FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter: September 30, 1996 Commission File Number 0-13358 CAPITAL CITY BANK GROUP, INC. (Exact name of registrant as specified in its charter) Florida 59-2273542 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 217 North Monroe Street, Tallahassee, Florida 32301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (904) 671-0610 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes __X___ No _____ At October 31, 1996, there were 2,871,562 shares of the Registrant's Common Stock, $.01 par value, outstanding. CAPITAL CITY BANK GROUP, INC. FORM 10-Q I N D E X ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER 1. Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 ITEM PART II. OTHER INFORMATION 1. Legal Proceedings Not Applicable 2. Changes in Securities Not Applicable 3. Defaults Upon Senior Securities Not Applicable 4. Submission of Matters to a Vote of Security Holders Not Applicable 5. Other Information 16 6. Exhibits and Reports on Form 8-K 16 Signatures 16 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF CONDITION AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Dollars In Thousands, Except Per Share Amounts) September 30, 1996 December 31, 1995 (Unaudited) (Audited) ASSETS Cash and Due From Banks $ 59,643 $ 61,613 Federal Funds Sold 21,400 41,150 Interest Bearing Deposits in Other Banks 6,747 300 Investment Securities Available-for-Sale 209,105 230,747 Loans 668,081 447,779 Unearned Interest (2,756) (3,806) Allowance for Loan Losses (8,292) (6,474) Loans, Net 657,033 437,499 Premises and Equipment 34,381 26,240 Accrued Interest Receivable 8,624 7,339 Intangibles 8,704 1,129 Other Assets 10,298 7,642 Total Assets $1,015,935 $813,659 LIABILITIES Deposits: Noninterest Bearing Deposits $185,347 $168,566 Interest Bearing Deposits 681,979 531,013 Total Deposits 867,326 699,579 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 17,342 17,367 Other Short-Term Borrowings 14,091 2,400 Long-Term Debt 16,899 1,982 Other Liabilities 14,138 11,173 Total Liabilities 929,796 732,501 SHAREHOLDERS' EQUITY Common Stock, $.01 par value; 30,000,000 shares authorized; 2,871,559 shares outstanding at September 30,1996 and 2,853,716 outstanding at December 31, 1995 29 29 Additional Paid In Capital 4,438 3,913 Retained Earnings 82,321 76,248 Net Unrealized Gain (Loss) on Available- for-Sale Securities, Net of Taxes (649) 968 Total Shareholders' Equity 86,139 81,158 Total Liabilities and Shareholders' Equity $1,015,935 $813,659 Book Value Per Share $ 30.00 $ 28.44 The accompanying notes to Consolidated Financial Statements are an integral part of these statements. CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED SEPTEMBER 30 (Unaudited) (Dollars in Thousands, Except Per Share Amounts) THREE MONTHS ENDED SEPTEMBER NINE MONTHS ENDED SEPTEMBER 1996 1995 1996 1995 INTEREST INCOME Interest and Fees on Loans $15,127 $10,523 $36,586 $30,322 Investment Securities: U. S. Treasury 1,153 1,045 3,182 3,164 U. S. Government Agencies/ Corporations 1,070 1,046 3,074 2,346 States and Political Subdivisions 857 883 2,639 2,579 Other Securities 96 60 236 188 Federal Funds Sold 716 502 1,604 1,814 Total Interest Income 19,019 14,059 47,321 40,413 INTEREST EXPENSE Deposits 7,025 5,098 16,388 14,367 Federal Funds Purchased & Securities Sold Under Repurchase Agreements 325 252 865 780 Long-Term Debt 299 0 358 0 Other Short-Term Borrowings 136 14 157 38 Total Interest Expense 7,785 5,364 17,768 15,185 Net Interest Income 11,234 8,695 29,553 25,228 Provision for Loan Losses 334 2 857 293 Net Interest Income After Provision for Loan Losses 10,900 8,693 28,696 24,935 NONINTEREST INCOME Service Charges on Deposit Accounts 2,347 1,422 5,496 4,152 Data Processing 716 632 2,228 2,018 Income from Fiduciary Activities 245 183 785 685 Securities Transactions 7 (1) 23 (1) Other 1,120 972 3,287 2,957 Total Noninterest Income 4,435 3,208 11,819 9,811 NONINTEREST EXPENSE Salaries and Employee Benefits 5,876 4,428 15,407 13,333 Occupancy, Net 745 639 1,971 1,858 Furniture and Equipment 1,098 830 2,961 2,461 Other 3,166 2,129 8,176 7,188 Total Noninterest Expense 10,885 8,026 28,515 24,840 Income Before Income Tax 4,450 3,875 12,000 9,906 Income Tax Expense 1,405 1,160 3,606 2,842 NET INCOME $3,045 $ 2,715 $ 8,394 $ 7,064 Net Income Per Share $ 1.06 $ .96 $ 2.93 $ 2.48 Cash Dividends Per Share $ .27 $ 0.00 $ .81 $ .11 Average Shares Outstanding 2,871,455 2,853,699 2,864,601 2,853,073 The accompanying notes to Consolidated Financial Statements are an integral part of these statements. CAPITAL CITY BANK