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 June 30, 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 ------- CAPITAL CITY BANK GROUP, INC. ----------------------------- (Exact name of registrant as specified in its charter) Florida 59-227354 ------- --------- (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 July 31, 2006, 18,530,472 shares of the Registrant's Common Stock, $.01 par value, were outstanding. 1 CAPITAL CITY BANK GROUP, INC. QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 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 31 4. Controls and Procedures 34 PART II 1. Legal Proceedings 34 1.A. Risk Factors 34 2. Unregistered Sales of Equity Securities and Use of Proceeds 34 3. Defaults Upon Senior Securities 35 4. Submission of Matters to a Vote of Security Holders 35 5. Other Information 36 6. Exhibits 36 Signatures 36 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 PERIODS ENDED JUNE 30 (Unaudited) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------- (Dollars in Thousands, Except Per Share Data) 2006 2005 2006 2005 - ----------------------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans $38,967 $32,105 $76,310 $60,947 Investment Securities: U.S. Treasury 98 121 177 257 U.S. Govt. Agencies and Corporations 929 834 1,743 1,654 States and Political Subdivisions 583 335 1,023 717 Other Securities 206 157 403 292 Funds Sold 586 358 1,125 517 ------- ------- ------- ------- Total Interest Income 41,369 33,910 80,781 64,384 INTEREST EXPENSE Deposits 8,716 4,618 16,438 8,927 Short-Term Borrowings 776 734 1,600 1,184 Subordinated Notes Payable 926 667 1,852 1,108 Other Long-Term Borrowings 764 769 1,574 1,489 ------- ------- ------- ------- Total Interest Expense 11,182 6,788 21,464 12,708 ------- ------- ------- ------- Net Interest Income 30,187 27,122 59,317 51,676 Provision for Loan Losses 121 388 788 798 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 30,066 26,734 58,529 50,878 ------- ------- ------- ------- NONINTEREST INCOME Service Charges on Deposit Accounts 6,096 5,035 11,776 9,383 Data Processing 703 650 1,340 1,257 Asset Management Fees 1,155 1,013 2,205 2,125 Securities Transactions (4) - (4) - Mortgage Banking Revenues 903 1,036 1,624 1,799 Other 5,150 4,307 10,107 8,537 ------- ------- ------- ------- Total Noninterest Income 14,003 12,041 27,048 23,101 ------- ------- ------- ------- NONINTEREST EXPENSE Salaries and Associate Benefits 15,204 13,187 30,634 25,747 Occupancy, Net 2,358 2,035 4,581 3,972 Furniture and Equipment 2,661 2,192 5,161 4,304 Intangible Amortization 1,536 1,296 3,066 2,492 Merger Expense - 234 - 234 Other 9,311 7,652 17,720 15,114 ------- ------- ------- ------- Total Noninterest Expense 31,070 26,596 61,162 51,863 Income Before Income Taxes 12,999 12,179 24,415 22,116 Income Taxes 4,684 4,311 8,679 7,871 ------- ------- ------- ------- NET INCOME $ 8,315 $ 7,868 $15,736 $14,245 ======= ======= ======= ======= BASIC NET INCOME PER SHARE $ .44 $ .44 $ .84 $ .80 ======= ======= ======= ======= DILUTED NET INCOME PER SHARE $ .44 $ .44 $ .84 $ .80 ======= ======= ======= ======= Average Basic Shares Outstanding 18,633,132 18,094,256 18,642,387 17,898,253 ========== ========== ========== ========== Average Diluted Shares Outstanding 18,652,963 18,102,200 18,657,691 17,908,580 ========== ========== ========== ========== 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 JUNE 30, 2006 AND DECEMBER 31, 2005 (Unaudited) June 30, December 31, (Dollars In Thousands, Except Share Data) 2006 2005 - ------------------------------------------------------------------------------------ ASSETS Cash and Due From Banks $ 103,078 $ 105,195 Funds Sold and Interest Bearing Deposits 126,210 61,164 ---------- ---------- Total Cash and Cash Equivalents 229,288 166,359 Investment Securities, Available-for-Sale 191,232 171,019 Loans, Net of Unearned Interest 2,052,860 2,067,494 Allowance for Loan Losses (17,264) (17,410) ---------- ---------- Loans, Net 2,035,596 2,050,084 Premises and Equipment, Net 81,407 73,818 Goodwill 84,810 84,829 Other Intangible Assets 22,612 25,622 Other Assets 52,541 53,731 ---------- ---------- Total Assets $2,697,486 $2,625,462 ========== ========== LIABILITIES Deposits: Noninterest Bearing Deposits $ 572,549 $ 559,492 Interest Bearing Deposits 1,581,310 1,519,854 ---------- ---------- Total Deposits 2,153,859 2,079,346 Short-Term Borrowings 77,571 82,973 Subordinated Notes Payable 62,887 62,887 Other Long-Term Borrowings 63,022 69,630 Other Liabilities 28,403 24,850 ---------- ---------- Total Liabilities 2,385,742 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; 18,530,469 and 18,631,706 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively 185 186 Additional Paid-In Capital 80,272 83,304 Retained Earnings 233,201 223,532 Accumulated Other Comprehensive Loss, Net of Tax (1,914) (1,246) ---------- ---------- Total Shareowners' Equity 311,744 305,776 ---------- ---------- Total Liabilities and Shareowners' Equity $2,697,486 $2,625,462 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Dollars in Thousands, Except Per Share Data) Additional Accumulated Other Common Paid-In Retained Comprehensive Stock Capital Earnings Loss, Net of Taxes Total - ----------------------------------------------------------------------------------------------------------------- Balance, December 31, 2005 $186 $83,304 $223,532 $(1,246) $305,776 Comprehensive Income: Net Income - - 15,736 - Net Change in Unrealized Loss On Available-for-Sale Securities - - - (668) Total Comprehensive Income - - - - 15,068 Cash Dividends ($.3250 per share) - - (6,067) - (6,067) Stock Performance Plan Compensation - 889 - - 889 Issuance of Common Stock 1 918 - - 919 Repurchase of Common Stock (2) (4,839) - - (4,841) ---- ------- -------- ------- -------- Balance, June 30, 2006 $185 $80,272 $233,201 $(1,914) $311,744 ==== ======= ======== ======= ======== 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 SIX MONTH PERIODS ENDED JUNE 30 (Unaudited) (Dollars in Thousands) 2006 2005 - ---------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 15,736 $ 14,245 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses 788 798 Depreciation 3,539 2,769 Net Securities Amortization 362 783 Amortization of Intangible Assets 3,066 2,492 Origination of Loans Held-for-Sale (95,580) (99,574) Proceeds From Sales of Loans Held-for-Sale 97,968 100,195 Net Gain From Sales of Loans Held-for-Sale (1,624) (1,799) Non-Cash Compensation 889 339 Deferred Income Taxes 1,831 1,587 Net Decrease (Increase) in Other Assets 2,000 (4,539) Net Increase in Other Liabilities 1,966 8,167 -------- -------- Net Cash Provided By Operating Activities 30,941 25,463 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Securities Available--for-Sale: Purchases (85,590) (29,468) Sales 283 34,729 Payments, Maturities, and Calls 63,614 42,628 Net Decrease (Increase) in Loans 12,297 (96,867) Net Cash Acquired in Acquisition - 37,412 Purchase of Premises & Equipment (11,409) (9,918) Proceeds From Sales of Premises & Equipment 280 134 -------- -------- Net Cash Used In Investing Activities (20,525) (21,350) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net Increase in Deposits 74,513 4,157 Net Decrease in Short-Term Borrowings (8,878) (74,909) Proceeds from Subordinated Note Payable - 31,959 Increase in Other Long-Term Borrowings 3,250 3,600 Repayment of Other Long-Term Borrowings (6,382) 51,134 Dividends Paid (6,067) (5,541) Repurchase of Common Stock (4,841) - Issuance of Common Stock 918 925 -------- -------- Net Cash Provided By Financing Activities 52,513 11,325 -------- -------- Net Increase in Cash and Cash Equivalents 62,929 15,438 Cash and Cash Equivalents at Beginning of Period 166,359 161,545 -------- -------- Cash and Cash Equivalents at End of Period $229,288 $176,983 ======== ======== Supplemental Disclosure: Interest Paid on Deposits $ 16,105 $ 8,210 ======== ======== Interest Paid on Debt $ 5,092 $ 3,525 ======== ======== Taxes Paid $ 8,135 $ 6,468 ======== ======== Loans Transferred to Other Real Estate $ 638 $ 99 ======== ======== Issuance of Common Stock as Non-Cash Compensation $ 889 $ 339 ======== ======== Transfer of Current Portion of Long-Term Borrowings to Short-Term Borrowings $ 3,061 $ 43 ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
