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: June 30, 1998 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: (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 July 31, 1998, 8,848,627 shares of the Registrant's Common Stock, $.01 par value, were outstanding CAPITAL CITY BANK GROUP, INC. FORM 10-Q INDEX ITEM PART I. FINANCIAL INFORMATION PAGE NUMBER 1. Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 3. Qualitative and Quantitative Disclosure of Market Risk 17 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 19 5. Other Information Not Applicable 6. Exhibits and Reports on Form 8-K Not Applicable Signatures 20 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED JUNE 30 (UNAUDITED) (Dollars in Thousands, Except Per Share Amounts)(1)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 1998 1997 1998 1997 INTEREST INCOME Interest and Fees on Loans $17,247 $15,806 $33,857 $31,204 Investment Securities: U. S. Treasury 447 543 815 1,097 U. S. Government Agencies/Corp. 677 1,254 1,489 2,544 States and Political Subdivisions 713 816 1,427 1,648 Other Securities 90 89 175 185 Funds Sold & Interest Bearing Deposits 759 357 1,530 616 ------- ------- ------- ------- Total Interest Income 19,933 18,865 39,293 37,294 INTEREST EXPENSE Deposits $ 7,037 $ 6,586 $13,810 $12,948 Short-Term Borrowings 514 476 1,051 886 Long-Term Borrowings 280 298 560 602 ------- ------- ------- ------- Total Interest Expense 7,831 7,360 15,421 14,436 ------- ------- ------- ------- Net Interest Income 12,102 11,505 23,872 22,858 Provision for Loan Losses 558 446 1,044 902 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 11,544 11,059 22,828 21,956 ------- ------- ------- ------- NONINTEREST INCOME Service Charges on Deposit Accounts 2,025 2,041 3,966 4,054 Data Processing 988 937 1,840 1,737 Trust Fees 454 253 781 528 Securities Transactions 15 - 24 (2) Other 2,162 1,621 4,013 2,985 ------- ------- ------- ------- Total Noninterest Income 5,644 4,852 10,624 9,302 ------- ------- ------- ------- NONINTEREST EXPENSE Salaries and Employee Benefits 6,327 5,890 12,687 11,684 Occupancy, Net 795 776 1,580 1,481 Furniture and Equipment 1,225 1,139 2,393 2,424 Other 3,619 3,173 6,869 6,190 ------- ------- ------- ------- Total Noninterest Expense 11,966 10,978 23,529 21,779 ------- ------- ------- ------- Income Before Income Tax 5,222 4,933 9,923 9,479 Income Tax Expense 1,775 1,657 3,375 3,161 ------- ------- ------- ------- NET INCOME $ 3,447 $ 3,276 $ 6,548 $ 6,318 ======= ======= ======= ======= Basic Net Income Per Share $ .39 $ .38 $ .74 $ .73 ====== ======= ====== ======= Diluted Net Income Per Share $ .39 $ .38 $ .74 $ .73 ====== ======= ====== ======= Cash Dividends Per Share $ .11 $ .10 $ .22 $ .20 ====== ======= ====== ======= Average Shares Outstanding 8,830,198 8,694,435 8,821,316 8,691,450 ========= ========= ========= ========= (1) Prior period share and per share information have been restated to reflect a 3-for-2 stock split effective June 1, 1998.
CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF CONDITION AS OF JUNE 30, 1998 AND DECEMBER 31, 1997 (Dollars In Thousands, Except Share Data)(1)
June 30 December 31 1998 1997 (Unaudited) (Audited) ASSETS Cash and Due From Banks $ 63,963 $ 61,270 Funds Sold 60,589 52,519 Investment Securities, Available-for-Sale 139,412 148,514 Loans, Net of Unearned Interest 746,203 697,726 Allowance for Loan Losses (8,747) (8,322) ---------- ---------- Loans, Net 737,456 689,404 Premises and Equipment, Net 31,134 31,613 Intangibles 10,489 7,703 Other Assets 24,547 18,650 ---------- ---------- Total Assets $1,067,590 $1,009,673 ========== ========== LIABILITIES Deposits: Noninterest Bearing Deposits $ 204,164 $ 191,797 Interest Bearing Deposits 679,378 643,015 ---------- ---------- Total Deposits 883,542 834,812 Short-Term Borrowings 48,461 46,114 Long-Term Debt 15,800 15,896 Other Liabilities 12,936 12,401 ---------- ---------- Total Liabilities 960,739 909,223 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; 8,848,624 shares outstanding at June 30,1998 and 8,776,085 outstanding at December 31, 1997 88 88 Additional Paid-In-Capital 8,328 6,507 Retained Earnings 97,893 93,288 Net Unrealized Gain on Available-for-Sale Securities 542 567 ---------- ---------- Total Shareowners' Equity 106,851 100,450 ---------- ---------- Total Liabilities and Shareowners' Equity $1,067,590 $1,009,673 ========== ========== (1) Prior period share and per share data have been restated to reflect a 3-for-2 stock split effective June 1, 1998.