GROUP, INC. STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30 (Dollars In Thousands) 1996 1995 (Unaudited) (Unaudited) NET INCOME $ 8,394 $ 7,064 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses 857 293 Depreciation 2,008 1,650 Net Amortization (Accretion) 747 317 Amortization of Intangible Assets 332 183 Non-Cash Compensation 90 72 Net (Increase) Decrease in Interest Receivable 270 (1,781) Net (Increase) Decrease in Other Assets 786 3,027 Net Increase (Decrease) in Other Liabilities (1,261) 2,977 Net Cash From Operating Activities 12,223 13,802 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Payments/Maturities of Investment Securities-Held to Maturity - 36,571 Proceeds from Payments/Maturities of Investment Securities-Available for Sale 69,756 13,235 Purchase of Investment Securities-Held to Maturity - (27,701) Purchase of Investment Securities- Available for Sale (28,206) (47,621) Net (Increase) Decrease in Loans (28,968) (16,451) Purchase of Premises & Equipment (1,792) (3,517) Sales of Premises & Equipment 1,237 94 Cash Used to Fund Acquisition (20,666) - Cash Acquired in Acquisition 4,499 - Net Cash from Investing Activities (4,140) (45,390) CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits (37,358) 9,701 Net Increase (Decrease) in Federal Funds Purchased (25) 950 Net Increase (Decrease) in Other Borrowed Funds 3,508 1,238 Addition of Long-Term Debt 15,000 0 Repayment of Long-Term Debt (82) 0 Dividends Paid (4,860) (2,591) Issuance of Common Stock 461 221 Net Cash From Financing Activities (23,356) 9,519 Net Increase (Decrease) in Cash and Cash Equivalents (15,273) (22,069) Cash and Cash Equivalents at Beginning of Period 103,063 89,067 Cash and Cash Equivalents at End of Period $87,790 $66,998 Supplemental Disclosure: Interest Paid $18,421 $13,604 Taxes Paid $ 2,712 $ 2,066 The accompanying notes to Consolidated Financial Statements are an integral part of these statements. Cash balances of business acquired CAPITAL CITY BANK GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements contain all adjustments and disclosures necessary to present fairly the financial position of the Company as of September 30, 1996 and December 31, 1995, the results of operations for the three and nine month periods ended September 30, 1996 and 1995, and cash flows for the nine month periods ended September 30, 1996 and 1995. Such adjustments are of a normal and recurring nature and include the elimination of all significant intercompany accounts and transactions. Prior year financial statements have been reformatted and/or amounts reclassified, as necessary, to conform with the current year presentation. The Company and its subsidiaries follow generally accepted accounting principles and reporting practices applicable to the banking industry. The principles which materially affect its financial position, results of operations and cash flows are set forth in Notes to Financial Statements which are included in the Company's 1995 Annual Report and Form 10-K. There have been no significant changes in the accounting policies of the Company since December 31, 1995. The preparation of financial statements in conformity with generally accepted accounting principles inherently involves the use of estimates and assumptions which affect the amounts reported in the financial statements and the related disclosures. Such estimates and assumptions may change over time and actual amounts may differ from those reported. (2) BUSINESS COMBINATION On July 1, 1996, the Company completed its acquisition of First Financial Bancorp, Inc.("First Financial"), parent company of First Federal Bank. First Financial was acquired for $20.3 million in cash. The Company borrowed $15.0 million to fund the acquisition. As of June 30, 1996, First Financial had approximately $244 million in assets, $192 million in loans, $205 million in deposits, $15 million in equity and operated five branch locations in North Florida. The acquisition was accounted for under the purchase method of accounting. Accordingly, the Company's consolidated results of operations only reflect First Financial's operations for the period from July 1, 1996. First Financial's contribution to the Company's net income during the third quarter was $190,000, or $.06 cents per share. The intangibles created from this acquisition totaled $7.5 million. These assets are being amortized over periods not exceeding 15 years for financial reporting purposes. A significant portion of the amortization of the intangible assets is not deductible for tax purposes. The purchase price of First Financial has