43 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter: September 30, 1997 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 incorporation or organization) Identification No.) 217 North Monroe Street, Tallahassee, Florida 32301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (850) 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, 1997, there were 5,835,141 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 8 3. Qualitative and Quantitative Disclosure of Market Risk Not Applicable ITEM PART II. OTHER INFORMATION 1. Legal Proceedings Not Applicable 2. Changes in Securities and Use of Proceeds 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 (1) AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (Dollars In Thousands, Except Per Share Amounts)
September 30, 1997 December 31, 1996 (Unaudited) (Audited) ASSETS Cash and Due From Banks $ 51,520 $ 62,863 Funds Sold 18,769 26,043 Investment Securities Available-for-Sale 167,839 207,189 Loans 705,627 674,675 Unearned Interest (1,766) (2,479) Allowance for Loan Losses (8,505) (8,179) Loans, Net 695,356 664,017 Premises and Equipment 31,677 34,006 Accrued Interest Receivable 6,996 6,877 Intangibles 7,684 8,398 Other Assets 12,231 12,006 Total Assets $ 992,072 $1,021,399 LIABILITIES Deposits: Noninterest Bearing Deposits $ 187,287 $ 196,486 Interest Bearing Deposits 638,560 670,210 Total Deposits 825,847 866,696 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 31,028 28,697 Other Short-Term Borrowings 6,427 7,260 Long-Term Debt 16,440 18,072 Other Liabilities 14,048 11,174 Total Liabilities 893,790 931,899 SHAREHOLDERS' EQUITY Preferred Stock, $.01 par value, 3,000,000 shares authorized, no shares outstanding - - Common Stock, $.01 par value; 60,000,000 shares authorized; 5,835,138 shares outstanding at September 30,1997 and 5,778,366 outstanding at December 31, 1996 58 58 Additional Paid In Capital 6,335 4,934 Retained Earnings 91,397 84,426 Net Unrealized Gain (Loss) on Available-for-Sale Securities, Net of Taxes 492 82 Total Shareholders' Equity 98,282 89,500 Total Liabilities and Shareholders' Equity $ 992,072 $1,021,399 Book Value Per Share $ 16.84 $ 15.49
(1) Prior period share and per share data have been restated to reflect a 2-for-1 stock split effective April 1, 1997. The accompanying notes to Consolidated Financial Statements are an integral part of these statements. CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (1) FOR THE PERIODS ENDED SEPTEMBER 30 (UNAUDITED) (Dollars In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED SEPTEMBER 1997 1996 INTEREST INCOME Interest and Fees on Loans $16,542 $15,127 Investment Securities: U.S. Treasury 904 1,153 U.S. Gov. Agencies/Corp. 684 1,070 States and Political Subdivisions 784 857 Other Securities 82 96 Funds Sold 366 716 Total Interest Income 19,362 19,019 INTEREST EXPENSE Deposits 6,597 7,025 Federal Funds Purchased & Securities Sold Under Repurchase Agreements 416 325 Long-Term Debt 291 299 Other Short-Term Borrowings 98 136 Total Interest Expense 7,402 7,785 Net Interest Income 11,960 11,234 Provision for Loan Losses 449 334 Net Interest Income After Provision for Loan Losses 11,511 10,900 NONINTEREST INCOME Service Charges on Deposit Accounts 2,021 2,347 Data Processing 724 716 Income from Fiduciary Activities 269 245 Securities Transactions (3) 7 Other 1,383 1,120 Total Noninterest Income 4,394 4,435 NONINTEREST EXPENSE Salaries and Employee Benefits 5,903 5,876 Occupancy, Net 771 745 Furniture and Equipment 1,241 1,098 Other 3,059 3,166 Total Noninterest Expense 10,974 10,885 Income Before Income Tax 4,931 4,450 Income Tax Expense 1,664 1,405 NET INCOME $ 3,267 $3,045 Net Income Per Share $ .56 $ .53 Cash Dividends Per Share $ .15 $ .135 Average Shares Outstanding 5,830,421 5,742,910
NINE MONTHS ENDED SEPTEMBER 1997 1996 INTEREST INCOME Interest and Fees on Loans $47,746 $36,586 Investment Securities: U.S. Treasury 2,943 3,182 U.S. Gov. Agencies/Corp. 2,286 3,074 States and Political Subdivisions 2,432 2,639 Other Securities 267 236 Funds Sold 982 1,604 Total Interest Income 56,656 47,321 INTEREST EXPENSE Deposits 19,545 16,388 Federal Funds Purchased & Securities Sold Under Repurchase Agreements 1,166 865 Long-Term Debt 893 358 Other Short-Term Borrowings 234 157 Total Interest Expense 21,838 17,768 Net Interest Income 34,818 29,553 Provision for Loan Losses 1,351 857 Net Interest Income After Provision for Loan Losses 33,467 28,696 NONINTEREST INCOME Service Charges on Deposit Accounts 6,075 5,496 Data Processing 2,461 2,228 Income from Fiduciary Activities 797 785 Securities Transactions (5) 23 Other 4,368 3,287 Total Noninterest Income 13,696 11,819 NONINTEREST EXPENSE Salaries and Employee Benefits 17,587 15,407 Occupancy, Net 2,252 1,971 Furniture and Equipment 3,665 2,961 Other 9,249 8,176 Total Noninterest Expense 32,753 28,515 Income Before Income Tax 14,410 12,000 Income Tax Expense 4,825 3,606 NET INCOME $ 9,585 $8,394 Net Income Per Share $ 1.65 $ 1.47 Cash Dividends Per Share $ .45 $ .405 Average Shares Outstanding 5,806,473 5,729,202