7 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, 2006 and December 31, 2005, the results of operations for the three and six month periods ended June 30, 2006 and 2005, and cash flows for the six month periods ended June 30, 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 June 30, 2006 and December 31, 2005 were as follows: June 30, 2006 ------------------------------------------- Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------- U.S. Treasury $ 11,064 $ - $ 122 $ 10,942 U.S. Government Agencies and Corporations 60,934 - 1,350 59,584 States and Political Subdivisions 82,017 9 797 81,229 Mortgage-Backed Securities 25,851 - 807 25,044 Other Securities(1) 14,433 - - 14,433 -------- ---- ------ -------- Total Investment Securities $194,299 $ 9 $3,076 $191,232 ======== ==== ====== ======== 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 June 30, 2006 and December 31, 2005 was as follows: (Dollars in Thousands) June 30, 2006 December 31, 2005 - ----------------------------------------------------------------------------- Commercial, Financial and Agricultural $ 220,345 $ 218,434 Real Estate-Construction 180,049 160,914 Real Estate-Commercial 672,881 718,741 Real Estate-Residential 560,435 553,124 Real Estate-Home Equity 171,835 165,337 Real Estate-Loans Held-for-Sale 5,695 4,875 Consumer 241,620 246,069 ---------- ---------- Loans, Net of Unearned Interest $2,052,860 $2,067,494 ========== ==========
(4) ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the six month periods ended June 30, 2006 and 2005, is as follows: (Dollars in Thousands) 2006 2005 - ---------------------------------------------------------------------------- Balance, Beginning of Period $17,410 $16,037 Acquired Reserves - 1,385 Provision for Loan Losses 788 798 Recoveries on Loans Previously Charged-Off 907 943 Loans Charged-Off (1,841) (1,712) ------- ------- Balance, End of Period $17,264 $17,451 ======= =======
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, 2006 December 31, 2005 -------------------- -------------------- Valuation Valuation (Dollars in Thousands) Balance Allowance Balance Allowance - ------------------------------------------------------------------------------------ Impaired Loans: With Related Valuation Allowance $5,079 $2,377 $5,612 $2,915 Without Related Valuation Allowance 3,218 - 1,658 -
(5) INTANGIBLE ASSETS The Company had intangible assets of $107.4 million and $110.5 million at June 30, 2006 and December 31, 2005, respectively. Intangible assets were as follows: June 30, 2006 December 31, 2005 ---------------------- ---------------------- Gross Accumulated Gross Accumulated (Dollars in Thousands) Amount Amortization Amount Amortization - ------------------------------------------------------------------------------------ Core Deposit Intangibles $ 47,176 $26,133 $ 47,176 $23,312 Goodwill 88,596 3,786 88,615 3,786 Customer Relationship Intangible 1,867 401 1,867 305 Non-Compete Agreement 539 436 483 287 -------- ------- -------- ------- Total Intangible Assets $138,178 $30,756 $138,141 $27,690
Net Core Deposit Intangibles: As of June 30, 2006 and December 31, 2005, the Company had net core deposit intangibles of $21.0 million and $23.9 million, respectively. Amortization expense for the first six months of 2006 and 2005 was $2.8 million and $2.3 million, respectively. Estimated annual amortization expense is $5.6 million. 9 Goodwill: As of June 30, 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 June 30, 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 recorded as a result of the March 2004 acquisition of trust customer relationships from Synovus Trust Company. Amortization expense for the first six months of 2006 and 2005 was $96,000. Estimated annual amortization expense is $191,000 based on use of a 10-year useful life. As of June 30, 2006 and December 31, 2005, the Company also had a non-compete intangible, net of accumulated amortization, of $103,000 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 six months of 2006 and 2005 was $149,000 and $118,000, respectively. Estimated amortization expense for the remainder of 2006 is $103,000. (6) DEPOSITS The composition of the Company's interest bearing deposits at June 30, 2006 and December 31, 2005 was as follows: (Dollars in Thousands) June 30, 2006 December 31, 2005 - ------------------------------------------------------------------------- NOW Accounts $ 555,350 $ 520,878 Money Market Accounts 377,958 331,094 Savings Deposits 135,330 144,296 Other Time Deposits 512,672 523,586 ---------- ---------- Total Interest Bearing Deposits $1,581,310 $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 June 30, 2006, the Company had three stock-based compensation plans, consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate Stock Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan ("DSPP"). For 2006, the Company also has a stock option arrangement with a key executive officer. Total compensation expense associated with these plans for the six months ended June 30, 2006 and 2005, was approximately $889,000 and $538,000, 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 $745,000 for the first six months of 2006 related to the Incentive Plan. Under a substantially similar predecessor plan, the Company recognized expense of $381,000 for the first six months 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 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 13,591 shares have been issued since the inception of the DSPP. For the first six months of 2006, the Company issued 7,002 shares under the DSPP and recognized $24,000 in expense related to this plan. For the first six months of 2005, the Company issued 5,123 shares and recognized $18,000 in expense related to the DSPP. 2005 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 six months of 2006, the Company issued 9,343 shares under the ASPP and recognized $45,000 in expense related to this plan. For the first six months of 2005, the Company issued 8,928 shares and recognized $42,000 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 six months of 2006. For the first six months 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: Six Months Ended June 30, ---------------- 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 have 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 $95,000 and $97,000 for the first six months of 2006 and 2005, respectively, related to the aforementioned agreements. 11 A summary of the status of the Company's option shares as of June 30, 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 $32.79 8.6 $ 88,161 Granted - - - - Exercised - - - - Forfeited or expired - - - - ------ ------ --- -------- Outstanding at June 30, 2006 60,384 $32.79 8.1 $ - ====== ====== === ======== Exercisable at June 30, 2006 27,841 $32.79 8.1 $ - ====== ====== === ========