been allocated to the underlying assets and liabilities based on the estimated fair values as of the acquisition date. These amounts may be revised at a future date when actual amounts become known, although such adjustments are not expected to be significant. The following table sets forth the unaudited pro forma summary results of operations for the nine month periods ended September 30, 1996 and 1995, and assumes the acquisition of First Financial, including the related debt financing, had been consummated as of January 1, 1996 and 1995, respectively. The pro forma results are not necessarily indicative of the results that would have been achieved had the acquisition occurred on the dates indicated or that may occur in the future (dollars in thousands). Sept. 30, Sept. 30, 1996 1995 Net Interest Income $ 32,753 $ 29,350 Net Income $ 8,479 $ 7,202 Net Income Per Share $ 2.96 $ 2.52 (3) INVESTMENT SECURITIES The carrying value and related market value of investment securities at September 30, 1996 and December 31, 1995 were as follows (dollars in thousands): September 30, 1996 Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value U. S. Treasury $ 38,896 $ 66 $ 67 $ 38,895 U. S. Government Agencies and Corporations 63,068 199 894 62,373 States and Political Subdivisions 72,324 392 462 72,254 Mortgage Backed Securities 30,426 123 410 30,139 Other Securities 5,448 4 8 5,444 Total $ 210,162 $ 784 $ 1,841 $209,105 December 31, 1995 Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value U.S. Treasury $ 72,289 $ 470 $ 54 $72,705 U.S. Government Agencies and Corporations 70,883 264 96 71,051 States and Political Subdivisions 75,986 1,037 143 76,880 Mortgage Backed Securities 5,965 47 26 5,986 Other Securities 4,107 19 1 4,125 Total $ 229,230 $ 1,837 $ 320 $230,747 (4) LOANS The composition of the Company's loan portfolio at September 30, 1996 and December 31, 1995 was as follows (dollars in thousands): September 30, 1996 December 31, 1995 Commercial, Financial and Agricultural $ 68,346 $ 46,149 Real Estate-Construction 42,798 28,391 Real Estate-Mortgage 420,784 259,503 Consumer 136,153 113,736 Gross Loans $668,081 $447,779 (5) ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the nine month period ended September 30, 1996 and 1995, is as follows (dollars in thousands): September 30, 1996 September 30, 1995 Balance, Beginning of the Period $6,474 $7,551 Acquired Reserves 1,846 - Provision for Loan Losses 857 293 Recoveries on Loans Previously Charged-Off 498 417 Loans Charged-Off (1,383) (1,227) Balance, End of Period $8,292 $7,034 Impaired loans are primarily defined as all nonaccruing loans for the loan categories which are included within the scope of SFAS 114. Nonaccruing loans at September 30, 1996 were $3.4 million compared to $4.3 million at September 30, 1995 and $4.7 million at December 31, 1995. The Company recognizes income on nonaccrual loans primarily on the cash basis. Any change in the present value of expected cash flows is recognized through the allowance for loan losses. (6) DEPOSITS The composition of the Company's interest bearing deposits at September 30, 1996 and December 31, 1995 was as follows (dollars in thousands): September 30, 1996 December 31, 1995 NOW Accounts $104,601 $122,517 Money Market Accounts 88,243 67,942 Savings Deposits 94,372 78,522 Other Time Deposits 394,763 262,032 Total Interest Bearing Deposits $681,979 $531,013 (7) RECLASSIFICATION Pursuant to current state laws, treasury shares are treated as authorized, but unissued. Accordingly, the Company canceled all existing treasury shares and recorded the cancellation as charges to paid-in capital and retained earnings and a credit to treasury stock. At the time the shares previously recorded as treasury shares were originally issued, (January 1, 1984), the book value per share was $8.57. Upon cancellation of the treasury shares, the book value of $8.57 was used to reduce the capital stock accounts ($.01 per share for common stock and $8.56 per share for additional paid-in-capital), and the difference between $8.57 and the cost per share at which the treasury shares were repurchased was charged to retained earnings. All prior period statements presented herein have been reclassified to reflect the cancellation of treasury shares and to conform with current period presentation. ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion sets forth the major factors that have affected the Company's financial condition and results of operations and should be read in conjunction with the accompanying financial statements. The year- to-date averages used in this report are based on daily balances for each respective period. On July 1, 1996, the Company completed its acquisition of First Financial Bancorp, Inc. and its wholly-owned subsidiary, First Federal Bank; collectively referred to as "First Financial". The acquisition was accounted for under the purchase method of accounting. Operating results of First Financial are included in the Company's consolidated financial statements presented herein for the period July 1, through September 30, 1996. Financial comparisons to prior year periods are not necessarily comparable due to the impact of the acquisition. See Note 2 in the Notes to Consolidated Financial Statements for further information. RESULTS OF OPERATIONS Net Income Net income was $3.0 million, or $1.06 per share for the third quarter of 1996, a per share increase of 10.4% over the $2.7 million, or $ .96 per share for the comparable period in 1995. Net income was $8.4 million, or $2.93 per share for the nine months ended September 30, 1996, a per share increase of 18.1% over the $7.1 million, or $2.48 per share for comparable period in 1995. Operating revenues, which include net interest income and noninterest income, increased $6.3 million, or 18.1%, over the comparable nine month period of 1995, and were the most significant factors contributing to the increase in earnings. For The Three For The Nine Months Ended Months Ended September 30, September 30, 1996 1995 1996 1995 Interest and Dividend Income $19,019 $14,059 $47,321 $40,413 Taxable Equivalent Adjustment(1) 404 409 1,274 1,188 19,423 14,468 48,595 41,601 Interest Expense 7,785 5,364 17,768 15,185 Net Interest Income (FTE) 11,638 9,104 30,827 26,416 Provision for Loan Losses 334 2 857 293 Taxable Equivalent Adjustment 404 409 1,274 1,188 Net Int. Inc. After Provision 10,900 8,693 28,696 24,935 Noninterest Income 4,435 3,208 11,819 9,811 Noninterest Expense 10,885 8,026 28,515 24,840 Income Before Income Taxes 4,450 3,875 12,000 9,906 Income Taxes 1,405 1,160 3,606 2,842 Net Income $ 3,045 $ 2,715 $ 8,394 $ 7,064 Percent Change over comparable prior year period 12.15% 23.07% 18.83% 1.74% Return on Average Assets (2) 1.18% 1.40% 1.29% 1.25% Return on Average Equity (2) 14.29% 13.73% 13.49% 12.43% (1) Computed using a statutory tax rate of 34% (2) Annualized Net Interest Income Third quarter taxable equivalent net interest income increased $2.5 million, or 27.8%, over the comparable quarter in 1995. Taxable equivalent net interest income for the nine month period of 1996 increased $4.4 million, or 16.7%, over the same period of 1995. The increase in the third quarter is attributable to growth in average earning assets which grew by $237.7 million, or 34.6%, due primarily to the First Financial acquisition. The increase for the nine month period is attributable to the Company's recent acquisition, internal earning asset growth and an improvement in the Company's net interest margin which has been bolstered by loan growth and a reduction in the cost of funds. Table I on page 15 provides a comparative analysis of the Company's average balances and interest rates. For the three and nine month periods ended September 30, 1996, taxable- equivalent interest income increased $5.0 million, or 34.3%, and $7.0 million, or 16.8%, respectively, over the comparable prior year periods. Interest income has increased due to growth in earning assets and, in particular, loan growth. Loans during the first nine months of 1996 averaged $523.5 million, representing an increase of $94.4 million, or 22.0%, over the comparable period in 1995, again due primarily to the First Financial acquisition. Over the same periods, loans as a percent of average earning assets increased to 67.3% from 63.5%. This shift in the mix contributed to an 11 basis point increase, from 8.23% to 8.34%, in the yield on earning assets. Interest expense for the three and nine month periods of 1996 increased $2.4 million, or 45.1%, and $2.6 million, or 17.0%, over the comparable periods of 1995. The increase in interest expense is attributable to higher levels of interest bearing liabilities and a shift in the mix of deposits. The increase in interest bearing liabilities is due to both internal growth and the First Financial acquisition. For the third quarter of 1996, average interest bearing deposits represented 79.9% of total deposits compared to 76.1% for the third quarter of 1995. The shift in deposit mix is principally attributable to the deposit base acquired from First Financial, which was predominately certificates of deposit. During the third quarter of 