UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended: June 30,2005 ------------ Commission File Number 0-13358 CAPITAL CITY BANK GROUP, INC. ----------------------------- (Exact name of registrant as specified in its charter) Florida 59-2273542 ------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 217 North Monroe Street, Tallahassee, Florida 32301 --------------------------------------------------- (Address of principal executive offices) (850) 671-0300 -------------- Registrant's telephone number, including area code: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] At July 29, 2005, 18,623,393 shares of the Registrant's Common Stock, $.01 par value, were outstanding. 1 CAPITAL CITY BANK GROUP, INC. FORM 10-Q INDEX ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER - ---- ----------------------------- ----------- 1. Consolidated Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 3. Quantitative and Qualitative Disclosures About Market Risk 27 4. Controls and Procedures 29 ITEM PART II. OTHER INFORMATION - ---- -------------------------- 1. Legal Proceedings Not Applicable 2. Unregistered Sales of Equity Securities and Use of Proceeds Not Applicable 3. Defaults Upon Senior Securities Not Applicable 4. Submission of Matters to a Vote of Security Holders 30 5. Other Information Not Applicable 6. Exhibits 30 Signatures 31 INTRODUCTORY NOTE This Report and other Company communications and statements may contain "forward-looking statements," including statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. For information concerning these factors and related matters, see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and the Company's other filings with the Securities and Exchange Commission. 2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED JUNE 30 (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ------------------- (Dollars in Thousands, Except Per Share Data)(1) 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and Fees on Loans $32,105 $22,922 $60,947 $44,194 Investment Securities: U.S. Treasury 121 224 257 452 U.S. Govt. Agencies and Corporations 834 462 1,654 791 States and Political Subdivisions 335 482 717 1,023 Other Securities 157 59 292 136 Funds Sold 358 116 517 339 ------- ------- ------- ------- Total Interest Income 33,910 24,265 64,384 46,935 INTEREST EXPENSE Deposits 4,618 2,385 8,927 4,779 Short-Term Borrowings 734 249 1,184 536 Subordinated Notes Payable 667 - 1,108 - Other Long-Term Borrowings 769 587 1,489 1,084 ------- ------- ------- ------- Total Interest Expense 6,788 3,221 12,708 6,399 ------- ------- ------- ------- Net Interest Income 27,122 21,044 51,676 40,536 Provision for Loan Losses 388 580 798 1,541 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 26,734 20,464 50,878 38,995 ------- ------- ------- ------- NONINTEREST INCOME Service Charges on Deposit Accounts 5,035 4,427 9,383 8,371 Data Processing 650 703 1,257 1,336 Asset Management Fees 1,013 950 2,125 1,691 Gain on Sale of Investment Securities - 19 - 19 Mortgage Banking Revenues 1,036 986 1,799 1,680 Other 4,307 3,946 8,537 7,815 ------- ------- ------- ------- Total Noninterest Income 12,041 11,031 23,101 20,912 ------- ------- ------- ------- NONINTEREST EXPENSE Salaries and Associate Benefits 13,187 10,809 25,747 21,549 Occupancy, Net 2,035 1,749 3,972 3,366 Furniture and Equipment 2,192 1,977 4,304 4,040 Intangible Amortization 1,296 927 2,492 1,752 Merger Expense 234 4 234 46 Other 7,652 6,135 15,114 11,923 ------- ------- ------- ------- Total Noninterest Expense 26,596 21,601 51,863 42,676 ------- ------- ------- ------- Income Before Income Taxes 12,179 9,894 22,116 17,231 Income Taxes 4,311 3,451 7,871 5,941 ------- ------- ------- ------- NET INCOME $ 7,868 $ 6,443 $14,245 $11,290 ======= ======= ======= ======= BASIC NET INCOME PER SHARE $ .44 $ .38 $ .80 $ .68 ======= ======= ======= ======= DILUTED NET INCOME PER SHARE $ .44 $ .38 $ .80 $ .68 ======= ======= ======= ======= Average Basic Shares Outstanding 18,094,256 16,592,894 17,898,253 16,585,340 ========== ========== ========== ========== Average Diluted Shares Outstanding 18,102,200 16,596,333 17,908,580 16,588,863 ========== ========== ========== ========== (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF JUNE 30, 2005 AND DECEMBER 31, 2004 (Unaudited) June 30, December 31, (Dollars In Thousands, Except Share Data)(1) 2005 2004 - ------------------------------------------------------------------------------------ ASSETS Cash and Due From Banks $ 117,921 $ 87,039 Funds Sold and Interest Bearing Deposits 59,062 74,506 ---------- ---------- Total Cash and Cash Equivalents 176,983 161,545 Investment Securities, Available-for-Sale 195,860 210,240 Loans, Net of Unearned Interest 2,046,774 1,828,825 Allowance for Loan Losses (17,451) (16,037) ---------- ---------- Loans, Net 2,029,323 1,812,788 Premises and Equipment, Net 69,294 58,963 Goodwill 84,511 54,341 Other Intangible Assets 28,570 25,964 Other Assets 45,344 40,172 ---------- ---------- Total Assets $2,629,885 $2,364,013 ========== ========== LIABILITIES Deposits: Noninterest Bearing Deposits $ 598,602 $ 566,991 Interest Bearing Deposits 1,502,027 1,327,895 ---------- ---------- Total Deposits 2,100,629 1,894,886 Short-Term Borrowings 71,148 96,014 Subordinated Notes Payable 62,887 30,928 Other Long-Term Borrowings 73,144 68,453 Other Liabilities 26,655 16,932 ---------- ---------- Total Liabilities 2,334,463 2,107,213 SHAREOWNERS' EQUITY Preferred Stock, $.01 par value, 3,000,000 shares authorized; no shares outstanding - - Common Stock, $.01 par value, 90,000,000 shares authorized; 18,614,482 shares outstanding at June 30, 2005 and 17,694,139 outstanding at December 31, 2004 186 177 Additional Paid-In Capital 82,582 52,328 Retained Earnings 213,352 204,648 Accumulated Other Comprehensive Loss, Net of Tax (698) (353) ---------- ---------- Total Shareowners' Equity 295,422 256,800 ---------- ---------- Total Liabilities and Shareowners' Equity $2,629,885 $2,364,013 ========== ========== (1) All share, per share, and shareowners' equity data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Dollars in Thousands, Except Per Share Data)(1) Additional Accumulated Other Common Paid-In Retained Comprehensive Stock Capital Earnings Loss, Net of Taxes Total - ----------------------------------------------------------------------------------------------------------------- Balance, December 31, 2004 $177 $52,328 $204,648 $(353) $256,800 Comprehensive Income: Net Income - - 14,245 Net Change in Unrealized Loss On Available-for-Sale Securities - - - (345) Total Comprehensive Income - - - - 13,900 Cash Dividends ($.304 per share) - - (5,541) - (5,541) Stock Performance Plan Compensation - 765 - - 765 Issuance of Common Stock 9 29,489 - - 29,498 ---- ------- -------- ----- -------- Balance, June 30, 2005 $186 $82,582 $213,352 $(698) $295,422 ==== ======= ======== ===== ======== (1) All share, per share, and shareowners' equity data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30 (Unaudited) (Dollars in Thousands) 2005 2004 - ---------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 14,245 $ 11,290 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses 798 1,541 Depreciation 2,769 2,584 Net Securities Amortization 783 1,229 Amortization of Intangible Assets 2,492 1,729 Gains on Sale of Investment Securities - (19) Non-Cash Compensation 339 1,625 Net (Increase) Decrease in Other Assets (5,534) 4,940 Net Increase in Other Liabilities 10,749 4,167 -------- -------- Net Cash Provided By Operating Activities 26,641 29,086 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Payments/Maturities/Sales of Investment Securities Available-for-Sale 77,357 87,296 Purchase of Investment Securities Available-for-Sale (29,468) (76,484) Net Increase in Loans (98,045) (92,296) Net Cash Acquired (Used) In Acquisitions 37,412 (18,055) Purchase of Premises & Equipment (9,918) (3,686) Proceeds From Sales of Premises & Equipment 