As of June 30, 2006, there was $220,000 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 13 months. (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) 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% 8.00% 8.00% Service Cost $1,250 $1,040 $2,500 $2,080 Interest Cost 875 800 1,750 1,600 Expected Return on Plan Assets (975) (798) (1,950) (1,596) Prior Service Cost Amortization 50 55 100 110 Net Loss Amortization 375 295 750 590 Net Periodic Benefit Cost $1,575 $1,392 $3,150 $2,784
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) 2006 2005 2006 2005 - -------------------------------------------------------------------------------------- Discount Rate 5.75% 6.00% 5.75% 6.00% Long-Term Rate Of Return On Assets N/A N/A N/A N/A Service Cost $ 30 $ 35 $ 60 $ 70 Interest Cost 56 54 112 108 Expected Return On Plan Assets N/A N/A N/A N/A Prior Service Cost Amortization 15 15 30 30 Net Loss Amortization 19 21 38 42 Net Periodic Benefit Cost $120 $125 $240 $250
12 (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, 2006, the amounts associated with the Company's off-balance sheet obligations were as follows: (Dollars in Millions) Amount - ---------------------------------------------- Commitments to Extend Credit(1) $454.6 Standby Letters of Credit $ 19.1 (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. 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). Comprehensive income totaled $7.7 million and $15.1 million, respectively, for the three and six months ended June 30, 2006, and $8.3 million and $13.9 million, respectively, for the comparable periods in 2005. 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 $(576,000) and $(668,000), respectively, for the three and six months ended June 30, 2006, and $452,000 and $(345,000), respectively, for the three and six months ended June 30, 2005. Reclassification adjustments consist only of realized gains and losses on sales of investment securities and were not material for the six months ended June 30, 2006 and 2005. 13 QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in Thousands, Except Per Share Data) 2006 2005 2004 ---------------------- ---------------------------------------------- ---------------------- Second First Fourth Third Second First Fourth Third - --------------------------------------------------------------------------------------------------------------------- Summary of Operations: Interest Income $ 41,369 $ 39,412 $ 38,780 $ 36,889 $ 33,910 $ 30,474 $ 29,930 $ 24,660 Interest Expense 11,182 10,282 9,470 7,885 6,788 5,920 5,634 3,408 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Interest Income 30,187 29,130 29,310 29,004 27,122 24,554 24,296 21,252 Provision for Loan Losses 121 667 1,333 376 388 410 300 300 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Interest Income After Provision for Loan Losses 30,066 28,463 27,977 28,628 26,734 24,144 23,996 20,952 Gain on Sale of Credit Card Portfolios - - - - - - 324 6,857 Noninterest Income 14,003 13,045 12,974 13,123 12,041 11,060 11,596 10,864 Conversion/ Merger Expense - - 24 180 234 - 436 68 Noninterest Expense 31,070 30,092 29,318 28,429 26,362 25,267 24,481 21,565 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income Before Provision for Income Taxes 12,999 11,416 11,609 13,142 12,179 9,937 10,999 17,040 Provision for Income Taxes 4,684 3,995 4,150 4,565 4,311 3,560 3,737 6,221 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income $ 8,315 $ 7,421 $ 7,459 $ 8,577 $ 7,868 $ 6,377 $ 7,262 $ 10,819 ========== ========== ========== ========== ========== ========== ========== ========== Net Interest Income (FTE) $ 30,591 $ 29,461 $ 29,652 $ 29,329 $ 27,396 $ 24,835 $ 24,619 $ 21,528 Per Common Share: Net Income Basic $ .44 $ .40 $ .40 $ .46 $ .44 $ .36 $ .40 $ .66 Net Income Diluted .44 .40 .40 .46 .44 .36 .40 .66 Dividends Declared .163 .163 .163 .152 .152 .152 .152 .144 Diluted Book Value 16.81 16.65 16.39 16.17 15.87 14.69 14.51 13.19 Market Price: High 35.39 37.97 39.33 38.72 33.46 33.60 36.78 32.96 Low 29.51 33.79 33.21 31.78 28.02 29.30 30.17 26.66 Close 30.20 35.55 34.29 37.71 32.32 32.41 33.44 30.97 Selected Average Balances: Loans $2,040,656 $2,048,642 $2,062,775 $2,046,968 $1,932,637 $1,827,327 $1,779,736 $1,524,401 Earning Assets 2,278,817 2,275,667 2,279,010 2,250,902 2,170,483 2,047,049 2,066,111 1,734,708 Assets 2,603,090 2,604,458 2,607,597 2,569,524 2,458,788 2,306,807 2,322,870 1,941,372 Deposits 2,047,755 2,040,248 2,027,017 2,013,427 1,932,144 1,847,378 1,853,588 1,545,224 Shareowners' Equity 315,794 311,461 306,208 300,931 278,107 260,946 248,773 217,273 Common Equivalent Average Shares: Basic 18,633 18,652 18,624 18,623 18,094 17,700 17,444 16,604 Diluted 18,653 18,665 18,654 18,649 18,102 17,708 17,451 16,609 Ratios: ROA 1.28% 1.16% 1.14% 1.32% 1.28% 1.12% 1.24% 2.22%(1) ROE 10.56% 9.66% 9.67% 11.31% 11.35% 9.91% 11.61% 19.81%(1) Net Interest Margin (FTE) 5.38% 5.25% 5.16% 5.17% 5.07% 4.92% 4.75% 4.94% Efficiency Ratio 66.23% 67.20% 65.22% 63.60% 63.56% 67.06% 63.85% 52.60%(1) (1) 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." 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. In this MD&A, we present an operating efficiency ratio and an operating net noninterest expense as a percent of average assets, both of which are not calculated based on accounting principles generally accepted in the United State ("GAAP"), but that we believe provide important information regarding our results of operations. Our calculation of the operating efficiency ratio is computed by dividing non-interest expense less intangible amortization and one-time merger expenses, by the sum of tax equivalent net interest income and noninterest income. We calculate our operating net noninterest expense as a percent of average assets by subtracting noninterest expense excluding intangible amortization and one-time merger expenses from noninterest income. We believe that excluding intangible amortization and one-time merger expenses in our calculations better reflect our periodic expenses and is more reflective of normalized operations. Although we believe the above-mentioned non-GAAP financial measures enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. We provide reconciliations for all non-GAAP financial measures below: Reconciliation of operating efficiency ratio to efficiency ratio Six Months Ended June 30 ------------------- 2006 2005 - -------------------------------------------------------------------- Efficiency ratio 70.22% 68.85% Effect of intangible amortization and one-time merger expenses (3.52)% (3.63)% Operating efficiency ratio 66.70% 65.22%