1996, the average rate paid on interest bearing liabilities rose to 4.13% from 3.68% in the second quarter of 1996 and 4.07% in the third quarter of 1995. The Company's interest rate spread (defined as the average taxable equivalent yield on earning assets less the average rate paid on interest bearing liabilities) for the three and nine month periods ended September 30, 1996 was 4.24% and 4.43%, respectively, compared to 4.31% and 4.29% for the comparable periods in 1995. The Company's net interest margin percentage (defined as taxable-equivalent net interest income divided by average earning assets) for the three and nine month periods ended September 30, 1996 was 5.01% and 5.29%, respectively, compared to 5.27% and 5.23% for the comparable periods in 1995. The lower spread and margin in the third quarter comparison reflects the acquisition of First Financial. Provision for Loan Losses The provision for loan losses was $334,000 and $857,000, respectively, for the three and nine month periods ended September 30, 1996, compared to $2,000 and $293,000 for the comparable periods in 1995. As a result of improving credit quality and continued low net charge-off levels, management discontinued recording a loan loss provision during the second quarter of 1995 and did not resume the provision until the first quarter of 1996. The provision recorded during the first nine months of 1996 approximates net charge-offs. As of September 30, 1996, the allowance for loan losses totaled $8.3 million compared to $6.5 million at September 30, 1995. The allowance as a percent of loans represented 1.25% and 1.46% at the end of each respective period. Although the allowance for loan losses as a percent of loans has declined over the prior year, it is management's opinion based on the current economic conditions, low level of nonperforming loans and net charge-offs, the allowance as of September 30, 1996 is sufficient to provide for losses inherent in the loan portfolio as of that date. For a discussion of the Company's nonperforming loans, see the section entitled "Financial Condition". Charge-off activity for the respective periods is set forth below. Three Months Ended Nine Months Ended 9/30/96 9/30/95 9/30/96 9/30/95 Net Charge-Offs $297,000 $312,000 $885,000 $810,000 Net Charge-Offs (Annualized) as a percent of Average Loans Outstanding, Net of Unearned Interest .18% .29% .23% .25% Noninterest Income Noninterest income increased $1.2 million, or 38.3%, in the third quarter of 1996 versus the comparable quarter for 1995, and $2.0 million, or 20.5%, for the nine months ended September 30, 1996 versus the comparable period for 1995. Although the acquisition of First Financial impacted noninterest income, the increase is principally attributable to a greater focus on revenue growth and several initiatives undertaken by management, including the implementation of recommendations resulting from a profit enhancement program conducted in 1995. Additionally, fees for deposit services were increased effective July 1, 1996. Service charges on deposit accounts increased $925,000, or 65.1%, and $1.3 million, or 32.4%, over the comparable three and nine month periods for 1995. The increase reflects the repricing mentioned above and tighter controls over waived fees. Data processing revenues increased $84,000, or 13.3%, and $210,000, or 10.4%, respectively, over the comparable three and nine month periods in 1995. The increase reflects higher revenues associated with processing for both government agencies and third party banks. Fees from fiduciary services increased $62,000, or 33.9%, and $100,000, or 14.6%, respectively, over the comparable three and nine month periods of 1995. A price increase effective January 1, 1996, growth in assets under management and the collection of estate fees contributed to the higher revenues during 1996. In January 1995, the Company changed its method of income recognition for Capital City Trust Company ("CCTC") from cash to accrual. This change resulted in a one-time adjustment which inflated CCTC revenues during the first quarter of 1995. Other income increased $148,000, or 15.2%, and $330,000, or 11.2%, respectively, for the three and nine month periods ended September 30, 1996 over the comparable prior year periods. Gains on the sale of fixed rate loans increased $90,000 due to the acquisition of First Financial and check printing income increased $142,000 due to a renegotiation of the contract which went into effect in March 1996. Additionally, other fees and commissions were up $79,000. Annualized noninterest income as a percent