134 861 -------- -------- Net Cash Used In Investing Activities (22,528) (102,364) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net Increase in Deposits 4,157 36,097 Net (Decrease) Increase in Short-Term Borrowings (74,909) 18,828 Proceeds from Subordinated Note Payable 31,959 - Increase in Other Long-Term Borrowings 3,600 9,737 Repayment of Other Long-Term Borrowings 51,134 (785) Dividends Paid (5,541) (4,779) Issuance of Common Stock 925 141 -------- -------- Net Cash Provided By Financing Activities 11,325 59,239 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 15,438 (14,039) Cash and Cash Equivalents at Beginning of Period 161,545 218,592 -------- -------- Cash and Cash Equivalents at End of Period $176,983 $204,553 ======== ======== Supplemental Disclosure: Interest Paid on Deposits $ 8,210 $ 4,815 ======== ======== Interest Paid on Debt $ 3,525 $ 1,615 ======== ======== Taxes Paid $ 6,468 $ 2,148 ======== ======== Transfer of Loans to Other Real Estate $ 99 $ 846 ======== ======== Issuance of Common Stock as Non-Cash Compensation $ 339 $ 1,625 ======== ======== Transfer of Current Portion of Long-Term Borrowings to Short-Term Borrowings $ 43 $ - ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6 CAPITAL CITY BANK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES Basis of Presentation - --------------------- The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, including Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Prior period financial statements have been reformatted and/or amounts reclassified, as necessary, to conform with the current presentation. In the opinion of management, the consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of June 30, 2005 and December 31, 2004, the results of operations for the three and six month periods ended June 30, 2005 and 2004, and cash flows for the six month periods ended June 30, 2005 and 2004. The Company and its subsidiary follow accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry. The principles that materially affect its financial position, results of operations and cash flows are set forth in Notes to Consolidated Financial Statements which are included in the Company's 2004 Annual Report on Form 10-K. On July 1, 2005, the Company executed a five-for-four stock split in the form of a 25% stock dividend, payable to shareowners of record as of close of business on June 17, 2005. All share, per share, and shareowners' equity data have been adjusted to reflect stock split. Stock-based Compensation - ------------------------ As of June 30, 2005, 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 share units are awarded to participants based on performance goals being achieved. In addition, pursuant to the AIP, the Company executed stock option arrangements for 2005, 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, "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. The cost related to all stock-based associate compensation included in net income is accounted for under the fair value based method during 2004 and 2005 as all awards have grant dates after January 1, 2003. (2) ACQUISITIONS On May 20, 2005, the Company completed its merger with First Alachua Banking Corporation ("FABC"), headquartered in Alachua, Florida. The Company issued approximately 906,000 shares of common stock and paid approximately $29.0 million in cash for a total purchase price of $58.0 million. Results of FABC operations have been included in the Company's consolidated financial statements since May 21, 2005. FABC's wholly-owned subsidiary, First National Bank of Alachua ("FNBA") had $228.3 million in assets at closing with seven offices in Alachua County and an eighth office in Hastings, Florida, which is in St. Johns County. The transaction was accounted for as a purchase and resulted in approximately $35.6 million of intangible assets, including approximately $30.5 million in goodwill and a core deposit intangible of $5.1 million. The core deposit intangible is being amortized over a 5.5 year period. 7 On May 20, 2005, the Company issued a $32.0 million junior subordinated deferrable interest note to a wholly owned Delaware statutory trust, Capital City Bank Group Capital Trust II ("CCBG Capital Trust II") to facilitate the cash portion of the consideration paid to FABC shareowners. Interest payments on this note are due quarterly at a fixed rate of 6.07% for five years, then adjustable annually to three month LIBOR plus a margin of 1.80%. The note matures on June 15, 2035. The general terms and conditions of the Company's transaction with CCBG Capital Trust II are consistent with those enumerated for CCBG Capital Trust I which are described in Note 10 in the Company's 2004 Annual Report on Form 10-K. The information below lists the consolidated assets and liabilities of FNBA as of May 20, 2005, along with the consideration paid: First National Bank (Dollars in Thousands) of Alachua - ------------------------------------------------------------------ Cash and Due From Banks $ 9,082 Funds Sold 58,312 -------- Total Cash and Cash Equivalents 67,394 Investment Securities, Available-for-Sale 35,181 Loans, Net of Unearned Interest 119,262 Intangible Assets 35,623 Other Assets 3,282 -------- Total Assets Acquired $260,742 Total Deposits $201,748 Long-Term Borrowings - Other Liabilities 994 -------- Total Liabilities Assumed $202,742 Consideration Paid to FABC Shareowners $ 58,000 ========
The following unaudited pro forma financial information for the three and six months ended June 30, 2005 and 2004, presents the consolidated operations of the Company as if the FNBA acquisition had been made on January 1, 2004. The unaudited pro forma financial information is provided for informational purposes only, should not be construed to be indicative of the Company's consolidated results of operations had the acquisition of FNBA been consummated on this earlier date, and do not project the Company's results of operations for any future period: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ (Dollars in Thousands, Except Per Share Data)(1) 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------- Interest Income $35,442 $27,012 $68,772 $52,475 Interest Expense 7,451 4,371 14,533 8,722 ------- ------- ------- ------- Net Interest Income 27,991 22,641 54,239 43,753 Provision for Loan Losses 388 580 798 1,541 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 27,603 22,061 53,441 42,212 Noninterest Income 12,492 11,491 23,920 21,901 Noninterest Expense(2) 28,554 22,966 55,858 45,983 ------- ------- ------- ------- Income Before Income Taxes 11,541 10,586 21,503 18,130 Income Taxes 4,311 3,714 7,881 6,283 ------- ------- ------- ------- Net Income $ 7,230 $ 6,872 $13,622 $11,847 ======= ======= ======= ======= Basic Net Income Per Share $ .40 $ .41 $ .76 $ .70 ======= ======= ======= ======= Diluted Net Income Per Share $ .40 $ .41 $ .76 $ .70 ======= ======= ======= ======= (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. (2) Includes non-recurring merger related expenses at FNBA and CCBG in the second quarter of 2005 totaling approximately $959,000, and year-to-date 2005 totaling approximately $1.1 million.
8 (3) INVESTMENT SECURITIES The amortized cost and related market value of investment securities available-for-sale at June 30, 2005 and December 31, 2004 were as follows: June 30, 2005 ------------------------------------------- Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------- U.S. Treasury $ 23,235 $ - $ 169 $ 23,066 U.S. Government Agencies and Corporations 86,354 20 814 85,560 States and Political Subdivisions 51,736 148 208 51,676 Mortgage-Backed Securities 22,131 100 170 22,061 Other Securities(1) 13,497 - - 13,497 -------- ---- ------ -------- Total Investment Securities $196,953 $268 $1,361 $195,860 ======== ==== ====== ======== December 31, 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 ======== ==== ====== ======== (1) FHLB and FRB stock recorded at cost.