CAPITAL CITY BANK GROUP, INC. STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30 (Dollars in Thousands)
1998 1997 (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 6,548 $ 6,318 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses 1,044 902 Depreciation 1,590 1,579 Net Securities Amortization 385 340 Amortization of Intangible Assets 513 505 Gains in Sales on Investment Securities (24) (2) Non-Cash Compensation 1,677 184 Net (Increase) Decrease in Interest Receivable (270) 183 Net (Increase) Decrease in Other Assets (5,310) 1,426 Net Increase (Decrease) in Other Liabilities 550 (343) -------- -------- Net Cash Provided by Operating Activities 6,703 11,092 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Payments/Maturities of Investment Securities 34,567 26,055 Purchase of Investment Securities, Available-for-Sale (25,864) (4,205) Net Increase in Loans (4,659) (39,222) Net Cash Received from Acquisition 7,022 - Purchase of Premises & Equipment (967) (976) Sales of Premises & Equipment 278 955 -------- -------- Net Cash Provided by (Used in) Investing Activities 10,377 (17,393) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Decrease in Deposits (6,768) (13,643) Net Increase in Short-Term Borrowings 2,347 1,317 Borrowing from Long-Term Debt 1,000 - Repayment of Long-Term Debt (1,096) (1,088) Dividends Paid (1,943) (1,739) Issuance of Common Stock 143 1,048 ------- ------- Net Cash Used in Financing Activities (6,317) (14,105) -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 10,763 (20,406) Cash and Cash Equivalents at Beginning of Period 113,789 88,906 -------- -------- Cash and Cash Equivalents at End of Period $124,552 $ 68,500 ======== ======== Supplemental Disclosure: Interest Paid $ 14,379 $ 13,102 ======== ======== Transfer of Loans to ORE $ 483 $ 3,696 ======== ======== Income Tax Paid $ 3,252 $ 3,696 ======== ========
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 S-X and S-K 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 year presentation, including the restatement of share and per share data to reflect a 3-for-2 stock split effective June 1, 1998. 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, 1998 and December 31, 1997, and the results of operations for the three and six month periods ended June 30, 1998 and 1997, and cash flows for the six month periods ended June 30, 1998 and 1997. 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 Consolidated Financial Statements which are included in the Company's 1997 Annual Report and Form 10-K. (2) INVESTMENT SECURITIES The carrying value and related market value of investment securities at June 30, 1998 and December 31, 1997 were as follows (dollars in thousands): June 30, 1998 Amortized Unrealized Unrealized Market Cost Gains Losses Value
Available-For-Sale U. S. Treasury $ 31,154 $ 50 $15 $ 31,189 U. S. Government Agencies and Corporations 21,770 40 14 21,796 States and Political Subdivisions 62,576 548 5 63,119 Mortgage-Backed Securities 17,952 256 11 18,197 Other Securities 5,104 7 - 5,111 -------- ---- --- -------- Total $138,556 $901 $45 $139,412 ======== ==== === ========
December 31, 1997 Amortized Unrealized Unrealized Market Cost Gains Losses Value
Available-For-Sale U. S. Treasury $ 24,345 $ 42 $ 4 $ 24,383 U. S. Government Agencies and Corporations 32,036 55 60 32,031 States and Political Subdivisions 63,661 593 10 64,244 Mortgage-Backed Securities 22,644 326 48 22,922 Other Securities 4,933 1 - 4,934 -------- ------ ---- -------- Total $147,619 $1,017 $122 $148,514 ======== ====== ==== ========