(1) Prior period share and per share information have been restated to reflect a 2-for-1 stock split effective April 1, 1997. 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 (UNAUDITED)
(Dollars In Thousands) 1997 1996 NET INCOME $ 9,585 $ 8,394 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses 1,351 857 Depreciation 2,441 2,008 Net Amortization (Accretion) 501 747 Amortization of Intangible Assets 714 332 Gain on Sale of Real Estate Loans (500) (90) Gain on Sale of Bank Property (275) - Non-Cash Compensation 185 90 Net (Increase) Decrease in Interest Receivable (119) 270 Net (Increase) Decrease in Other Assets 2,528 876 Net Increase (Decrease) in Other Liabilities (341) (1,261) Net Cash From Operating Activities 16,070 12,223 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Payments/Maturities of Investment Securities-Available for Sale 43,420 69,756 Purchase of Investment Securities- Available for Sale (2,925) (28,206) Net (Increase) Decrease in Loans (32,691) (28,968) Purchase of Premises & Equipment (1,270) (1,792) Sales of Premises & Equipment 1,157 1,237 Cash Used to Fund Acquisition - (20,666) Cash Acquired in Acquisition - 4,499 Net Cash from Investing Activities 7,691 (4,140) CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits (40,849) (37,358) Net Increase (Decrease) in Federal Funds Purchased 2,332 (25) Net Increase (Decrease) in Other Borrowed Funds (833) 3,508 Addition of Long-Term Debt - 15,000 Repayment of Long-Term Debt (1,632) (82) Dividends Paid (2,613) (4,860) Issuance of Common Stock 1,217 461 Net Cash From Financing Activities (42,378) (23,356) Net Increase (Decrease) in Cash and Cash Equivalents (18,617) (15,273) Cash and Cash Equivalents at Beginning of Period 88,906 103,063 Cash and Cash Equivalents at End of Period $ 70,289 $ 87,790 Supplemental Disclosure: Interest Paid $ 19,926 $ 18,421 Taxes Paid $ 5,159 $ 2,712
The accompanying notes to Consolidated Financial Statements are an integral part of these statements. 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. Prior year financial statements have been reformatted and/or amounts reclassified, as necessary, to conform with the current presentation, including the restatement of share and per share data to reflect a 2-for-1 stock split effective April 1, 1997. 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 September 30, 1997 and December 31, 1996, the results of operations for the three and nine month periods ended September 30, 1997 and 1996, and cash flows for the nine month periods ended September 30, 1997 and 1996. 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 1996 Annual Report and Form 10-K. There have been no significant changes in the accounting policies of the Company since December 31, 1996. (2) INVESTMENT SECURITIES The carrying value and related market value of investment securities at September 30, 1997 and December 31, 1996 were as follows (dollars in thousands):
September 30, 1997 Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value U.S. Treasury $ 29,384 $ 55 $ 4 $ 29,435 U.S. Government Agencies and Corporations 41,058 76 60 41,074 States and Political Subdivisions 66,783 462 74 67,171 Mortgage Backed Securities 25,181 388 68 25,501 Other Securities 4,657 1 - 4,658 Total $167,063 $982 $206 $167,839
December 31, 1996 Amortized Unrealized Unrealized Market Available-For-Sale Cost Gains Losses Value U.S. Treasury $ 40,766 $ 75 $ 9 $ 40,832 U.S. Government Agencies and Corporations 57,381 32 376 57,037 States and Political Subdivisions 74,196 620 117 74,699 Mortgage Backed Securities 29,266 160 257 29,169 Other Securities 5,448 4 - 5,452 Total $207,057 $891 $759 $207,189
(3) LOANS The composition of the Company's loan portfolio at September 30, 1997 and December 31, 1996 was as follows (dollars in thousands):