(4) LOANS The composition of the Company's loan portfolio at June 30, 2005 and December 31, 2004 was as follows: (Dollars in Thousands) June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------- Commercial, Financial and Agricultural $ 214,983 $ 206,474 Real Estate-Construction 148,462 140,190 Real Estate-Commercial Mortgage 713,619 655,426 Real Estate-Residential 553,034 438,484 Real Estate-Home Equity 160,767 150,061 Real Estate-Loans Held-for-Sale 9,624 11,830 Consumer 246,285 226,360 ---------- ---------- Loans, Net of Unearned Interest $2,046,774 $1,828,825
(5) ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the six month periods ended June 30, 2005 and 2004, is as follows: (Dollars in Thousands) June 30, 2005 June 30, 2004 - -------------------------------------------------------------------------------- Balance, Beginning of Period $16,037 $12,429 Acquired Reserves 1,385 1,313 Provision for Loan Losses 798 1,541 Recoveries on Loans Previously Charged-Off 943 892 Loans Charged-Off (1,712) (2,518) ------- ------- Balance, End of Period $17,451 $13,657 ======= =======
9 Impaired loans are primarily defined as all nonaccruing loans for the loan categories which are included within the scope of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Selected information pertaining to impaired loans is depicted in the table below: June 30, 2005 December 31, 2004 -------------------- --------------------- Valuation Valuation (Dollars in Thousands) Balance Allowance Balance Allowance - ----------------------------------------------------------------------------------------- Impaired Loans: With Related Valuation Allowance $5,672 $2,910 $ 578 $313 Without Related Valuation Allowance 3,346 - 3,150 -
(Dollars in Thousands) June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------------- Average Recorded Investment in Impaired Loans $9,724 $5,382 Interest Income on Impaired Loans: Recognized 62 140 Collected in Cash 62 120
(6) DEPOSITS The composition of the Company's interest bearing deposits at June 30, 2005 and December 31, 2004 was as follows: (Dollars in Thousands) June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------- NOW Accounts $ 475,687 $ 338,932 Money Market Accounts 287,601 270,095 Savings Deposits 162,665 147,348 Other Time Deposits 576,074 571,520 ---------- ---------- Total Interest Bearing Deposits $1,502,027 $1,327,895 ========== ==========
(7) INTANGIBLE ASSETS The Company had intangible assets of $113.1 million and $80.3 million at June 30, 2005 and December 31, 2004, respectively. Intangible assets were as follows: June 30, 2005 December 31, 2004 ------------------------ ------------------------ Gross Accumulated Gross Accumulated (Dollars in Thousands) Amount Amortization Amount Amortization - ---------------------------------------------------------------------------------------- Core Deposit Intangibles $ 47,176 $20,578 $ 42,078 $18,300 Goodwill 88,297 3,786 58,127 3,786 Customer Relationship Intangible 1,867 210 1,867 114 Other 483 168 483 50 -------- ------- -------- ------- Total Intangible Assets $137,823 $24,742 $102,555 $22,250 ======== ======= ======== =======
Net Core Deposit Intangibles: As of June 30, 2005 and December 31, 2004, the Company had net core deposit intangibles of $26.6 million and $23.8 million, respectively. Amortization expense for the first half of 2005 and 2004 was $2.3 million and $1.7 million, respectively. Estimated annual amortization expense is $5.3 million. Goodwill: As of June 30, 2005 and December 31, 2004, the Company had goodwill, net of accumulated amortization, of $84.5 million and $54.3 million, respectively. Goodwill is the Company's only intangible asset that is no longer subject to amortization under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." 10 Other: As of June 30, 2005 and December 31, 2004, the Company had a customer relationship intangible, net of accumulated amortization, of $1.7 million and $1.8 million, respectively. This intangible was recorded as a result of the March 2004 acquisition of trust client relationships from Synovus Trust Company. Amortization expense for the first six months of 2005 and 2004 was $96,000 and $34,000, respectively. Estimated annual amortization expense is $191,000 based on a 10 year useful life. As of June 30, 2005 and December 31, 2004, the Company also had a non-compete intangible, net of accumulated amortization, of $315,000 and $433,000, respectively. This intangible was recorded as a result of the October 2004 acquisition of Farmers and Merchants Bank of Dublin, Georgia. Amortization expense for the first six months of 2005 was $118,000. Estimated annual amortization expense is $236,000 based on a 2-year useful life. (8) EMPLOYEE BENEFIT PLANS The components of the net periodic benefit costs for the Company's qualified benefit pension plan were as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ (Dollars in Thousands) 2005 2004 2005 2004 - --------------------------------------------------------------------------------------- Discount rate 6.00% 6.25% 6.00% 6.25% Long-term rate of return on assets 8.00% 8.00% 8.00% 8.00% Service cost $1,040 $ 950 $2,080 $1,900 Interest cost 800 725 1,600 1,450 Expected return on plan assets (798) (675) (1,596) (1,350) Prior service cost amortization 55 50 110 100 Net loss amortization 295 300 590 600 ------ ------ ------ ------ Net periodic benefit cost $1,392 $1,350 $2,784 $2,700 ====== ====== ====== ======
The components of the net periodic benefit costs for the Company's Supplemental Executive Retirement Plan ("SERP") were as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ (Dollars in Thousands) 2005 2004 2005 2004 - --------------------------------------------------------------------------------------- Discount rate 6.00% 6.25% 6.00% 6.25% Long-term rate of return on assets N/A N/A N/A N/A Service cost $ 35 $ 48 $ 70 $ 96 Interest cost 54 65 108 129 Expected return on plan assets N/A N/A N/A N/A Prior service cost amortization 15 30 30 61 Net loss/(gain) amortization 21 (18) 42 (36) ---- ---- ---- ---- Net periodic benefit cost $125 $125 $250 $250 ==== ==== ==== ====
11 (9) 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 June 30, 2005, the amounts associated with the Company's off-balance sheet obligations were as follows: (Dollars in Millions) Amount - ---------------------------------------------- Commitments to Extend Credit(1) $471.1 Standby Letters of Credit $ 21.0 (1) 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. (10) 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). Comprehensive income totaled $8.3 million and $13.9 million, respectively, for the three and six months ended June 30, 2005 and $5.0 million and $9.9 million, respectively, for the comparable periods in 2004. The Company's comprehensive income consists of net income 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 totaled $452,000 and $(345,000), respectively, for the three and six months ended June 30, 2005, and $(1.4 million) for both the three and six months ended June 30, 2004. Reclassification adjustments consist only of realized gains on sales of investment securities and were not material for the six months ended June 30, 2005 and 2004. 12 QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in Thousands, Except Per Share Data)(1) 2005 2004 2003 Second First Fourth Third Second First Fourth Third ---------------------- ---------------------------------------------- ---------------------- Summary of Operations: Interest Income $ 33,910 $ 30,474 $ 29,930 $ 24,660 $ 24,265 $ 22,670 $ 23,022 $ 23,484 Interest Expense 6,788 5,920 5,634 3,408 3,221 3,178 3,339 3,506 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Interest Income 27,122 24,554 24,296 21,252 21,044 19,492 19,683 19,978 Provision for Loan Losses 388 410 300 300 580 961 850 921 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 26,734 24,144 23,996 20,952 20,464 18,531 18,833 19,057 Gain on Sale of Credit Card Portfolio - - 324 6,857 - - - - Noninterest Income 12,041 11,060 11,596 10,864 11,031 9,881 10,614 10,952 Merger Expense 234 - 436 68 4 42 - - Noninterest Expense 26,362 25,267 24,481 21,565 21,597 21,033 20,593 20,184 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income Before Provision for Income Taxes 12,179 9,937 10,999 17,040 9,894 7,337 8,854 9,825 Provision for Income Taxes 4,311 3,560 3,737 6,221 3,451 2,490 2,758 3,529 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income $ 7,868 $ 6,377 $ 7,262 $ 10,819 $ 6,443 $ 4,847 $ 6,096 $ 6,296 ========== ========== ========== ========== ========== ========== ========== ========== Net Interest Income (FTE) $ 27,396 $ 24,835 $ 24,619 $ 21,528 $ 21,333 $ 19,811 $ 20,020 $ 20,332 Per Common Share: Net Income Basic $ .44 $ .36 $ .40 $ .66 $ .38 $ .30 $ .38 $ .38 Net Income Diluted .44 .36 .40 .66 .38 .30 .37 .38 Dividends Declared .152 .152 .152 .144 .144 .144 .144 .136 Diluted Book Value 15.87 14.69 14.51 13.19 12.64 12.43 12.22 12.00 Market Price: High 33.46 33.60 36.78 32.96 34.52 36.44 37.46 32.74 Low 28.02 29.30 30.17 26.66 28.40 31.24 29.30 28.00 Close 32.32 32.41 33.44 30.97 31.67 33.00 36.79 30.53 Selected Average Balances: Loans $1,932,637 $1,827,327 $1,779,736 $1,524,401 $1,491,142 $1,357,206 $1,329,673 $1,336,139 Earning Assets 2,170,483 2,047,049 2,066,111 1,734,708 1,721,655 1,634,468 1,636,269 1,634,689 Assets 2,458,788 2,306,807 2,322,870 1,941,372 1,929,485 1,830,496 1,819,552 1,816,005 Deposits 1,932,144 1,847,378 1,853,588 1,545,224 1,538,630 1,457,160 1,451,095 1,451,879 Shareowners' Equity 278,107 260,946 248,773 217,273 210,211 206,395 201,939 199,060 Common Equivalent Average Shares: Basic 18,094 17,700 17,444 16,604 16,593 16,578 16,528 16,527 Diluted 18,102 17,708 17,451 16,609 16,596 16,607 16,581 16,575 Ratios: ROA 1.28% 1.12% 1.24% 2.22%(2) 1.34% 1.06% 1.33% 1.38% ROE 11.35% 9.91% 11.61% 19.81%(2) 12.33% 9.45% 11.98% 12.55% Net Interest Margin (FTE) 5.07% 4.92% 4.75% 4.94% 4.99% 4.88% 4.85% 4.94% Efficiency Ratio 63.56% 67.06% 63.85% 52.60%(2) 63.87% 68.06% 64.58% 61.93% (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. (2) Includes $4.2 million (after-tax) one-time gain on sale of credit card portfolio.