Reconciliation of operating net noninterest expense to net noninterest expense Six Months Ended June 30 ------------------- 2006 2005 - -------------------------------------------------------------------- Net noninterest expense as a percent of average assets 2.64% 2.43% Effect of intangible amortization and one-time merger expenses (0.24)% (0.23)% Operating net noninterest expense as a percent of average assets 2.40% 2.20%
16 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; * 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. 16 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" or "CCB"). 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 service fees, 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. 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 Acquisition. 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. 17 FINANCIAL OVERVIEW A summary overview of our financial performance for 2006 versus 2005 is provided below. 2006 Financial Performance Highlights - * Earnings of $8.3 million, up 5.7% and $15.7 million, up 10.5% for the three and six months ended June 30, 2006 as compared to the same periods in 2005. * Diluted earnings per share of $.44 for the second quarter of 2006 consistent with the same period in 2005. Earnings per diluted share for the six months ended June 30, 2006 of $.84 represents a 5.0% increase over the same period in 2005. * Growth in earnings was attributable to improvement in operating revenues of 12.8% and 15.5% for the three and six month periods, respectively, driven primarily by higher net interest income and noninterest income. * Taxable equivalent net interest income grew 11.7% and 15.0% for the three and six month periods, respectively, due to earning asset growth and an improved net interest margin. * Net interest margin percentage improved 31 basis points and 32 basis points for the three and six month periods, respectively, driven by favorable repricing spread and higher yield on new loan production. * Noninterest income grew 16.3% and 17.1% for the three and six month periods, respectively, due primarily to higher deposit service charge fees and card processing fees. * Continued strong credit quality as reflected by a nonperforming asset ratio of .28% and an annualized net charge-off ratio of .03% for the second quarter of 2006 compared to .08% for the same period in 2005. At quarter-end the allowance for loan losses was .84% of outstanding loans and provided coverage of 326% of nonperforming loans compared to .85% and 289%, respectively, for the same period in 2005. * Credit quality remains strong and a key driver in bank performance and growth. Nonperforming assets totaled $5.8 million, or .28% of total loans and other real estate at quarter-end compared to .30% and .28%, respectively, for the second quarter of 2005 and first quarter of 2006. * Average deposits grew 6.0% and 8.1% for the three and six month periods, respectively, due to our May 2005 acquisition and strong growth in balances related to "Absolutely Free" deposit products, and our Cash Power money market product. * We remain well-capitalized with a risk based capital ratio of 13.92%. RESULTS OF OPERATIONS Net Income Earnings for the three and six months ended June 30, 2006 were $8.3 million, or $.44 per diluted share, and $15.7 million, or $.84 per diluted share, respectively. This compared to $7.9 million, or $.44 per diluted share and $14.2 million, or $.80 per diluted share in 2005. Results include the impact of the acquisition of FABC in May 2005. Growth in earnings for the second quarter of 2006 was primarily attributable to an increase in operating revenue (defined as net interest income plus noninterest income) of $5.0 million, or 12.8%, and a decrease in our loan loss provision of $267,000, or 68.8%, partially offset by an increase in noninterest expense of $4.5 million, or 16.8%, and income taxes of $373,000, or 8.7%. The increase in operating revenue 18 reflects an 11.3% increase in net interest income and a 16.3% increase in noninterest income. Growth in earnings for the six month period of $1.5 million, or 10.5% was primarily attributable to an increase in operating revenue (defined as net interest income plus noninterest income) of $11.6 million, or 15.5%, partially offset by an increase in noninterest expense of $9.3 million, or 17.9%, and income taxes of $808,000, or 10.3%. The increase in operating revenue reflects an 14.8% increase in net interest income and a 17.1% increase in noninterest income. A condensed earnings summary is presented below: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ (Dollars in Thousands) 2006 2005 2006 2005 - ---------------------------------------------------------------------------------- Interest Income $41,369 $33,910 $80,781 $64,384 Taxable Equivalent Adjustment(1) 404 274 735 555 ------- ------- ------- ------- Interest Income (FTE) 41,773 34,184 81,516 64,939 Interest Expense (11,182) (6,788) (21,464) (12,708) ------- ------- ------- ------- Net Interest Income (FTE) 30,591 27,396 60,052 52,231 Provision for Loan Losses (121) (388) (788) (798) Taxable Equivalent Adjustment (404) (274) (735) (555) ------- ------- ------- ------- Net Interest Income After Provision 30,066 26,734 58,529 50,878 Noninterest Income 14,003 12,041 27,048 23,101 Merger Expense - 234 - 234 Noninterest Expense (31,070) (26,362) (61,162) (51,629) ------- ------- ------- ------- Income Before Income Taxes 12,999 12,179 24,415 22,116 Income Taxes (4,684) (4,311) (8,679) (7,871) ------- ------- ------- ------- Net Income $ 8,315 $ 7,868 $15,736 $14,245 ======= ======= ======= ======= Percent Change 5.68% 22.12% 10.47% 26.17% Return on Average Assets(2) 1.28% 1.28% 1.22% 1.21% Return on Average Equity(2) 10.56% 11.35% 10.12% 10.66% (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 2006 taxable-equivalent net interest income increased $3.2 million, or 11.7%, over the comparable quarter in 2005. During the first half of 2006, taxable-equivalent net interest income increased $7.8 million, or 15.0%, respectively, over the first half of 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 a 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 31 basis point improvement in the net interest margin as compared to the second quarter of 2005. Table I provides a comparative analysis of our average balances and interest rates. For the three month period ended June 30, 2006, taxable-equivalent interest income increased $7.6 million or 22.2%, over the comparable period in 2005. During the first half of 2006, taxable-equivalent interest income improved $16.6 million, or 25.5%, respectively, over the comparable period in 2005. The increase was attributable to a change in earning asset mix and higher yields on earning assets. Earning asset yields improved 103 basis points to 7.35% in the second quarter of 2006 from 6.32% in the second quarter of 2005 and 7.08% from the prior quarter, primarily attributable to the higher interest rate environment. We anticipate that our income on earning assets will expand during the third quarter due to the higher rate environment. 19 Interest expense for the three and six month periods ended June 30, 2006 increased $4.4 million, or 64.7% and $8.8 million, or 68.9%, respectively, from the comparable prior year periods. 