September 30, 1997 December 31, 1996 Commercial, Financial and Agricultural $ 55,871 $ 57,023 Real Estate-Construction 51,539 41,389 Real Estate-Mortgage 455,620 432,110 Consumer 142,597 137,153 Gross Loans $705,627 $674,675
(4) ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the nine month period ended September 30, 1997 and 1996, is as follows (dollars in thousands):
September 30, 1997 September 30, 1996 Balance, Beginning of the Period $8,179 $6,474 Acquired Reserves - 1,846 Provision for Loan Losses 1,351 857 Recoveries on Loans Previously Charged-Off 523 498 Loans Charged-Off (1,548) (1,383) Balance, End of Period $8,505 $8,292
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, 1997 were $2.4 million compared to $3.4 million at September 30, 1996 and $3.0 million at December 31, 1996. 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. (5) DEPOSITS The composition of the Company's interest bearing deposits at September 30, 1997 and December 31, 1996 was as follows (dollars in thousands):
September 30, 1997 December 31, 1996 NOW Accounts $ 98,257 $114,507 Money Market Accounts 79,338 79,352 Savings Deposits 81,634 91,986 Other Time Deposits 379,331 384,365 Total Interest Bearing Deposits $638,560 $670,210
(6) ACCOUNTING PRONOUNCEMENTS Effective January 1, 1997 Capital City Bank adopted Statements of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement establishes new rules for determining whether a transfer of financial assets constitutes a sale and, if so, the determination of any resulting gain or loss. This Statement requires that an enterprise recognize only assets it controls and liabilities it has incurred, to remove assets only when control has been surrendered, and to remove liabilities only when they have been extinguished. The adoption of the Statement did not have a material impact on the Company's financial condition or results of operation. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which, when adopted, will replace the current methodology for calculating and presenting earnings per share. Under SFAS No. 128, primary earnings per share will be replaced with a presentation of basic earnings per share and fully diluted earnings per share will be replaced with diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed similar to fully diluted earnings per share. This Statement will be effective for the Company's December 31, 1997 financial statements and is not anticipated to have a material impact on the Company's financial condition or results of operation. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information About Capital Structure." This Statement establishes standards for disclosing information about an entity's capital structure. This Statement will be effective for the Company's December 31, 1997 financial statements and will not have a material impact on the Company's financial condition or results of operation. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for the Company's financial statements for periods beginning after December 31, 1997 and will not have a material impact on the Company's financial condition or results of operation. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires the enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This Statement will be effective for the Company's financial statements for periods beginning after December 31, 1997 and will not have a material impact on the Company's financial condition or results of operation. 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. All prior period share and per share data have been adjusted to reflect a 2-for-1 stock split effective April 1, 1997. 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. Financial comparisons to prior year periods are not necessarily comparable due to the impact of the acquisition. RESULTS OF OPERATIONS Net Income Net income was $3.3 million, or $.56 per share for the third quarter of 1997, a per share increase of 5.7% over the $3.0 million, or $.53 per share for the comparable period in 1996. Net income was $9.6 million, or $1.65 per share for the nine months ended September 30, 1997, a per share increase of 12.2% over the $8.4 million, or $1.47 per share for comparable period in 1996. Operating revenue, which includes net interest income and noninterest income, increased $6.6 million, or 16.4%, over the comparable nine month period of 1996, and was the most significant factor contributing to the increase in earnings.
