners' equity as of December 31, for each of the last three years is
presented below:
Shareowners' Equity
(Dollars in Thousands) 2004 2003 2002
- --------------------------------------------------------------------------
Common Stock $ 142 $ 132 $ 132
Additional Paid-in Capital 52,363 16,157 14,691
Retained Earnings 204,648 185,134 168,587
-------- -------- --------
Subtotal 257,153 201,423 183,410
-------- -------- --------
Accumulated Other Comprehensive
(Loss) Income, Net of Tax (353) 1,386 3,121
-------- -------- --------
Total Shareowners' Equity $256,800 $202,809 $186,531
======== ======== ========
At December 31, 2004, the Company's common stock had a book value of $18.13
per diluted share compared to $15.27 in 2003. Beginning in 1994, book
value has been impacted by the net unrealized gains and losses on
investment securities available-for-sale. At December 31, 2004, the net
unrealized loss was $353,000 compared to a net unrealized gain in 2003 of
$1.4 million. The decrease in unrealized gain is a result of changes in the
portfolio due to securities which have matured or been called and an
increase in interest rates.
On March 30, 2000, the Company's Board of Directors authorized the
repurchase of up to 625,000 shares of its outstanding common stock. The
purchases are made in the open market or in privately negotiated
transactions. The Company acquired 155,775 shares during 2002 and 267,500
shares during 2001. On January 24, 2002, the Company's Board of Directors
authorized the repurchase of an additional 312,500 shares of its
outstanding common stock. From March 30, 2000 through February 28, 2005,
the Company repurchased a total of 572,707 shares at an average purchase
price of $19.18 per share.
The Company offers an Associate Incentive Plan under which certain
associates are eligible to earn shares of CCBG stock based upon achieving
established performance goals. In 2004, the Company issued 37,381 shares,
valued at approximately $1.6 million under this plan.
The Company also offers stock purchase plans, whereby employees and
directors may purchase shares at a 10% discount. In 2004, 27,425 shares,
valued at approximately $991,000, were issued under these plans.
Dividends
Adequate capital and financial strength is paramount to the stability of
the Company and its subsidiary bank. Cash dividends declared and paid
should not place unnecessary strain on the Company's capital levels. When
determining the level of dividends the following factors are considered:
* Compliance with state and federal laws and regulations;
* The Company's capital position and its ability to meet its financial
obligations;
* Projected earnings and asset levels; and
* The ability of the Bank and CCBG to fund dividends.
Although a consistent dividend payment is believed to be favorably viewed
by the financial markets and shareowners, the Board of Directors will
declare dividends only if the Company is considered to have adequate
capital. Future capital requirements and corporate plans are considered
when the Board considers a dividend payment.
44
Dividends declared and paid totaled $.730 per share in 2004. For the first
through third quarters of 2004 the Company declared a dividend of $.180 per
share. The dividend was raised 6.0% in the fourth quarter of 2004 from
$.180 per share to $.190 per share. The Company declared dividends of
$.656 per share in 2003 and $.502 per share in 2002. The dividend payout
ratio was 33.42%, 34.51%, and 28.87% for 2004, 2003 and 2002, respectively.
Total cash dividends declared per share in 2004 represented an 11.3%
increase over 2003. All share and per share data has been adjusted to
reflect the five-for-four stock dividend paid on June 13, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not currently engage in the use of derivative instruments
to hedge interest rate risks. However, the Company is a party to financial
instruments with off-balance sheet risks in the normal course of business
to meet the financing needs of its customers.
At December 31, 2004, the Company had $407.3 million in commitments to
extend credit and $17.8 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
revolving credit facility provide a sufficient source of funds to meet
these commitments.
ACCOUNTING POLICIES
Critical Accounting Policies
The consolidated financial statements and accompanying Notes to
Consolidated Financial Statements are prepared in accordance with
accounting principles generally accepted in the United States of America,
which require the Company to make various estimates and assumptions (see
Note 1 in the Notes to Consolidated Financial Statements). The Company
believes that, of its significant accounting policies, the following may
involve a higher degree of judgment and complexity.
Allowance for Loan Losses: The allowance for loan losses is established
through a charge to the provision for loan losses. Provisions are made to
reserve for estimated losses in loan balances. The allowance for loan
losses is a significant estimate and is evaluated quarterly by the Company
for adequacy. The use of different estimates or assumptions could produce
a different required allowance, and thereby a larger or smaller provision
recognized as expense in any given reporting period. A further discussion
of the allowance for loan losses can be found in the section entitled
"Allowance for Loan Losses" and Note 1 in the Notes to Consolidated
Financial Statements.
Intangible Assets: Intangible assets consist primarily of goodwill, core
deposit assets, and other identifiable intangibles 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
45
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, 2004. 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. Generally, core
deposits refer to nonpublic, nonmaturing deposits including noninterest-
bearing deposits, NOW, money market and savings. The Company makes certain
estimates relating to the useful life of these assets, and rate of run-off
based on the nature of the specific assets and the customer bases acquired.
If there is a reason to believe there has been a permanent loss in value,
management will assess these assets for impairment. Any changes in the
original estimates may materially affect reported earnings.
Pension Assumptions: The Company has a trusteed defined benefit pension
plan for the benefit of substantially all associates of the Company. 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 Statements of Financial Condition reflect an
accrued pension benefit cost due to funding levels and unrecognized
actuarial amounts. The most significant assumptions used in calculating
the pension obligation are the weighted-average discount rate used to
determine the present value of the pension obligation, the weighted-average
expected long-term rate of return on plan assets, and the assumed rate of
annual compensation increases. These assumptions are re-evaluated annually
with the external actuaries, taking into consideration both current market
conditions and anticipated long-term market conditions.
The weighted-average discount rate is determined by matching anticipated
Retirement Plan cash flows for a 30-year period to long-term corporate Aa-
rated bonds and solving for the underlying rate of return, which investing
in such securities would generate. This methodology is applied
consistently from year-to-year. The discount rate utilized in 2004 was
6.25%. The estimated impact to 2004 pension expense of a 25 basis point
increase or decrease in the discount rate would have been a decrease of
approximately $208,000 and an increase of approximately $217,000,
respectively. The discount rate to be used in 2005 will be 6.00%.
The weighted-average expected long-term rate of return on plan assets is
determined based on the current and anticipated future mix of assets in the
plan. The assets currently consist of equity securities, U.S. Government
and Government agency debt securities, and other securities (typically
temporary liquid funds awaiting investment). The weighted-average expected
long-term rate of return on plan assets utilized in 2004 was 8.00%. The
estimated impact to pension expense of a 25 basis point increase or
decrease in the rate of return would have been an approximate $83,000
decrease or increase, respectively. The rate of return on plan assets for
2005 will be 8.0%.
The assumed rate of annual compensation increases (5.50% in 2004) is based
on expected trends in salaries and the employee base. This assumption is
not expected to change materially in 2005.
Detailed information on the pension plan, the actuarially determined
disclosures, and the assumptions used are provided in Note 12 of the Notes
to Consolidated Financial Statements.
46
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment" (Revised). SFAS 123R establishes
standards for the accounting for transactions in which an entity
(i) exchanges its equity instruments for goods or services, or (ii) incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to
account for stock-based compensation using APB 25 and requires that such
transactions be recognized as compensation cost in the income statement
based on their fair values on the date of the grant. The Company adopted
the accounting standards set forth in SFAS No. 123 in 2003 and has
accordingly expensed stock-based compensation for 2003 and 2004. See
Note 1 - Accounting Policies.
In March 2004, the FASB 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. 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.
In December 2003, the FASB issued Interpretation No. 46 ("FIN46") (revised
December 2003 ("FIN46R")), "Consolidation of Variable Interest Entities,"
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN46R replaces
FIN46, which was issued in January 2003. FIN46R applies immediately to a
variable interest entity created after January 31, 2003 and as of the first
interim period ending after March 15, 2004 to those variable interest
entities created before February 1, 2003 and not already consolidated under
FIN46 in previously issued financial statements. The Company has adopted
FIN 46R in connection with its consolidated financial statements for the
year ended December 31, 2004. The implementation of FIN 46R requires the
Company to not consolidate its investment in CCBG Capital Trust I because
the Company is not the primary beneficiary.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") SOP No. 03-3, "Accounting
for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3
addresses accounting for differences between the contractual cash flows of
certain loans and debt securities and the cash flows expected to be
collected when loans or debt securities are acquired in a transfer and
those cash flow differences are attributable, at least in part, to credit
quality. As such, SOP 03-3 applies to loans and debt securities
47
acquired individually, in pools or as part of a business combination and
does not apply to originated loans. The application of SOP 03-3 limits the
interest income, including accretion of purchase price discounts, that may
be recognized for certain loans and debt securities. Additionally, SOP 03-
3 does not allow the excess of contractual cash flows over cash flows
expected to be collected to be recognized as an adjustment of yield, loss
accrual or valuation allowance, such as the allowance for loan losses.
SOP 03-3 requires that increases in expected cash flows subsequent to the
initial investment be recognized prospectively through adjustment of the
yield on the loan or debt security over its remaining life. Decreases in
expected cash flows should be recognized as impairment. In the case of
loans acquired in a business combination where the loans show signs of
credit deterioration, SOP 03-3 represents a significant change from current
purchase accounting practice whereby the acquiree's allowance for loan
losses is typically added to the acquirer's allowance for loan losses.
SOP 03-3 is effective for loans and debt securities acquired by the Company
beginning January 1, 2005. Loans acquired in future acquisitions will be
impacted by the adoption of this pronouncement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Overview
Market risk management arises from changes in interest rates, exchange
rates, commodity prices, and equity prices. The Company has risk
management policies to monitor and limit exposure to market risk and does
not participate in activities that give rise to significant market risk
involving exchange rates, commodity prices, or equity prices. In asset and
liability management activities, policies are in place that are designed to
minimize structural interest rate risk.
Interest Rate Risk Management
The normal course of business activity exposes CCBG to interest rate risk.
Fluctuations in interest rates may result in changes in the fair market
value of the Company's financial instruments, cash flows and net interest
income. The Company seeks to avoid fluctuations in its net interest margin
and to maximize net interest income within acceptable levels of risk
through periods of changing interest rates. Accordingly, the Company's
interest rate sensitivity and liquidity are monitored on an ongoing basis
by its Asset and Liability Committee ("ALCO"), which oversees market risk
management and establishes risk measures, limits and policy guidelines for
managing the amount of interest rate risk and its effects on net interest
income and capital. A variety of measures are used to provide for a
comprehensive view of the magnitude of interest rate risk, the distribution
of risk, the level of risk over time and the exposure to changes in certain
interest rate relationships.
ALCO continuously monitors and manages the balance between interest rate-
sensitive assets and liabilities. ALCO's objective is to manage the impact
of fluctuating market rates on net interest income within acceptable
levels. In order to meet this objective, management may adjust the rates
charged/paid on loans/deposits or may shorten/lengthen the duration of
assets or liabilities within the parameters set by ALCO.
The financial assets and liabilities of the Company are classified as
other-than-trading. An analysis of the other-than-trading financial
components, including the fair values, are presented in Table 14. This
table presents the Company's consolidated interest rate sensitivity
position as of year-end 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 14 may not necessarily be indicative of the Company's
interest rate sensitivity over an extended period of time.
48
The Company expects rising rates to have a favorable impact on the net
interest margin, subject to the magnitude and timeframe over which the rate
changes occur. However, as general interest rates rise or fall, other
factors such as current market conditions and competition may impact how
the Company responds to changing rates and thus impact the magnitude of
change in net interest income. Nonmaturity deposits offer management
greater discretion as to the direction, timing, and magnitude of interest
rate changes and can have a material impact on the Company's interest rate
sensitivity. In addition, the relative level of interest rates as compared
to the current yields/rates of existing assets/liabilities can impact both
the direction and magnitude of the change in net interest margin as rates
rise and fall from one period to the next.
Inflation
The impact of inflation on the banking industry differs significantly from
that of other industries in which a large portion of total resources are
invested in fixed assets such as property, plant and equipment.
Assets and liabilities of financial institutions are virtually all monetary
in nature, and therefore are primarily impacted by interest rates rather than
changing prices. While the general level of inflation underlies most
interest rates, interest rates react more to changes in the expected rate of
inflation and to changes in monetary and fiscal policy. Net interest income
and the interest rate spread are good measures of the Company's ability to
react to changing interest rates and are discussed in further detail in the
section entitled "Results of Operations."
