UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-13358
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CAPITAL CITY BANK GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2273542
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
217 North Monroe Street, Tallahassee, Florida 32301
--------------------------------------------- -----
(Address of principal executive office) (Zip Code)
(850) 671-0300
--------------
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer[ ] Accelerated filer[X] Non-accelerated filer[ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At April 28, 2006, 18,666,607 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
1
CAPITAL CITY BANK GROUP, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 2006
TABLE OF CONTENTS
PART I PAGE
- --------------------------------------------------------------------------------------
1. Consolidated Financial Statements 4
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
3. Quantitative and Qualitative Disclosure About Market Risk 29
4. Controls and Procedures 31
PART II
- -------
1. Legal Proceedings 32
1.A. Risk Factors 32
2. Unregistered Sales of Equity Securities and
Use of Proceeds 32
3. Defaults Upon Senior Securities 32
4. Submission of Matters to a Vote of Security Holders 32
5. Other Information 32
6. Exhibits 32
Signatures 33
2
INTRODUCTORY NOTE:
Caution Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements about our
beliefs, plans, objectives, goals, expectations, estimates and intentions
that are subject to significant risks and uncertainties and are subject to
change based on various factors, many of which are beyond our control. The
words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan," "target," "goal," and similar
expressions are intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks
and uncertainties. Our actual future results may differ materially from
those set forth in our forward-looking statements.
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 Part II, Item 1A "Risk Factors" in this
Quarterly Report on Form 10-Q, and the following sections of our Annual Report
on Form 10-K for the year ended December 31, 2005 (the "2005 Form 10-K"):
(a) "Introductory Note"; (b) "Risk Factors" in Part I, Item 1A; and
(c) "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Part II, Item 7. However, other factors besides those
referenced also could adversely affect our results, and you should not
consider any such list of factors to be a complete set of all potential risks
or uncertainties. Any forward-looking statements made by us or on our behalf
speak only as of the date they are made. We do not undertake to update any
forward-looking statement, except as required by applicable law.
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
(Dollars In Thousands, Except Per Share Data)(1) 2006 2005
- --------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $ 37,343 $ 28,842
Investment Securities:
U.S. Treasury 79 136
U.S. Government Agencies and Corporations 814 820
States and Political Subdivisions 439 382
Other Securities 198 135
Funds Sold 539 159
---------- ----------
Total Interest Income 39,412 30,474
---------- ----------
INTEREST EXPENSE
Deposits 7,722 4,309
Short-Term Borrowings 824 450
Subordinated Notes Payable 926 441
Other Long-Term Borrowings 810 720
---------- ----------
Total Interest Expense 10,282 5,920
---------- ----------
Net Interest Income 29,130 24,554
Provision for Loan Losses 667 410
---------- ----------
Net Interest Income After
Provision for Loan Losses 28,463 24,144
---------- ----------
NONINTEREST INCOME
Service Charges on Deposit Accounts 5,680 4,348
Data Processing 637 607
Asset Management Fees 1,050 1,112
Mortgage Banking Revenues 721 763
Other 4,957 4,230
---------- ----------
Total Noninterest Income 13,045 11,060
---------- ----------
NONINTEREST EXPENSE
Salaries and Associate Benefits 15,430 12,560
Occupancy, Net 2,223 1,937
Furniture and Equipment 2,500 2,112
Intangible Amortization 1,530 1,196
Other 8,409 7,462
---------- ----------
Total Noninterest Expense 30,092 25,267
---------- ----------
Income Before Income Taxes 11,416 9,937
Income Taxes 3,995 3,560
---------- ----------
NET INCOME $ 7,421 $ 6,377
========== ==========
BASIC NET INCOME PER SHARE $ .40 $ .36
========== ==========
DILUTED NET INCOME PER SHARE $ .40 $ .36
========== ==========
Average Basic Shares Outstanding 18,651,746 17,700,071
========== ==========
Average Diluted Shares Outstanding 18,665,136 17,706,965
========== ==========
(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.
4
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2006 AND DECEMBER 31, 2005
(Unaudited)
March 31, December 31,
(Dollars In Thousands, Except Per Share Data) 2006 2005
- -------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 104,486 $ 105,195
Funds Sold and Interest Bearing Deposits 110,604 61,164
---------- ----------
Total Cash and Cash Equivalents 215,090 166,359
Investment Securities, Available-for-Sale 180,760 171,019
Loans, Net of Unearned Interest 2,054,656 2,067,494
Allowance for Loan Losses (17,279) (17,410)
---------- ----------
Loans, Net 2,037,377 2,050,084
Premises and Equipment, Net 76,693 73,818
Goodwill 84,810 84,829
Other Intangible Assets 24,148 25,622
Other Assets 55,841 53,731
---------- ----------
Total Assets $2,674,719 $2,625,462
========== ==========
LIABILITIES
Deposits:
Noninterest Bearing Deposits $ 562,140 $ 559,492
Interest Bearing Deposits 1,547,016 1,519,854
---------- ----------
Total Deposits 2,109,156 2,079,346
Short-Term Borrowings 89,105 82,973
Subordinated Notes Payable 62,887 62,887
Other Long-Term Borrowings 68,764 69,630
Other Liabilities 33,744 24,850
---------- ----------
Total Liabilities 2,363,656 2,319,686
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; 18,666,604 and 18,631,706 shares
issued and outstanding at March 31, 2006 and
December 31, 2005, respectively 187 186
Additional Paid-In Capital 84,291 83,304
Retained Earnings 227,920 223,532
Accumulated Other Comprehensive Loss, Net of Tax (1,335) (1,246)
---------- ----------
Total Shareowners' Equity 311,063 305,776
---------- ----------
Total Liabilities and Shareowners' Equity $2,674,719 $2,625,462
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
5
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Unaudited)
Additional Accumulated Other
Common Paid-In Retained Comprehensive
(Dollars in Thousands, Except Per Share Data) Stock Capital Earnings Loss, Net of Taxes Total
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $186 $83,304 $223,532 $(1,246) $305,776
Comprehensive Income:
Net Income - - 7,421 - 7,421
Net Change in Unrealized Loss
On Available-for-Sale Securities - - - (89) (89)
Total Comprehensive Income - - - - 7,332
Cash Dividends ($.1625 per share) - - (3,033) - (3,033)
Stock Performance Plan Compensation - 442 - - 442
Issuance of Common Stock 1 545 - - 546
---- ------- -------- ------- --------
Balance, March 31, 2006 $187 $84,291 $227,920 $(1,335) $311,063
==== ======= ======== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31
(Unaudited)
(Dollars in Thousands) 2006 2005
- -------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,421 $ 6,377
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Loan Losses 667 410
Depreciation 1,657 1,360
Net Securities Amortization 220 414
Amortization of Intangible Assets 1,530 1,196
Origination of Loans Held-for-Sale (40,260) (41,820)
Proceeds From Sale of Loans Held-for Sale 42,705 43,604
Net Gain From Sales of Loans Held-for-Sale (721) (763)
Non-Cash Compensation 442 338
Deferred Income Taxes 2,722 (497)
Net (Increase) Decrease in Other Assets (2,019) 388
Net Increase in Other Liabilities 6,629 5,249
-------- --------
Net Cash Provided by Operating Activities 20,993 16,256
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Available-for-Sale:
Purchases (41,170) -
Sales - -
Payments, Maturities, and Calls 31,024 17,632
Net Decrease (Increase) in Loans 9,828 (16,464)
Purchase of Premises & Equipment (4,558) (2,846)
Proceeds From Sales of Premises & Equipment 26 5
-------- --------
Net Cash Used In Investing Activities (4,850) (1,673)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits 29,810 (5,528)
Net Increase (Decrease) in Short-Term Borrowings 2,711 (17,465)
Increase in Other Long-Term Borrowings 3,250 -
Repayment of Other Long-Term Borrowings (694) (531)
Dividends Paid (3,033) (2,691)
Issuance of Common Stock 546 70
-------- --------
Net Cash Provided By (Used In) Financing Activities 32,588 (26,145)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 48,731 (11,562)
Cash and Cash Equivalents at Beginning of Period 166,359 161,545
-------- --------
Cash and Cash Equivalents at End of Period $215,090 $149,983
======== ========
Supplemental Disclosure:
Interest Paid on Deposits $ 7,612 $ 4,372
======== ========
Interest Paid on Debt $ 2,558 $ 1,606
======== ========
Taxes Paid $ 27 $ 22
======== ========
Loans Transferred to Other Real Estate $ 488 $ 59
======== ========
Issuance of Common Stock as Non-Cash Compensation $ 644 $ 338
======== ========
Transfer of Current Portion of Long-Term Borrowings
to Short-Term Borrowings $ 3,000 $ 43
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
7
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 March
31, 2006 and December 31, 2005, the results of operations for the three month
periods ended March 31, 2006 and 2005, and cash flows for the three month
periods ended March 31, 2006 and 2005.