of average earning assets was 2.03% for the first nine months of 1996 versus 1.96% for the comparable period in 1995. Noninterest Expense Noninterest expense increased $2.9 million, or 35.6%, and $3.7 million, or 14.8%, respectively, over the comparable three and nine month periods of 1995. For the nine month period ended September 30, 1996, compensation expense and the acquisition of First Financial accounted for $3.0 million of the $3.7 million increase in expenses. Compensation expense increased $1.4 million, or 32.7%, and $2.1 million, or 15.6%, respectively, over the comparable three and nine month periods of 1995. The increase reflects growth in the number of full-time equivalent employees of 80 due principally to the First Financial acquisition, higher pension expense including the adoption of a Supplemental Employee Retirement Plan and increases associated with both cash and stock based compensation plans reflecting the Company's improved operating performance and higher stock price. Occupancy expense, including premises, furniture, fixtures and equipment increased $374,000, or 25.5%, and $613,000, or 14.2%, respectively, over the comparable three and nine month periods of 1995. Excluding the recent acquisition, the increase is attributable to higher depreciation and repairs/maintenance expenses. Other noninterest expense increased $1.0 million, or 48.7%, and 988,000, or 13.7%, respectively, over the comparable three and nine month periods of 1995. A reduction of approximately $600,000 in FDIC premiums was more than offset by an increase in professional fees of $655,000 and additional expenses associated with First Financial. The increase in professional fees reflects the hiring of consultants to assist with various projects within the Company including data processing conversions, technology initiatives, restructurings and the development of a strategic plan. Annualized net noninterest expense (noninterest income minus noninterest expense) as a percent of average assets was 2.56% in the first nine months of 1996 versus 2.65% for the first nine months of 1995. The decrease in this percentage is attributable to the growth in noninterest income. Income Taxes The provision for income taxes increased $245,000, or 21.1%, during the third quarter and $764,000, or 26.9%, during the first nine months of 1996. The increase in the provision over the prior year is attributable to higher taxable income. The Company's effective tax rate for the first nine months of 1996 was 30.0% versus 28.7% for the comparable period in 1995. The increase in the effective tax rate is attributable to a decrease in tax exempt income as a percent of taxable income in the first nine months of 1996 as compared to the comparable period of 1995. FINANCIAL CONDITION Average balances for the three and nine month periods ended September 30, 1996 reflect the acquisition of First Financial. The impact on average balances for the third quarter is substantially greater than the nine month period due to the timing of the acquisition. Table I on page 15, presents average balances for the three and nine month periods of 1996 and 1995. The Company's average assets increased to $871.5 million in the first nine months of 1996 from $757.7 million in the first nine months of 1995. Average earning assets were $778.3 million for the nine months ended September 30, 1996 versus $675.3 million for the comparable period in 1995. The most significant change in the mix of earning assets occurred through growth in the loan portfolio. The increase in the loan portfolio was funded primarily through deposit growth and investment portfolio maturities. The investment portfolio is a significant component of the Company's operations and, as such, it functions as a key element of liquidity and asset/liability management. Securities in the available-for-sale portfolio are recorded at fair value and unrealized gains and losses associated with these securities are recorded, net of taxes, as a separate component of shareholders' equity. At September 30, 1996, shareholders' equity included a net unrealized loss of $649,000 compared to a gain of $968,000 at December 31, 1995. The reduction in value reflects a rise in current interest rates relative to their level at year-end. Average loans were up $94.4 million, or 22.0%, over the comparable nine month period in 1995. Loan growth occurred primarily in the real estate and consumer portfolios. Residential real estate loans increased substantially with the acquisition of First Financial. Based on averages for the first nine months of 1996, loans as a percent of earning assets increased to 67.3% from 63.5% in 1995, which had a favorable impact on the Company's net interest income. During the third quarter of 1996 this percentage increased further to 70.5%. At September 30, 1996, the Company's nonperforming loans were $3.4 million versus $4.7 million at year-end 1995. As a percent of nonperforming loans, the allowance for loan losses represented 244.1% at September 30, 1996 versus 138.3% at year-end 1995. 