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 paid on interest bearing liabilities of 2.58% in the second quarter of 2006 represents an increase of 89 and 19 basis points, respectively, over the second quarter of 2005 and first quarter of 2006. We anticipate that our interest expense will continue to increase in the third quarter as a result of the higher rate environment and increased competition for deposits. Our interest rate spread (defined as the average fully taxable-equivalent yield on earning assets less the average rate paid on interest bearing liabilities) increased from 4.56% in the first half of 2005 to 4.72% in the comparable period of 2006, reflecting the higher yield on earning assets. Our net yield on earning assets (defined as fully taxable-equivalent net interest income divided by average earning assets) was 5.38% and 5.31%, respectively, for the three and six month periods of 2006, versus 5.07% and 4.99%, respectively, for the comparable periods in 2005. The increase in margin reflects higher asset yields driven by rising interest rates. Net interest income is expected to expand slightly during the third quarter, which is attributable to anticipated higher net yield on earning assets and other factors noted above. Provision for Loan Losses The provision for loan losses was $121,000 and $788,000, respectively, for the three and six month periods ended June 30, 2006, compared to $388,000 and $798,000 for the same periods in 2005. The decrease in the provision for both of the aforementioned periods was due to a lower level of required reserves reflective of improved credit quality. Net charge-offs totaled $136,000, or .03% of average loans for the second quarter of 2006 compared to $362,000, or .08% for the second quarter of 2005. For the six-month period ended June 30, 2006, net charge-offs totaled $934,000, or .09% of average loans compared to $769,000, or .08% of average loans for the comparable period in 2005. At quarter-end the allowance for loan losses was .84% of outstanding loans and provided coverage of 326% of nonperforming loans. Charge-off activity for the respective periods is set forth below: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------- (Dollars in Thousands) 2006 2005 2006 2005 - -------------------------------------------------------------------------------------- CHARGE-OFFS Commercial, Financial and Agricultural $ 144 $ 302 $ 466 $ 390 Real Estate - Construction - - - - Real Estate - Commercial - 2 291 6 Real Estate - Residential 23 37 46 62 Consumer 448 536 1,038 1,254 ------ ------ ------ ------ Total Charge-offs 615 877 1,841 1,712 ------ ------ ------ ------ RECOVERIES Commercial, Financial and Agricultural 63 98 126 107 Real Estate - Construction - - - - Real Estate - Commercial 2 - 4 - Real Estate - Residential 2 14 8 16 Consumer 412 403 769 820 ------ ------ ------ ------ Total Recoveries 479 515 907 943 ------ ------ ------ ------ Net Charge-offs $ 136 $ 362 $ 934 $ 769 ====== ====== ====== ====== Net Charge-offs (Annualized) as a Percent of Average Loans Outstanding, Net of Unearned Interest .03% .08% .09% .08% ====== ====== ====== ======
Noninterest Income Noninterest income increased $2.0 million, or 16.3%, and $3.9 million, or 17.1%, respectively, over the comparable three and six month periods in 2005, primarily due to higher deposit service charge fees, retail brokerage fees, and card processing fees. Noninterest income represented 31.7% and 31.3% of operating revenue for the three and six month periods of 2006 compared to 30.7% and 30.9% for the same periods in 2005. The increase is due to the aforementioned strong growth in noninterest income. The table below reflects the major components of noninterest income. Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------- (Dollars in Thousands) 2006 2005 2006 2005 - ----------------------------------------------------------------------------------- Noninterest Income: Service Charges on Deposit Accounts $ 6,096 $ 5,035 $11,776 $ 9,383 Data Processing 703 650 1,340 1,257 Asset Management Fees 1,155 1,013 2,205 2,125 Retail Brokerage Fees 502 313 985 612 Mortgage Banking Revenues 903 1,036 1,624 1,799 Merchant Service Fees 1,793 1,532 3,518 3,096 Interchange Fees 788 535 1,464 1,026 ATM/Debit Card Fees 627 535 1,226 1,074 Other 1,436 1,392 2,910 2,729 ------- ------- ------- ------- Total Noninterest Income $14,003 $12,041 $27,048 $23,101 ======= ======= ======= =======
Various significant components of noninterest income are discussed in more detail below. Service Charges on Deposit Accounts. Deposit service charge fees increased $1.1 million, or 21.1%, and $2.4 million, or 25.5%, respectively, over the comparable three and six month periods 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 and improved fee collection efforts. 21 Asset Management Fees. Income from asset management activities increased $142,000, or 14.0%, and $80,000, or 3.8%, respectively, over the comparable three and six month periods in 2005. The improvement for both periods is primarily due to growth in new business within existing and new markets. At June 30, 2006, assets under management totaled $685.0 million, representing an increase of $34.0 million, or 5.2% from the comparable period in 2005. Mortgage Banking Revenues. Mortgage banking revenues decreased $133,000, or 12.8%, and $175,000, or 9.7%, respectively, from the comparable three and six month periods in 2005. The decrease reflects the local and national trend of a slower housing market and a decreased level of refinance activity. Card Fees. Card processing fees (including merchant services fees, interchange fees, and ATM/debit card fees) increased $606,000, or 23.3%, and $1.0 million, or 19.5%, respectively, over the comparable three and six periods in 2005. The increase in merchant service fees is primarily due to higher transaction volume reflective of growth in merchant accounts. Higher interchange fees and ATM/debit card fees reflect an increase in deposit accounts. Other. Other income increased $286,000, or 12.1%, and $638,000, or 13.9%, respectively, over the comparable three and six month periods in 2005 due primarily to increases in retail brokerage fees, asset based lending fees, data processing fees, and a one-time gain on the sale of a real estate parcel in the amount of $109,000. Noninterest Expense Noninterest expense increased $4.5 million, or 16.8%, and $9.3 million, or 17.9%, respectively, over the comparable three and six month periods in 2005. The table below reflects the major components of noninterest expense. Three Months Ended Six Months Ended June 30, June 30, ------------------- -------------------- (Dollars in Thousands) 2006 2005 2006 2005 - ----------------------------------------------------------------------------- Noninterest Expense: Salaries $11,444 $ 9,980 $23,159 $19,638 Associate Benefits 3,760 3,207 7,475 6,109 ------- ------- ------- ------- Total Compensation 15,204 13,187 30,634 25,747 Premises 2,358 2,035 4,581 3,972 Equipment 2,661 2,192 5,161 4,304 ------- ------- ------- ------- Total Occupancy 5,019 4,227 9,742 8,276 Legal Fees 445 444 962 812 Professional Fees 865 879 1,618 1,575 Processing Services 419 349 854 748 Advertising 1,253 747 2,252 1,948 Travel and Entertainment 485 340 871 604 Printing and Supplies 670 666 1,277 1,117 Telephone 588 559 1,210 1,078 Postage 321 291 602 617 Intangible Amortization 1,536 1,296 3,066 2,492 Interchange Fees 1,546 1,349 3,040 2,690 Courier Service 327 334 657 641 Miscellaneous 2,392 1,928 4,377 3,518 ------- ------- ------- ------- Total Noninterest Expense $31,070 $26,596 $61,162 $51,863 ======= ======= ======= =======