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 the Notes to
Consolidated Financial Statements which are included in the Company's 2005
Annual Report on Form 10-K.
Stock-Based Compensation
On January 1, 2006, the Company changed its accounting policy related to
stock-based compensation in connection with the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment
(Revised 2004)" ("SFAS 123R"). See Note 7 - Stock-Based Compensation for
additional information.
(2) INVESTMENT SECURITIES
The amortized cost and related market value of investment securities
available-for-sale at March 31, 2006 and December 31, 2005 were as follows:
March 31, 2006
------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------
U.S. Treasury $ 11,496 $ - $ 59 $ 11,437
U.S. Government Agencies and Corporations 67,947 2 981 66,968
States and Political Subdivisions 69,017 24 620 68,421
Mortgage-Backed Securities 19,751 8 512 19,247
Other Securities(1) 14,687 - - 14,687
-------- --- ------ --------
Total Investment Securities $182,898 $34 $2,172 $180,760
======== === ====== ========
December 31, 2005
------------------------------------------
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------
U.S. Treasury $ 9,065 $ - $ 50 $ 9,015
U.S. Government Agencies and Corporations 75,233 - 1,017 74,216
States and Political Subdivisions 53,611 44 512 53,143
Mortgage-Backed Securities 20,948 35 452 20,531
Other Securities(1) 14,114 - - 14,114
-------- --- ------ --------
Total Investment Securities $172,971 $79 $2,031 $171,019
======== === ====== ========
(1) FHLB and FRB stock recorded at cost.
8
(3) LOANS
The composition of the Company's loan portfolio at March 31, 2006 and
December 31, 2005 was as follows:
(Dollars in Thousands) March 31, 2006 December 31, 2005
- -----------------------------------------------------------------------------
Commercial, Financial and Agricultural $ 209,642 $ 218,434
Real Estate - Construction 172,317 160,914
Real Estate - Commercial 693,617 718,741
Real Estate - Residential 566,356 553,124
Real Estate - Home Equity 163,189 165,337
Real Estate - Loans Held-for-Sale 3,967 4,875
Consumer 245,568 246,069
---------- ----------
Loans, Net of Unearned Interest $2,054,656 $2,067,494
========== ==========
(4) ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses for the three-
month periods ended March 31, 2006 and 2005, was as follows:
March 31,
-------------------------
(Dollars in Thousands) 2006 2005
- ----------------------------------------------------------------------------
Balance, Beginning of Period $17,410 $16,037
Provision for Loan Losses 667 410
Recoveries on Loans Previously Charged-Off 428 428
Loans Charged-Off (1,226) (835)
------- -------
Balance, End of Period $17,279 $16,040
======= =======
March 31, 2006 December 31, 2005
-------------------- ---------------------
Valuation Valuation
(Dollars in Thousands) Balance Allowance Balance Allowance
- --------------------------------------------------------------------------------------
Impaired Loans:
With Related Valuation Allowance $4,129 $2,383 $5,612 $2,915
Without Related Valuation Allowance $2,819 - $1,658 -
Three Months Ended
----------------------------------
(Dollars in Thousands) March 31, 2006 December 31, 2005
- -----------------------------------------------------------------------------------
Average Recorded Investment in Impaired Loans $8,718 $9,786
(5) INTANGIBLE ASSETS
The Company had intangible assets of $109.0 million and $110.5 million at
March 31, 2006 and December 31, 2005, respectively. Intangible assets were
as follows:
March 31, 2006 December 31, 2005
----------------------- -----------------------
Gross Accumulated Gross Accumulated
(Dollars in Thousands) Amount Amortization Amount Amortization
- ------------------------------------------------------------------------------------
Core Deposit Intangibles $ 47,176 $24,723 $ 47,176 $23,312
Goodwill 88,596 3,786 88,615 3,786
Customer Relationship Intangible 1,867 353 1,867 305
Non-Compete Agreement 539 358 483 287
-------- ------- -------- -------
Total Intangible Assets $138,178 $29,220 $138,141 $27,690
======== ======= ======== =======
Net Core Deposit Intangibles: As of March 31, 2006 and December 31, 2005,
the Company had net core deposit intangibles of $22.5 million and $23.9
million, respectively. Amortization expense for the first three months of
2006 and 2005 was $1.4 million and $1.1 million, respectively. Estimated
annual amortization expense is $5.6 million.
9
Goodwill: As of March 31, 2006 and December 31, 2005, the Company had
goodwill, net of accumulated amortization, of $84.8 million. 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."
Other: As of March 31, 2006 and December 31, 2005, the Company had a
customer relationship intangible, net of accumulated amortization, of $1.5
million and $1.6 million, respectively. This intangible was booked as a
result of the March 2004 acquisition of trust customer relationships from
Synovus Trust Company. Amortization expense for the first three months of
2006 and 2005 was $48,000 and $47,000, respectively. Estimated annual
amortization expense is $191,000 based on use of a 10-year useful life.
As of March 31, 2006 and December 31, 2005, the Company also had a non-
compete intangible, net of accumulated amortization, of $181,000 and
$196,000, 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 three months of 2006 and 2005 was $71,000
and $59,000, respectively. Estimated annual amortization expense for the
remainder of 2006 is $181,000.
(6) DEPOSITS
The composition of the Company's interest-bearing deposits at March 31, 2006
and December 31, 2005 was as follows:
(Dollars in Thousands) March 31, 2006 December 31, 2005
- ------------------------------------------------------------------------
NOW Accounts $ 518,024 $ 520,878
Money Market Accounts 369,416 331,094
Savings Deposits 137,780 144,296
Time Deposits 521,796 523,586
---------- ----------
Total Interest Bearing Deposits $1,547,016 $1,519,854
========== ==========
(7) STOCK-BASED COMPENSATION
In accordance with the Company's adoption of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") in the first quarter of 2003, the cost
related to stock-based associate compensation included in net income has been
accounted for under the fair value method in all reported periods.
On January 1, 2006, the Company adopted SFAS 123R. The Company continues to
include the cost of its share-based compensation plans in net income under
the fair value method.
As of March 31, 2006, the Company had three stock-based compensation plans,
consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate
Stock Purchase Plan, and the 2005 Director Stock Purchase Plan. For 2006,
the Company also has a stock option arrangement with a key executive officer.
Total compensation expense associated with these plans for the three months
ended March 31, 2006 and 2005, was approximately $461,000 and $258,000,
respectively.
2005 AIP. The Company's 2005 AIP allows the Company's Board of Directors to
award key associates various forms of equity-based incentive compensation.