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 $1.0 million at September 30, 1996 and December 31, 1995. The ratio of nonperforming assets to loans plus other real estate was .66% at September 30, 1996 compared to 1.28% at December 31, 1995. Average deposits increased to $741.0 million for the first nine months of 1996, from $653.3 million for the first nine months of 1995. The growth in deposits was primarily driven by deposit promotions which were initiated by the Company during the second and fourth quarters of 1995, as well as by the First Financial acquisition. As a result of these promotions and the recent acquisition, certificates of deposit represented $57.3 million, or 65.3%, of the $87.7 million growth in average total deposits. Certificates of deposit, as a percent of average total deposits, increased to 41.0% for the first nine months of 1996, from 37.7% for the comparable period in 1995. During the third quarter of 1996 this percentage increased to 45.6% reflecting the mix of deposits acquired from First Financial. The ratio of average noninterest bearing deposits to total deposits fell to 22.7% for the first nine months of 1996, compared to 24.3% for the comparable period in 1995. For the same periods, the ratio of average interest bearing liabilities to average earning assets was 78.0% and 76.3%, respectively. LIQUIDITY AND CAPITAL RESOURCES Liquidity, for a financial institution, is the availability of funds to meet increased loan demand and/or excessive deposit withdrawals. Management has implemented a financial structure that provides ready access to sufficient liquid funds to meet normal transaction requirements, take advantage of investment opportunities and cover unforeseen liquidity demands. In addition to core deposit growth, sources of funds available to meet liquidity demands for the subsidiary banks include federal funds sold, near-term loan and investment maturities, including the "Available-for- Sale" investment portfolio, and the ability to purchase federal funds through established lines of credit with correspondent banks. Additionally, the parent company maintains a $25.0 million revolving line of credit. As of September 30, 1996, there was $15.0 million outstanding under this credit facility which the Company borrowed on July 1, 1996 to fund the acquisition of First Financial. The Company's equity capital was $86.1 million as of September 30, 1996, compared to $81.2 million as of December 31, 1995. The Company's management continues to monitor its capital position in relation to its level of assets with the objective of maintaining a strong capital position. The leverage ratio was 7.6% at September 30, 1996 versus 9.8% at December 31, 1995. Further, the Company's risk-adjusted capital ratio of 14.0% significantly exceeds the 8.0% minimum requirement under the risk- based regulatory guidelines. Capital ratios declined during the third quarter reflecting the recent acquisition. In 1996, the Board of Directors converted its dividend payment schedule from semi-annual to quarterly. As of September 30, 1996, the Company had declared and paid three quarterly dividends of $ .27 each. State and federal regulations as well as the Company's long-term debt agreement place certain restrictions on the payment of dividends by both the Company and its Group banks. At September 30, 1996, these regulations and covenants did not impair the Company's (or its Group banks') ability to declare and pay dividends or to meet other existing obligations. During the first nine months of 1996, shareholders' equity increased $5.0 million, or 8.2%, on an annualized basis. The net increase in shareholders' equity reflects net income of $8.4 million, dividends of $2.3 million and a shift in the Company's net unrealized gain(loss) on available-for- sale securities from a gain of $968,000 at December 31, 1995 to a loss of $649,000 at September 30, 1996. The Company's common stock had a book value of $30.00 per share at September 30, 1996 compared to $28.44 at December 31, 1995. Pursuant to the Company's stock repurchase program adopted in 1989, the Company has repurchased 263,580 shares of its common stock. In the first nine months of 1996, there were no shares repurchased and 17,843 shares were issued, a majority of which were shares issued in accordance with the Company's Associate Stock Purchase Plan. AVERAGES BALANCES & INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands)