21 Various significant components of noninterest expense are discussed in more detail below. Compensation. Salaries and associate benefits expense increased $2.0 million, or 15.3%, and $4.9 million, or 19.0% over the comparable three and six month periods in 2005. For the first half of the year, we experienced increases in associate salaries of $3.3 million, payroll tax expense of $196,000, associate insurance expense of $365,000, pension plan expense of $382,000, and stock-based compensation of $507,000. The increase in associate salaries and payroll tax expense reflects the addition of FABC associates, annual merit/market based raises for associates, and lower realized loan cost. Realized loan cost reflects the impact of SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Acquiring Loans", 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 first half of the year reduced the amount of this offset as compared to the first half of 2005. The increase in expense for insurance and pension benefits is reflective of an increase in eligible participants. The higher pension expense is also due to a lower discount rate used for the 2006 expense projection. 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. Occupancy. Occupancy expense (including premises and equipment) increased $792,000, or 18.7%, and $1.5 million, or 17.7%, respectively over the comparable three and six month periods in 2005. For the first half of the year, we experienced increases in depreciation of $770,000, maintenance and repairs (building and FF&E) of $190,000, utilities of $174,000, maintenance agreements (FF&E) of $298,000, and building insurance of $66,000 from the comparable period in 2005, all of which reflect the increase in the number of banking offices from our May 2005 acquisition and new banking office openings during the later part of 2005. Other. Other noninterest expense increased $1.7 million, or 18.1%, and $2.9 million, or 16.5%, respectively over the three and six month periods in 2005. For the first half of the year, the increase was primarily attributable to higher expense for the following categories: 1) legal fees - $150,000, 2) advertising - $304,000, 3) travel and entertainment - $267,000, 4) printing and supplies - $160,000, 5) telephone expense - $132,000, 6) intangible amortization - $574,000, 7) interchange fees - $350,000, and 8) miscellaneous - - $859,000. Legal expenses have increased due to a general increase in legal services tied to corporate activities. The increase in advertising expense is due to an increase in promotional expenses associated with the addition of new banking offices in late 2005 and an expansion in our line of free checking products. The higher expense for travel and entertainment is linked primarily to associate related events that took place during the first half of the year. The increase in printing and supplies expense was driven by an increase 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. Operating net noninterest expense (noninterest income minus noninterest expense, excluding intangible amortization and one-time merger expenses) as a percent of average assets was 2.40% for the first half of 2006 compared to 2.20% in 2005. Our operating efficiency ratio (noninterest expense, excluding intangible amortization and one-time merger expenses, expressed as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 66.70% for the first half of 2006 compared to 65.23% for the same period in 2005 due to expense growth as discussed above. Income Taxes Relative to the prior year periods, the provision for income taxes increased $373,000, or 8.7%, during the second quarter and $808,000, or 10.3%, during the first six months 23 of 2006, reflecting higher taxable income. Our effective tax rate for the first half of 2006 was 35.55% compared to 35.59% for the same period in 2005. FINANCIAL CONDITION Asset and liability balances include the integration of FABC in May 2005. Average assets decreased $4.5 million, or .17%, to $2.603 billion for the quarter-ended June 30, 2006 from $2.608 billion in the fourth quarter of 2005. Average earning assets of $2.279 billion decreased $193,000, or .01%, from the fourth quarter of 2005. A decrease in average loans of $22.1 million was partially offset by a $5.4 million increase in investment securities and a $16.5 million increase in average short term investments. These variances are discussed in more detail below. Funds Sold We ended the second quarter with approximately $35.7 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 first part of the year has reduced the bank's position in overnight funds purchased. 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 June 30, 2006, the average investment portfolio increased $5.4 million, or 2.9%, 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 June 30, 2006 and December 31, 2005, shareowners' equity included a net unrealized loss of $1.9 million and $1.2 million, respectively. Loans Average loans for the second quarter decreased $22.1 million, or 1.07%, from the fourth quarter, due to higher than expected loan activity (principal pay- downs and pay-offs). We expect the loan pipeline to remain stable and loans outstanding to remain flat for the second half of the year. Our nonperforming loans were $5.3 million at June 30, 2006 and December 31, 2005. As a percent of nonperforming loans, the allowance for loan losses represented 326% at June 30, 2006 and 331% at 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 $0.5 million at June 30, 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 June 30, 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 24 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 June 30, 2006 was $17.3 million, compared to $17.4 million at December 31, 2005. At June 30, 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 June 30, 2006 is adequate to absorb losses inherent in the loan portfolio at quarter-end. Deposits Average deposits for the second quarter of 2006 increased $23.7 million, or 1.17%, from the fourth quarter of 2005 due to continued strong increases in NOW ($26.3 million) and money market ($55.8 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 25.5% for the second quarter of 2006, compared to 26.8% for the fourth quarter of 2005. For the same period, the ratio of average interest bearing liabilities to average earning assets was 75.3% 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. Average liquidity (defined as funds sold and interest bearing deposits with other banks) for the second quarter of 2006 was approximately $48.8 million, an increase of $16.5 million from the fourth quarter of 2005. The increase is primarily reflective of deposit growth. Liquidity levels should fluctuate during the third quarter consistent with 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 note is unsecured. The existing loan agreement contains certain financial covenants that we must maintain. At June 30, 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 half of the year, the Bank made FHLB advance payments totaling approximately $6.4 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 adjust 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 FABC purchase price. 25 Contractual Cash Obligations. We maintain certain contractual arrangements to make future cash payments. The table below details those future cash payment obligations as of June 30, 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 $31,414 $31,010 $6,349 $26,673 $ 95,446 Subordinated Notes Payable - - - 62,887 62,887 Operating Lease Obligations 734 2,709 2,226 7,088 12,757 ------- ------- ------ ------- -------- Total Contractual Cash Obligations $32,148 $33,719 $8,576 $96,647 $171,090 ======= ======= ====== ======= ========