Under the 2005 AIP, the Company has adopted the Stock-Based Incentive Plan
(the "Incentive Plan"), effective January 1, 2006, which is a performance-
based equity bonus plan for selected members of management, including all
executive officers. Under the Incentive Plan, all participants are eligible
to earn an equity award, consisting of performance shares, in each year of
the five-year period ending December 31, 2010. Annual awards are tied to the
annual earnings progression necessary to achieve the Project 2010 goal. The
grant-date fair value of an annual compensation award is $1.5 million.
A total of 43,437 shares are eligible for issuance annually.
10
At the end of each calendar year, the Compensation Committee will confirm
whether the performance goals have been met prior to the payout of any
awards. Any performance shares earned under the Incentive Plan will be
issued in the calendar quarter following the calendar year in which the
shares were earned.
In accordance with the provisions of SFAS 123R, the Company recognized
expense of approximately $367,000 for the first quarter of 2006 related to
the Incentive Plan. Under a substantially similar predecessor plan, the
Company recognized expense of $166,000 for the first quarter of 2005. A
total of 875,000 shares of common stock have been reserved for issuance under
the 2005 AIP. To date, the Company has issued 28,093 shares of common stock.
2005 Director Stock Purchase Plan ("DSPP"). The Company's DSPP allows the
directors to purchase the Company's common stock at a price equal to 90% of
the closing price on the date of purchase. Stock purchases under the DSPP
are limited to the amount of the directors' annual retainer and meeting fees.
The DSPP has 93,750 shares reserved for issuance. A total of 11,623 shares
have been issued since the inception of the DSPP. For the first quarter of
2006, the Company issued 5,034 shares under the DSPP and recognized $18,000
in expense related to this plan. For the first quarter of 2005, the Company
issued 4,816 shares and recognized $14,000 in expense related to the DSPP.
2005 Associate Stock Purchase Plan ("ASPP"). Under the Company's ASPP,
substantially all associates may purchase the Company's common stock through
payroll deductions at a price equal to 90% of the lower of the fair market
value at the beginning or end of each six-month offering period. Stock
purchases under the ASPP are limited to 10% of an associate's eligible
compensation, up to a maximum of $25,000 (fair market value on each
enrollment date) in any plan year. Shares are issued at the beginning of the
quarter following each six-month offering period. The ASPP has 593,750
shares of common stock reserved for issuance. A total of 26,938 shares have
been issued since inception of the ASPP. For the first quarter of 2006, the
Company recognized $23,000 in expense related to this plan. For the first
quarter of 2005, the Company recognized $22,000 in expense related to the
ASPP.
Based on the Black-Scholes option pricing model, the weighted average
estimated fair value of the purchase rights granted under the ASPP Plan was
$6.22 for the first quarter of 2006. For the first quarter of 2005, the
weighted average fair value of the purchase rights granted was $5.64. In
calculating compensation, the fair value of each stock purchase right was
estimated on the date of grant using the following weighted average
assumptions:
First Quarter
-----------------
2006 2005
- ----------------------------------------------
Dividend yield 1.8% 1.9%
Expected volatility 25.0% 26.0%
Risk-free interest rate 4.0% 2.2%
Expected life (in years) 0.5 0.5
Executive Stock Option Agreement. In 2006, the Company's Board of Directors
approved a stock option agreement for a key executive officer (William G.
Smith, Jr. - Chairman, President and CEO, CCBG). Similar stock option
agreements were approved in 2003-2005. These agreements grant a non-
qualified stock option award upon achieving certain annual earnings per share
conditions set by the Board, subject to certain vesting requirements. The
options granted under the agreements have a term of ten years and vest at a
rate of one-third on each of the first, second, and third anniversaries of
the date of grant. Under the 2004 and 2003 agreements, 37,246 and 23,138
options, respectively, were issued, none of which has been exercised. The
fair value of a 2004 option was $13.42, and the fair value of a 2003 option
was $11.64. The exercise prices for the 2004 and 2003 options are $32.69 and
$32.96, respectively. Under the 2005 agreement, the earnings per share
conditions were not met; therefore, no economic value was earned by the
executive. In accordance with the provisions of SFAS 123R and SFAS 123, the
Company recognized expense of approximately $53,000 and $56,000 for the first
quarter of 2006 and first quarter of 2005, respectively, related to the
aforementioned agreements.
11
A summary of the status of the Company's nonvested option shares as of March
31, 2006 is presented below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term Value
- ----------------------------------------------------------------------------------
Outstanding at January 1, 2006 60,384 $32.83 8.6 $ 88,161
Granted - - - -
Exercised - - - -
Forfeited or expired - - - -
------
Outstanding at March 31, 2006 60,384 $32.83 8.4 $164,244
====== ====== === ========
Exercisable at March 31, 2006 27,841 $32.83 8.4 $ 75,728
====== ====== === ========
As of March 31, 2006, there was $268,000 of total unrecognized compensation
cost related to the nonvested option shares granted under the agreements.
That cost is expected to be recognized over a remaining weighted-average
period of 16 months.
(8) EMPLOYEE BENEFIT PLANS
The components of the net periodic benefit costs for the Company's qualified
benefit pension plan and Supplemental Executive Retirement Plan ("SERP") were
as follows:
Three months ended March 31,
------------------------------------------
Qualified Plan SERP
------------------ ------------------
(Dollars in Thousands) 2006 2005 2006 2005
- -------------------------------------------------------------------------------------
Discount Rate 5.75% 6.00% 5.75% 6.00%
Long-Term Rate of Return on Assets 8.00% 8.00% N/A N/A
Service Cost $1,250 $1,040 $ 30 $ 35
Interest Cost 875 800 56 54
Expected Return on Plan Assets (975) (798) N/A N/A
Prior Service Cost Amortization 50 55 15 15
Net Loss Amortization 375 295 19 21
Net Periodic Benefit Cost $1,575 $1,392 $120 $125
(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 clients. 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 March 31, 2006, the amounts associated with the Company's
off-balance sheet obligations were as follows:
(Dollars in Thousands) Amount
- -----------------------------------------------
Commitments to Extend Credit(1) $440,312
Standby Letters of Credit $ 18,901
(1) Commitments include unfunded loans, revolving lines of credit,
and other unused commitments.
12
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.
Contingencies. The Company is a party to lawsuits and claims arising out of
the normal course of business. In management's opinion, there are no known
pending claims or litigation, the outcome of which would, individually or in
the aggregate, have a material effect on the consolidated results of
operations, financial position, or cash flows of the Company.
(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). 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 $(89,000) and $(797,000)
for the three months ended March 31, 2006 and 2005, respectively.