49
Table 14
FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
Other Than Trading Portfolio
Maturing or Repricing in:
---------------------------------------------------------------------------------- Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- ----------------------------------------------------------------------------------------------------------------------------------
Loans:
Fixed Rate $ 336,290 $153,445 $ 81,088 $48,491 $27,987 $21,637 $ 668,938 $ 670,404
Average Interest Rate 5.90% 7.09% 7.01% 6.83% 6.65% 6.34% 6.42%
Floating Rate(2) 888,396 165,277 84,206 7,625 6,245 8,138 1,159,887 1,162,303
Average Interest Rate 5.02% 6.21% 6.17% 7.08% 7.07% 7.36% 5.32%
Investment Securities:(3)
Fixed Rate 83,436 76,818 25,132 9,528 4,342 8,374 207,630 207,630
Average Interest Rate 2.98% 2.57% 3.75% 3.23% 3.54% 3.25% 2.96%
Floating Rate 2,610 - - - - - 2,610 2,610
Average Interest Rate 4.37% - - - - - 4.37%
Other Earning Assets:
Floating Rate 74,506 - - - - - 74,506 74,506
Average Interest Rate 2.01% - - - - - 2.01%
Total Financial Assets $1,385,238 $395,540 $190,426 $65,644 $38,574 $38,149 $2,113,571 $2,117,453
Average Interest Rate 4.95% 5.84% 6.21% 6.33% 6.37% 5.88% 5.32%
Deposits:(4)
Fixed Rate $ 452,241 $ 64,554 $ 37,962 $12,563 $ 5,349 $ 8 $ 572,677 $ 535,085
Average Interest Rate 1.87% 2.64% 3.38% 3.35% 3.19% 2.50% 2.10%
Floating Rate 755,218 - - - - - 755,218 755,218
Average Interest Rate 0.63% - - - - - 0.63%
Other Interest Bearing Liabilities:
Fixed Rate Debt 4,476 24,630 3,574 3,318 2,747 29,708 68,453 68,582
Average Interest Rate 4.26% 3.18% 4.68% 4.80% 4.97% 5.04% 4.29%
Floating Rate Debt 93,811 - 346 832 1,025 30,928 126,942 127,093
Average Interest Rate 1.40% - 4.91% 3.05% 4.00% 5.71% 1.46%
Total Financial Liabilities $1,305,746 $ 89,184 $ 41,882 $16,713 $ 9,121 $60,644 $1,523,290 $1,485,978
Average Interest Rate 1.13% 2.79% 3.50% 3.62% 3.82% 5.38% 1.41%
(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. Time deposit balances are classified according to maturity.
50
Item 8. Financial Statements and Supplementary Data
Table 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
2004
----------------------------------------------
(Dollars in Thousands, Except Per Share Data)(1) Fourth Third Second First
- ------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 29,930 $ 24,660 $ 24,265 $ 22,670
Interest Expense 5,634 3,408 3,221 3,178
---------- ---------- ---------- ----------
Net Interest Income 24,296 21,252 21,044 19,492
Provision for Loan Losses 300 300 580 961
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 23,996 20,952 20,464 18,531
Gain on Sale of Credit Card Portfolio 324 6,857 - -
Noninterest Income 11,596 10,864 11,031 9,881
Conversion/Merger Expense 436 68 4 42
Noninterest Expense 24,481 21,565 21,597 21,033
---------- ---------- ---------- ----------
Income Before Provision for Income Taxes 10,999 17,040 9,894 7,337
Provision for Income Taxes 3,737 6,221 3,451 2,490
---------- ---------- ---------- ----------
Net Income $ 7,262 $ 10,819 $ 6,443 $ 4,847
========== ========== ========== ==========
Net Interest Income (FTE) $ 24,619 $ 21,528 $ 21,333 $ 19,811
Per Common Share:
Net Income Basic $ .51 $ .82 $ .48 $ .37
Net Income Diluted .51 .82 .48 .37
Dividends Declared .190 .180 .180 .180
Diluted Book Value 18.13 16.48 15.80 15.54
Market Price:
High 45.98 41.20 43.15 45.55
Low 37.71 33.33 35.50 39.05
Close 41.80 38.71 39.59 41.25
Selected Average
Balances:
Loans $1,779,736 $1,524,401 $1,491,142 $1,357,206
Earning Assets 2,066,111 1,734,708 1,721,655 1,634,468
Assets 2,322,870 1,941,372 1,929,485 1,830,496
Deposits 1,853,588 1,545,224 1,538,630 1,457,160
Shareowners' Equity 248,773 217,273 210,211 206,395
Common Equivalent Average Shares:
Basic 13,955 13,283 13,274 13,262
Diluted 13,961 13,287 13,277 13,286
Ratios:
ROA 1.24% 2.22% 1.34% 1.06%
ROE 11.61% 19.81% 12.33% 9.45%
Net Interest Margin (FTE) 4.75% 4.94% 4.99% 4.88%
Efficiency Ratio 63.85% 52.60%(2) 63.87% 68.06%
2003
----------------------------------------------
(Dollars in Thousands, Except Per Share Data)(1) Fourth Third Second First
- ------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 23,022 $ 23,484 $ 23,997 $ 24,327
Interest Expense 3,339 3,506 3,894 4,100
---------- ---------- ---------- ----------
Net Interest Income 19,683 19,978 20,103 20,227
Provision for Loan Losses 850 921 886 779
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 18,833 19,057 19,217 19,448
Gain on Sale of Credit Card Portfolio - - - -
Noninterest Income 10,614 10,952 10,428 9,945
Conversion/Merger Expense - - - -
Noninterest Expense 20,593 20,184 19,516 19,428
---------- ---------- ---------- ----------
Income Before Provision for Income Taxes 8,854 9,825 10,129 9,965
Provision for Income Taxes 2,758 3,529 3,689 3,604
---------- ---------- ---------- ----------
Net Income $ 6,096 $ 6,296 $ 6,440 $ 6,361
========== ========== ========== ==========
Net Interest Income (FTE) $ 20,020 $ 20,332 $ 20,456 $ 20,597
Per Common Share:
Net Income Basic $ .47 $ .47 $ .49 $ .48
Net Income Diluted .46 .47 .49 .48
Dividends Declared .180 .170 .170 .136
Diluted Book Value 15.27 15.00 14.73 14.42
Market Price:
High 46.83 40.93 36.43 32.32
Low 36.62 35.00 29.74 26.81
Close 45.99 38.16 36.08 31.29
Selected Average
Balances:
Loans $1,329,673 $1,336,139 $1,316,705 $1,289,161
Earning Assets 1,636,269 1,634,689 1,612,133 1,615,287
Assets 1,819,552 1,816,005 1,786,991 1,796,657
Deposits 1,451,095 1,451,879 1,415,798 1,407,763
Shareowners' Equity 201,939 199,060 194,781 190,416
Common Equivalent Average Shares:
Basic 13,223 13,221 13,209 13,207
Diluted 13,265 13,260 13,255 13,253
Ratios:
ROA 1.33% 1.38% 1.45% 1.44%
ROE 11.98% 12.55% 13.26% 13.55%
Net Interest Margin (FTE) 4.85% 4.94% 5.09% 5.17%
Efficiency Ratio 64.58% 61.93% 60.57% 60.96%
(1) All share and per-share data have been adjusted to reflect the 5-for-4 stock split effective June 13, 2003.
(2) Includes $4.2 million (after-tax) one-time gain on sale of credit card portfolio.
51
CONSOLIDATED FINANCIAL STATEMENTS
53 Report of Independent Registered Public Accounting Firm
54 Consolidated Statements of Income
55 Consolidated Statements of Financial Condition
56 Consolidated Statements of Changes in Shareowners' Equity
57 Consolidated Statements of Cash Flows
58 Notes to Consolidated Financial Statements
52
Report of Independent Registered Public Accounting Firm
The Board of Directors
Capital City Bank Group, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Capital City Bank Group, Inc. and subsidiary (the "Company")
as of December 31, 2004 and 2003, and the related consolidated statements
of income, changes in shareowners' equity, and cash flows for each of the
years in the three-year period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capital
City Bank Group, Inc. and subsidiary as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of computing stock-based compensation in 2003
and changed its method of accounting for goodwill and other intangible
assets in 2002.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
the Company's internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control -Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 16, 2005 expressed
an unqualified opinion on management's assessment of, and the effective
operation of, internal control over financial reporting.
KPMG LLP
Orlando, Florida
March 16, 2005
53
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)(1)
For the Years Ended December 31,
----------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $ 95,607 $ 87,435 $ 92,991
Investment Securities:
U.S. Treasury 759 664 2
U.S. Government Agencies/Corporations 2,111 2,486 5,366
States and Political Subdivisions 1,944 2,409 2,752
Other Securities 271 575 1,573
Funds Sold 833 1,261 1,481
-------- ------- --------
Total Interest Income 101,525 94,830 104,165
-------- ------- --------
INTEREST EXPENSE
Deposits 11,315 11,567 20,551
Short-Term Borrowings 1,270 1,270 767
Subordinated Note Payable 294 - -
Other Long-Term Borrowings 2,562 2,002 1,185
-------- ------- --------
Total Interest Expense 15,441 14,839 22,503
-------- ------- --------
Net Interest Income 86,084 79,991 81,662
Provision for Loan Losses 2,141 3,436 3,297
-------- ------- --------
Net Interest Income After Provision for
Loan Losses 83,943 76,555 78,365
-------- ------- --------
NONINTEREST INCOME
Service Charges on Deposit Accounts 17,574 16,319 12,749
Data Processing 2,628 2,403 2,006
Asset Management Fees 4,007 2,650 2,521
Securities Transactions 14 1 10
Mortgage Banking Revenues 3,208 6,090 5,502
Gain on Sale of Credit Cards 7,181 - -
Other 15,941 14,476 13,315
-------- ------- --------
Total Noninterest Income 50,553 41,939 36,103
-------- ------- --------
NONINTEREST EXPENSE
Salaries and Associate Benefits 44,345 40,462 40,212
Occupancy, Net 7,074 5,972 5,719
Furniture and Equipment 8,393 7,840 7,677
Intangible Amortization 3,824 3,241 3,242
Merger Expense 550 - 212
Other 25,040 22,206 21,633
-------- ------- --------
Total Noninterest Expense 89,226 79,721 78,695
-------- ------- --------
Income Before Income Taxes 45,270 38,773 35,773
Income Taxes 15,899 13,580 12,691
-------- ------- --------
NET INCOME $ 29,371 $ 25,193 $ 23,082
======== ======== ========
BASIC NET INCOME PER SHARE $ 2.18 $ 1.91 $ 1.75
======== ======== ========
DILUTED NET INCOME PER SHARE $ 2.18 $ 1.90 $ 1.74
======== ======== ========
Average Basic Common Shares Outstanding 13,444 13,222 13,225
======== ======== ========
Average Diluted Common Shares Outstanding 13,448 13,251 13,274
======== ======== ========
(1) All share and per share data have been adjusted to reflect the 5-for-4
stock split effective June 13, 2003.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
54
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)(1)
As of December 31,
-----------------------------
2004 2003
- ----------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 87,039 $ 93,140
Funds Sold and Interest Bearing Deposits 74,506 125,452
---------- ----------
Total Cash and Cash Equivalents 161,545 218,592
Investment Securities, Available-for-Sale 210,240 181,734
Loans, Net of Unearned Interest 1,828,825 1,341,632
Allowance for Loan Losses (16,037) (12,429)
---------- ----------
Loans, Net 1,812,788 1,329,203
Premises and Equipment, Net 58,963 54,011
Goodwill 54,341 6,680
Other Intangible Assets 25,964 19,112
Other Assets 40,172 37,170
---------- ----------
Total Assets $2,364,013 $1,846,502
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 566,991 $ 455,550
Interest Bearing Deposits 1,327,895 1,018,655
---------- ----------
Total Deposits 1,894,886 1,474,205
Short-Term Borrowings 96,014 108,184
Subordinated Note Payable 30,928 -
Other Long-Term Borrowings 68,453 46,475
Other Liabilities 16,932 14,829
---------- ----------
Total Liabilities 2,107,213 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; 14,155,312 and 13,236,462 shares
issued and outstanding at December 31, 2004
and December 31, 2003, respectively 142 132
Additional Paid-In Capital 52,363 16,157
Retained Earnings 204,648 185,134
Accumulated Other Comprehensive (Loss) Income,
Net of Tax (353) 1,386
---------- ----------
Total Shareowners' Equity 256,800 202,809
---------- ----------
Commitments and Contingencies (See Note 18)
Total Liabilities and Shareowners' Equity $2,364,013 $1,846,502
========== ==========
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split
effective June 13, 2003.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
55
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Thousands, Except Per Share Data)(1)
Accumulated Other
Additional Comprehensive
Common Paid-In Retained (Loss) Income,
Stock Capital Earnings Net of Taxes Total
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $132 $17,152 $152,149 $2,350 $171,783
Comprehensive Income:
Net Income - - 23,082
Net Change in Unrealized Gain (Loss)
On Available-for-Sale Securities - - - 771
Total Comprehensive Income - - - - 23,853
Cash Dividends ($.502 per share) - - (6,644) - (6,644)
Issuance of Common Stock - 934 - - 934
Repurchase and Retirement of Common Stock - (3,395) - - (3,395)
---- ------- -------- ------ --------
Balance, December 31, 2002 132 14,691 168,587 3,121 186,531
Comprehensive Income:
Net Income - - 25,193
Net Change in Unrealized (Loss) Gain
On Available-for-Sale Securities - - - (1,735)
Total Comprehensive Income - - - - 23,458
Cash Dividends ($.656 per share) - - (8,646) - (8,646)
Executive Stock Performance Plan Compensation - 62 - - 62
Issuance of Common Stock - 1,421 - - 1,421
Repurchase and Retirement of Common Stock - (17) - - (17)
---- ------- -------- ------ --------
Balance, December 31, 2003 132 16,157 185,134 1,386 202,809
Comprehensive Income:
Net Income - - 29,371
Net Change in Unrealized (Loss) Gain
On Available-for-Sale Securities - - - (1,739)
Total Comprehensive Income - - - - 27,632
Cash Dividends ($.730 per share) - - (9,857) - (9,857)
Executive Stock Performance Plan Compensation - 193 - - 193
Issuance of Common Stock 10 36,013 - - 36,023
---- ------- -------- ------ --------
Balance, December 31, 2004 $142 $52,363 $204,648 $ (353) $256,800
==== ======= ======== ====== ========
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13, 2003.