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected the Company's financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled "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 2005 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 comparable quarters of consecutive years may be more meaningful than simply analyzing year-to-date averages. Therefore, where appropriate, quarterly averages have been presented for analysis and have been noted as such. See Table I on page 26 for average balances and interest rates 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" 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; * Worldwide political and social unrest, including acts of war and terrorism; 14 * 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; * 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. The Company is headquartered in Tallahassee, Florida and as of June 30, 2005 had 68 banking offices, six mortgage lending offices, 79 ATMs and 11 Bank'N Shop locations in Florida, Georgia and Alabama. 15 RESULTS OF OPERATIONS Net Income - ---------- Earnings for the three and six months ended June 30, 2005 were $7.9 million, or $0.44 per diluted share, and $14.2 million, or $0.80 per diluted share, respectively. This compares to $6.4 million, or $0.38 per diluted share, and $11.3 million, or $0.68 per diluted share in 2004. The growth in earnings for the three and six month periods was driven by an increase in operating revenues and a decrease in the loan loss provision. Operating revenues (defined as net interest income plus noninterest income) increased 22.1% and 21.7% over the comparable three and six month periods in 2004. Growth in operating revenues is reflective of higher net interest income and noninterest income. Net interest income increased 28.9% and 27.5%, respectively, on a dollar basis, for the three and six month periods due to strong earning asset growth and an improved net interest margin. The increase in noninterest income is due to higher deposit service charge fees, asset management fees, and merchant fees. The loan loss provision declined 33.1% and 48.2% over the same periods in 2004. The lower loan loss provision reflects continued strong credit quality. A condensed earnings summary is presented below. Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ (Dollars in Thousands) 2005 2004 2005 2004 - ---------------------------------------------------------------------------------- Interest Income $33,910 $24,265 $64,384 $46,935 Taxable Equivalent Adjustment(1) 274 289 555 608 ------- ------- ------- ------- Interest Income (FTE) 34,184 24,554 64,939 47,543 Interest Expense 6,788 3,221 12,708 6,399 ------- ------- ------- ------- Net Interest Income (FTE) 27,396 21,333 52,231 41,144 Provision for Loan Losses 388 580 798 1,541 Taxable Equivalent Adjustment 274 289 555 608 ------- ------- ------- ------- Net Interest Income After Provision 26,734 20,464 50,878 38,995 Noninterest Income 12,041 11,031 23,101 20,912 Merger Expense 234 4 234 46 Noninterest Expense 26,362 21,597 51,629 42,630 ------- ------- ------- ------- Income Before Income Taxes 12,179 9,894 22,116 17,231 Income Taxes 4,311 3,451 7,871 5,941 ------- ------- ------- ------- Net Income $ 7,868 $ 6,443 $14,245 $11,290 ======= ======= ======= ======= Percent Change 22.12% .05% 26.17% (11.80)% Return on Average Assets(2) 1.28% 1.34% 1.21% 1.21% Return on Average Equity(2) 11.35% 12.33% 10.66% 10.90% (1) Computed using a statutory tax rate of 35% (2) Annualized
Net Interest Income - ------------------- Net interest income represents the Company's single largest source of earnings and is equal to interest income and fees generated by earning assets, less interest expense paid on interest bearing liabilities. Second quarter of 2005 taxable-equivalent net interest income increased $6.1 million, or 28.4%, over the comparable quarter in 2004. During the first half of 2005, taxable-equivalent net interest income increased $11.1 million, or 26.9%, respectively, over the first half of 2004. This favorable impact was caused by the effect of three acquisitions (two in 2004 and one in 2005), an improved earning asset mix and higher yields; partially offset by increased funding costs resulting from the higher interest rate environment. Table I on page 26 provides a comparative analysis of the Company's average balances and interest rates. 16 For the three month period ended June 30, 2005, taxable-equivalent interest income increased $9.6 million or 39.2%, over the comparable period in 2004. During the first half of 2005, taxable-equivalent interest income improved $17.4 million, or 36.6%, respectively, over the comparable period in 2004. During the second quarter of 2005, growth in interest income resulted from strong loan demand, the recent acquisition of the First National Bank of Alachua ("FNBA"), and higher earning asset yields attributable to the rising rate environment. New loan production and repricing of existing earning assets produced a 58 basis point improvement in the yield on earning assets, which increased from 5.74% for the second quarter in 2004 to 6.32% for the same period in 2005. The Federal Reserve increased interest rates during the second quarter of 2005, which continue to impact new production and repricing. Income generated on earning assets is anticipated to expand in the third quarter due to the improved earning asset mix and the higher rate environment. Interest expense for the three and six month periods ended June 30, 2005 increased $3.6 million, or 110.7% and $6.3 million, or 98.6%, respectively, from the comparable prior year periods. The unfavorable variance is attributable to higher rates, acquired deposits and an unfavorable shift in mix, as certificates of deposit, generally a higher cost deposit product, increased relative to total deposits. The average rate paid on interest bearing liabilities in 2005 increased 63 basis points over the second quarter of 2004, to a level of 1.69%. Interest expense is anticipated to increase in the third quarter as a result of the higher rate environment and increased competition for funding sources. The Company's interest rate spread (defined as the average federal taxable- equivalent yield on earning assets less the average rate paid on interest bearing liabilities) decreased from 4.63% in the first half of 2004 to 4.56% in the comparable period of 2005, reflecting the higher cost of funds. The Company's net yield on earning assets (defined as taxable-equivalent net interest income divided by average earning assets) was 5.07% and 4.99%, respectively, for the three and six month periods of 2005, versus 4.99% and 4.93%, respectively, for the comparable periods in 2004. The increase in margin reflects higher asset yields driven by rising interest rates, partially offset by higher cost of funds. If interest rates continue to rise at a measured pace, the net yield on earning assets is anticipated to increase slightly during the third quarter of 2005. Net interest income is expected to expand during the third quarter attributable to anticipated higher yield on earning assets, a favorable shift in mix of earning assets, and other factors noted above. Provision for Loan Losses - ------------------------- The provision for loan losses was $388,000 and $798,000, respectively, for the three and six month periods ended June 30, 2005, compared to $580,000 and $1.5 million for the same periods in 2004. The decrease in the provision for the first half of 2005 reflects a lower level of net charge-offs between comparable periods. Net charge-offs totaled $362,000, or .08% of average loans for the second quarter of 2005 compared to $631,000, or .18% for the second quarter of 2004. The primary reason for the decrease in net charge-offs is attributable to a lower level of credit card charge-offs due to the sale of the portfolio. At quarter-end the allowance for loan losses was .85% of outstanding loans and provided coverage of 289% of nonperforming loans. 17 Charge-off activity for the respective periods is set forth below: Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- (Dollars in Thousands) 2005 2004 2005 2004 - -------------------------------------------------------------------------------------- CHARGE-OFFS Commercial, Financial and Agricultural $ 302 $ 286 $ 390 $ 453 Real Estate - Construction - - - - Real Estate - Commercial Mortgage 2 - 6 39 Real Estate - Residential 37 11 62 94 Consumer 536 885 1,254 1,932 ------ ------ ------ ------ Total Charge-offs 877 1,182 1,712 2,518 ------ ------ ------ ------ RECOVERIES Commercial, Financial and Agricultural 98 24 107 36 Real Estate - Construction - - - - Real Estate - Commercial Mortgage - - - - Real Estate - Residential 14 176 16 176 Consumer 403 333 820 680 ------ ------ ------ ------ Total Recoveries 515 533 943 892 ------ ------ ------ ------ Net Charge-offs $ 362 $ 649 $ 769 $1,626 ====== ====== ====== ====== Net Charge-offs (Annualized) as a Percent of Average Loans Outstanding, Net of Unearned Interest .08% .18% .08% .23% ====== ====== ====== ======