FOR THREE MONTHS ENDED SEPTEMBER 30, FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 1996 1995 Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS Loans, Net of Unearned Interest $651,753 $15,164 9.26% $432,791 $10,536 9.66% $523,485 36,685 9.36% $429,061 $30,354 9.46% Taxable Investment Securities 144,756 2,319 6.38% 146,754 2,151 5.82% 139,811 6,492 6.20% 135,681 5,698 5.62% Tax-Exempt Investment Securities 72,857 1,224 6.72% 72,249 1,279 7.08% 74,404 3,814 6.83% 69,993 3,735 7.11% Funds Sold 54,462 716 5.23% 34,335 502 5.80% 40,598 1,604 5.28% 40,576 1,814 5.98% Total Earning Assets 923,828 19,423 8.37% 686,129 14,468 8.37% 778,298 48,594 8.34% 675,311 41,601 8.23% Cash & Due From Banks 50,148 48,440 49,997 48,496 Allowance for Loan Losses (8,227) (7,254) (7,077) (7,528) Other Assets 60,362 41,295 50,311 41,423 TOTAL ASSETS $1,026,111 $768,610 $871,529 $757,702 LIABILITIES NOW Accounts $105,372 539 2.03% $ 91,435 422 1.83% $100,253 1,322 1.76% $ 91,245 1,412 2.07% Money Market Accounts 97,736 756 3.08% 70,747 527 2.96% 84,805 1,944 3.06% 69,841 1,586 3.04% Savings Accounts 96,492 517 2.13% 81,443 436 2.12% 84,061 1,323 2.10% 87,172 1,520 2.33% Other Time Deposits 399,072 5,213 5.20% 259,581 3,713 5.68% 303,537 11,799 5.19% 246,200 9,849 5.35% Total Int. Bearing Deposits 698,672 7,025 4.00% 503,206 5,098 4.02% 572,656 16,388 3.82% 494,458 14,367 3.88% Funds Purchased 26,325 325 4.90% 18,953 252 5.27% 23,963 865 4.82% 19,521 780 5.34% Other Borrowed Funds 8,929 136 6.06% 1,407 14 3.85% 3,842 158 5.49% 1,184 38 4.25% Long-Term Debt 16,855 299 7.06% -- -- -- 6,964 358 6.87% -- -- -- Total Interest Bearing Liabilities 750,781 7,785 4.13% 523,566 5,364 4.07% 607,425 17,768 3.91% 515,163 15,185 3.94% Noninterest Bearing Deposits 175,931 157,677 168,350 158,817 Other Liabilities 14,611 8,960 12,610 7,723 TOTAL LIABILITIES 941,323 690,203 788,385 681,703 SHAREHOLDERS' EQUITY Common Stock 29 31 30 31 Surplus 4,349 5,868 4,979 5,866 Retained Earnings 80,410 72,508 78,135 70,102 TOTAL SHAREHOLDERS' EQUITY 84,788 78,407 83,144 75,999 TOTAL LIABILITIES & EQUITY $1,026,111 $768,610 $871,529 $757,702 Interest Rate Spread 4.24% 4.31% 4.43% 4.29% Net interest Income $11,638 $ 9,104 $30,827 $26,416 Net Interest Margin 5.01% 5.27% 5.29% 5.23% (1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $685,000 and $1,641,000, for the three and nine months ended September 30, 1996, versus $422,000 and $1,119,000, for the comparable periods ended September 30, 1995. (2) Interest income includes the effects of taxable equivalent adjustments using a 34% tax rate.
PART II. OTHER INFORMATION ITEMS 1-4 Not applicable ITEM 5 On October 25, 1996, the Company filed an application for inclusion of its common stock on the NASDAQ National Market. The Company anticipates such inclusion to be approved. If so, quotations on the National Market System should commence during the first quarter of 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 2(a) The Agreement and Plan of Merger, dated as of December 10, 1995, by and among Capital City Bank Group, Inc., a Florida corporation to be formed as a direct wholly-owned subsidiary of the Company, and First Financial Bancorp, Inc., is incorporated herein by reference to Exhibit 2 of the Company's Form 10-K/A filed on April 9, 1996 (File No. 0-13358). 3(a) Amended and Restated Articles of Incorporation of the Company are incorporated by reference to the Company's 1996 Proxy Statement filed on April 11, 1996 (File No. 0-13358). 3(b) Bylaws of the Company are incorporated by reference to Exhibit 3(b) of the Company's 1983 Form 10-K (File No. 2-86158). 27 Financial Data Schedule (B) Reports on Form 8-K On July15, 1996, the Company filed a Form 8-K to report the acquisition of First Financial Bancorp, Inc., had been consummated on July 1, 1996. This Form 8-K was amended by a Form 8-K/A filed on September 13, 1996, to include audited financial statements of First Financial Bancorp, Inc., for the years ended September 30, 1995, 1994 and 1993, and pro forma consolidated financial statements for the year ended December 31, 1995 and for the six months ended June 30, 1996. 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) J. Kimbrough Davis Senior Vice President and Chief Financial Officer Date: November 14, 1996