56
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
----------------------------------
(Dollars in Thousands) 2004 2003 2002
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 29,371 $ 25,193 $ 23,082
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Loan Losses 2,141 3,436 3,297
Depreciation 5,288 4,857 4,897
Loss on Disposal of Fixed Assets - 92 32
Net Securities Amortization 2,117 2,180 889
Amortization of Intangible Assets 3,824 3,241 3,242
Gain on Sale of Investment Securities (14) (1) (10)
Non-Cash Compensation 1,707 508 892
Deferred Income Taxes 765 755 (1,479)
Net (Increase) Decrease in Other Assets (4,210) 1,385 4,183
Net Increase (Decrease) in Other Liabilities 3,182 (3,791) (953)
-------- -------- --------
Net Cash Provided by Operating Activities 44,171 37,855 38,062
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Payments/Maturities/Sales of
Investment Securities Available-for-Sale 132,083 101,359 82,466
Purchase of Investment Securities Available-for-Sale (88,028) (107,695) (43,370)
Net Increase in Loans (139,507) (65,180) (46,006)
Net Cash Used in Acquisitions (31,743) - -
Purchase of Premises & Equipment (5,576) (11,152) (6,868)
Proceeds From Sales of Premises & Equipment 1,155 1,090 89
-------- -------- --------
Net Cash Used in Investing Activities (131,616) (81,578) (13,689)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits 23,776 40,005 (115,901)
Net (Decrease) Increase in Short-Term Borrowings (33,559) (45,913) 46,633
Proceeds from Subordinated Note Payable 30,928 - -
Increase in Other Long-Term Borrowings 59,741 16,564 62,058
Repayment of Other Long-Term Borrowings (41,815) (1,412) (3,883)
Dividends Paid (9,857) (8,646) (6,644)
Repurchase of Common Stock - (17) (3,395)
Issuance of Common Stock 1,184 975 688
-------- -------- --------
Net Cash Provided By (Used in) Financing Activities 30,398 1,556 (20,444)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (57,047) (42,167) 3,929
Cash and Cash Equivalents at Beginning of Year 218,592 260,759 256,830
-------- -------- --------
Cash and Cash Equivalents at End of Year $161,545 $218,592 $260,759
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest Paid on Deposits $ 10,661 $ 11,999 $ 23,694
======== ======== ========
Interest Paid on Debt $ 4,066 $ 3,238 $ 1,825
======== ======== ========
Taxes Paid $ 12,606 $ 16,303 $ 13,175
======== ======== ========
Loans Transferred to Other Real Estate $ 1,351 $ 5,267 $ 1,238
======== ======== ========
Issuance of Common Stock as Non-Cash Compensation $ 1,707 $ 508 $ 246
======== ======== ========
Transfer of Current Portion of Long-Term Borrowings
to Short-Term Borrowings $ 16,002 $ 40,423 $ -
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
57
Notes to Consolidated Financial Statements
Note 1
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Capital City
Bank Group, Inc. ("CCBG"), and its wholly-owned subsidiary, Capital City
Bank ("CCB" or the "Bank" and together with CCBG, the "Company"). All
material inter-company transactions and accounts have been eliminated.
The Company, which operates in a single reportable business segment
comprised of commercial banking within the states of Florida, Georgia, and
Alabama, follows accounting principles generally accepted in the United
States of America and reporting practices applicable to the banking
industry. The principles which materially affect the financial position,
results of operations and cash flows are summarized below.
The Company determines whether it has a controlling financial interest in
an entity by first evaluating whether the entity is a voting interest
entity or a variable interest entity under accounting principles generally
accepted in the United States of America. Voting interest entities are
entities in which the total equity investment at risk is sufficient to
enable the entity to finance itself independently and provides the equity
holders with the obligation to absorb losses, the right to receive residual
returns and the right to make decisions about the entity's activities. The
Company consolidates voting interest entities in which it has all, or at
least a majority of, the voting interest. As defined in applicable
accounting standards, variable interest entities (VIEs) are entities that
lack one or more of the characteristics of a voting interest entity. A
controlling financial interest in an entity is present when an enterprise
has a variable interest, or a combination of variable interests, that will
absorb a majority of the entity's expected losses, receive a majority of
the entity's expected residual returns, or both. The enterprise with a
controlling financial interest, known as the primary beneficiary,
consolidates the VIE. CCBG's wholly-owned subsidiary, CCBG Capital
Trust I (established November 1, 2004) is a VIE for which the Company is
not the primary beneficiary. Accordingly, the accounts of this entity are
not included in the Company's consolidated financial statements.
Certain items in prior financial statements have been reclassified to
conform to the current presentation. All acquisitions during the reported
periods were accounted for using the purchase method. Accordingly, the
operating results of the acquired companies are included with the Company's
results of operations since their respective dates of acquisition (see
Note 2 - Acquisitions).
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
vary from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing
deposits in other banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods and all other cash equivalents
have a maturity of 90 days or less.
58
Investment Securities
Investment securities available-for-sale are carried at fair value and
represent securities that are available to meet liquidity and/or other needs
of the Company. Gains and losses are recognized and reported separately in
the Consolidated Statements of Income upon realization or when impairment of
values is deemed to be other than temporary. Gains or losses are recognized
using the specific identification method. Unrealized holding gains and
losses for securities available-for-sale are excluded from the Consolidated
Statements of Income and reported net of taxes in the accumulated other
comprehensive (loss) income component of shareowners' equity until realized.
Accretion and amortization are recognized on the effective yield method over
the life of the securities.
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Interest income is generally accrued on the effective yield method
based on outstanding balances. Fees charged to originate loans and direct
loan origination costs are deferred and amortized over the life of the loan
as a yield adjustment. Loans held for sale are valued at lower of cost or
market value based on information obtained from third party investors.
Allowance for Loan Losses
The allowance for loan losses is that amount considered adequate to absorb
losses inherent in the portfolio based on management's evaluation of the
current risk characteristics of the loan portfolio as of the reporting
date. The allowance is a significant estimate recorded by management and
is based on the credit quality of the portfolio.
The evaluation of credit quality begins with the review for impairment of
commercial purpose loans with balances exceeding $25,000. Impaired loans
are defined as those in which the full collection of principal and interest
in accordance with the contractual terms is improbable. Impaired loans
typically include those that are in nonaccrual status or classified as
doubtful as defined by the Company's internal risk rating system.
Generally, loans are placed on nonaccrual status when interest becomes past
due 90 days or more, or management deems the ultimate collection of
principal and interest is in doubt. A specific allowance for loss is made
for impaired loans based on a comparison of the recorded investment in the
loan to either the present value of the loan's expected cash flow, the
loan's estimated market price or the estimated fair value of the underlying
collateral less costs to sell the collateral.
Commercial purpose loans exceeding $100,000 that are not impaired, but have
weaknesses requiring closer management attention, are analyzed to determine
if an allowance is required. This analysis is based primarily on the
underlying value of the collateral. If the value of the collateral is
considered insufficient, an allowance is made for the deficiency. The
value of the collateral is dependent on current economic conditions in the
communities served and is subject to change. In addition, the analysis
includes changes in risk ratings that are assigned based on the Bank's
Asset Classification Policy, and for the ultimate disposition of the loan.
The ultimate disposition may include upgrades in risk ratings, payoff of
the loan, or charge-off of the loan. This migration analysis results in a
charge-off ratio by loan pool of classified loans that is applied to the
balance of the pool to determine general reserves for specifically
identified problem loans. This charge-off ratio is adjusted for various
environmental factors including past due and nonperforming trends in the
loan portfolio, the micro-and macro-economic outlook, and credit
administration practices as determined by independent parties.
59
Larger commercial purpose loans that show no signs of weakness are assigned
an allowance based on the historical loss ratios in pools of loans with
similar characteristics. The historical loss ratios are determined by
analyzing losses over the prior twelve quarters, with more emphasis being
placed on the recent four quarters. The historical loss ratios are then
adjusted for certain external factors, including micro and macro-economic
outlook, past due and nonperforming trends within the portfolio, loan
growth, and credit administration practices.
Large groups of smaller balance homogeneous loans that are not impaired are
collectively evaluated to determine the allowance required for loan losses.
These small balance homogenous loans include commercial purpose loans less
than $100,000, consumer installment loans, and residential mortgage loans.
Historical loss ratios are determined for these smaller balance loan pools
and applied to the balance of the related pool of loans to determine the
allowance needed. The historical loss ratios are adjusted for external
factors as described above.
Long-Lived Assets
Premises and equipment are stated at cost less accumulated depreciation,
computed on the straight-line method over the estimated useful lives for
each type of asset with premises being depreciated over a range of 10 to 40
years, and equipment being depreciated over a range of 3 to 10 years.
Major additions are capitalized and depreciated in the same manner.
Repairs and maintenance are charged to noninterest expense as incurred.
Intangible assets, other than goodwill, consist of core deposit assets, and a
customer relationship and non-compete asset that were recognized in
connection with various acquisitions. Core deposit intangible assets are
amortized on the straight-line method over various periods, with the majority
being amortized over an average of 7 to 10 years. Other identifiable
intangibles are amortized on the straight-line methods over their estimated
useful lives.
Long-lived assets are evaluated for impairment if circumstances suggest
that their carrying value may not be recoverable, by comparing the carrying
value to estimated undiscounted cash flows. If the asset is deemed
impaired, an impairment charge is recorded equal to the carrying value less
the fair value.
Goodwill
As of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). The adoption of SFAS 142 required the Company to
discontinue goodwill amortization and identify reporting units to which the
goodwill related for purposes of assessing potential impairment of goodwill
on an annual basis, or more frequently, if events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. In accordance with the guidelines in SFAS 142, the Company
determined it has one reporting unit with goodwill. As of December 31,
2004, the Company performed its annual impairment review and concluded that
no impairment adjustment was necessary.
Income Taxes
The Company files consolidated federal and state income tax returns. In
general, the parent company and its subsidiary compute their tax provisions
as separate entities prior to recognition of any tax expense or benefits
which may accrue from filing a consolidated return.
The Company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the carrying amounts of existing assets and liabilities on the
Company's consolidated statement of
60
financial position and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Stock Based Compensation
As of December 31, 2004, the Company had three stock-based compensation
plans, consisting of the Associate Incentive Plan ("AIP"), the Associate
Stock Purchase Plan and the Director Stock Purchase Plan. Under the AIP,
performance shares are awarded to participants based on performance goals
being achieved. In addition, pursuant to the AIP, the Company executed
incentive stock option arrangements for 2004 and 2003 for a key executive
officer (William G. Smith, Jr.). 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 Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("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 net income per
share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based compensation.