Noninterest Income - ------------------ Noninterest income increased $1.0 million, or 9.2%, and $2.2 million, or 10.5%, respectively, over the comparable three and six month periods in 2004, primarily due to higher deposit service charge fees, asset management fees, and merchant fees. Noninterest income represented 30.7% and 30.9% of operating revenue for the three and six month periods of 2005 compared to 34.4% and 34.0% for the same periods in 2004. The decrease is due to strong growth in net interest income during 2005. Service charges on deposit accounts increased $608,000, or 13.7% and $1.0 million, or 12.1%, respectively, over the comparable three and six month periods in 2004. The increase is due to the growth in deposit accounts, partially attributable to acquisitions, a fee structure change implemented in mid-2004, and an increase in non-sufficient funds (NSF) and overdraft fees due to increased NSF activity. Data processing revenues of $650,000 and $1.3 million for the three and six month periods ended June 30, 2005 reflect a decrease of 7.5% and 5.9%, respectively, from the comparable periods in 2004. The decline is due to slightly lower revenues from one processing contract with a state agency. The Company currently provides data processing services for six financial clients and contract processing services for six non-financial clients. For the first half of 2005 and 2004, processing revenues for financial clients represented 67.6% and 64.4% of total processing revenues, respectively. Management anticipates that revenues for the remainder of 2005 will remain consistent with the first half of the year. Income from asset management activities increased $63,000, or 6.6%, and $434,000, or 25.7%, respectively, over the comparable three and six month periods in 2004. The improvement for the three-month period is due primarily to growth in new business within existing markets. The increase for the first half of 2005 reflects trust assets acquired late in the first quarter of 2004. At June 30, 2005, assets under management totaled $651.0 million, representing an increase of $18.6 million, or 2.9% from the comparable period in 2004. Management anticipates that revenues for the remainder of 2005 will remain consistent with the first half of the year. 18 Mortgage banking revenues increased $50,000, or 5.1%, and $119,000, or 7.1%, respectively, over the comparable three and six month periods in 2004. The improvement is due to an increase in mortgage production, which is up 24.0% over the first half of 2004, reflecting growth in both portfolio loans (ARM product) and loans sold in the secondary market. Due to the increasing rate environment, a larger percentage of total production is being retained in the loan portfolio. Loans sold in the secondary market during the first half of 2005 increased 9.5% over the first half of 2004 to a level of $101.4 million. The residential loan pipeline at the end of the second quarter of 2005 reflects an increase of 27.2% over the pipeline at the end of the first quarter of 2005. Other income increased $361,000, or 9.1%, and $722,000, or 9.2%, respectively, over the comparable three and six month periods in 2004. The increase for both periods is primarily due to growth in card processing fees and miscellaneous loan fees. Noninterest income as a percent of average assets was 1.95% and 2.24%, respectively, for the first half of 2005 and 2004. Noninterest Expense - ------------------- Noninterest expense increased $5.0 million, or 23.1%, and $9.2 million, or 21.5%, respectively, over the comparable three and six month periods in 2004. Factors impacting the Company's noninterest expense for the first six months of 2005 are discussed below. Salaries and associate benefits expense increased $2.4 million, or 22.0%, and $4.2 million, or 19.5% over the comparable three and six month periods in 2004. For the first half of the year, the Company experienced increases in associate salaries of $2.9 million, payroll tax expense of $328,000, pension plan expense of $154,000, associate insurance expense of $328,000, and stock- based compensation of $523,000. The increases in associate salaries and payroll tax reflects the addition of associates from acquisitions in 2004 and 2005 and annual merit/market based raises for associates. The higher pension expense is due primarily to a lower discount rate used for the 2005 expense projection. The increase in associate insurance expense is primarily attributable to additional participants and higher healthcare insurance premiums. The increase in stock-based compensation reflects an increase in the number of participants in the Company's stock compensation plans and a higher level of projected performance. Occupancy expense, including premises, furniture, fixtures and equipment increased $501,000, or 13.4%, and $870,000, or 11.7%, respectively, over the comparable three and six month periods in 2004. For the first half of the year, the Company experienced increases in depreciation of $185,000, maintenance and repairs (building) of $261,000, utilities of $66,000, property taxes of $191,000, tangible tax of $96,000, and maintenance agreements of $218,000 from the comparable period in 2004. The increase in the aforementioned expense categories is primarily reflective of incremental expense incurred with the addition of 12 new banking offices since the second quarter of 2004. Other noninterest expense increased $1.5 million, or 24.7%, and $3.1 million, or 26.8%, respectively, over the comparable three and six month periods in 2004. For the first half of the year, the increase was primarily attributable to higher expense for the following categories: 1) legal - $190,000; 2) professional fees - $339,000; 3) processing services - $244,000; 4) advertising - $894,000; 5) printing and supplies - $197,000; 6) travel and entertainment - $136,000; and 7) interchange service fees - $391,000. The increase in legal fees is reflective of increased corporate governance initiatives and a general increase in legal services tied to corporate activities. The increase in professional fees is due to higher expense for external audit fees. The higher expense for processing fees is attributable to the cost of integrating recent acquisitions and core processing system upgrades. The increase in advertising expense reflects the marketing cost to support the new free checking product introduced in the first quarter of 2005. The higher expense for printing and supplies and travel and entertainment is driven by the recent acquisitions. The increase in interchange fees is due to increased card processing volume. 19 Net noninterest expense (noninterest income minus noninterest expense, excluding intangible amortization and one-time merger expenses) as a percent of average assets was 2.20% for the first half of 2005 compared to 2.14% in 2004. The Company's efficiency ratio (noninterest expense, excluding intangible amortization and one-time merger expense, expressed as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 65.23% for the first half of 2005 compared to 65.87% for the first half of 2004. Income Taxes - ------------ Relative to the prior year periods, the provision for income taxes increased $860,000, or 24.9%, during the second quarter and $1.9 million, or 32.5%, during the first six months of 2005, reflecting higher taxable income. The Company's effective tax rate for the first half of 2005 was 35.6% compared to 34.5% for the same period in 2004. The increase in the effective tax rate is primarily attributable to a lower level of tax-free loan and security income. FINANCIAL CONDITION Asset and liability balances include the integration of Farmers and Merchants Bank of Dublin on October 15, 2004, and First National Bank of Alachua on May 20, 2005. The Company's average assets increased $136.0 million, or 5.9%, to $2.46 billion for the quarter-ended June 30, 2005 from $2.32 billion in the fourth quarter of 2004. Average earning assets of $2.17 billion increased $104.4 million, or 5.1%, from the fourth quarter of 2004 driven by a $152.9 million, or 8.6%, increase in average loans. The growth in loans reflects the recent FNBA acquisition and strong organic loan growth. The Company ended the second quarter with approximately $13.0 million in average net overnight funds sold as compared to $60.6 million in net overnight funds sold in the fourth quarter of 2004. The decline is primarily reflective of the Company's loan growth. For a further discussion on liquidity see the section "Liquidity and Capital Resources." The investment portfolio is a significant component of the Company's operations and, as such, it functions as a key element of liquidity and asset/liability management. As of June 30, 2005, the average investment portfolio decreased $12.5 million, or 6.1%, from the fourth quarter of 2004. Cash from portfolio run-off for the first half of the year has been used to fund loan growth. Management will continue to evaluate the need to purchase securities for the investment portfolio throughout 2005, taking into consideration liquidity needed to fund