For The Three For The Nine Months Ended Months Ended September 30, September 30, 1997 1996 1997 1996 Interest and Dividend Income $19,362 $19,019 $56,656 $47,321 Taxable Equivalent Adjustment(1) 406 404 1,257 1,274 19,768 19,423 57,913 48,595 Interest Expense 7,402 7,785 21,838 17,768 Net Interest Income (FTE) 12,366 11,638 36,075 30,827 Provision for Loan Losses 449 334 1,351 857 Taxable Equivalent Adjustment 406 404 1,257 1,274 Net Interest Income After Provision 11,511 10,900 33,467 28,696 Noninterest Income 4,394 4,435 13,696 11,819 Noninterest Expense 10,974 10,885 32,753 28,515 Income Before Income Taxes 4,931 4,450 14,410 12,000 Income Taxes 1,664 1,405 4,825 3,606 Net Income $ 3,267 $ 3,045 $ 9,585 $ 8,394 Percent Change over comparable prior year period 7.29% 12.15% 14.19% 18.83% Return on Average Assets (2) 1.29% 1.18% 1.28% 1.29% Return on Average Equity (2) 13.44% 14.20% 13.76% 13.49%
(1) Computed using a statutory tax rate of 35% (2) Annualized Net Interest Income Third quarter taxable equivalent net interest income increased $728,000, or 6.3%, over the comparable quarter in 1996. Taxable equivalent net interest income for the nine month period of 1997 increased $5.2 million, or 17.0%, over the same period of 1996. The increase in both the three and nine month periods is attributable to loan growth. Loans, on average through the first nine months, increased 31.8%, reflecting the acquisition of First Financial and internal loan growth. During 1997, loans averaged 76.6% of total earning assets compared to 67.6% for the comparable nine month period in 1996. Table I on page 16 provides a comparative analysis of the Company's average balances and interest rates. For the three and nine month periods ended September 30, 1997, taxable equivalent interest income increased $345,000, or 1.8%, and $9.3 million, or 19.2%, respectively, over the comparable prior year periods. Interest income has increased primarily due to the Company's ability to grow the loan portfolio. Loans during the first nine months of 1997 averaged $690.2 million, representing an increase of $166.7 million, or 31.8%, over the comparable period in 1996, and loans as a percent of average earning assets increased to 76.6% from 67.3%. This shift in mix contributed to a 25 basis point increase, from 8.34% to 8.59%, in the yield on earning assets. Interest expense for the three month period of 1997 decreased $383,000, or 4.9%, from the comparable period of 1996. The decrease in the three month period is primarily attributable to the contraction of interest bearing deposits. For the third quarter of 1997, average interest bearing deposits declined $48.2 million and represented 77.5% of total deposits, compared to 79.9% for the third quarter of 1996. During the third quarter of 1997, the average rate paid on interest bearing liabilities rose to 4.18%, from 4.16% in the second quarter of 1997 and 4.13% in the third quarter of 1996. For the nine month period ended September 30, interest expense increased $4.1 million, or 22.9%, over the comparable period of 1996. The year-to-date increase in interest expense is attributable to higher levels of interest bearing liabilities and a shift in the mix of deposits, both reflecting the acquisition of First Federal. 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, 1997 was 4.48% and 4.47%, respectively, compared to 4.24% and 4.43% for the comparable periods in 1996. The improvement in spread is attributable to higher yields on earning assets. 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, 1997 was 5.42% and 5.35%, respectively, compared to 5.01% and 5.29% for the comparable periods in 1996. The higher margin is due to higher yields on earning assets and a reduction in the level of earning assets funded with interest bearing liabilities. Provision for Loan Losses The provision for loan losses was $449,000 and $1.4 million, respectively, for the three and nine month periods ended September 30, 1997, compared to $334,000 and $857,000 for the comparable periods in 1996. Net charge-offs, while up slightly from 1996, remain at historically low levels relative to the size of the loan portfolio. Nonperforming loans declined $600,000, or 20.0%, during the first nine months of 1997. As compared to year-end, the allowance for loan losses increased slightly to $8.5 million and represented 1.21% of total loans versus 1.22% at year-end 1996. Based on current economic conditions, the low level of nonperforming loans, and net charge-offs, it is management's opinion the allowance for loan losses as of September 30, 1997 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 9/30/97 9/30/96 9/30/97 9/30/96 Net Charge-Offs $393,000 $297,000 $1,025,000 $885,000 Net Charge-Offs (Annualized) as a percent of Average Loans Outstanding, Net of Unearned Interest .22% .18% .20% .23%