Capital Equity capital was $311.7 million as of June 30, 2006 compared to $305.8 million as of December 31, 2005. Management continues to monitor our capital position in relation to our level of assets with the objective of maintaining a strong capital position. The leverage ratio was 10.35% at June 30, 2006 compared to 10.27% at December 31, 2005. Further, the risk-adjusted capital ratio of 13.92% at June 30, 2006 exceeds the 8.0% minimum requirement under the risk-based regulatory guidelines. As allowed by the Federal Reserve Board capital guidelines the trust preferred securities issued by Capital City Bank Group 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 second quarter of 2006 totaled $.1625 per share compared to $.1520 per share for the second quarter of 2005, an increase of 6.9%. The dividend payout ratios for the second quarter ended 2006 and 2005 were 36.8% and 34.5%, respectively. 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 June 30, 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 six months of 2006, shareowners' equity increased $6.0 million, or 3.9%, on an annualized basis. Growth in equity during the first six months of the year was positively impacted by net income of $15.7 million, the issuance of common stock of $0.9 million and, stock-based compensation accretion of $0.9 million. Equity was reduced by dividends paid during the first six months of the year by $6.1 million, or $.3250 per share, an increase in the net unrealized loss on available-for-sale securities of $0.7 million, and the repurchase of common stock of $4.8 million. At June 30, 2006, our common stock had a book value of $16.81 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 864,760 shares at an average purchase price of $18.28 per share. We repurchased 148,876 shares of our common stock in the second quarter of 2006 at an average purchase price of $32.41 per share. 26 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 June 30, 2006, we had $454.6 million in commitments to extend credit and $19.1 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 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 27 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. 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. 28 In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more- likely-than-not" to be sustained by the taxing authority. The recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are currently evaluating the potential impact of FIN 48 on our consolidated financial statements. 29 TABLE I AVERAGE BALANCES & INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands) FOR THREE MONTHS ENDED JUNE 30, 2006 005 -------------------------- -------------------------- Balance Interest Rate Balance Interest Rate ---------- -------- ----- ---------- -------- ----- ASSETS Loans, Net of Unearned Interest(1)(2) $2,040,656 $39,059 7.68% $1,932,637 $32,200 6.68% Taxable Investment Securities 114,521 1,233 4.30% 149,958 1,113 2.96% Tax-Exempt Investment Securities(2) 74,862 895 4.78% 41,316 513 4.97% Funds Sold 48,778 586 4.75% 46,572 358 3.04% ---------- ------- ---- ---------- ------- ---- Total Earning Assets 2,278,817 41,773 7.35% 2,170,483 34,184 6.32% Cash & Due From Banks 99,830 104,336 Allowance for Loan Losses (17,443) (16,998) Other Assets 241,886 200,967 ---------- ---------- TOTAL ASSETS $2,603,090 $2,458,788 LIABILITIES NOW Accounts $ 510,088 $ 1,664 1.31% $ 413,799 $ 560 0.54% Money Market Accounts 363,754 2,642 2.91% 270,195 830 1.23% Savings Accounts 136,168 67 0.20% 155,286 75 0.19% Other Time Deposits 518,679 4,343 3.36% 547,919 3,153 2.31% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Deposits 1,528,689 8,716 2.29% 1,387,199 4,618 1.34% Short-Term Borrowings 82,846 776 3.75% 108,508 734 2.71% Subordinated Notes Payable 62,887 926 5.91% 45,681 667 5.86% Other Long-Term Borrowings 63,597 764 4.82% 68,975 769 4.47% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Liabilities 1,738,019 11,182 2.58% 1,610,363 6,788 1.69% Noninterest Bearing Deposits 519,066 544,945 Other Liabilities 30,211 25,373 ---------- ---------- TOTAL LIABILITIES 2,287,296 2,180,681 SHAREOWNERS' EQUITY TOTAL SHAREOWNERS' EQUITY 315,794 278,107 ---------- ---------- TOTAL LIABILITIES & EQUITY $2,603,090 $2,458,788 ========== ========== Interest Rate Spread 4.77% 4.63% ==== ==== Net Interest Income $30,591 $27,396 ======= ======= Net Interest Margin(3) 5.38% 5.07% ==== ==== FOR SIX MONTHS ENDED JUNE 30, 2006 005 -------------------------- -------------------------- Balance Interest Rate Balance Interest Rate ---------- -------- ----- ---------- -------- ----- ASSETS Loans, Net of Unearned Interest(1)(2) $2,044,627 $76,498 7.54% $1,880,272 $61,120 6.56% Taxable Investment Securities 16,278 2,323 3.99% 151,740 2,203 2.91% Tax-Exempt Investment Securities(2) 67,158 1,570 4.67% 42,615 1,099 5.16% Funds Sold 49,188 1,125 4.56% 34,479 517 2.98% ---------- ------- ---- ---------- ------- ---- Total Earning Assets 2,277,251 81,516 7.21% 2,109,106 64,939 6.21% Cash & Due From Banks 104,841 100,848 Allowance for Loan Losses (17,512) (16,585) Other Assets 239,190 189,849 ---------- ---------- TOTAL ASSETS $2,603,770 $2,383,218 ========== ========== LIABILITIES NOW Accounts $ 510,178 $ 3,110 1.23% $ 386,626 $ 1,007 0.53% Money Market Accounts 353,759 4,940 2.82% 261,072 1,455 1.12% Savings Accounts 137,906 130 0.19% 151,502 151 0.20% Other Time Deposits 520,314 8,258 3.20% 549,983 6,314 2.31% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Deposits 1,522,157 16,438 2.18% 1,349,183 8,927 1.33% Short-Term Borrowings 88,326 1,600 3.64% 94,125 1,184 2.54% Subordinated Notes Payable 62,887 1,852 5.94% 38,345 1,108 5.83% Other Long-Term Borrowings 66,763 1,574 4.75% 68,590 1,489 4.38% ---------- ------- ---- ---------- ------- ---- Total Int. Bearing Liabilities 1,740,133 21,464 2.49% 1,550,243 12,708 1.65% Noninterest Bearing Deposits 521,865 540,812 Other Liabilities 28,132 22,589 TOTAL LIABILITIES 2,290,130 2,113,644 SHAREOWNERS' EQUITY TOTAL SHAREOWNERS' EQUITY 313,640 269,574 ---------- ---------- TOTAL LIABILITIES & EQUITY 2,603,770 $2,383,218 ========== ========== Interest Rate Spread 4.72% 4.56% ==== ==== Net Interest Income $60,052 $52,231 ======= ======= Net Interest Margin(3) 5.31% 4.99% ==== ==== (1) Average balances include nonaccrual loans. Interest income includes fees on loans of $979,128 and $1.9 million, for the three and six months ended June 30, 2006, versus $820,478 and $1.3 million for the comparable periods ended June 30, 2005. (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.