loan growth, acquisitions, and meet pledging requirements. Securities classified as available-for-sale are recorded at fair value and unrealized gains and losses associated with these securities are recorded, net of tax, as a separate component of shareowners' equity. At June 30, 2005 and December 31, 2004, shareowners' equity included a net unrealized loss of $0.7 million and $0.4 million, respectively. Average loans increased $152.9 million, or 8.6%, from the fourth quarter of 2004. The increase was driven by gains in all loan categories reflective of loans integrated from the FNBA acquisition and from organic loan growth for the first half of the year. Exclusive of the FNBA acquisition, period end loans increased $97.5 million, or 5.3% over the fourth quarter of 2004. Loan activity in all markets remains moderate to strong. The Company's nonperforming loans were $6.2 million at June 30, 2005, versus $4.6 at December 31, 2004. The increase is attributable to the addition of one large commercial real estate loan relationship for which the bank recently received a deed in lieu of foreclosure. Management expects no significant loss upon the disposition of this asset. As a percent of nonperforming loans, the allowance for loan losses represented 289% at June 30, 2005 versus 345% at December 31, 2004. Nonperforming loans include nonaccruing and restructured loans. Other real estate, which includes property acquired either through foreclosure or by receiving a deed in lieu of foreclosure, was $0.2 million at 20 June 30, 2005, versus $0.6 million at December 31, 2004. The ratio of nonperforming assets as a percent of loans plus other real estate was .30% at June 30, 2005 compared to .29% at December 31, 2004. Management maintains the allowance for loan losses at a level sufficient to provide for the estimated credit losses inherent in the loan portfolio as of the balance sheet date. Credit losses arise from the borrowers' ability and willingness to repay, and from other risks inherent in the lending process, including collateral risk, operations risk, concentration risk and economic risk. All related risks of lending are considered when assessing the adequacy of the loan loss reserve. The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance for loan losses is based on management's judgment of overall loan quality. This is a significant estimate based on a detailed analysis of the loan portfolio. The balance can and will change based on changes in the assessment of the portfolio's overall credit quality. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The allowance for loan losses at June 30, 2005 was $17.5 million, compared to $16.0 million at year-end 2004. The increase from year-end primarily reflects the integration of acquired loan reserves from FNBA in the second quarter of 2005. At quarter-end 2005, the allowance represented 0.85% of total loans. While there can be no assurance that the Company will not sustain loan losses in a particular period that are substantial in relation to the size of the allowance, management's assessment of the loan portfolio does not indicate a likelihood of this occurrence. It is management's opinion that the allowance at June 30, 2005 is adequate to absorb losses inherent in the loan portfolio at quarter-end. Average total deposits increased $78.6 million, or 4.2% from the fourth quarter of 2004 driven by a $84.1 million increase in nonmaturity deposits. This increase primarily reflects accounts added from the FNBA acquisition and new accounts gained from the Company's free-checking campaign initiated early in the first quarter of 2005. The ratio of average noninterest bearing deposits to total deposits was 28.2% for the second quarter of 2005 compared to 29.9% for the fourth quarter of 2004. For the same periods, the ratio of average interest bearing liabilities to average earning assets was 74.2%, and 72.1%, respectively. LIQUIDITY AND CAPITAL RESOURCES Liquidity - --------- General. Liquidity for a banking institution is the availability of funds to meet increased loan demand, excessive deposit withdrawals, and the payment of other contractual cash obligations. 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 and take advantage of investment opportunities and cover unforeseen liquidity demands. In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities (i.e., collection of interest and fees), federal funds sold, loan and investment maturities, bank lines of credit for the Company, approved lines for the purchase of federal funds by CCB and Federal Home Loan Bank ("FHLB") advances. Borrowings. The Company maintains a $25.0 million revolving line of credit. As of June 30, 2005, the Company had no borrowings under the revolving line of credit. For the first six months of the year, the Bank has made scheduled FHLB advance payments totaling $51.1 million and obtained $53.8 million in new FHLB advances. The aforementioned borrowing activity for the year includes a new short-term advance for $50.0 million that was obtained in May and repaid in June. 21 The Company issued a $32.0 million junior subordinated deferrable interest note in May 2005 to a wholly owned Delaware statutory trust, Capital City Bank Group Capital Trust II ("CCBG Capital Trust II"). Interest payments are due quarterly at a fixed rate of 6.07% for five years, then adjustable annually to three month LIBOR plus a margin of 1.80%. The note matures on June 15, 2035. The proceeds of the borrowing were used to partially fund the First National Bank of Alachua acquisition. The Company ended the second quarter of 2005 with approximately $13.0 million in average net overnight funds sold as compared to $60.6 million net overnight funds sold in the fourth quarter of 2004. The decline reflects cash used to fund loan growth. If loan growth continues at its current pace, the Company expects to be a net purchaser of funds in the third quarter. Contractual Cash Obligations. The Company maintains certain debt and operating lease commitments that require cash payments. The table below details those future cash commitments as of June 30, 2005: Payments Due After June 30, 2005 - --------------------------------------------------------------------------------------- 2005 (Dollars in Thousands) (Remaining) 2006 2007 2008 2009 Thereafter Total - --------------------------------------------------------------------------------------- Federal Home Loan Bank Advances $17,320 $22,843 $5,905 $4,905 $2,775 $ 33,124 $ 86,872 Subordinated Notes Payable - - - - - 62,887 62,887 Operating Lease Obligations 707 1,243 1,122 1,114 1,104 7,129 12,419 ------- ------- ------ ------ ------ -------- -------- Total Contractual Cash Obligations $18,027 $24,086 $7,027 $6,019 $3,879 $103,140 $162,178 ======= ======= ====== ====== ====== ======== ========
Capital - ------- The Company's equity capital was $295.4 million as of June 30, 2005 compared to $256.8 million as of December 31, 2004. Management continues to monitor its capital position in relation to its level of assets with the objective of maintaining a strong capital position. The leverage ratio was 9.28% at June 30, 2005 compared to 8.79% at December 31, 2004. Further, the Company's risk-adjusted capital ratio of 11.96% at June 30, 2005 exceeds the 8.0% minimum requirement under risk-based regulatory guidelines. As allowed by Federal Reserve Board capital guidelines the trust preferred securities issued by CCBG Capital Trust I and CCBG Capital Trust II are included as Tier 1 capital in the Company's capital calculations previously noted. Adequate capital and financial strength is paramount to the stability of CCBG and its subsidiary bank. Cash dividends declared and paid should not place unnecessary strain on the Company's capital levels. Although a consistent dividend payment is believed to be favorably viewed by the financial markets and shareowners, the Board of Directors will declare dividends only if the Company is considered to have adequate capital. Future capital requirements and corporate plans are considered when the Board considers a dividend payment. Dividends declared and paid during the second quarter of 2005 totaled $.1520 per share compared to $.1440 per share for the second quarter of 2004, an increase of 5.6%. The dividend payout ratios for the second quarter ended 2005 and 2004 were 34.5% and 37.9%, respectively. State and federal regulations as well as the Company's long-term debt agreements place certain restrictions on the payment of dividends by both the Company and the Bank. At June 30, 2005, these regulations and covenants did not impair the Company's (or the Bank's) ability to declare and pay dividends or to meet other existing obligations in the normal course of business. During the first six months of 2005, shareowners' equity increased $38.6 million, or 30.0%, on an annualized basis. Growth in equity during the first half of the year was positively impacted by net income of $14.2 million, the issuance of common stock of $29.5 million, and stock-based compensation accretion of $0.7 million. Equity was reduced by dividends paid during the first half of the year by $5.5 million, or $.304 per share and 22 an increase in the net unrealized loss on available-for-sale securities of $0.3 million. At June 30, 2005, the Company's common stock had a book value of $15.87 per diluted share compared to $14.50 at December 31, 2004. On July 1, 2005, the Company executed a five-for-four stock split in the form of a 25% stock dividend, payable to shareowners of record as of close of business on June 17, 2005. All share, per share, and shareowners' equity data in this Form 10-Q have been adjusted to reflect the stock split. On March 30, 2000, the Company's Board of Directors authorized the repurchase of up to 781,250 shares of its outstanding common stock. On January 24, 2002, the Company's Board of Directors authorized the repurchase of an additional 390,625 shares of its outstanding common stock. The purchases will be made in the open market or in privately negotiated transactions. The Company did not purchase any shares in the second quarter of 2005. From March 30, 2000 through June 30, 2005, the Company repurchased 715,884 shares at an average purchase price of $15.34 per share. 