Noninterest Income Noninterest income declined $41,000, or .9%, in the third quarter of 1997 versus the comparable quarter for 1996, and increased $1.9 million, or 15.9%, for the nine months ended September 30, 1997 versus the comparable period for 1996. The lower level of noninterest income during the third quarter reflects a decline in service charge revenues. Although the acquisition of First Financial favorable impacted noninterest income, the increase is principally attributable to the implementation of recommendations resulting from a profit enhancement program conducted in the latter half of 1995 and repricing of the bank service fees which went into effect on July 1, 1996. Additionally, the Company sold parcels of bank property which resulted in a $275,000 gain during the second quarter of 1997. Service charges on deposit accounts for the third quarter of 1997 decreased $326,000, or 13.9%, versus the comparable period in 1996, and increased $579,000, or 10.5%, over the comparable nine month periods for 1996. The third quarter decline is partially attributable to a decrease in the total number of deposit accounts. The year-to- date increase reflects the repricing mentioned above. Data processing revenues increased $8,000, or 1.1%, and $233,000, or 10.5%, respectively, over the comparable three and nine month periods in 1996. The increase reflects higher revenues associated with processing for third party banks. Other income increased $263,000, or 23.5%, and $1.1 million, or 32.9%, respectively, for the three and nine month periods ended September 30, 1997 over the comparable prior year periods. The increase is primarily attributable to gains on the sale of real estate loans during the first nine months of 1997 totaling $500,000, a $275,000 gain on the sale of bank property recognized in the second quarter, and ATM surcharge revenue. Annualized noninterest income as a percent of average assets was 1.83% for the first nine months of 1997, an increase of 1 basis point for the comparable period in 1996. Noninterest Expense Noninterest expense increased $89,000, or .8%, and $4.2 million, or 14.9%, respectively, over the comparable three and nine month periods of 1996. The comparison to the first nine months of 1996 is substantially impacted by the acquisition of First Financial. Compensation expense increased $27,000, or .5%, and $2.2 million, or 14.2%, respectively, over the comparable three and nine month periods of 1996. The increase reflects growth in the number of full-time equivalent employees by 55 attributable to the First Financial acquisition. Occupancy expense, including premises, furniture, fixtures and equipment increased $169,000, or 9.2%, and $985,000, or 20.0%, respectively, over the comparable three and nine month periods of 1996. The increase is primarily attributable to the addition of five new offices acquired through the First Financial acquisition. Other noninterest expense declined $107,000, or 3.4%, and increased $1.1 million, or 13.1%, respectively, over the comparable three and nine month periods of 1996. A significant portion of the increase reflects operating expenses with the five new offices. Additionally, advertising expense increased $187,000, or 42.1%, and amortization of intangible assets increased $303,000, or 88.1%. Annualized net noninterest expense (noninterest income minus noninterest expense, net of intangibles) as a percent of average assets was 2.46% in the first nine months of 1997 versus 2.56% for the first nine months of 1996. The decrease in this percentage is attributable to the growth in noninterest income. Income Taxes The provision for income taxes increased $259,000, or 18.4%, during the third quarter and $1.2 million, or 33.8%, during the first nine months of 1997. 