(Dollars in Thousands, Except Per Share Data) 2004 2003 2002
- ----------------------------------------------------------------------------------
Net income, as reported $29,371 $25,193 $23,082
Add: Stock based compensation included
in reported net income, net of tax 400 634 553
Deduct: Stock based compensation
determined under fair value based method
for all awards, net of tax (400) (348) (388)
------- ------- -------
Pro forma net income $29,371 $25,479 $23,247
======= ======= =======
Net income per share:
Basic-as reported $ 2.18 $ 1.91 $ 1.75
======= ======= =======
Basic-pro forma $ 2.18 $ 1.93 $ 1.76
======= ======= =======
Diluted-as reported $ 2.18 $ 1.90 $ 1.74
======= ======= =======
Diluted-pro forma $ 2.18 $ 1.92 $ 1.75
======= ======= =======
Director Stock Purchase Plan ("DSPP"). The Company's DSPP allows the
directors to purchase the Company's common stock at a price equal to 90% of
the closing price on the date of purchase. The DSPP has 187,500 shares
reserved for issuance. In 2004, 2003, and 2002, CCBG issued 7,369, 4,861,
and 4,438 shares, respectively, under this plan. A total of 54,388 shares
have been issued to directors since the inception of this plan. Prior to
2003, the DSPP plan was accounted for under the
61
provisions of APB 25 and no compensation expense was recognized. In
accordance with the Company's adoption of SFAS 123, compensation expense
has been recognized for the Company's purchase plan activity in 2004 and
2003.
Associate Stock Purchase Plan ("ASPP"). Under the Company's ASPP,
substantially all associates may purchase the Company's common stock
through payroll deductions at a price equal to 90% of the lower of the fair
market value at the beginning or end of each six-month offering period.
Stock purchases under the ASPP are limited to 10% of an associate's
eligible compensation, up to a maximum of $25,000 (fair market value on
each enrollment date) in any plan year. The ASPP has 562,500 shares of
common stock reserved for issuance. CCBG issued 20,056, 25,234, and 31,588
shares under the plan in 2004, 2003, and 2002, respectively. A total of
321,749 shares have been issued since inception of this plan. Prior to
2003, the ASPP was accounted for under the provisions of APB 25 and no
compensation expense was recognized. In accordance with the Company's
adoption of SFAS 123, compensation expense has been recognized for the
Company's purchase plan activity in 2004 and 2003.
Transactions under the ASPP were as follows:
Purchase Price
Number of Shares per Share(1)
- ---------------------------------------------------------------------------
Available at December 31, 2001 317,629
Purchased (31,588) $18.90
-------
Available at December 31, 2002 286,041
Purchased (25,234) $30.46
-------
Available at December 31, 2003 260,807
Purchased (20,056) $35.63
-------
Available at December 31, 2004 240,751
=======
(1) Weighted Average Price for two annual offering periods
Based on the Black-Scholes option pricing model, the weighted average
estimated fair value of the purchase rights granted under the ASPP was
$7.37 for 2004, $6.65 for 2003, and $3.96 for 2002. In calculating pro
forma compensation at December 31, the fair value of each stock purchase
right is estimated on the date of grant using the following weighted
average assumptions:
2004 2003 2002
- -------------------------------------------------------
Dividend yield 1.7% 1.8% 2.4%
Expected volatility 30.0% 34.5% 33.0%
Risk-free interest rate 1.1% 1.1% 1.7%
Expected life (in years) 0.5 0.5 0.5
Associate Incentive Plan ("AIP"). Under the Company's AIP, shares are
granted to participants based upon the achievement of performance goals
established by the Board of Directors at the beginning of each award
period. A total of 937,500 shares of common stock have been reserved for
issuance under this Plan. Award periods have historically been one year
for the short-term plan and three years for the long-term plan. In 2004,
award periods were one year for both plans. Both plans were accounted for
under SFAS 123 for 2004 and compensation expense was measured under the
fair value method as of the grant date and recognized over the service
period. Shares earned are issued during the first calendar quarter of the
following year. CCBG issued 37,381, 10,596, and 12,618 shares under the
plan in 2004, 2003, and 2002, respectively. A total of 279,438 shares have
been issued since inception of this plan.
62
Executive Stock Option Agreement. In 2003 and 2004, the Company's Board of
Directors approved stock option agreements for a key executive officer
(William G. Smith, Jr. - Chairman, President and CEO, CCBG) under the
provisions of the AIP. These agreements grant a non-qualified stock option
award upon achieving certain annual earnings per share conditions set by
the Board, subject to certain vesting requirements. The options granted
under the agreements have a term of ten years and vest at a rate of one-
third on each of the first, second, and third anniversaries of the date of
grant. Under the 2003 agreement, 18,510 option shares were issued, none of
which have been exercised. The exercise price for the 2003 shares is
$41.20. Under the 2004 agreement, the earnings per share conditions were
analyzed resulting in economic value earned by the executive of
approximately $500,000, for which the Company will issue option shares
equal to that value. During 2004 and 2003, the Company recognized expense
of $193,000 and $61,658, respectively, related to these agreements in
accordance with the provisions of SFAS 123.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No.123R, "Share-Based Payment" (Revised). SFAS 123R establishes
standards for the accounting for transactions in which an entity
(i) exchanges its equity instruments for goods or services, or (ii) incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to
account for stock-based compensation using APB 25 and requires that such
transactions be recognized as compensation cost in the income statement
based on their fair values on the date of the grant. The Company adopted
the accounting standards set forth in SFAS No. 123 in 2003 and has
accordingly expensed stock-based compensation for 2003 and 2004. See
Note 1 - Accounting Policies.
In March 2004, the FASB 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. 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.
In December 2003, the FASB issued Interpretation No. 46 ("FIN46") (revised
December 2003 ("FIN46R")), "Consolidation of Variable Interest Entities,"
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights and accordingly should
63
consolidate the entity. FIN46R replaces FIN46, which was issued in January
2003. FIN46R applies immediately to a variable interest entity created after
January 31, 2003 and as of the first interim period ending after March 15,
2004 to those variable interest entities created before February 1, 2003 and
not already consolidated under FIN46 in previously issued financial
statements. The Company has adopted FIN 46R in connection with its
consolidated financial statements for the year ended December 31, 2004. The
implementation of FIN 46R requires the Company to not consolidate its
investment in CCBG Capital Trust I because the Company is not the primary
beneficiary.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") SOP No. 03-3, "Accounting
for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3
addresses accounting for differences between the contractual cash flows of
certain loans and debt securities and the cash flows expected to be
collected when loans or debt securities are acquired in a transfer and
those cash flow differences are attributable, at least in part, to credit
quality. As such, SOP 03-3 applies to loans and debt securities acquired
individually, in pools or as part of a business combination and does not
apply to originated loans. The application of SOP 03-3 limits the interest
income, including accretion of purchase price discounts, that may be
recognized for certain loans and debt securities. Additionally, SOP 03-3
does not allow the excess of contractual cash flows over cash flows
expected to be collected to be recognized as an adjustment of yield, loss
accrual or valuation allowance, such as the allowance for loan losses.
SOP 03-3 requires that increases in expected cash flows subsequent to the
initial investment be recognized prospectively through adjustment of the
yield on the loan or debt security over its remaining life. Decreases in
expected cash flows should be recognized as impairment. In the case of
loans acquired in a business combination where the loans show signs of
credit deterioration, SOP 03-3 represents a significant change from current
purchase accounting practice whereby the acquiree's allowance for loan
losses is typically added to the acquirer's allowance for loan losses.
SOP 03-3 is effective for loans and debt securities acquired by the Company
beginning January 1, 2005. Loans acquired in future acquisitions will be
impacted by the adoption of this pronouncement.
Note 2
ACQUISITIONS
On February 3, 2005, the Company announced the signing of a definitive
agreement to acquire First Alachua Banking Corporation ("FABC"),
headquartered in Alachua, Florida. FABC's wholly-owned subsidiary, First
National Bank of Alachua ("FNBA") has $229 million in assets, seven offices
located in Alachua County -- Gainesville (three), Alachua, High Springs,
Jonesville, Newberry -- and an eighth office in Hastings, Florida, which is
located in St. Johns County. FABC also has a mortgage lending office in
Gainesville and a financial services division. Subject to certain
potential adjustments, FABC shareowners will receive $2,847.04 in cash and
71.176 shares of CCBG common stock for each of the 10,186 shares of FABC
common stock outstanding. Based on Capital City's closing market price on
Nasdaq on February 3, 2005, this cash and stock combination equaled
aggregate consideration of $58.0 million. Closing is anticipated for mid-
year 2005.
On March 19, 2004, the Company's subsidiary, Capital City Bank, completed
its merger with Quincy State Bank, a former 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.
64
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. The transaction resulted in approximately
$41.1 million of intangible assets, including approximately $34.7 million
in goodwill, a core deposit intangible of $5.9 million, and a non-compete
intangible of $483,000. The core deposit intangible is being amortized
over a 7-year period and the non-compete intangible is being amortized over
a 2-year period.
The following table summarizes the assets acquired and liabilities assumed
as of the date of each acquisition (excluding trust assets), along with the
consideration paid:
Farmers & Merchants
(Dollars in Thousands) Quincy State Bank Bank of Dublin
- ------------------------------------------------------------------------------------
Cash and Due From Banks $ 2,295 $ 8,521
Funds Sold 6,949 12,641
-------- --------
Total Cash and Cash Equivalents 9,244 21,162
Investment Securities, Available-for-Sale 16,150 61,359
Loans, Net 88,727 257,685
Intangible Asset 14,915 41,103
Other Assets 2,498 4,035
-------- --------
Total Assets Acquired 131,534 385,344
Total Deposits 102,434 293,938
Short-Term Borrowings - 5,388
Long-Term Borrowings 3,000 17,063
Other Liabilities - 2,305
-------- --------
Total Liabilities Assumed 105,434 318,694
Consideration Paid to Shareowners $ 26,100 $ 66,650
======== ========
65
The following unaudited pro forma financial information for 2004 and 2003
presents the consolidated operations of the Company as if the acquisitions
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 acquisitions been consummated on this earlier date, and
does not project the Company's results of operations for any future period:
For the 12 Months Ended
December 31,
-------------------------
(Dollars in Thousands, Except Per Share Data) 2004 2003
- -----------------------------------------------------------------------------
Interest Income $120,416 $121,757
Interest Expense 20,480 22,637
-------- --------
Net Interest Income 99,936 99,120
Provision for Loan Losses 2,696 3,976
-------- --------
Net Interest Income After
Provision for Loan Losses 97,240 95,144
Noninterest Income 52,321 46,158
Noninterest Expense 97,380 90,863
-------- --------
Income Before Income Taxes 52,181 50,439
Income Taxes 18,525 18,357
-------- --------
Net Income $ 33,656 $ 32,082
======== ========
Basic Net Income Per Share $ 2.38 $ 2.28
======== ========
Diluted Net Income Per Share $ 2.38 $ 2.27
======== ========
Note 3
INVESTMENT SECURITIES
The amortized cost and related market value of investment securities
available-for-sale at December 31, were as follows:
2004
----------------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury $ 31,027 $ - $ 244 $ 30,783
U.S. Government Agencies
and Corporations 92,073 5 741 91,337
States and Political
Subdivisions 49,889 409 92 50,206
Mortgage-Backed Securities 26,293 187 80 26,400
Other Securities(1) 11,514 - - 11,514
-------- ------ ------ --------
Total Investment
Securities $210,796 $ 601 $1,157 $210,240
======== ====== ====== ========
2003
----------------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury $ 78,498 $ 105 $ 1 $ 78,602
U.S. Government Agencies
and Corporations 26,862 133 - 26,995
States and Political
Subdivisions 55,641 1,511 - 57,152
Mortgage-Backed Securities 11,618 427 - 12,045
Other Securities(1) 6,927 13 - 6,940
-------- ------ ------ --------
Total Investment
Securities $179,546 $2,189 $ 1 $181,734
======== ====== ====== ========
(1) FHLB and FRB stock recorded at cost.
66
The total proceeds from the sale of investment securities and the gross
realized gains and losses from the sale of such securities for each of the
last three years are as follows:
- -----------------------------------------------------------------------------------
Total Gross Gross
(Dollars in Thousands) Year Proceeds Realized Gains Realized Losses
- -----------------------------------------------------------------------------------
2004 $114,184 $17 $ 3
2003 $ 48,922 $24 $23
2002 $ 44,576 $10 $ -
Total proceeds do not include principal reductions in mortgage-backed
securities and proceeds from securities which were called of $17.9 million,
$52.4 million, and $37.9 million in 2004, 2003 and 2002, respectively.
As of December 31, 2004, the Company's investment securities had the
following maturity distribution based on contractual maturities:
-------------------------------
(Dollars in Thousands) Amortized Cost Market Value
- -----------------------------------------------------------------
Due in one year or less $ 76,958 $ 76,910
Due after one through five years 110,658 110,243
Due after five through ten years 11,666 11,573
Over ten years 11,514 11,514
-------- --------
Total Investment Securities $210,796 $210,240
======== ========
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Securities with an amortized cost of $142.8 million and $73.9 million at
December 31, 2004 and 2003, respectively, were pledged to secure public
deposits and for other purposes.