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 June 30, 2005, the Company had $471.1 million in commitments to extend credit and $21.0 million in standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company uses the same credit policies in establishing commitments and issuing letters of credit as it does for on-balance sheet instruments. If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact its ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the Federal Home Loan Bank, investment security maturities and the Company's 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 in the Company's 2004 Annual Report on Form 10-K. 23 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 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 5.5-10 years. Generally, core deposits refer to nonpublic, nonmaturing deposits including noninterest-bearing deposits, NOW, money market and savings. The Company makes certain estimates relating to the useful life of these assets, and rate of run-off based on the nature of the specific assets and the customer bases acquired. If there is a reason to believe there has been a permanent loss in value, management will assess these assets for impairment. Any changes in the original estimates may materially affect reported earnings. Pension Assumptions: The Company has a defined benefit pension plan for the benefit of substantially all associates of the Company. 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 for 2005 is 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 for 2005 is 8.0%. The assumed rate of annual compensation increases of 5.50% in 2005 is based on expected trends in salaries and the employee base. This assumption is not expected to change materially in 2005. Information on components of the Company's net periodic benefit cost is provided in Note 8 of the Notes to Consolidated Financial Statements included herein and Note 8 of the Notes to Consolidated Financial Statements in the Company's 2004 10-K. 24 Recent Accounting Pronouncements - -------------------------------- SFAS No. 154, "Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. Under SFAS 154, retrospective application requires (i) the cumulative effect of the change to the new accounting principle on periods prior to those presented to be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented, (ii) an offsetting adjustment, if any, to be made to the opening balance of retained earnings (or other appropriate components of equity) for that period, and (iii) financial statements for each individual prior period presented to be adjusted to reflect the direct period-specific effects of applying the new accounting principle. Special retroactive application rules apply in situations where it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Indirect effects of a change in accounting principle are required to be reported in the period in which the accounting change is made. SFAS 154 carries forward the guidance in APB Opinion 20 "Accounting Changes," requiring justification of a change in accounting principle on the basis of preferability. SFAS 154 also carries forward without change the guidance contained in APB Opinion 20, for reporting the correction of an error in previously issued financial statements and for a change in accounting estimate. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Corporation does not expect SFAS 154 will significantly impact its financial statements upon its adoption on January 1, 2006. In December 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans acquired in a transfer when 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. The Company has adopted SOP 03-3 and application of its guidance for the recent FABC acquisition did not have a significant impact on the Company's financial statements. Loans acquired in future acquisitions will continue to be accounted for under SOP 03-3. 25 TABLE I AVERAGE BALANCES & INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands) FOR THREE MONTHS ENDED JUNE 30, 2005 2004 -------------------------- -------------------------- Balance Interest Rate Balance Interest Rate ---------- -------- ----- ---------- -------- ----- Loans, Net of Unearned Interest(1)(2) $1,932,637 $32,200 6.68% $1,491,142 $22,961 6.19% Taxable Investment Securities 149,958 1,113 2.96% 134,634 745 2.21% Tax-Exempt Investment Securities(2) 41,316 513 4.97% 50,191 732 5.83% Funds Sold 46,572 358 3.04% 45,688 116 1.01% ---------- ------- ---- ---------- ------- ---- Total Earning Assets 2,170,483 34,184 6.32% 1,721,655 24,554 5.74% Cash & Due From Banks 104,336 89,921 Allowance for Loan Losses (16,998) (13,804) Other Assets 200,967 131,713 ---------- ---------- TOTAL ASSETS $2,458,788 $1,929,485 LIABILITIES NOW Accounts $ 413,799 $ 560 0.54% $ 283,297 $ 121 0.17% Money Market Accounts 270,195 830 1.23% 215,746 239 0.44% Savings Accounts 155,286 75 0.19% 129,684 32 0.10% Other Time Deposits 547,919 3,153 2.31% 433,514 1,993 1.85% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Deposits 1,387,199 4,618 1.34% 1,062,241 2,385 0.90% Short-Term Borrowings 108,508 734 2.71% 109,723 249 0.91% Subordinated Note Payable 45,681 667 5.86% - - - Other Long-Term Borrowings 68,975 769 4.47% 53,752 587 4.39% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Liabilities 1,610,363 6,788 1.69% 1,225,716 3,221 1.06% Noninterest Bearing Deposits 544,945 476,389 Other Liabilities 25,373 17,169 ---------- ---------- TOTAL LIABILITIES 2,180,681 1,719,274 SHAREOWNERS' EQUITY TOTAL SHAREOWNERS' EQUITY 278,107 210,211 ---------- ---------- TOTAL LIABILITIES & EQUITY $2,458,788 $1,929,485 ========== ========== Interest Rate Spread 4.63% 4.68% ==== ==== Net Interest Income $27,396 $21,333 ======= ======= Net Interest Margin(3) 5.07% 4.99% ==== ==== FOR SIX MONTHS ENDED JUNE 30, 2005 2004 -------------------------- -------------------------- Balance Interest Rate Balance Interest Rate ---------- -------- ----- ---------- -------- ----- ASSETS Loans, Net of Unearned Interest(1)(2) $1,880,272 $61,120 6.56% $1,424,175 $44,271 6.25% Taxable Investment Securities 151,740 2,203 2.91% 128,167 1,380 2.15% Tax-Exempt Investment Securities(2) 42,615 1,099 5.16% 52,233 1,554 5.95% Funds Sold 34,479 517 2.98% 73,487 338 0.91% ---------- ------- ---- ---------- ------- ---- Total Earning Assets 2,109,106 64,939 6.21% 1,678,062 47,543 5.70% Cash & Due From Banks 100,848 90,124 Allowance for Loan Losses (16,585) (13,264) Other Assets 189,849 125,069 ---------- ---------- TOTAL ASSETS $2,383,218 $1,879,991 LIABILITIES NOW Accounts $ 386,626 $ 1,007 0.53% $ 277,588 $ 245 0.18% Money Market Accounts 261,072 1,455 1.12% 215,412 478 0.45% Savings Accounts 151,502 151 0.20% 122,835 60 0.10% Other Time Deposits 549,983 6,314 2.31% 427,007 3,996 1.88% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Deposits 1,349,183 8,927 1.33% 1,042,842 4,779 0.92% Short-Term Borrowings 94,125 1,184 2.54% 107,064 536 1.01% Subordinated Note Payable 38,345 1,108 5.83% - - - Other Long-Term Borrowings 68,590 1,489 4.38% 50,387 1,084 4.33% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Liabilities 1,550,243 12,708 1.65% 1,200,293 6,399 1.07% Noninterest Bearing Deposits 540,812 455,053 Other Liabilities 22,589 16,342 ---------- ---------- TOTAL LIABILITIES 2,113,644 1,671,688 SHAREOWNERS' EQUITY TOTAL SHAREOWNERS' EQUITY 269,574 208,303 ---------- ---------- TOTAL LIABILITIES & EQUITY $2,383,218 $1,879,991 ========== ========== Interest Rate Spread 4.56% 4.63% ==== ==== Net Interest Income $52,231 $41,144 ======= ======= Net Interest Margin(3) 4.99% 4.93% ==== ==== (1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $820,478 and $1.3 million, for the three and six months ended June 30, 2005, versus $528,000 and $873,000, for the comparable periods ended June 30, 2004. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate. (3) Taxable equivalent net interest income divided by average earning assets.