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 1997 was 33.5%, versus 30.0% for the comparable period in 1996. 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 1997 as compared to the comparable period of 1996. FINANCIAL CONDITION Average balances for the nine month period ended September 30, 1997 reflect the acquisition of First Financial. The impact on average balances for the nine month period is due to the timing of the acquisition. Table I on page 16 presents average balances for the three and nine month periods of 1997 and 1996. The Company's average assets increased to $1.0 billion in the first nine months of 1997 from $871.5 million in the first nine months of 1996. Average earning assets were $901.7 million for the nine months ended September 30, 1997 versus $778.3 million for the comparable period in 1996. The most significant change in the mix of earning assets occurred through growth in the loan portfolio. The increase in the loan portfolio reflects the First Financial acquisition, and internal loan growth partially funded through a reduction in the investment portfolio. Average loans increased $166.7 million, or 31.8%, over the comparable nine month period in 1996. 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 1997, loans as a percentage of earning assets increased to 76.6% from 67.3% in 1996, which had a favorable impact on the Company's net interest income. At September 30, 1997, the Company's nonperforming loans were $2.4 million versus $3.0 million at year-end 1996. As a percentage of nonperforming loans, the allowance for loan losses represented 354.5% at September 30, 1997 versus 275.8% at year-end 1996. 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 $2.3 million at September 30, 1997 compared to $1.5 million at December 31, 1996. The increase reflects undeveloped branch sites acquired in the First Financial transaction which are held for sale and have been reclassified to other real estate. The ratio of nonperforming assets to loans plus other real estate was .66% at September 30, 1997, constant with year- end. 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. During 1997, maturities in the securities portfolio have been used to fund loan growth resulting in a $39.4 million, or 18.8%, reduction in the portfolio. 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, 1997, shareholders' equity included a net unrealized gain of $492,000 compared to a gain of $82,000 at December 31, 1996. The increase in value reflects a decline in current interest rates relative to their level at year-end. Average deposits increased to $840.5 million for the first nine months of 1997, from $741.0 million for the first nine months of 1996. The growth in deposits is attributable to the First Financial acquisition. During the third quarter, deposits averaged $838.7 million, compared to $874.6 million for the comparable quarter in 1996. The decrease reflects growing competition from banks and non-banks. The mix of deposits acquired through First Financial (certificates of deposit representing 75% of total acquired deposits) impacted the Company's overall deposit structure. Certificates of deposit, as a percent of average total deposits, increased to 45.8% for the first nine months of 1997, from 41.0% for the comparable period in 1996. The ratio of average noninterest bearing deposits to total deposits fell to 21.92% for the first nine months of 1997, compared to 22.7% for the comparable period in 1996. For the same periods, the ratio of average interest bearing liabilities to average earning assets was 78.7% and 78.1%, 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, 1997, there was $13.5 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 $98.3 million as of September 30, 1997, compared to $89.5 million as of December 31, 1996. 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 9.1% at September 30, 1997 versus 7.9% at December 31, 1996. Further, the Company's risk- adjusted capital ratio of 14.8% significantly exceeds the 8.0% minimum requirement under the risk-based regulatory guidelines. 