(3) LOANS The composition of the Company's loan portfolio at June 30, 1998 and December 31, 1997 was as follows (dollars in thousands): June 30, 1998 December 31, 1997 Commercial, Financial and Agricultural $ 63,710 $ 53,888 Real Estate-Construction 40,846 45,563 Real Estate-Mortgage 495,923 456,499 Consumer 145,724 141,776 -------- -------- Loans, Net of Unearned Interest $746,203 $697,726 ======== ======== (4) ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the six month period ended June 30, 1998 and 1997, is as follows (dollars in thousands): June 30, 1998 1997 Balance, Beginning of the Period $8,322 $8,179 Provision for Loan Losses 1,044 902 Recoveries on Loans Previously Charged-Off 418 370 Loans Charged-Off (1,037) (1,003) ------ ------ Balance, End of Period $8,747 $8,448 ====== ====== Impaired loans are primarily defined as all nonaccruing loans for the loan categories which are included within the scope of SFAS 114. Selected information pertaining to impaired loans is depicted in the table below (dollars in thousands): June 30, 1998 1997 Impaired Loans: Valuation Valuation Balance Allowance Balance Allowance With Related Credit Allowance $2,972 $305 $ 218 $108 Without Related Credit Allowance 1,297 - 881 - Average Recorded Investment for the Period 4,680 * 1,650 * Interest Income: Recognized $ 48 $ 31 Collected $ 12 $ 28 The Company recognizes income on impaired loans primarily on the cash basis. Any change in the present value of expected cash flows on impaired loans is recognized through the allowance for loan losses.
(5) DEPOSITS The composition of the Company's interest bearing deposits at June 30, 1998 and December 31, 1997 was as follows (dollars in thousands): June 30, 1998 December 31, 1997 NOW Accounts $102,881 $113,163 Money Market Accounts 74,612 79,010 Savings Deposits 89,641 80,476 Other Time Deposits 412,244 370,366 -------- -------- Total Interest Bearing Deposits $679,378 $643,015 ======== ======== (6) ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, the Company adopted Statements of Financial Accounting Standards "SFAS" No. 130, "Reporting Comprehensive Income". Statement 130 provides new accounting and reporting standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The adoption of this standard did not have a material impact on reported results of operations of the Company. Effective February 1998, the Company adopted SFAS No. 132 "Employers Disclosure about Pensions and Other Post-Retirement Benefits". Statement 132 standardizes the disclosure requirements for pension and other post-retirement benefits and requires additional information on changes in the benefit obligations and fair values of plan assets. The Statement suggests combined formats for presentation of pension and other post-retirement benefit disclosures. The adoption of this standard did not have a material impact on reported results of operations of the Company. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments of Hedging Activities". The statement establishes accounting and reporting standards for derivative instruments (including certain derivative instruments imbedded in other contracts). The statement is effective for fiscal years beginning after June 15, 1999. The adoption of this standard is not expected to have a material impact on reported results of operations of the Company. (7) COMPREHENSIVE INCOME Total comprehensive income is defined as net income and all other changes in equity which, for Capital City Bank Group, consists solely of changes in unrealized gains (losses) on available-for-sale securities. The Company reported total comprehensive income, net of tax, for the three month periods ended June 30, 1998 and 1997, was as follows (dollars in thousands): THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 1998 1997 1998 1997
Net Income $3,447 $3,276 $6,548 $6,318 Other Comprehensive Income, Net of Tax Unrealized Gains (Losses) on Securities: Unrealized Gains (Losses) on Securities During the Period 21 620 49 147 Less: Reclassification Adjustments for Gains (Losses) Included in Net Income 5 0 24 (2) ------ ------ ----- ------ Total Unrealized Gains (Losses) On Securities 16 620 25 149 Other Comprehensive Income, Net of Tax $3,463 $3,896 $6,573 $6,467 ====== ====== ====== ====== These changes reflect a market value decrease for the second quarter ended June 30, 1998, and an increase in investment securities available-for-sale for the comparable quarter in 1997.