26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 II on page 28. This table presents the Company's consolidated interest rate sensitivity position as of June 30, 2005 based upon certain assumptions as set forth in the Notes to the Table. The objective of interest rate sensitivity analysis is to measure the impact on the Company's net interest income due to fluctuations in interest rates. The asset and liability values presented in Table II may not necessarily be indicative of the Company's interest rate sensitivity over an extended period of time. The Company expects rising rates to have a favorable impact on the net interest margin, subject to the magnitude and timeframe over which the rate changes occur. However, as general interest rates rise or fall, other factors such as current market conditions and competition may impact how the Company responds to changing rates and thus impact the magnitude of change in net interest income. Nonmaturity deposits offer management greater discretion as to the direction, timing, and magnitude of interest rate changes and can have a material impact on the Company's interest rate sensitivity. In addition, the relative level of interest rates as compared to the current yields/rates of existing assets/liabilities can impact both the direction and magnitude of the change in net interest margin as rates rise and fall from one period to the next. 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." 27 Table II FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1) (Other Than Trading Portfolio) As of June 30, 2005 -------------------------------------------------------------------------------- Fair (Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value - ------------------------------------------------------------------------------------------------------------------------- Loans Fixed Rate $ 371,720 $174,391 $ 96,393 $61,712 $27,637 $25,534 $ 757,387 $ 745,841 Average Interest Rate 6.24% 7.01% 7.14% 6.81% 7.11% 6.18% 6.61% Floating Rate(2) 1,018,582 152,998 97,721 8,172 5,270 6,645 1,289,388 1,289,946 Average Interest Rate 5.39% 6.13% 6.39% 7.08% 7.46% 7.62% 5.59% Investment Securities(3) Fixed Rate 105,989 31,496 21,997 5,281 1,395 27,248 193,406 193,406 Average Interest Rate 2.62% 3.14% 3.28% 3.45% 3.78% 4.28% 3.04% Floating Rate 2,454 - - - - - 2,454 2,454 Average Interest Rate 4.51% - - - - - 4.51% Other Earning Assets Floating Rate 59,062 - - - - - 59,062 59,062 Average Interest Rates 3.10% - - - - - 3.10% Total Financial Assets $1,557,807 $358,885 $216,111 $75,165 $34,302 $59,427 $2,301,697 $2,290,709 Average Interest Rates 5.32% 6.30% 6.41% 6.61% 7.03% 5.47% 5.64% Deposits(4) Fixed Rate Deposits $ 427,064 $ 90,030 $ 40,776 $11,585 $ 7,461 $ 258 $ 577,174 $ 555,784 Average Interest Rates 2.27% 2.96% 3.47% 3.37% 3.62% 4.88% 2.50% Floating Rate Deposits 924,852 - - - - - 924,852 891,570 Average Interest Rates 0.75% - - - - - 0.75% Other Interest Bearing Liabilities Fixed Rate Debt 3,275 26,418 3,881 3,914 3,846 31,811 73,145 73,981 Average Interest Rate 4.70% 3.17% 4.67% 3.72% 4.63% 5.08% 4.26% Floating Rate Debt 71,148 - - - 62,887 - 134,035 134,268 Average Interest Rate 2.63% - - - 5.89% - 4.16% Total Financial Liabilities $1,426,339 $116,448 $ 44,657 $15,499 $74,194 $32,069 $1,709,207 $1,655,603 Average interest Rate 1.31% 3.01% 3.58% 3.46% 5.60% 5.08% 1.76% (1) Based upon expected cashflows, unless otherwise indicated. (2) Based upon a combination of expected maturities and repricing opportunities. (3) Based upon contractual maturity, except for callable and floating rate securities, which are based on expected maturity and weighted average life, respectively. (4) Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as floating rate deposits in Year 1. Other time deposit balances are classified according to maturity.
28 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures - ------------------------------------------------ The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that the information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation and subject to the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company's disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives. Changes in Internal Control over Financial Reporting - ---------------------------------------------------- The Company's management, including the Chief Executive Officer and Chief Financial Officer, has reviewed the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(l) under the Securities Exchange Act of 1934). There have not been any changes in the Company's internal controls over financial reporting during the Company's most recently completed fiscal quarter that have materially affected, or that are reasonably likely to materially affect, the Company's internal control over financial reporting. 29 PART II. OTHER INFORMATION ITEMS 1-3. Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of Capital City Bank Group, Inc. was held on April 26, 2005. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's solicitations. The following summarizes all matters voted upon at this meeting. 1. The following directors were elected for terms expiring as noted. These individuals served on the Board of Directors prior to the Annual Meeting. The number of votes cast were as follows: For terms to expire at Against/ Abstentions/ the 2008 annual meeting: For Withheld Broker Non-Votes ------------------------ ------------ ---------- ------------------- Thomas A. Barron 11,149,980 13,609 - J. Everitt Drew 11,148,011 15,578 - Lina S. Knox 11,069,396 94,193 - John R. Lewis 11,086,005 77,585 - 2. The shareowners ratified the selection of KPMG LLP as the Company's independent auditors for the fiscal year ending December 31, 2005. The number of votes cast were as follows: Against/ Abstentions/ For Withheld Broker Non-Vote ------------ ---------- ----------------- 11,140,536 13,908 9,145 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS (A) Exhibits 31.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 31.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 32.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized. CAPITAL CITY BANK GROUP, INC. (Registrant) By: /s/ J. Kimbrough Davis ------------------------- J. Kimbrough Davis Executive Vice President and Chief Financial Officer Date: August 9, 2005 31 ??