12
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)(1)
2006 2005 2004
---------- ---------------------------------------------- ----------------------------------
First Fourth Third Second First Fourth Third Second
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Interest Income $ 39,412 $ 38,780 $ 36,889 $ 33,910 $ 30,474 $ 29,930 $ 24,660 $ 24,265
Interest Expense 10,282 9,470 7,885 6,788 5,920 5,634 3,408 3,221
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income 29,130 29,310 29,004 27,122 24,554 24,296 21,252 21,044
Provision for
Loan Losses 667 1,333 376 388 410 300 300 580
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision
for Loan Losses 28,463 27,977 28,628 26,734 24,144 23,996 20,952 20,464
Gain on Sale of Credit
Card Portfolios - - - - - 324 6,857 -
Noninterest Income 13,045 12,974 13,123 12,041 11,060 11,596 10,864 11,031
Conversion/
Merger Expense - 24 180 234 - 436 68 4
Noninterest Expense 30,092 29,318 28,429 26,362 25,267 24,481 21,565 21,597
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income Before
Provision for
Income Taxes 11,416 11,609 13,142 12,179 9,937 10,999 17,040 9,894
Provision for
Income Taxes 3,995 4,150 4,565 4,311 3,560 3,737 6,221 3,451
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 7,421 $ 7,459 $ 8,577 $ 7,868 $ 6,377 $ 7,262 $ 10,819 $ 6,443
========== ========== ========== ========== ========== ========== ========== ==========
Net Interest
Income (FTE) $ 29,461 $ 29,652 $ 29,329 $ 27,396 $ 24,835 $ 24,619 $ 21,528 $ 21,333
Per Common Share:
Net Income Basic $ .40 $ .40 $ .46 $ .44 $ .36 $ .40 $ .66 $ .38
Net Income Diluted .40 .40 .46 .44 .36 .40 .66 .38
Dividends Declared .163 .163 .152 .152 .152 .152 .144 .144
Diluted Book Value 16.65 16.39 16.17 15.87 14.69 14.51 13.19 12.64
Market Price:
High 37.97 39.33 38.72 33.46 33.60 36.78 32.96 34.52
Low 33.79 33.21 31.78 28.02 29.30 30.17 26.66 28.40
Close 35.55 34.29 37.71 32.32 32.41 33.44 30.97 31.67
Selected Average
Balances:
Loans $2,048,642 $2,062,775 $2,046,968 $1,932,637 $1,827,327 $1,779,736 $1,524,401 $1,491,142
Earning Assets 2,275,667 2,279,010 2,250,902 2,170,483 2,047,049 2,066,111 1,734,708 1,721,655
Assets 2,604,458 2,607,597 2,569,524 2,458,788 2,306,807 2,322,870 1,941,372 1,929,485
Deposits 2,040,248 2,027,017 2,013,427 1,932,144 1,847,378 1,853,588 1,545,224 1,538,630
Shareowners' Equity 311,461 306,208 300,931 278,107 260,946 248,773 217,273 210,211
Common Equivalent
Average Shares:
Basic 18,652 18,624 18,623 18,094 17,700 17,444 16,604 16,593
Diluted 18,665 18,654 18,649 18,102 17,708 17,451 16,609 16,596
Ratios:
ROA 1.16% 1.14% 1.32% 1.28% 1.12% 1.24% 2.22%(2) 1.34%
ROE 9.66% 9.67% 11.31% 11.35% 9.91% 11.61% 19.81%(2) 12.33%
Net Interest
Margin (FTE) 5.25% 5.16% 5.17% 5.07% 4.92% 4.75% 4.94% 4.99%
Efficiency Ratio 67.20% 65.22% 63.60% 63.56% 67.06% 63.85% 52.60%(2) 63.87%
(1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005.
(2) Includes $6.9 million ($4.2 million after-tax) one-time gain on sale of credit card portfolio.
14
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 our
financial condition and results of operations and should be read in
conjunction with the Consolidated Financial Statements and related notes.
The MD&A is divided into subsections entitled "Business Overview," "Financial
Overview," "Results of Operations," "Financial Condition," "Liquidity and
Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting
Policies." Information therein should facilitate a better understanding of
the major factors and trends that affect our earnings performance and
financial condition, and how our performance during 2006 compares with prior
years. Throughout this section, Capital City Bank Group, Inc., and its
subsidiary, collectively, are referred to as "CCBG," "Company," "we," "us,"
or "our." 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 for average balances and interest rates
presented on a quarterly basis.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in this
Quarterly Report on Form 10-Q.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A section, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include,
among others, statements about our beliefs, plans, objectives, goals,
expectations, estimates and intentions that are subject to significant risks
and uncertainties and are subject to change based on various factors, many of
which are beyond our control. The words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan," "target,"
"goal," and similar expressions are intended to identify forward-looking
statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those
set forth in our forward-looking statements. Please see the Introductory
Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, which
should be read in conjunction with this Quarterly Report (as updated by
Item 1A, "Risk Factors," in Part II of this Quarterly Report), and in our
other filings made from time to time with the SEC after the date of this
report. Our ability to achieve our financial objectives could be adversely
affected by the factors discussed in detail in Item 1A, "Risk Factors," in
our Annual Report on Form 10-K, as well as:
* our ability to integrate the business and operations of companies and
banks that we have acquired, and those we may acquire in the future;
* strength of the United States economy in general and the strength of
the local economies in which we conduct operations;
* effects of harsh weather conditions, including hurricanes;
* inflation, interest rate, market and monetary fluctuations;
* effect of changes in the stock market and other capital markets;
15
* legislative or regulatory changes;
* willingness of customers to accept third-party products and services
for our products and services and vice versa;
* changes in the securities and real estate markets;
* increased competition and its effect on pricing;
* technological changes;
* changes in monetary and fiscal policies of the U.S. government;
* changes in consumer spending and savings habits;
* growth and profitability of our noninterest income;
* changes in accounting principles, policies, practices or guidelines;
* other risks described from time to time in filings with the Securities
and Exchange Commission; and
* our ability to manage the risks involved in the foregoing.
However, other factors besides those listed above, in our Quarterly Report or
in our Annual Report also could adversely affect our results, and you should
not consider any such list of factors to be a complete set of all potential
risks or uncertainties. Any forward-looking statements made by us or on our
behalf speak only as of the date they are made. We do not undertake to
update any forward-looking statement, except as required by applicable law.
BUSINESS OVERVIEW
We are a financial holding company headquartered in Tallahassee, Florida and
are the parent of our wholly-owned subsidiary, Capital City Bank (the
"Bank"). The Bank offers a broad array of products and services through a
total of 69 full-service offices located in Florida, Georgia, and Alabama.
The Bank also has mortgage lending offices in three additional Florida
communities, and one Georgia community. The Bank offers commercial and
retail banking services, as well as trust and asset management, merchant
services, brokerage and data processing services.
Our profitability, like most financial institutions, is dependent to a large
extent upon net interest income, which is the difference between the interest
received on earning assets, such as loans and securities, and the interest
paid on interest-bearing liabilities, principally deposits and borrowings.
Results of operations are also affected by the provision for loan losses,
operating expenses such as salaries and employee benefits, occupancy and
other operating expenses including income taxes, and non-interest income such
as service charges on deposit accounts, asset management and trust fees,
mortgage banking revenues, merchant services, brokerage and data processing
revenues.
Our philosophy is to grow and prosper, building long-term relationships based
on quality service, high ethical standards, and safe and sound banking
practices. We are a super-community bank in the relationship banking
business with a locally oriented, community-based focus, which is augmented
by experienced, centralized support in select specialized areas. Our local
market orientation is reflected in our network of banking office locations,
experienced community executives, and community advisory boards which support
our focus on responding to local banking needs. We strive to offer a broad
array of sophisticated products and to provide quality service by empowering
associates to make decisions in their local markets.
16
Pursuant to our long-term strategic initiative, "Project 2010", we have
continued our expansion, emphasizing a combination of growth in existing
markets and acquisitions. Acquisitions will continue to be focused on a
three state area including Florida, Georgia, and Alabama with a particular
focus on financial institutions, which are $100 million to $400 million in
asset size and generally located on the outskirts of major metropolitan
areas. We continue to evaluate de novo expansion opportunities in attractive
new markets in the event that acquisition opportunities are not feasible.
Other expansion opportunities that will be evaluated include asset
management, insurance, and mortgage banking.
Recent Acquisitions. On May 20, 2005, we completed our merger with First
Alachua Banking Corporation ("FABC"), headquartered in Alachua, Florida. We
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. FABC's
wholly-owned subsidiary, First National Bank of Alachua, 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.
FINANCIAL OVERVIEW
A summary overview of our financial performance for the first quarter of 2006
versus the first quarter of 2005 is provided below. Results for the first
quarter of 2006 include the impact of the acquisition of FABC in May 2005.
Highlights -
* Quarterly earnings totaled $7.4 million, or $0.40 per diluted share,
increases of 16.4% and 11.1%, respectively.
* Earnings improvement driven by growth in operating revenue reflective
of an 18.6% increase in net interest income and 17.9% increase in
noninterest income.