Securities with unrealized losses at year-end 2004 not recognized in income
by period of time unrealized losses have existed are as follows:
Less Than Greater Than
12 months 12 Months Total
----------------- ----------------- -----------------
Market Unrealized Market Unrealized Market Unrealized
(Dollars in Thousands) Value Losses Value Losses Value Losses
- -------------------------------------------------------------------------------------
U.S. Treasury $ 30,783 $ 244 $ - $ - $ 30,783 $ 244
U.S. Government Agencies
and Corporations 88,331 741 - - 88,331 741
States and Political
Subdivisions 13,217 92 - - 13,217 92
Mortgage-Backed Securities 18,173 80 - - 18,173 80
-------- ------ --- --- -------- ------
Total Investment
Securities $150,504 $1,157 $ - $ - $150,504 $1,157
======== ====== === === ======== ======
Note 4
LOANS
At December 31, the composition of the Company's loan portfolio was as
follows:
(Dollars in Thousands) 2004 2003
- ----------------------------------------------------------------------
Commercial, Financial and Agricultural $ 206,474 $ 160,048
Real Estate - Construction 140,190 89,149
Real Estate - Commercial Mortgage 655,426 391,250
Real Estate - Residential 438,484 346,170
Real Estate - Home Equity 150,061 116,810
Real Estate - Loans Held-for-Sale 11,830 4,810
Consumer 226,360 233,395
---------- ----------
Total Loans, Net of Unearned Interest $1,828,825 $1,341,632
========== ===========
67
Nonaccruing loans amounted to $4.6 million and $2.3 million, at December
31, 2004 and 2003, respectively. There were no restructured loans at
December 31, 2004 or 2003. Interest on nonaccrual loans is generally
recognized only when received. Cash collected on nonaccrual loans is
applied against the principal balance or recognized as interest income
based upon management's expectations as to the ultimate collectibility of
principal and interest in full. If interest on nonaccruing loans had been
recognized on a fully accruing basis, interest income recorded would have
been $189,000, $166,000, and $116,000 higher for the years ended December
31, 2004, 2003, and 2002, respectively.
Note 5
ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the years
ended December 31, is as follows:
(Dollars in Thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------
Balance, Beginning of Year $12,429 $12,495 $12,096
Acquired Reserves 5,713 - -
Reserve Reversal(1) (800) - -
Provision for Loan Losses 2,141 3,436 3,297
Recoveries on Loans Previously Charged-Off 1,612 1,037 1,374
Loans Charged-Off (5,058) (4,539) (4,272)
------- ------- -------
Balance, End of Year $16,037 $12,429 $12,495
======= ======= =======
(1) Reflects recapture of reserves allocated to the credit card portfolio,
which was sold in August 2004.
Selected information pertaining to impaired loans, at December 31,
is as follows:
2004 2003
------------------------------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- -----------------------------------------------------------------------------
With Related Credit Allowance $ 578 $313 $810 $178
Without Related Credit Allowance $3,150 - $477 -
(Dollars in Thousands) 2004 2003 2002
- --------------------------------------------------------------------
Average Recorded Investment
in Impaired Loans $5,382 $6,737 $2,544
Interest Income on Impaired Loans
Recognized 140 194 169
Collected in Cash $ 120 $ 194 $ 169
68
Note 6
INTANGIBLE ASSETS
The Company had intangible assets of $80.3 million and $25.8 million at
December 31, 2004 and December 31, 2003, respectively. Intangible assets
at December 31, were as follows:
2004 2003
----------------------- -----------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------
Core Deposits Intangibles $ 42,078 $18,300 $33,752 $14,640
Goodwill 58,127 3,786 10,466 3,786
Customer Relationship
Intangible 1,867 114 - -
Non-Compete Agreement 483 50 - -
-------- ------- ------- -------
Total Intangible Assets $102,555 $22,250 $44,218 $18,426
======== ======= ======= =======
Net Core Deposit Intangibles. As of December 31, 2004 and December 31,
2003, the Company had net core deposit intangibles of $23.8 million and
$19.1 million, respectively. Amortization expense for the twelve months of
2004, 2003 and 2002 was $3.7 million, $3.2 million and $3.2 million,
respectively. The estimated annual amortization expense for the next five
years is expected to be approximately $4.4 million per year.
Goodwill. As of December 31, 2004 and December 31, 2003, the Company had
goodwill, net of accumulated amortization, of $54.3 million and $6.7
million, respectively. The increase in goodwill is due to the acquisition
of Quincy State Bank and Farmers and Merchants Bank of Dublin during 2004.
Goodwill is the Company's only intangible asset that is no longer subject
to amortization under the provisions of SFAS 142. On December 31, 2004,
the Company performed its annual impairment review and concluded that no
impairment adjustment was necessary.
Other. As of December 31, 2004, the Company had a customer relationship
intangible, net of accumulated amortization, of $1.8 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 twelve months of 2004 was $114,000. Estimated annual amortization
expense is $187,000 based on use of a 10-year useful life. The Company
also had a non-compete intangible, net of accumulated amortization, of
$433,000. This intangible was booked as a result of the October 2004
acquisition of Farmers and Merchants Bank of Dublin. Amortization expense
for the twelve months of 2004 was $50,000. Estimated annual amortization
expense is $242,000 based on a 2-year useful life.
Note 7
PREMISES AND EQUIPMENT
The composition of the Company's premises and equipment at December 31, was
as follows:
(Dollars in Thousands) 2004 2003
- --------------------------------------------------------
Land $ 13,251 $ 12,152
Buildings 59,311 51,577
Fixtures and Equipment 40,878 43,623
-------- --------
Total 113,440 107,352
Accumulated Depreciation (54,477) (53,341)
-------- --------
Premises and Equipment, Net $ 58,963 $ 54,011
======== ========
69
Note 8
DEPOSITS
Interest bearing deposits, by category, as of December 31, were as follows:
(Dollars in Thousands) 2004 2003
- ----------------------------------------------------
NOW Accounts $ 338,932 $ 276,934
Money Market Accounts 270,095 207,934
Savings Accounts 147,348 110,834
Time Deposits 571,520 422,953
---------- ----------
Total $1,327,895 $1,018,655
========== ==========
At December 31, 2004 and 2003, $4.1 million and $7.2 million, respectively,
in overdrawn deposit accounts were reclassified as loans.
Deposits from certain directors, executive officers, and their related
interests totaled $23.1 million and $11.1 million at December 31, 2004 and
2003, respectively.
Time deposits in denominations of $100,000 or more totaled $166.8 million
and $107.2 million at December 31, 2004 and 2003, respectively.
The balances maintained on deposit with the Federal Reserve Bank to meet
reserve requirements as of December 31, 2004 and 2003, were $59.0 million
and $57.1 million, respectively.
At December 31, 2004, the scheduled maturities of time deposits were as
follows:
(Dollars in Thousands)
- -----------------------------------
2005 $448,880
2006 64,553
2007 38,309
2008 13,395
2009 and thereafter 6,383
--------
Total $571,520
========
Interest expense on deposits for the three years ended December 31, was as
follows:
(Dollars in Thousands) 2004 2003 2002
- ----------------------------------------------------------------
NOW Accounts $ 733 $ 678 $ 1,272
Money Market Accounts 1,189 1,310 2,904
Savings Accounts 164 189 500
Time Deposits < $100,000 6,683 7,007 12,060
Time Deposits > $100,000 2,546 2,383 3,815
------- ------- -------
Total $11,315 $11,567 $20,551
======= ======= =======
70
Note 9
SHORT-TERM BORROWINGS
Short-term borrowings included the following:
Securities
Federal Sold Under Other
Funds Repurchase Short-Term
(Dollars in Thousands) Purchased Agreements Borrowings
- ---------------------------------------------------------------------------------
2004
- ----
Balance at December 31, $19,800 $58,431 $17,783
Maximum indebtedness at any month end 27,875 77,087 41,941
Daily average indebtedness outstanding 22,291 54,607 23,683
Average rate paid for the year 1.27% 0.71% 2.52%
Average rate paid on period-end borrowings 1.97% 1.12% 3.19%
2003
- ----
Balance at December 31, $12,624 $53,223 $42,337
Maximum indebtedness at any month end 23,930 90,209 44,226
Daily average indebtedness outstanding 14,768 49,785 36,721
Average rate paid for the year 0.94% 0.59% 2.28%
Average rate paid on period-end borrowings 0.68% 0.31% 2.50%
2002
- ----
Balance at December 31, $14,120 $77,318 $22,237
Maximum indebtedness at any month end 17,395 77,318 22,237
Daily average indebtedness outstanding 9,079 55,679 7,836
Average rate paid for the year 1.46% 0.87% 1.89%
Average rate paid on period-end borrowings 0.55% 0.83% 2.32%
71
Note 10
LONG-TERM BORROWINGS
Federal Home Loan Bank Notes. At December 31, Federal Home Loan Bank advances
included:
(Dollars in Thousands) 2004 2003
- ---------------------------------------------------------------------------------
Due on September 12, 2005, fixed rate of 3.06% $ - $15,000
Due on December 19, 2005, fixed rate of 6.04% - 1,103
Due on February 15, 2006, fixed rate of 3.00% 49 86
Due on September 11, 2006, fixed rate of 2.93% 20,000 -
Due on February 13, 2007, fixed rate of 3.05% 3,000 -
Due on April 24, 2007, fixed rate of 7.30% 136 -
Due on May 30, 2008, fixed rate of 2.50% 134 168
Due on June 13, 2008, fixed rate of 5.40% 500 643
Due on November 10, 2008, fixed rate of 4.12% 2,346 2,419
Due on October 19, 2009, fixed rate of 3.69% 784 906
Due on November 10, 2010, fixed rate of 4.72% 774 798
Due on December 31, 2010, fixed rate of 3.85% 1,006 1,115
Due on April 4, 2011, fixed rate of 4.00%(1) 5,000 -
Due on December 18, 2012, fixed rate of 4.84% 610 631
Due on March 18, 2013, fixed rate of 6.37% 699 755
Due on June 17, 2013, fixed rate of 3.53% 977 1,060
Due on June 17, 2013, fixed rate of 3.85% 96 98
Due on June 17, 2013, fixed rate of 4.11% 1,828 1,877
Due on September 23, 2013, fixed rate of 5.64% 998 1,076
Due on January 27, 2014, fixed rate of 5.79% 1,297 1,344
Due on March 10, 2014, fixed rate of 4.21% 694 -
Due on May 27, 2014, fixed rate of 5.92% 527 569
Due on July 20, 2016, fixed rate of 6.27% 1,371 1,489
Due on October 3, 2016, fixed rate of 5.41% 355 -
Due on October 31, 2016, fixed rate of 5.16% 789 -
Due on June 27, 2017, fixed rate of 5.53% 875 -
Due on October 31, 2017, fixed rate of 4.79% 1,070 1,160
Due on December 11, 2017, fixed rate of 4.78% 948 1,021
Due on December 20, 2017, fixed rate of 5.37% 979 1,003
Due on February 26, 2018, fixed rate of 4.36% 2,247 2,418
Due on September 18, 2018, fixed rate of 5.15% 660 708
Due on November 5, 2018, fixed rate of 5.10% 3,749 3,866
Due on December 3, 2018, fixed rate of 4.87% 688 737
Due on December 17, 2018, fixed rate of 6.33% 1,640 1,710
Due on December 24, 2018, fixed rate of 6.29% 742 769
Due on February 16, 2021, fixed rate of 3.00% 884 915
Due on May 30, 2023, fixed rate of 2.50% 1,001 1,031
Due on May 21, 2024, fixed rate of 5.94% 9,000 -
------- -------
Total outstanding $68,453 $46,475
======= =======
(1) This advance is callable quarterly at the option of the FHLB beginning on
April 4, 2005.
The contractual maturities of FHLB debt for the five years succeeding
December 31, 2004, are as follows:
(Dollars in Thousands)
- ----------------------------------
2005 $ 2,313
2006 22,509
2007 5,554
2008 4,536
2009 2,386
2010 and thereafter 31,155
-------
Total $68,453
=======
72
The Federal Home Loan Bank advances are collateralized with 1-4 family
residential mortgage loans and treasury securities. Interest on the
Federal Home Loan Bank advances is paid on a monthly basis.