30 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. 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 June 30, 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. 31 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." 32 Table II FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1) (Other Than Trading Portfolio) As of June 30, 2006 Fair (Dollars in Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value - ----------------------------------------------------------------------------------------------------------------------- Loans Fixed Rate $ 305,779 $155,784 $116,878 $55,001 $26,097 $20,923 $ 680,463 $ 679,515 Average Interest Rate 6.30% 7.47% 7.53% 7.27% 6.92% 6.04% 6.87% Floating Rate(2) 1,100,334 145,866 106,947 7,242 4,814 7,195 1,372,397 1,372,397 Average Interest Rate 6.78% 6.61% 7.21% 7.61% 7.69% 7.89% 6.81% Investment Securities(3) Fixed Rate 43,248 58,180 56,426 3,696 10,213 17,987 189,750 189,750 Average Interest Rate 3.05% 3.74% 4.23% 4.38% 4.08% 5.52% 3.93% Floating Rate 1,482 - - - - - 1,482 1,482 Average Interest Rate 5.09% - - - - - 5.09% Other Earning Assets Floating Rate 126,211 - - - - - 126,211 126,211 Average Interest Rates 4.82% - - - - - 4.82% Total Financial Assets $1,557,053 $359,830 $280,251 $65,939 $41,123 $46,105 $2,370,302 $2,367,387 Average Interest Rates 6.43% 6.52% 6.74% 7.15% 6.30% 6.12% 6.49% Deposits(4) Fixed Rate Deposits $ 419,299 $ 61,548 $ 21,558 $ 7,976 $ 3,045 $ 257 $ 513,682 $ 423,834 Average Interest Rates 3.53% 3.66% 3.83% 3.77% 4.11% 4.93% 3.56% Floating Rate Deposits 1,067,628 - - - - - 1,067,628 1,067,628 Average Interest Rates 1.94% - - - - - 1.94% Other Interest Bearing Liabilities Fixed Rate Debt 3,981 14,545 13,610 3,509 3,281 24,097 63,022 61,025 Average Interest Rate 4.74% 4.43% 4.46% 4.64% 5.06% 5.26% 4.82% Floating Rate Debt 77,571 - - 30,928 31,959 - 140,458 140,458 Average Interest Rate 3.50% - - 5.71% 6.07% - 4.57% Total Financial Liabilities $1,568,479 $ 76,092 $ 35,169 $74,371 $ 6,325 $24,354 $1,784,790 $1,692,945 Average interest Rate 2.45% 3.80% 4.07% 5.61% 4.60% 5.25% 2.72% (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.
33 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of June 30, 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 June 30, 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. 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 Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table contains information about all purchases made by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act. 34 Maximum Number of shares that may yet be Total Total number of purchased number Average shares purchased as under our share of shares price paid part of our share repurchase Period purchased per share repurchase program(1) program - ----------------------------------------------------------------------------------------------- April 1, 2006 to - - - 455,991 April 30, 2006 May 1, 2006 to 47,300 $32.71 763,184 408,691 May 31, 2006 June 1, 2006 to 101,576 32.27 864,760 307,115 June 30, 2006 -------- ------- -------- -------- Total 148,876 $32.41 864,760 307,115 ======== ======= ======== ======== (1) This balance represents the number of shares that were repurchased through the Capital City Bank Group, Inc. Share Repurchase Program, which was approved on March 30, 2000, and modified by our Board on January 24, 2002 (the "Program") under which we were authorized to repurchase up to 1,171,875 shares of our common stock. The Program is flexible and shares are acquired with free cash flow from the public markets and other sources. There is no predetermined expiration date for the Program.
Item 3. Defaults Upon Senior Securities None. 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 25, 2006. 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 the 2009 annual meeting: For Withheld ---------------------------------------------------- DuBose Ausley 15,635,678 149,636 Frederick Carroll, III 15,768,143 17,171 John K. Humphress 15,767,211 18,103 Henry Lewis III 15,744,434 40,880 35 2. The shareowners ratified the selection of KPMG LLP as the Company's independent auditors for the fiscal year ending December 31, 2006. The number of votes cast were as follows: Against/ Abstentions/ For Withheld Broker Non-Vote --------------------------------------------- 15,761,858 11,506 11,950 Item 5. Other Information None. Item 6. Exhibits (A) Exhibits 10.1 Form of Participant Agreement for the Capital City Bank Group, Inc. Long-Term Incentive Plan. 31.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 31.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 32.1 Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized. CAPITAL CITY BANK GROUP, INC. (Registrant) /s/ J. Kimbrough Davis - ----------------------------- J. Kimbrough Davis Executive Vice President and Chief Financial Officer Date: August 9, 2006 1