* Growth in net interest income is reflective of loan growth from the May
2005 acquisition and strong organic loan growth throughout 2005, and
improvement in the net interest margin.
* Net interest margin improved 33 basis points primarily due to a
favorable re-pricing on existing assets and higher yields on new loan
production.
* Growth in noninterest income is primarily due to a 30.6% increase in
deposit service charge fees primarily reflective of growth in free
checking accounts.
* Continued strong credit quality as reflected by a nonperforming asset
ratio of .28% and an annualized net charge-off ratio of .16%.
* We remain well capitalized with a risk based capital ratio of 13.94%.
RESULTS OF OPERATIONS
Net Income
Earnings were $7.4 million, or $.40 per diluted share, for the first quarter
of 2006. This compares to $6.4 million, or $.36 per diluted share for the
first quarter of 2005, increases of 16.4% and 11.1%, respectively. Results
include the impact of the acquisition of FABC in May 2005.
The increase in our earnings was primarily attributable to an increase in
operating revenue (defined as net interest income plus noninterest income) of
$6.6 million, or 18.4%, partially offset by an increase in our loan loss
provision of $257,000, or 62.7%, noninterest expense of $4.8 million, or
19.1%, and income taxes of $435,000,
17
or 12.2%. The increase in operating revenue reflects an 18.6% increase in
net interest income and a 17.9% increase in noninterest income. The increase
in net interest income is attributable to loan growth and an improving net
interest margin. Our noninterest income increased because of higher deposit
service charge fees, retail brokerage fees, and card processing fees. The
higher loan loss provision reflects a higher level of required reserves.
Higher expense for compensation and occupancy drove the increase in
noninterest expense.
A condensed earnings summary is presented below:
For the Three Months
Ended March 31,
----------------------------
(Dollars in Thousands) 2006 2005
- -----------------------------------------------------------------
Interest Income $39,412 $30,474
Taxable Equivalent Adjustment(1) 331 281
------- -------
Interest Income (FTE) 39,743 30,755
Interest Expense 10,282 5,920
------- -------
Net Interest Income (FTE) 29,461 24,835
Provision for Loan Losses 667 410
Taxable Equivalent Adjustment 331 281
------- -------
Net Int. Inc. After Provision 28,463 24,144
Noninterest Income 13,045 11,060
Noninterest Expense 30,092 25,267
------- -------
Income Before Income Taxes 11,416 9,937
Income Taxes 3,995 3,560
------- -------
Net Income $ 7,421 $ 6,377
======= =======
Percent Change 16.37% 30.84%
Return on Average Assets(2) 1.16% 1.12%
Return on Average Equity(2) 9.66% 9.91%
(1) Computed using a statutory tax rate of 35%
(2) Annualized
Net Interest Income
Net interest income represents our single largest source of earnings and is
equal to interest income and fees generated by earning assets, less interest
expense paid on interest bearing liabilities. First quarter taxable-
equivalent net interest income increased $4.6 million, or 18.6%, over the
comparable quarter in 2005. This increase was caused by the effect of our
acquisition of FABC, higher earning asset yields and a slight improvement in
earning asset mix, partially offset by higher funding costs and change in
deposit mix. The increase in yields and funding costs are a result of the
higher interest rate environment. The combination of these factors resulted
in a 33 basis point improvement in the net interest margin as compared to the
first quarter of 2005. Table I provides a comparative analysis of our
average balances and interest rates.
For the first quarter of 2006, taxable-equivalent interest income increased
$9.0 million, or 29.2% over the comparable quarter in 2005. The increase was
attributable to a change in earning asset mix, higher yields on earning
assets, and the acquisition of FABC. Earning asset yields improved 100 basis
points to 7.08% in the first quarter of 2006 from 6.09% in the first quarter
of 2005 and 6.81% from the prior quarter, primarily attributable to the
higher interest rate environment. We anticipate that our income on earning
assets will expand during the second quarter due to the higher rate
environment.
Interest expense for the first quarter increased $4.4 million, or 73.7%, from
the comparable prior-year period. The unfavorable variance is attributable
to higher rates paid on all interest bearing liabilities and an increase in
long-term debt costs resulting from debt secured to fund the FABC acquisition.
The average rate
18
paid on interest bearing liabilities of 2.39% in the first quarter of 2006
represents an increase of 22 and 78 basis points, respectively, over the
fourth and first quarters of 2005. We anticipate that our interest expense
will continue to increase in the second quarter as a result of the higher rate
environment and increased competition.
Our interest rate spread (defined as the average federal taxable-equivalent
yield on earning assets less the average rate paid on interest bearing
liabilities) increased from 4.48% in the first quarter of 2005 to 4.69% in
the comparable period of 2006, reflecting the higher yield on earning assets.
Our net yield on earning assets (defined as federal taxable-equivalent net
interest income divided by average earning assets) was 5.25% in the first
three months of 2006, versus 4.92% in the first three months of 2005. The
increase in margin reflects higher asset yields driven by rising interest
rates. If interest rates continue to rise at a measured pace, we anticipate
that the net yield on earning assets will remain constant or may slightly
improve during the second quarter of 2006 as higher yields will only be
partially offset by the rising costs of funds. Net interest income is
expected to expand slightly during the second quarter, which is attributable
to anticipated higher net yield on earning assets, favorable shift in mix of
earning assets and other factors noted above.
Provisions for Loan Losses
The provision for loan losses of $667,000 for the quarter was higher than the
first quarter of 2005 due to a higher level of required reserves based on our
analysis of the allowance for loan losses at quarter-end. Net charge-offs
totaled $798,000, or .16% of average loans for the quarter compared to
$407,000, or .09% for the first quarter of 2005. At quarter-end the
allowance for loan losses was .84% of outstanding loans and provided coverage
of 331% of nonperforming loans.
Detail of charge-off activity for the respective periods is set forth below:
Three Months Ended
March 31,
--------------------
(Dollars in Thousands) 2006 2005
- ------------------------------------------------------------------
CHARGE-OFFS
Commercial, Financial and Agricultural $ 322 $ 88
Real Estate - Construction - -
Real Estate - Commercial 291 4
Real Estate - Residential 22 25
Consumer 591 718
------ ------
Total Charge-offs 1,226 835
------ ------
RECOVERIES
Commercial, Financial and Agricultural 62 9
Real Estate - Construction - -
Real Estate - Commercial 3 -
Real Estate - Residential 7 2
Consumer 356 417
------ ------
Total Recoveries 428 428
------ ------
Net Charge-offs $ 798 $ 407
====== ======
Net Charge-Offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest .16% .09%
====== ======
Noninterest Income
Noninterest income increased $2.0 million, or 17.9%, from the first quarter
of 2005 primarily due to higher deposit service charge fees, retail brokerage
fees, card processing fees, and other income. Noninterest income represented
30.9% of operating revenues in the first quarter of 2006 compared to 31.1%
for the same period in 2005.
19
The table below reflects the major components of noninterest income.
Three Months Ended
March 31,
---------------------
(Dollars in Thousands) 2006 2005
- -------------------------------------------------------------------
Noninterest Income:
Service Charges on Deposit Accounts $ 5,680 $ 4,348
Data Processing 637 607
Asset Management Fees 1,050 1,112
Retail Brokerage Fees 483 299
Mortgage Banking Revenues 721 763
Merchant Services Fees 1,725 1,564
Interchange Fees 675 491
ATM/Debit Card Fees 599 538
Other 1,475 1,338
------- -------
Total Noninterest Income $13,045 $11,060
======= =======
Various significant components of noninterest income are discussed in more
detail below.
Service Charges on Deposit Accounts. Deposit service charge fees increased
$1.3 million, or 30.6%, from the comparable period in 2005. The increase
reflects higher overdraft and nonsufficient funds fees due primarily to
growth in deposit accounts attributable to an increase in free checking
accounts.