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, 1997, 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 1997, shareholders' equity increased $8.8 million, or 13.1%, on an annualized basis. The net increase in shareholders' equity reflects net income of $9.6 million, dividends of $2.6 million, stock issuances of $1.4 million and an increase in the Company's net unrealized gain on available-for-sale securities of $410,000. Stock issuances totaling $1.4 million reflect 9,368 shares issued under the Company's recently adopted Dividend Reinvestment and Optional Stock Purchase Plan and 47,405 shares issued under other employee stock purchase and incentive plans. The Company's common stock had a book value of $16.84 per share at September 30, 1997 compared to $15.49 at December 31, 1996. Pursuant to the Company's stock repurchase program adopted in 1989, the Company has repurchased 527,160 (split adjusted) shares of its common stock. In the first nine months of 1997, there were no shares repurchased. IMPACT OF NEW ACCOUNTING STANDARDS Effective January 1, 1997 Capital City Bank adopted SFAS No. 125, "Accounting Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement establishes new rules for determining whether a transfer of financial assets constitutes a sale and, if so, the determination of any resulting gain or loss. This Statement requires that an enterprise recognize only assets it controls and liabilities it has incurred, to remove assets only when control has been surrendered, and to remove liabilities only when they have been extinguished. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which, when adopted, will replace the current methodology for calculating and presenting earnings per share. The Statement will be effective for the Company's December 31, 1997 financial statements. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information About Capital Structure." The Statement will be effective for the Company's December 31, 1997 financial statements. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS)No. 130, "Reporting Comprehensive Income." The Statement will be effective for the Company's financial statements for periods beginning after December 15, 1997. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statements will be effective for the Company's financial statements for periods beginning after December 15, 1997. ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable AVERAGES BALANCES & INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands)
FOR THREE MONTHS ENDED SEPTEMBER 30, 1997 Balance Interest Rate ASSETS Loans, Net of Unearned Interest $ 704,222 $16,580 9.34% Taxable Investment Securities 106,684 1,670 6.20% Tax-Exempt Investment Securities 68,192 1,152 6.76% Funds Sold 26,623 366 5.49% Total Earning Assets 905,721 19,768 8.66% Cash & Due From Banks 46,796 Allowance for Loan Losses (8,476) Other Assets 59,129 TOTAL ASSETS $1,003,170 LIABILITIES NOW Accounts $ 100,740 $ 408 1.61% Money Market Accounts 81,528 627 3.05% Savings Accounts 83,294 420 2.00% Other Time Deposits 384,783 5,142 5.30% Total Int. Bearing Deposits 650,345 6,597 4.02% Funds Purchased 29,096 416 5.67% Other Borrowed Funds 6,187 98 6.26% Long-Term Debt 16,935 291 6.83% Total Interest Bearing Liabilities 702,563 7,402 4.18% Noninterest Bearing Deposits 188,387 Other Liabilities 15,773 TOTAL LIABILITIES 906,723 SHAREHOLDERS' EQUITY Common Stock 58 Surplus 6,169 Retained Earnings 90,220 TOTAL SHAREHOLDERS' EQUITY 96,447 TOTAL LIABILITIES & EQUITY $1,003,170 Interest Rate Spread 4.48% Net interest Income $12,366 Net Interest Margin 5.42%
FOR THREE MONTHS ENDED SEPTEMBER 30, 1996 Balance Interest Rate ASSETS Loans, Net of Unearned Interest $ 651,753 $15,164 9.26% Taxable Investment Securities 144,756 2,319 6.38% Tax-Exempt Investment Securities 72,857 1,224 6.72% Funds Sold 54,462 716 5.23% Total Earning Assets 923,828 19,423 8.37% Cash & Due From Banks 50,148 Allowance for Loan Losses (8,227) Other Assets 60,362 TOTAL ASSETS $1,026,111 LIABILITIES NOW Accounts $ 105,372 $ 539 2.03% Money Market Accounts 97,736 756 3.08% Savings Accounts 96,492 517 2.13% Other Time Deposits 399,072 5,213 5.20% Total Int. Bearing Deposits 698,672 7,025 4.00% Funds Purchased 26,325 325 4.90% Other Borrowed Funds 8,929 136 6.06% Long-Term Debt 16,855 299 7.06% Total Interest Bearing Liabilities 750,781 7,785 4.13% Noninterest Bearing Deposits 175,931 Other Liabilities 14,611 TOTAL LIABILITIES 941,323 SHAREHOLDERS' EQUITY Common Stock 58 Surplus 4,320 Retained Earnings 80,410 TOTAL SHAREHOLDERS' EQUITY 84,788 TOTAL LIABILITIES & EQUITY $1,026,111 Interest Rate Spread 4.24% Net interest Income $11,638 Net Interest Margin 5.01%