Line of Credit. The Company has the ability to draw on a Revolving Credit
Note, due on October 15, 2007. Interest is payable quarterly at LIBOR plus
an applicable margin on advances. The revolving credit is unsecured. The
existing loan agreement contains certain financial covenants that must be
maintained by the Company. At December 31, 2004, the Company was in
compliance with all of the terms of the agreement and had $36.0 million
available under a $36.0 million line of credit facility. Effective January
1, 2005, in accordance with the terms of the agreement which was executed
on October 15, 2004, the amount available under the facility will be
reduced from $36.0 million to $25.0 million.
Junior Subordinated Deferrable Interest Note. The Company has issued a
$30.9 million junior subordinated deferrable interest note to a wholly
owned Delaware statutory trust, Capital City Bank Group Capital Trust I
("CCBG Capital Trust I"). The trust is considered a variable interest
entity for which the Company is not the primary beneficiary. Accordingly,
the accounts of the trust are not included in the Company's consolidated
financial statements. See Note 1 - Summary of Significant Accounting
Policies for additional information about the Company's consolidation
policy. Details of the Company's transaction with the trust are provided
below.
In November 2004, CCBG Capital Trust I issued $30.0 million of trust
preferred securities which represent beneficial interest in the assets of
the trust. The interest rate is fixed at 5.71% for a period of five years,
then adjustable annually to LIBOR plus a margin of 1.90%. The trust
preferred securities will mature on December 31, 2034, and are redeemable
upon approval of the Federal Reserve Board in whole or in part at the
option of the Company at any time after December 31, 2009 and in whole or
upon occurrence of certain events affecting their tax or regulatory capital
treatment. Distributions on the trust preferred securities are payable
quarterly on March 31, June 30, September 30, and December 31 of each year.
CCBG Capital Trust I also issued $928,000 of common equity securities to
Capital City Bank Group, Inc. The proceeds of the offering of trust
preferred securities and common equity securities were used to purchase a
$30.9 million junior subordinated deferrable interest note issued by the
Company, which has terms substantially similar to the trust preferred
securities.
The Company has the right to defer payments of interest on the note at any
time or from time to time for a period of up to twenty consecutive
quarterly interest payment periods. Under the terms of the note, in the
event that under certain circumstances there is an event of default under
the note or the Company has elected to defer interest on the note, the
Company may not, with certain exceptions, declare or pay any dividends or
distributions on its capital stock or purchase or acquire any of its
capital stock. The Company is current on the interest payment obligation
and has not executed the right to defer interest payments on the note.
The Company has entered into an agreement to guarantee the payments of
distributions on the trust preferred securities and payments of redemption
of the trust preferred securities. Under this agreement, the Company also
agrees, on a subordinated basis, to pay expenses and liabilities of the
trust other than those arising under the trust preferred securities. The
obligations of the Company under the junior subordinated note, the trust
agreement establishing the trust, the guarantee and agreement as to
expenses and liabilities, in aggregate, constitute a full and conditional
guarantee by the Company of the trust's obligations under the trust
preferred securities.
Despite the fact that the accounts of CCBG Capital Trust I are not included
in the Company's consolidated financial statements, the $30.0 million in
trust preferred securities issued by the trust is included in the Tier 1
capital of Capital City Bank Group, Inc. as allowed by Federal Reserve
Board guidelines.
73
Note 11
INCOME TAXES
The provision for income taxes reflected in the statement of income is
comprised of the following components:
(Dollars in Thousands) 2004 2003 2002
- -----------------------------------------------------------------
Current:
Federal $13,753 $10,876 $12,123
State 1,381 1,949 2,047
Deferred:
Federal 656 682 (1,337)
State 109 73 (142)
------- ------- -------
Total $15,899 $13,580 $12,691
======= ======= =======
The net deferred tax assets and the temporary differences comprising that
balance at December 31, 2004 and 2003, are as follows:
(Dollars in Thousands) 2004 2003
- --------------------------------------------------------------------
Deferred Tax Assets attributable to:
Allowance for Loan Losses $5,681 $4,216
Associate Benefits 229 -
Unrealized Losses on Investment Securities 203 -
Accrued Pension/SERP 1,390 985
Market Value of Loans 248 -
Interest on Nonperforming Loans 45 -
Core Deposit Intangible Amortization - 1,524
Intangible Assets 18 -
Accrued Expense 573 461
Other 331 871
------ ------
Total Deferred Tax Assets $8,718 $8,057
Deferred Tax Liabilities attributable to:
Depreciation on Premises and Equipment $3,433 $2,852
Deferred Loan Costs 2,016 3,041
Unrealized Gains on Investment Securities - 802
Core Deposit Intangible Amortization 465 -
Securities Accretion 20 65
Other 321 150
------ ------
Total Deferred Tax Liabilities 6,256 6,910
------ ------
Net Deferred Tax Assets $2,463 $1,147
====== ======
Income taxes provided were different than the tax expense computed by
applying the statutory federal income tax rate of 35% to pre-tax income as a
result of the following:
(Dollars in Thousands) 2004 2003 2002
- --------------------------------------------------------------------------
Tax Expense at Federal Statutory Rate $15,845 $13,571 $12,521
Increases (Decreases) Resulting From:
Tax-Exempt Interest Income (992) (957) (1,084)
State Taxes, Net of Federal Benefit 969 1,314 1,238
Other 77 (348) 16
------- ------- -------
Actual Tax Expense $15,899 $13,580 $12,691
======= ======= =======
74
Note 12
EMPLOYEE BENEFIT PLANS
Pension Plan
The Company sponsors a noncontributory pension plan covering substantially
all of its associates. Benefits under this plan generally are based on the
associate's years of service and compensation during the years immediately
preceding retirement. The Company's general funding policy is to
contribute amounts deductible for federal income tax purposes.
The following table details the components of pension expense, the funded
status of the plan, amounts recognized in the Company's consolidated
statements of financial condition, and major assumptions used to determine
these amounts.
(Dollars in Thousands) 2004 2003 2002
- ---------------------------------------------------------------------------------------
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year $ 46,227 $ 37,941 $ 33,642
Service Cost 3,776 3,302 2,842
Interest Cost 2,893 2,571 2,348
Actuarial Loss 2,890 3,196 1,671
Benefits Paid (1,092) (1,060) (2,385)
Expenses Paid (165) (237) (177)
Plan Change(1) - 514 -
-------- -------- --------
Projected Benefit Obligation at End of Year $ 54,529 $ 46,227 $ 37,941
======== ======== ========
Accumulated Benefit Obligation at End of Year $ 38,325 $ 32,444 $ 26,441
======== ======== ========
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year $ 34,784 $ 27,423 $ 30,113
Actual Return on Plan Assets 2,710 4,915 (3,357)
Employer Contributions 4,888 3,744 3,229
Benefits Paid (1,092) (1,061) (2,385)
Expenses Paid (165) (237) (177)
-------- -------- --------
Fair Value of Plan Assets at End of Year $ 41,125 $ 34,784 $ 27,423
-------- -------- --------
Reconciliation of Funded Status:
Funded Status $(13,404) $(11,443) $(10,518)
Unrecognized Net Actuarial Losses 11,676 9,993 10,672
Unrecognized Prior Service Cost 1,517 1,732 1,434
Unrecognized Net Transition Obligation - 1 1
-------- -------- --------
(Accrued) Prepaid Benefit Cost $ (211) $ 283 $ 1,589
======== ======== ========
Components of Net Periodic Benefit Costs:
Service Cost $ 3,776 $ 3,302 $ 2,842
Interest Cost 2,893 2,571 2,348
Expected Return on Plan Assets (2,665) (2,168) (2,404)
Amortization of Prior Service Costs 215 216 284
Transition Obligation Recognition 1 1 1
Recognized Net Actuarial Loss 1,163 1,127 317
-------- -------- --------
Net Periodic Benefit Cost $ 5,383 $ 5,049 $ 3,388
======== ======== ========
Assumptions:
Weighted-average used to determine benefit obligations:
Discount Rate 6.00% 6.25% 6.75%
Expected Return on Plan Assets 8.00% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
Weighted-average used to determine net cost:
Discount Rate 6.25% 6.75% 7.25%
Expected Return on Plan Assets 8.00% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
(1) Represents a change in mortality assumptions set forth in IRC 417(e).
75
Return on Plan Assets. The overall expected long-term rate of return on
assets is a weighted-average expectation for the return on plan assets.
The Company considers historical performance and current benchmarks to
arrive at expected long-term rates of return in each asset category. The
Company assumed that 65% of its portfolio would be invested in equity
securities, with the remainder invested in debt securities.
Plan Assets. The Company's pension plan asset allocation at year-end 2004
and 2003, and the target asset allocation for 2005 are as follows:
Percentage of Plan
Target Allocation Assets at Year-End
----------------- ------------------
2005 2004 2003
- ---------------------------------------------------------------
Equity Securities 65% 58% 60%
Debt Securities 35% 28% 28%
Real Estate - - -
Other - 14% 12%
--- --- ---
Total 100% 100% 100%
The Company's pension plan assets are overseen by the CCBG Retirement
Committee. Capital City Trust Company acts as plan trustee and investment
manager. The investment strategy is to maximize return on investments
while minimizing risk. The Company believes the best way to accomplish
this goal is to take a conservative approach to its investment strategy by
investing in high-grade equity and debt securities.
Expected Benefit Payments. As of December 31, 2004, expected benefit
payments related to the Company's defined benefit pension plan were as
follows:
2005 $ 2,438,891
2006 2,660,318
2007 3,178,166
2008 3,621,447
2009 3,954,736
2010 through 2014 25,227,483
-----------
$41,081,041
===========
Contributions. The following table details the amounts contributed to the
pension plan in 2004 and 2003, and the expected amount to be contributed in
2005.
Expected
2004 2003 2005
---------- ---------- -------------
$4,000,000 to
Actual Contributions $4,888,593 $3,743,763 $5,000,000
Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan ("SERP") covering
selected executives. Benefits under this plan generally are based on the
executive's years of service and compensation during the years immediately
preceding retirement. The Company recognized expense during 2004, 2003 and
2002 of approximately $490,000, $208,000, and $393,000, respectively, and
no minimum liability, at December 31, 2004, 2003 and 2002.
The following table details the components of the Supplemental Executive
Retirement Plan's periodic benefit cost, the funded status of the plan,
amounts recognized in the Company's consolidated statements of financial
condition, and major assumptions used to determine these amounts.
76
(Dollars in Thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------
Change in Projected Benefit Obligation:
Benefit Obligation at Beginning of Year $ 1,880 $ 2,770 $ 1,458
Service Cost 147 80 118
Interest Cost 198 111 169
Actuarial Loss (Gain) 1,376 (1,107) 1,025
Plan Change(1) - 26 -
------- ------- -------
Projected Benefit Obligation at End of Year $ 3,601 $ 1,880 $ 2,770
======= ======= =======
Accumulated Benefit Obligation at End of Year $ 1,894 $ 1,206 $ 1,273
======= ======= =======
Reconciliation of Funded Status:
Funded Status $(3,601) $(1,880) $(2,770)
Unrecognized Net Actuarial Loss (Gain) 874 (418) 645
Unrecognized Prior Service Cost 449 511 546
------- ------- -------
Accrued Benefit Cost $(2,278) $(1,787) $(1,579)
======= ======= =======
Components of Net Periodic Benefit Costs:
Service Cost $ 147 $ 80 $ 118
Interest Cost 198 111 169
Amortization of Prior Service Cost 62 61 59
Recognized Net Actuarial Loss (Gain) 84 (44) 47
------- ------- -------
Net Periodic Benefit Cost $ 491 $ 208 $ 393
======= ======= =======
Assumptions:
Weighted-average used to determine the benefit obligations:
Discount Rate 6.00% 6.25% 6.75%
Expected Return on Plan Assets 8.00% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
Weighted-average used to determine the net cost:
Discount Rate 6.25% 6.75% 7.25%
Expected Return on Plan Assets 8.00% 8.25% 8.25%
Rate of Compensation Increase 5.50% 5.50% 5.50%
(1) Represents a change in mortality assumptions set forth in IRC 417(e)
Expected Benefit Payments. As of December 31, 2004, expected benefit
payments related to the Company's SERP were as follows:
2005 $ 17,519
2006 19,411
2007 20,507
2008 103,905
2009 218,825
2010 through 2014 2,720,069
----------
$3,100,236
==========
401(k) Plan
The Company has a 401(k) Plan which enables associates to defer a portion
of their salary on a pre-tax basis. The plan covers substantially all
associates of the Company who meet minimum age requirements. The plan is
designed to enable participants to elect to have an amount from 1% to 15%
of their compensation withheld in any plan year placed in the 401(k) Plan
trust account. Matching contributions from the Company are made up to 6%
of the participant's compensation for some qualifying associates. During
2004 and 2003, the Company made matching contributions of $66,281 and
$32,258, respectively. There were no contributions made by the Company for
2002. The participant may choose to invest their contributions into
seventeen investment funds available to CCBG participants, including CCBG's
common stock. A total of 50,000 shares of Capital City Bank Group, Inc.
common stock have been reserved for issuance.