Asset Management Fees. Income from asset management activities decreased
$62,000, or 5.6%, from the comparable period in 2005.
Mortgage Banking Revenues. Mortgage banking revenues decreased $42,000, or
5.5%, from the comparable period in 2005. The decrease reflects the local
and national trend of a slower housing market and a decreased level of
refinance activity. The residential pipeline picked up momentum toward the
end of the first quarter and is now at a level slightly lower than the first
quarter of 2005.
Card Fees. Card processing fees (including merchant services fees,
interchange fees, and ATM/debit card fees) increased $406,000, or 15.7%, over
the comparable period in 2005 due to growth in transaction volume.
Other. Other income increased $137,000, or 10.2%, over the comparable period
in 2005 due primarily to increases in credit life/vendor single interest
commission fees and check printing fees.
Noninterest Expense
Noninterest expense in the first quarter of 2006 increased $4.8 million, or
19.1%, over the first quarter of 2005.
20
The table below reflects the major components of noninterest expense.
Three Months Ended
March 31,
---------------------
(Dollars in Thousands) 2006 2005
- ---------------------------------------------------------------
Noninterest Expense:
Salaries $11,715 $ 9,658
Associate Benefits 3,715 2,902
------- -------
Total Compensation 15,430 12,560
Premises 2,223 1,937
Equipment 2,500 2,112
------- -------
Total Occupancy 4,723 4,049
Legal Fees 517 368
Professional Fees 754 696
Processing Services 434 399
Advertising 999 1,200
Travel and Entertainment 386 265
Printing and Supplies 607 451
Telephone 622 519
Postage 281 325
Intangible Amortization 1,530 1,196
Interchange Fees 1,494 1,341
Courier Service 330 308
Miscellaneous 1,985 1,590
------- -------
Total Other 9,939 8,658
------- -------
Total Noninterest Expense $30,092 $25,267
======= =======
Various significant components of noninterest expense are discussed in more
detail below.
Compensation. Salaries and associate benefit expense increased $2.9 million,
or 22.9%, over the first quarter of 2005. This increase is due primarily to
higher associate salaries and payroll taxes of $1.4 million, higher cash
performance based compensation of $387,000 (cash incentive and profit
participation), higher stock based compensation of $223,000, higher benefit
expense (insurance and pension) of $483,000, and lower realized loan cost of
$235,000. The increase in associate salaries and payroll tax expenses
primarily reflects the addition of associates from the FABC acquisition in
May 2005 and annual merit/market based raises for associates. The increase
in cash performance based compensation reflects a higher achievement rate of
performance goals. Higher stock based compensation reflects an increase in
plan participants and higher target awards due to the adoption of our new
Stock-Based Incentive Plan. The increase in expense for insurance and
pension benefits is also reflective of an increase in eligible participants.
Realized loan cost reflects the impact of SFAS No. 91, which requires
deferral and amortization of loan costs that are accounted for as a credit
offset to salary expense. The decrease in loan production for the quarter
reduced the amount of this offset as compared to the first quarter of 2005.
Occupancy. Occupancy expense (including premises and equipment) increased
$674,000, or 16.7%, over the first quarter of 2005. We experienced increases
in depreciation of $297,000, maintenance and repairs (building and FF&E) of
$135,000, utilities of $72,000, and maintenance agreements (FF&E) of $173,000
from the comparable period in 2005, all of which reflect the increase in the
number of banking offices from recent acquisitions and new banking office
openings during the later part of 2005.
Other. Other noninterest expense increased $1.3 million, or 14.8%, over the
first quarter of 2005. Legal fees have increased due to a general increase
in legal services tied to corporate activities. The higher expense for
travel and entertainment is linked primarily to associate related events that
took place during the quarter. The increase in printing and supplies expense
was driven by an increase
21
in the number of banking offices requiring printed brochures for bank
products and services, and supplies. Telephone expense increased also due to
an increase in banking offices. The increase in intangible amortization
reflects new core deposit amortization from the FABC acquisition. The
increase in interchange fees is due to increased merchant card transaction
volume. Miscellaneous expense grew due to increases in other losses,
ATM/debit card production, associate hiring expense, and seminars/education
expense.
Net noninterest expense (noninterest income minus noninterest expense,
excluding intangible amortization) as a percent of average assets was 2.38%
in the first quarter of 2006 compared to 2.29% in 2005. Our efficiency ratio
(noninterest expense, excluding intangible amortization, expressed as a
percent of the sum of taxable-equivalent net interest income plus noninterest
income) was 67.20% in the first quarter 2006 compared to 67.06% for the
comparable quarter in 2005.
Income Taxes
The provision for income taxes increased $435,000, or 12.2%, over the first
quarter of 2005, reflecting higher taxable income. Our effective tax rate
for the first quarter of 2006 was 35.1% compared to 35.8% for the same
quarter in 2005. The decrease in the effective tax rate is primarily
attributable to a higher level of tax-free securities income.
FINANCIAL CONDITION
Asset and liability balances include the integration of FABC in May 2005.
Average assets decreased $3.1 million, or .12%, to $2.604 billion for the
quarter-ended March 31, 2006 from $2.607 billion in the fourth quarter of
2005. Average earning assets of $2.276 billion decreased $3.3 million, or
..15%, from the fourth quarter of 2005, attributable to a $14.1 million
decline in average loans and a $6.5 million decline in average investment
securities, partially offset by a $17.3 million increase in average short
term investments. These variances are discussed in more detail below.
Funds Sold
We ended the first quarter with approximately $29.5 million in average net
overnight funds sold, compared to $5.7 million net overnight funds purchased
in the fourth quarter of 2005. The improvement reflects the increase in
deposits that is discussed in further detail below (Deposits). Growth in
deposits during the quarter helped to reduce the reliance on purchasing
overnight funds.
Investment Securities
Our investment portfolio is a significant component of our operations and, as
such, it functions as a key element of liquidity and asset/liability
management. As of March 31, 2006, the average investment portfolio decreased
$6.5 million, or 3.6%, from the fourth quarter of 2005. We will continue to
evaluate the need to purchase securities for the investment portfolio
throughout 2006, taking into consideration liquidity needed to fund loan
growth and to 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 March 31,
2006 and December 31, 2005, shareowners' equity included a net unrealized
loss of $1.3 million and $1.2 million, respectively.
Loans
Average loans for the first quarter decreased $14.1 million, or .69%, from
the fourth quarter, due to higher than expected loan activity (principal pay-
downs and pay-offs). Lower than expected loan production was realized during
the first quarter, however,
22
the pipeline of new loan requests has accelerated and net loan growth is
expected in the second quarter.
Our nonperforming loans were $5.2 million at March 31, 2006 versus $5.3
million at December 31, 2005. As a percent of nonperforming loans, the
allowance for loan losses represented 331% at March 31, 2006 and December 31,
2005. 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 $0.6 million at March 31,
2006 versus $0.3 million at December 31, 2005. The ratio of nonperforming
assets as a percent of loans plus other real estate was .28% at March 31,
2006, compared to .27% at December 31, 2005.
We maintain an 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 borrowers' inability or unwillingness
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. We evaluate the
adequacy of the allowance for loan losses on a quarterly basis.
The allowance for loan losses at March 31, 2006 was $17.3 million, compared
to $17.4 million at December 31, 2005. At March 31, 2006 and December 31,
2005, the allowance represented 0.84% of total loans. While there can be no
assurance that we will not sustain loan losses in a particular period that
are substantial in relation to the size of the allowance, our assessment of
the loan portfolio does not indicate a likelihood of this occurrence. It is
management's opinion that the allowance at March 31, 2006 is adequate to
absorb losses inherent in the loan portfolio at quarter-end.