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 Balance Interest Rate ASSETS Loans, Net of Unearned Interest $ 690,175 $47,859 9.27% Taxable Investment Securities 116,658 5,496 6.30% Tax-Exempt Investment Securities 70,189 3,576 6.79% Funds Sold 24,630 982 5.33% Total Earning Assets 901,652 57,913 8.59% Cash & Due From Banks 47,188 Allowance for Loan Losses (8,371) Other Assets 60,489 TOTAL ASSETS $1,000,957 LIABILITIES NOW Accounts $ 103,572 $ 1,331 1.72% Money Market Accounts 80,720 1,826 3.03% Savings Accounts 87,124 1,307 2.01% Other Time Deposits 384,742 15,081 5.24% Total Int. Bearing Deposits 656,158 19,545 3.98% Funds Purchased 29,607 1,166 5.26% Other Borrowed Funds 6,319 234 4.95% Long-Term Debt 17,480 893 6.83% Total Interest Bearing Liabilities 709,564 21,838 4.11% Noninterest Bearing Deposits 184,291 Other Liabilities 13,954 TOTAL LIABILITIES 907,809 SHAREHOLDERS' EQUITY Common Stock 58 Surplus 6,169 Retained Earnings 86,921 TOTAL SHAREHOLDERS' EQUITY 93,148 TOTAL LIABILITIES & EQUITY $1,000,957 Interest Rate Spread 4.47% Net interest Income $36,075 Net Interest Margin 5.35%
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 Balance Interest Rate ASSETS Loans, Net of Unearned Interest $523,485 36,685 9.36% Taxable Investment Securities 139,811 6,492 6.20% Tax-Exempt Investment Securities 74,404 3,814 6.83% Funds Sold 40,598 1,604 5.28% Total Earning Assets 778,298 48,594 8.34% Cash & Due From Banks 49,997 Allowance for Loan Losses (7,077) Other Assets 50,311 TOTAL ASSETS $871,529 LIABILITIES NOW Accounts $100,253 1,322 1.76% Money Market Accounts 84,805 1,944 3.06% Savings Accounts 84,061 1,323 2.10% Other Time Deposits 303,537 11,799 5.19% Total Int. Bearing Deposits 572,656 16,388 3.82% Funds Purchased 23,963 865 4.82% Other Borrowed Funds 3,842 158 5.49% Long-Term Debt 6,964 358 6.87% Total Interest Bearing Liabilities 607,425 17,768 3.91% Noninterest Bearing Deposits 168,350 Other Liabilities 12,610 TOTAL LIABILITIES 788,385 SHAREHOLDERS' EQUITY Common Stock 58 Surplus 4,951 Retained Earnings 78,135 TOTAL SHAREHOLDERS' EQUITY 83,144 TOTAL LIABILITIES & EQUITY $871,529 Interest Rate Spread 4.43% Net interest Income $30,827 Net Interest Margin 5.29%
(1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $741,000 and $2,215,000, for the three and nine months ended September 30, 1997, versus $685,000 and $1,641,000, for the comparable periods ended September 30, 1996. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate. PART II. OTHER INFORMATION ITEMS 1-4 Not applicable ITEM 5. OTHER INFORMATION On October 29, 1997, the Company entered into a definitive purchase and assumption agreement with First Federal Savings & Loan Association of Lakeland, Florida ("First Federal") to acquire five of First Federal's branch facilities which include loans and deposits. The Company has agreed to pay a deposit premium of 6.33% to assume approximately $60 million in deposits, purchase loans equal to 80% of deposits at closing, and acquire the real estate. Four of the five offices will be merged into existing offices of Capital City Bank. The buildings and premises, totaling approximately $415,000, of the four First Federal offices being merged, will be classified as other real estate. The transaction, subject to regulatory approval, is expected to close during the first quarter of 1998. On October 18, 1997, the Company consolidated three of its subsidiary banks (Levy County State Bank, Farmers and Merchants Bank of Trenton and Branford State Bank) into Capital City Bank. As a result, the Company now has one subsidiary bank with approximately $1.0 billion in assets, $700 million in loans and $826 million in deposits. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits (3b) Amended and Restated Bylaws of Capital City Bank Group, Inc. 27 Financial Data Schedule (B) Reports on Form 8-K The Company did not file any reports on Form 8-K during the period ended September 30, 1997. 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: November 13, 1997