77
Other Plans
The Company has a Dividend Reinvestment and Optional Stock Purchase Plan.
A total of 250,000 shares have been reserved for issuance. In recent
years, shares for the Dividend Reinvestment and Optional Stock Purchase
Plan have been acquired in the open market and, thus, CCBG did not issue
any shares under this plan in 2004, 2003 and 2002.
Note 13
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
(Dollars in Thousands, Except Per Share Data) 2004 2003 2002
- -----------------------------------------------------------------------------------------
Numerator:
Net Income $ 29,371 $ 25,193 $ 23,082
========== ========== ==========
Denominator:
Denominator for Basic Earnings Per Share
Weighted-Average Shares 13,443,753 13,222,487 13,225,285
Effects of Dilutive Securities
Stock Compensation Plans 4,184 28,702 49,070
---------- ---------- ----------
Denominator for Diluted Earnings Per Share
Adjusted Weighted-Average Shares and
Assumed Conversions 13,447,937 13,251,189 13,274,355
========== ========== ==========
Basic Earnings Per Share $ 2.18 $ 1.91 $ 1.75
========== ========== ==========
Diluted Earnings per Share $ 2.18 $ 1.90 $ 1.74
========== ========== ==========
Note 14
CAPITAL
The Company is subject to various regulatory capital requirements which
involve quantitative measures of the Company's assets, liabilities and
certain off-balance sheet items. The Company's capital amounts and
classification are subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require
that the Company maintain amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. As of December 31, 2004, the Company met all
capital adequacy requirements to which it is subject.
A summary of actual, required, and capital levels necessary to be
considered well-capitalized for Capital City Bank Group, Inc. consolidated
and its banking subsidiary, Capital City Bank, as of December 31, 2004 and
December 31, 2003 are as follows:
78
To Be Well-
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------
As of December 31, 2004:
- ------------------------
Tier I Capital:
CCBG $207,776 11.44% $ 72,617 4.00% * *
CCB 199,565 11.01% 72,506 4.00% $108,759 6.00%
Total Capital:
CCBG 223,813 12.33% 145,235 8.00% * *
CCB 215,602 11.89% 145,012 8.00% 181,265 10.00%
Tier I Leverage:
CCBG 207,776 8.79% 54,463 3.00% * *
CCB 199,564 8.47% 54,379 3.00% 90,632 5.00%
As of December 31, 2003:
- -----------------------
Tier I Capital:
CCBG $175,631 12.88% $ 54,547 4.00% * *
CCB 167,698 12.32% 54,438 4.00% $ 81,658 6.00%
Total Capital:
CCBG 188,059 13.79% 109,094 8.00% * *
CCB 180,126 13.24% 108,877 8.00% 136,096 10.00%
Tier I Leverage:
CCBG 175,631 9.51% 40,910 3.00% * *
CCB 167,698 9.10% 40,829 3.00% 68,048 5.00%
*Not applicable to bank holding companies.
Note 15
DIVIDEND RESTRICTIONS
Substantially all the Company's retained earnings are undistributed
earnings of its banking subsidiary which are restricted by various
regulations administered by federal and state bank regulatory authorities.
The approval of the appropriate regulatory authority is required if the
total of all dividends declared by a subsidiary bank in any calendar year
exceeds the bank's net profits (as defined under Florida law) for that year
combined with its retained net profits for the preceding two calendar
years. In 2005, the bank subsidiary may declare dividends without
regulatory approval of $35.2 million plus an additional amount equal to the
net profits of the Company's subsidiary bank for 2005 up to the date of any
such dividend declaration.
Note 16
RELATED PARTY INFORMATION
DuBose Ausley, a Director of the Company, is employed by and is the former
Chairman of Ausley & McMullen, the Company's general counsel. Fees paid by
the Company and its subsidiary for legal services, in aggregate,
approximated $797,000, $765,000, and $647,000 during 2004, 2003, and 2002,
respectively.
Under a lease agreement expiring in 2024, the Bank leases land from a
partnership in which several directors and officers have an interest. The
lease agreement with Smith Interests General Partnership L.L.P., provides
for annual lease payments of approximately $91,000, to be adjusted for
inflation in future years.
79
At December 31, 2004 and 2003, certain officers and directors were
indebted to the Company's bank subsidiary in the aggregate amount of $18.8
million and $17.8 million, respectively. During 2004, $13.6 million in
new loans were made and repayments totaled $12.6 million. In the opinion
of management, these loans were made on similar terms as loans to other
individuals of comparable creditworthiness and were all current at year-
end.
Note 17
SUPPLEMENTARY INFORMATION
Components of other noninterest income and noninterest expense in excess
of 1% of the sum of total interest income and noninterest income, which
are not disclosed separately elsewhere, are presented below for each of
the respective years.
(Dollars in Thousands) 2004 2003 2002
- -------------------------------------------------------------------
Noninterest Income:
Merchant Fee Income $5,135 $4,563 $3,715
Interchange Commission Fees 2,229 2,183 2,133
Noninterest Expense:
Professional Fees 2,858 1,918 1,895
Printing & Supplies 1,854 1,742 1,772
Telephone 2,048 1,872 1,832
Commission/Service Fees 4,741 4,181 3,464
Note 18
COMMITMENTS AND CONTINGENCIES
Lending Commitments. The Company is a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the
financing needs of its customers. These financial instruments consist of
commitments to extend credit and standby letters of credit.
The Company's maximum exposure to credit loss under standby letters of
credit and commitments to extend credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in
establishing commitments and issuing letters of credit as it does for on-
balance sheet instruments. As of December 31, 2004, the amounts
associated with the Company's off-balance sheet obligations were as
follows:
(Dollars in Thousands) Amount
- ----------------------------------------------
Commitments to Extend Credit(1) $407,331
Standby Letters of Credit $ 17,844
Commitments include unfunded loans, revolving lines of credit, and other
unused commitments.
Commitments to extend credit are agreements to lend to a customer so long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities. In general, management
does not anticipate any material losses as a result of participating in
these types of transactions. However, any potential losses arising from
such transactions are reserved for in the same manner as management
reserves for its other credit facilities.
For both on- and off-balance sheet financial instruments, the Company
requires collateral to support such instruments when it is deemed
necessary. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include deposits held in financial
institutions; U.S.
80
Treasury securities; other marketable securities; real estate; accounts
receivable; property, plant and equipment; and inventory.
Other Commitments. In the normal course of business, the Company enters
into lease commitments. Minimum lease payments under leases classified as
operating leases due in each of the five years subsequent to December 31,
2004, are as follows (in millions): 2005, $1.3; 2006, $1.2; 2007, $1.1;
2008, $1.1; and 2009, $1.1.
Contingencies. The Company is a party to lawsuits and claims arising out
of the normal course of business. In management's opinion, there are no
known pending claims or litigation, the outcome of which would,
individually or in the aggregate, have a material effect on the
consolidated results of operations, financial position, or cash flows of
the Company.
Note 19
FAIR VALUE OF FINANCIAL INSTRUMENTS
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying values approximate fair value. These items
include Cash and Due From Banks, Interest Bearing Deposits with Other
Banks, Federal Funds Sold, Federal Funds Purchased, Securities Sold Under
Repurchase Agreements, and Short-Term Borrowings. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. The resulting fair values may
be significantly affected by the assumptions used, including the discount
rates and estimates of future cash flows.
The methods and assumptions used to estimate the fair value of the
Company's other financial instruments are as follows:
Investment Securities - Fair values for investment securities are based on
quoted market prices. If a quoted market price is not available, fair
value is estimated using market prices for similar securities.
Loans - The loan portfolio is segregated into categories and the fair value
of each loan category is calculated using present value techniques based
upon projected cash flows and estimated discount rates. The calculated
present values are then reduced by an allocation of the allowance for loan
losses against each respective loan category.
Deposits - The fair value of Noninterest Bearing Deposits, NOW Accounts,
Money Market Accounts and Savings Accounts are the amounts payable on
demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated using present value techniques and
rates currently offered for deposits of similar remaining maturities.
Subordinated Note Payable - The fair value of the note is calculated using
present value techniques, based upon projected cash flows and estimated
discount rates as well as rates being offered for similar obligations.
Long-Term Borrowings - The fair value of each note is calculated using
present value techniques, based upon projected cash flows and estimated
discount rates as well as rates being offered for similar debt.
Commitments to Extend Credit and Standby Letters of Credit - The fair value
of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the present
creditworthiness of the counterparties. Fair value of these fees is not
material.
81
The Company's financial instruments that have estimated fair values are
presented below:
At December 31,
---------------------------------------------------
2004 2003
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Thousands) Value Value Value Value
- -------------------------------------------------------------------------------------
Financial Assets:
Cash $ 87,039 $ 87,039 $ 93,140 $ 93,140
Short-Term Investments 74,506 74,506 125,452 125,452
Investment Securities 210,240 210,240 181,734 181,734
Loans, Net of Allowance
for Loan Losses 1,812,788 1,816,670 1,329,203 1,365,541
---------- ---------- ---------- ----------
Total Financial Assets $2,184,573 $2,188,455 $1,729,529 $1,765,867
========== ========== ========== ==========
Financial Liabilities:
Deposits $1,894,886 $1,791,797 $1,474,205 $1,486,539
Short-Term Borrowings 96,014 96,053 108,184 108,184
Subordinated Note Payable 30,928 31,040 - -
Long-Term Borrowings 68,453 68,582 46,475 47,270
---------- ---------- ---------- ----------
Total Financial Liabilities $2,090,281 $1,987,472 $1,628,864 $1,641,993
========== ========== ========== ==========
Certain financial instruments and all nonfinancial instruments are excluded
from the above table. The disclosures also do not include certain
intangible assets such as customer relationships, deposit base intangibles
and goodwill. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
Note 20
PARENT COMPANY FINANCIAL INFORMATION
The operating results of the parent company for the three years ended
December 31, are shown below:
Parent Company Statements of Income
(Dollars in Thousands) 2004 2003 2002
- -------------------------------------------------------------------------------
OPERATING INCOME
Income Received from Subsidiary Bank:
Dividends $12,716 $11,599 $12,678
Overhead Fees 3,232 2,935 3,061
Other Income 2 - 59
------- ------- -------
Total Operating Income 15,950 14,534 15,798
------- ------- -------
OPERATING EXPENSE
Salaries and Associate Benefits 2,257 1,847 2,311
Interest on Long-Term Borrowings 33 - 7
Interest on Subordinated Note Payable 294 - -
Professional Fees 895 1,104 994
Advertising 286 193 138
Legal Fees 468 374 197
Other 480 404 335
------- ------- -------
Total Operating Expense 4,713 3,922 3,982
------- ------- -------
Income Before Income Taxes and Equity
in Undistributed Earnings of Subsidiary Bank 11,237 10,612 11,816
Income Tax Benefit (581) (278) (248)
------- ------- -------
Income Before Equity in Undistributed
Earnings of Subsidiary Bank 11,818 10,890 12,064
Equity in Undistributed Earnings
of Subsidiary Bank 17,553 14,303 11,018
------- ------- -------
Net Income $29,371 $25,193 $23,082
======= ======= =======
82
The following are condensed statements of financial condition of the parent
company at December 31:
Parent Company Statements of Financial Condition
(Dollars in Thousands, Except Per Share Data)(1) 2004 2003
- ----------------------------------------------------------------------------
ASSETS
Cash and Due From Subsidiary Bank $ 6,893 $ 7,850
Investment in Subsidiary Bank 282,034 196,316
Other Assets 1,536 1,310
-------- --------
Total Assets $290,463 $205,476
======== ========
LIABILITIES
Subordinated Note Payable $ 30,928 $ -
Other Liabilities 2,735 2,667
-------- --------
Total Liabilities $ 33,663 $ 2,667
======== ========
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; 14,155,312 and 13,236,462
shares issued and outstanding at December 31,
2004 and December 31, 2003, respectively 142 132
Additional Paid-In Capital 52,363 16,157
Retained Earnings 204,648 185,134
Accumulated Other Comprehensive (Loss) Income,
Net of Tax (353) 1,386
-------- --------
Total Shareowners' Equity 256,800 202,809
-------- --------
Total Liabilities and Shareowners' Equity $290,463 $205,476
======== ========
(1) All share and per share data have been adjusted to reflect the 5-for-4
stock split effective June 13, 2003.