Deposits
Average deposits for the first quarter of 2006 increased $16.2 million, or
..80% from the fourth quarter of 2005 due to continued strong increases in NOW
($26.5 million) and money market ($35.7 million) account balances. The
increases reflect new free checking deposits and an increase in Cash Power
money market balances.
The ratio of average noninterest bearing deposits to total deposits was 25.7%
for the first quarter of 2006, compared to 26.8% for the fourth quarter of
2005. The decline in the percentage is attributable to the strong growth in
interest bearing nonmaturity deposits, primarily interest bearing free
checking accounts and Cash Power money market accounts. For the same period,
the ratio of average interest bearing liabilities to average earning assets
was 76.6% and 75.8%, 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 our financial
position in an effort to ensure we have 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,
our bank lines of credit, approved lines for the purchase of federal funds by
CCB and Federal Home Loan Bank ("FHLB") advances.
23
Average liquidity (defined as funds sold and interest bearing deposits with
other banks) for the first quarter of 2006 was approximately $49.6 million,
an increase of $17.3 million from the fourth quarter of 2005. The increase
is primarily reflective of deposit growth. Management expects liquidity
levels to decline in the second quarter due to funding of planned loan
growth.
Borrowings. We have the ability to draw on a $25.0 million Revolving Credit
Note, due on October 15, 2007. Interest is payable quarterly at LIBOR plus
an applicable margin on advances. The revolving credit is unsecured. The
existing loan agreement contains certain financial covenants that we must
maintain. At March 31, 2006, we were in compliance with all of the terms of
the agreement and had $25.0 million available under the credit facility.
For the first three months of the year, the Bank made scheduled FHLB advance
payments totaling approximately $0.7 million and obtained one new FHLB
advance for $3.2 million.
We 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 the first five years, then adjusts
annually thereafter based on the three month LIBOR plus a margin of 1.80%.
The note matures on June 15, 2035. The proceeds of the borrowing were used
to fund the cash portion of the acquisition price for the purchase of FABC.
Contractual Cash Obligations. We maintain certain contractual arrangements
to make future cash payments. The table below details those future cash
payment obligations as of March 31, 2006. Payments for borrowings do not
include interest. Payments related to leases are based on actual payments
specified in the underlying contracts.
Payments Due By Period
-----------------------------------------------
1 Year 1 - 3 4 - 5 After
(Dollars in Thousands) or Less Years Years 5 Years Total
- ------------------------------------------------------------------------------------
Federal Home Loan Bank Advances $32,112 $3,028 $6,349 $ 31,673 $ 73,162
Subordinated Notes Payable - - - 62,887 62,887
Operating Lease Obligations 1,059 2,512 2,180 7,088 12,839
------- ------ ------ -------- --------
Total Contractual Cash Obligations $33,171 $5,540 $8,529 $101,647 $148,888
======= ====== ====== ======== ========
Capital
Equity capital was $311.1 million as of March 31, 2006 compared to $305.8
million as of December 31, 2005. 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 10.34% at March 31, 2006
compared to 10.27% at December 31, 2005. Further, the risk-adjusted capital
ratio of 13.56% at March 31, 2006 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 our
capital calculations.
Adequate capital and financial strength is paramount to the stability of CCBG
and the Bank. Cash dividends declared and paid should not place unnecessary
strain on our 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 we are considered to have
adequate capital. Future capital requirements and corporate plans are
considered when the Board considers a dividend payment. Dividends declared
and paid during the first quarter of 2006 totaled $.1625 per share compared
to $.1520 per share for the first quarter of 2005, an increase of 6.9%. The
dividend payout ratios for the first quarter ended 2006 and 2005 were 40.1%
and 41.6%, respectively.
24
State and federal regulations as well as our long-term debt agreements place
certain restrictions on the payment of dividends by both CCBG and the Bank.
At March 31, 2006, these regulations and covenants did not impair CCBG 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 three months of 2006, shareowners' equity increased $5.3
million, or 6.9%, on an annualized basis. Growth in equity during the first
three months of the year was positively impacted by net income of $7.4
million, the issuance of common stock of $0.5 million, and stock-based
compensation accretion of $0.4 million. Equity was reduced by dividends paid
during the first three months of the year by $3.0 million, or $.1625 per
share and an increase in the net unrealized loss on available-for-sale
securities of $0.1 million. At March 31, 2006, our common stock had a book
value of $16.65 per diluted share compared to $16.39 at December 31, 2005.
Our Board of Directors has authorized the repurchase of up to 1,171,875
shares of our outstanding common stock. The purchases are made in the open
market or in privately negotiated transactions. To date, we have repurchased
a total of 715,884 shares at an average purchase price of $15.34 per share.
We did not repurchase any shares of our common stock in the first three
months of 2006.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently engage in the use of derivative instruments to hedge
interest rate risks. However, we are a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the
financing needs of our clients.
At March 31, 2006, we had $440.3 million in commitments to extend credit and
$18.9 million in standby letters of credit. Commitments to extend credit are
agreements to lend to a client 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 us to guarantee the performance of a client to a third party. We
use the same credit policies in establishing commitments and issuing letters
of credit as we do 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
FHLB, investment security maturities and our 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 us to make
various estimates and assumptions (see Note 1 in the Notes to Consolidated
Financial Statements). We believe that, of our 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 us 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
25
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 our 2005 Annual Report on Form 10-K.
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. We perform an impairment review on an annual basis to determine
if there has been impairment of our goodwill. We have determined that no
impairment existed at December 31, 2005. 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 our reported results.
Core deposit assets represent the premium we paid for core deposits. Core
deposit intangibles are amortized on the straight-line method over various
periods ranging from 5-10 years. Generally, core deposits refer to
nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW,
money market and savings. We make 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 client 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. We have a defined benefit pension plan for the benefit
of substantially all of our associates. Our 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. We anticipate using a 5.75% discount rate for 2006.
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). We anticipate using a rate of return on
plan assets of 8.0% for 2006.
The assumed rate of annual compensation increases of 5.50% for 2006 is based
on expected trends in salaries and the employee base. This assumption is not
expected to change materially in 2006.
Information on components of our net periodic benefit cost is provided in
Note 8 of the Notes to Consolidated Financial Statements included herein and
Note 12 of the Notes to Consolidated Financial Statements in our 2005 Annual
Report on Form 10-K.
26
Recent Accounting Pronouncements
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments."
SFAS 155 amends SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS 155 (i) permits
fair value re-measurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation, (ii)
clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS 133, (iii) establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, (iv) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective for us on January 1,
2007 and is not expected to have a significant impact on our financial
statements.
On January 31, 2006, we adopted SFAS 123R which requires the cost related to
stock-based associate compensation included in net income to be accounted for
under the fair value method. SFAS 123R will not have a significant impact on
our financial statements as stock-based associate compensation has been
accounted for under the provisions of SFAS 123 since the first quarter of
2003.
27
TABLE I
AVERAGE BALANCES & INTEREST RATES
For Three Months Ended March 31,
--------------------------------------------------------------------
2006 2005
----------------------------- -----------------------------
Average Average Average Average
(Taxable Equivalent Basis - Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Loans, Net of Unearned Interest(1)(2) $2,048,642 $37,439 7.41% $1,827,327 $28,920 6.42%
Taxable Investment Securities 118,055 1,091 3.70% 153,543 1,090 2.85%
Tax-Exempt Investment Securities(2) 59,368 674 4.54% 43,928 586 5.33%
Funds Sold 49,602 539 4.36% 22,251 159 2.85%
---------- ------- ---- ---------- ------- ----
Total Earning Assets 2,275,667 39,743 7.08% 2,047,049 30,755 6.09%
Cash & Due From Banks 109,907 97,322
Allowance for Loan Losses (17,582) (16,167)
Other Assets 236,466 178,603
---------- ----------
TOTAL ASSETS $2,604,458 $2,306,807
========== ==========
LIABILITIES
NOW Accounts $ 510,270 $ 1,446 1.15% $ 359,151 $ 447 0.50%
Money Market Accounts 343,652 2,298 2.71% 251,849 625 1.01%
Savings Accounts 139,664 62 0.18% 147,676 75 0.21%
Other Time Deposits 521,966 3,916 3.04% 552,069 3,162 2.32%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Deposits 1,515,552 7,722 2.07% 1,310,745 4,309 1.33%
Short-Term Borrowings 93,867 824 3.55% 79,582 450 2.29%
Subordinated Notes Payable 62,887 926 5.97% 30,928 441 5.79%
Other Long-Term Borrowings 69,966 810 4.70% 68,200 720 4.28%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Liabilities 1,742,272 10,282 2.39% 1,489,455 5,920 1.61%
Noninterest Bearing Deposits 524,696 536,633
Other Liabilities 26,029 19,773
---------- ----------
TOTAL LIABILITIES 2,292,997 2,045,861
SHAREOWNERS' EQUITY
Common Stock 186 176
Surplus 83,527 52,606
Other Comprehensive Loss (1,194) (489)
Retained Earnings 228,942 208,653
---------- ----------
TOTAL SHAREOWNERS' EQUITY 311,461 260,946
---------- ----------
TOTAL LIABILITIES & EQUITY $2,604,458 $2,306,807
========== ==========
Net Interest Rate Spread 4.69% 4.48%
==== ====
Net Interest Income $29,461 $24,835
======= =======
Net Interest Margin(3) 5.25% 4.92%
==== ====
(1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $964,000
and $479,000, for the three months ended March 31, 2006 and 2005, respectively.
(2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest
on tax-exempt loans and securities to a taxable equivalent basis.
(3) Taxable equivalent net interest income divided by average earning assets.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE FOR MARKET RISK
Overview
Market risk management arises from changes in interest rates, exchange rates,
commodity prices, and equity prices. We have risk management policies to
monitor and limit exposure to market risk and do 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 us to interest rate risk.
Fluctuations in interest rates may result in changes in the fair market value
of our financial instruments, cash flows and net interest income. We seek to
avoid fluctuations in our net interest margin and to maximize net interest
income within acceptable levels of risk through periods of changing interest
rates. Accordingly, our interest rate sensitivity and liquidity are
monitored on an ongoing basis by our 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.
Our financial assets and liabilities are classified as other-than-trading.
An analysis of the other-than-trading financial components, including the
fair values, are presented in Table II. This table presents our consolidated
interest rate sensitivity position as of March 31, 2006 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 our net
interest income due to fluctuations in interest rates. The asset and
liability values presented in Table II may not necessarily be indicative of
our interest rate sensitivity over an extended period of time.
We expect 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 we respond to
changing rates and thus impact the magnitude of change in net interest
income. Non-maturity deposits offer management greater discretion as to the
direction, timing, and magnitude of interest rate changes and can have a
material impact on our 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.
29
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 our ability to react to
changing interest rates and are discussed in further detail in the section
entitled "Results of Operations."
30
TABLE II - FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1)
Other Than Trading Portfolio
As of March 31, 2006
------------------------------------------------------------------------------ Fair
(Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value
- -------------------------------------------------------------------------------------------------------------------------
Loans:
Fixed Rate $ 315,294 $157,171 $116,714 $53,606 $27,306 $23,075 $ 693,166 $ 694,113
Average Interest Rate 6.22% 7.37% 7.42% 7.26% 7.53% 6.42% 6.82%
Floating Rate(2) 1,101,611 137,255 105,029 6,549 5,196 5,850 1,361,490 1,361,490
Average Interest Rate 6.54% 6.43% 6.97% 7.25% 7.34% 7.75% 6.57%
Investment Securities:(3)
Fixed Rate 62,354 53,474 31,814 2,898 9,712 18,589 178,841 178,841
Average Interest Rate 3.06% 3.31% 3.83% 3.91% 3.93% 4.49% 3.48%
Floating Rate 1,919 - - - - - 1,919 1,919
Average Interest Rate 4.75% - - - - - 4.75%
Other Earning Assets:
Floating Rates 110,604 - - - - - 110,604 110,604
Average Interest Rate 4.55% - - - - - 4.55%
Total Financial Assets $1,591,782 $347,900 $253,557 $63,053 $42,214 $47,514 $2,346,020 $2,346,967
Average Interest Rate 6.20% 6.37% 6.78% 7.10% 6.68% 5.83% 6.31%
Deposits:(4)
Fixed Rate Deposits $ 410,385 $ 75,086 $ 25,456 $ 7,615 $ 4,320 253 $ 523,115 $ 442,687
Average Interest Rate 3.23% 3.62% 3.61% 3.54% 4.09% 4.93% 3.32%
Floating Rate Deposits 1,023,901 - - - - - 1,023,901 1,023,901
Average Interest Rate 1.68% - - - - - 1.68%
Other Interest Bearing Liabilities
Fixed Rate Debt 3,920 14,421 13,796 3,505 3,263 29,859 68,764 67,130
Average Interest Rate 4.79% 4.43% 4.46% 4.62% 5.05% 5.04% 4.76%
Floating Rate Debt 89,105 - - 30,928 31,959 - 151,992 151,922
Average Interest Rate 3.62% - - 5.71% 6.07% - 4.56%
Total Financial Liabilities $1,527,311 $ 89,507 $ 39,252 $42,048 $39,542 $30,112 $1,767,772 $1,685,640
Average interest Rate 2.22% 3.75% 3.91% 5.23% 5.77% 5.04% 2.53%
(1) Based upon expected cash flows, unless otherwise indicated.
(2) Based upon a combination of expected maturities and repricing opportunities.
(3) Based upon contractual maturity, except for callable and floating rate securities, which are based on expected
maturity and weighted average life, respectively.
(4) Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as
floating rates deposits in Year 1. Other time deposit balances are classified according to maturity.
31
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2006, the end of the period covered by this Form 10-Q, our
management, including our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer each concluded that as of March 31, 2006, the end of the
period covered by this Form 10-Q, we maintained effective disclosure controls
and procedures.
Changes in Internal Control over Financial Reporting
Our management, including the Chief Executive Officer and Chief Financial
Officer, has reviewed our internal control. There have been no significant
changes in our internal control during our most recently completed fiscal
quarter, nor subsequent to the date of their evaluation, that could
significantly affect our internal control over financial reporting.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are party to lawsuits and claims arising out of the normal course of
business. In management's opinion, there are no known pending claims or
litigation, the outcome of which would, individually or in the aggregate,
have a material effect on our consolidated results of operations, financial
position, or cash flows.
Item 1.A. Risk Factors
In addition to the other information set forth in this Quarterly Report on
Form 10-Q, you should carefully consider the factors discussed in Part I,
"Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2005, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form
10-K are not the only risks we face. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or
operating results.
Item 2. Unregistered Sales of equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
10.1 2006 Stock Option Agreement by and between Capital City Bank Group,
Inc. and William G. Smith, Jr., dated March 23, 2006 - incorporated
herein by reference to Exhibit 10.1 of the Registrants Form 8-K (filed
3/29/06)(No. 0-13358).
10.2 Capital City Bank Group, Inc. Non-Employee Director Compensation Plan,
as amended - incorporated herein by reference to Exhibit 10.2 of the
Registrant's Form 8-K (filed 3/29/06)(No. 0-13358).
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.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned Chief Financial Officer hereunto duly authorized.
CAPITAL CITY BANK GROUP, INC.
(Registrant)
/s/ William G. Smith, Jr.
- ----------------------------------
William G. Smith, Jr.
Chairman, President and
Chief Executive Officer
Date: May 10, 2006
qtr110q2006 1