83
The cash flows for the parent company for the three years ended December 31,
were as follows:
Parent Company Statements of Cash Flows
(Dollars in Thousands) 2004 2003 2002
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $29,371 $25,193 $23,082
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Equity in Undistributed
Earnings of Subsidiary Bank (17,553) (14,303) (11,018)
Non-Cash Compensation 1,707 508 892
Increase in Other Assets (189) (130) (256)
Increase (Decrease) in Other Liabilities 68 300 (2,603)
------- ------- -------
Net Cash Provided by Operating Activities 13,404 11,568 10,097
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Cash Paid for Investment in Subsidiary (928) - -
Increase in Investment in Bank Subsidiary (35,688) - -
------- ------- -------
Net Cash Used in Investing Activities (36,616) - -
CASH FROM FINANCING ACTIVITIES:
Proceeds from Subordinated Note 30,928 - -
Increase in Other Long-Term Borrowings 30,000 - 2,040
Repayments of Long-Term Borrowings (30,000) - (2,040)
Payment of Dividends (9,857) (8,646) (6,644)
Repurchase of Common Stock - (17) (3,395)
Issuance of Common Stock, Net 1,184 975 688
------- ------- -------
Net Cash Provided by (Used in)
Financing Activities 22,255 (7,688) (9,351)
------- ------- -------
Net (Decrease) Increase in Cash (957) 3,880 746
Cash at Beginning of Period 7,850 3,970 3,224
------- ------- -------
Cash at End of Period $ 6,893 $ 7,850 $ 3,970
======= ======= =======
Note 21
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that certain
transactions and other economic events that bypass the income statement
be displayed as other comprehensive income (loss). The Company's
comprehensive income (loss) consists of net income (loss) and changes in
unrealized gains (losses) on securities available-for-sale, net of income
taxes. Changes in unrealized gains (losses) (net of taxes) on securities
are reported as other comprehensive (loss) income and totaled
($1,739,000), ($1,735,000), and $771,000, for 2004, 2003 and 2002,
respectively. Reclassification adjustments consist only of realized
gains on sales of investment securities and were not material for the
years ended December 31, 2004, 2003 and 2002.
84
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of December 31, 2004,
the end of the period covered by this Annual Report on Form 10-K, the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer each concluded that as of
December 31, 2004, the end of the period covered by this Annual Report on
Form 10-K, the Company maintained effective disclosure controls and
procedures.
Management's Report on Internal Control Over Financial Reporting.
Management of the Company is responsible for establishing and maintaining
effective internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S.
generally accepted accounting principles.
Under the supervision and with the participation of management, including
the Chief Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation under the framework in
Internal Control - Integrated Framework, management of the Company has
concluded the Company maintained effective internal control over financial
reporting, as such term is defined in Securities Exchange Act of 1934 Rule
13a-15(f), as of December 31, 2004.
The Company acquired Farmers and Merchants Bank during 2004, and management
excluded from its assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004, Farmers and Merchants Bank's
internal control over financial reporting associated with total assets of
$395 million and total revenues of $4.2 million included in the consolidated
financial statements of the Company as of and for the year ended December 31,
2004.
Internal control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control
over financial reporting can also be circumvented by collusion or improper
management override. Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a timely basis
by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of
the consolidated financial statements and other financial information
contained in this report. The accompanying consolidated financial
statements were prepared in conformity with U.S. generally accepted
accounting principles and include, as necessary, best estimates and
judgments by management.
85
KPMG LLP, an independent registered public accounting firm, has audited the
Company's consolidated financial statements as of and for the year ended
December 31, 2004, and management's assessment as to the effectiveness of
internal control over financial reporting as of December 31, 2004, as
stated in its report, which is included herein on page 87.
Changes in Internal Control. The Company's management, including the Chief
Executive Officer and Chief Financial Officer, has reviewed the Company's
internal control. There have been no significant changes in the Company's
internal control during the Company's most recently completed fiscal
quarter, nor subsequent to the date of their evaluation, that could
significantly affect the Company's internal control over financial
reporting.
86
Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors
Capital City Bank Group, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Capital City Bank Group, Inc. maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Capital City
Bank Group, Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management's assessment that Capital City Bank Group, Inc.
maintained effective internal control over financial reporting as of
December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Capital City Bank Group, Inc. maintained, in all
material respects, effective internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
87
Capital City Bank Group, Inc. acquired Farmers and Merchants Bank during
2004, and management excluded from its assessment of the effectiveness of
Capital City Bank Group, Inc.'s internal control over financial reporting as
of December 31, 2004, Farmers and Merchants Bank's internal control over
financial reporting associated with total assets of $395 million and total
revenues of $4.2 million included in the consolidated financial statements of
Capital City Bank Group, Inc. and subsidiary as of and for the year ended
December 31, 2004. Our audit of internal control over financial reporting of
Capital City Bank Group, Inc. also excluded an evaluation of the internal
control over financial reporting of Farmers and Merchants Bank.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
statements of financial condition of Capital City Bank Group, Inc. and
subsidiary as of December 31, 2004 and 2003, and the related consolidated
statements of income, changes in shareowners' equity, and cash flows for
each of the years in the three-year period ended December 31, 2004, and our
report dated March 16, 2005 expressed an unqualified opinion on those
consolidated financial statements.
KPMG LLP
Orlando, Florida
March 16, 2005
88
Item 9B. Other Information
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference to the sections entitled "Corporate
Governance," "Nominees for Election as Directors," "Continuing Directors
and Executive Officers" and "Share Ownership" in the Registrant's Proxy
Statement dated April 1, 2005, to be filed on or about April 1, 2005.
Item 11. Executive Compensation
Incorporated herein by reference to the sections entitled "Executive
Compensation Tables," the subsection entitled "Directors' Fees" under the
section entitled "Corporate Governance," "Compensation Committee Report,"
"Retirement Plans," and "Five Year Performance Graph" in the Registrant's
Proxy Statement dated April 1, 2005, to be filed on or about April 1, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareowners Matters
Incorporated herein by reference to the section entitled "Share Ownership"
in the Registrant's Proxy Statement dated April 1, 2005, to be filed on or
about April 1, 2005.
Equity Compensation Plan Information
Incorporated herein by reference to the section entitled "Executive
Compensation Tables" in the Registrant's Proxy Statement dated April 1,
2005, to be filed on or about April 1, 2005.
For additional information about the Company's equity compensation plans,
see Stock Based Compensation in Note 1 in the Notes to the Consolidated
Financial Statements.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the subsection entitled "Transactions
With Management and Related Parties" under the section entitled "Executive
Officers and Transactions with Management" in the Registrant's Proxy
Statement dated April 1, 2005, to be filed on or about April 1, 2005.
89
Item 14. Principal Accountants Fees and Services
Incorporated herein by reference to the subsection entitled "Fees Paid to
Principal Accountants" under the section entitled "Ratification of
Auditors" in the Registrant's Proxy Statement dated April 1, 2005, to be
filed on or about April 1, 2005.
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for Fiscal Years 2004, 2003, and
2002
Consolidated Statements of Financial Condition at the end of Fiscal
Years 2004 and 2003
Consolidated Statements of Changes in Shareowners' Equity for Fiscal
Years 2004, 2003, and 2002
Consolidated Statements of Cash Flows for Fiscal Years 2004, 2003,
and 2002
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Other schedules and exhibits are omitted because the required
information either is not applicable or is shown in the financial
statements or the notes thereto.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K
Reg. S-K
Exhibit
Table
Item No. Description of Exhibit
-------- ----------------------
2.1 Agreement and Plan of Merger, dated as of January 7,
2004, by and among Capital City Bank Group, Inc.,
Capital City Bank, Synovus Financial Corp. and Quincy
State Bank - incorporated herein by reference to the
Registrant's Form 8-K (filed 1/13/04) (No. 0-13358).
2.2 Agreement and Plan of Merger, dated as of May 12, 2004,
by and among Capital City Bank Group, Inc., Capital City
Bank, and Farmers and Merchants Bank - incorporated
herein by reference to the Registrant's Form 10-Q/A
(filed 8/10/04) (No. 0-13358).
2.3 Agreement and Plan of Merger, dated as of February 3,
2005, by and among Capital City Bank Group, Inc., First
Alachua Banking Corporation, and First National Bank of
Alachua (the schedules and exhibits have been omitted
pursuant to Item 601(b)(2) of Regulation S-K) -
incorporated herein by reference to the Registrant's Form
8-K (filed 2/9/05) (No. 0-13358).
3.1 Amended and Restated Articles of Incorporation -
incorporated herein by reference to Exhibit 3 of the
Registrant's 1996 Proxy Statement (filed 4/11/96) (No. 0-
13358).
90
3.2 Amended and Restated Bylaws - incorporated herein by
reference to Exhibit 3(b) of the Registrant's Form 10-Q
(filed 1/13/97) (No. 0-13358).
4.1 Capital City Bank Group, Inc. 2005 Director Stock
Purchase Plan - incorporated herein by reference to
Exhibit 4.3 of the Registrant's Form S-8 (filed 11/5/04)
(No. 333-120242).
4.2 Capital City Bank Group, Inc. 2005 Associate Stock
Purchase Plan - incorporated herein by reference to
Exhibit 4.4 of the Registrant's Form S-8 (filed 11/5/04)
(No. 333-120242).
4.3 Capital City Bank Group, Inc. 2005 Associate Incentive
Plan - incorporated herein by reference to Exhibit 4.5 of
the Registrant's Form S-8 (filed 11/5/04) (No. 333-
120242).
4.4 Junior Subordinated Indenture between the Registrant and
Wilmington Trust Company, dated as of November 1, 2004 -
incorporated herein by reference to Exhibit 4.1 of the
Registrant's Form 8-K (filed 11/4/04) (No. 0-13358).
4.5 Guarantee Agreement between the Registrant and Wilmington
Trust Company, dated as of November 1, 2004 -
incorporated herein by reference to Exhibit 4.2 of the
Registrant's Form 8-K (filed 11/4/04) (No. 0-13358).
4.6 Amended and Restated Trust Agreement among the
Registrant, Wilmington Trust Company and certain
Administrative Trustees, dated as of November 1, 2004 -
incorporated herein by reference to Exhibit 4.3 of the
Registrant's Form 8-K (filed 11/4/04) (No. 0-13358).
10.1 Capital City Bank Group, Inc. 1996 Dividend Reinvestment
and Optional Stock Purchase Plan - incorporated herein by
reference to Exhibit 10 of the Registrant's Form S-3
(filed 01/30/97) (No. 333-20683).
10.2 Capital City Bank Group, Inc. Supplemental Executive
Retirement Plan - incorporated herein by reference to
Exhibit 10(d) of the Registrant's Form 10-K (filed
3/27/03) (No. 0-13358).
10.3 Capital City Bank Group, Inc. 401(K) Profit Sharing Plan
- incorporated herein by reference to Exhibit 4.3 of
Registrant's Form S-8 (filed 09/30/97) (No. 333-36693)
14 Capital City Bank Group, Inc. Code of Ethics for the
Chief Financial Officer and Senior Financial Officers -
incorporated herein by reference to Exhibit 14 of the
Registrant's Form 8-K (filed 3/11/05) (No. 0-13358).
21 Capital City Bank Group, Inc. Subsidiaries, as of
December 31, 2004.
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of CEO pursuant to Securities and Exchange
Act Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Securities and Exchange
Act Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
91
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on May 10, 2005, on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL CITY BANK GROUP, INC.
/s/ William G. Smith, Jr.
- ----------------------------------
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on May 10, 2005 by the following persons in the
capacities indicated.
/s/ William G. Smith, Jr.
- ----------------------------------
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ J. Kimbrough Davis
- ----------------------------------
J. Kimbrough Davis
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Directors:
/s/ DuBose Ausley
- ----------------------------------
DuBose Ausley
/s/ Thomas A. Barron
- ----------------------------------
Thomas A. Barron
/s/ Frederick Carroll, III
- ----------------------------------
Frederick Carroll, III
/s/ Cader B. Cox, III
- ----------------------------------
Cader B. Cox, III
/s/ J. Everitt Drew
- ----------------------------------
J. Everitt Drew
/s/ John K. Humphress
- ----------------------------------
John K. Humphress
/s/ McGrath Keen, Jr.
- ----------------------------------
McGrath Keen, Jr.
/s/ Lina S. Knox
- ----------------------------------
Lina S. Knox
/s/ Ruth A. Knox
- ----------------------------------
Ruth A. Knox
/s/ Henry Lewis III
- ----------------------------------
Henry Lewis III
/s/ John R. Lewis
- ----------------------------------
John R. Lewis
/s/ William G. Smith, Jr.
- ----------------------------------
William G. Smith, Jr.
92
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39
35
40
46
80
83
161