SELECTED QUARTERLY FINANCIAL DATA UNAUDITED (Dollars in Thousands, Except Per Share Data)(1) 1998 1997 1996 Second First Fourth Third Second First Fourth Third
Summary of Operations: Interest Income $ 19,933 $ 19,360 $ 19,008 $ 19,362 $ 18,865 $ 18,429 $ 18,850 $ 19,019 Interest Expense 7,831 7,590 7,302 7,402 7,360 7,076 7,651 7,785 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Net Interest Income 12,102 11,770 11,706 11,960 11,505 11,353 11,199 11,234 Provision for Loan Loss 558 486 437 449 446 456 606 334 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Net interest Income After Provision for Loan Loss 11,544 11,284 11,269 11,511 11,059 10,897 10,593 10,900 Noninterest Income 5,644 4,986 4,895 4,394 4,852 4,450 4,497 4,436 Noninterest Expense 11,966 11,569 12,012 10,974 10,978 10,801 10,740 10,885 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Income Before Provision for Income Taxes 5,222 4,701 4,152 4,931 4,933 4,546 4,350 4,451 Provision for Income Taxes 1,775 1,600 1,299 1,664 1,657 1,504 1,384 1,405 ---------- ---------- ---------- ---------- -------- -------- ---------- ---------- Net Income $ 3,447 $ 3,101 $ 2,853 $ 3,267 $ 3,276 $ 3,042 $ 2,966 $ 3,046 ========== ========== ========== ========== ======== ======== ========== ========== Net Interest Income (FTE) $ 12,445 $ 12,131 $ 12,059 $ 12,366 $ 11,929 $ 11,780 $ 11,676 $ 11,638 Per Common Share: Net Income Basic $ .39 $ .35 $ .33 $ .37 $ .38 $ .35 $ .35 $ .35 Net Income Diluted .39 .35 .32 .37 .38 .35 .35 .35 Dividends Declared .11 .11 .11 .10 .10 .10 .10 .09 Book Value 12.08 11.77 11.45 11.23 10.91 10.55 10.33 10.00 Market Price(2): High 32.67 32.67 27.33 23.50 21.50 21.33 14.00 14.00 Low 29.75 29.25 23.00 20.83 19.33 14.00 14.00 12.67 Close 31.38 31.67 27.00 23.17 20.83 20.16 14.00 14.00 Selected Average Balances: Total Assets $1,046,842 $1,038,806 $1,001,661 $1,003,170 $999,888 $999,837 $1,029,891 $1,026,111 Earning Assets 938,970 933,052 898,383 905,722 902,970 896,130 926,169 923,828 Loans, Net of Unearned 741,914 731,204 700,158 704,222 687,280 678,730 672,672 651,752 Total Deposits 872,087 862,875 828,239 838,732 842,847 839,959 858,301 874,603 Total Shareowners' Equity 104,580 102,393 98,920 96,448 92,375 90,621 87,580 84,788 Common Equivalent Shares 8,830 8,812 8,757 8,745 8,694 8,688 8,616 8,613 Ratios: ROA 1.32% 1.21% 1.13% 1.29% 1.31% 1.23% 1.15% 1.18% ROE 13.22% 12.28% 11.45% 13.44% 14.22% 13.61% 13.47% 14.20% Net Interest Margin (FTE) 5.31% 5.27% 5.33% 5.42% 5.30% 5.32% 5.03% 5.02% (1) All share and per share data have been adjusted to reflect the three-for-two stock split effective June 1, 1998. (2) Prior to February 3, 1997, there was not an established trading market for the common stock.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis discusses important factors affecting the financial condition and results of operations of Capital City Bank Group, Inc., for the three and six month periods ended June 30, 1998 and 1997. This report contains forward-looking statements within the meaning of the federal securities laws such as interest rate sensitivity projections, revenue and expense trends, and long-term objectives. The forward looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. 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 three-for-two stock split effective June 1, 1998. The year-to-date averages used in this report are based on daily balances for each respective period. The Financial Review is divided into three subsections entitled Earnings Analysis, Financial Condition, and Liquidity and Capital Resources. Information therein should facilitate a better understanding of the major factors and trends which affect the Company's earnings performance and financial condition, and how the Company's performance during 1998 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and its subsidiary, collectively, are referred to as "CCBG" or the "Company." On January 31, 1998, the Company completed its purchase and assumption transaction with First Federal Savings & Loan Association of Lakeland, Florida ("First Federal-Florida") and acquired five of First Federal-Florida's branch facilities which included loans and deposits. The Company paid a deposit premium of $3.3 million, or 6.33%, and assumed $55 million in deposits and purchased loans equal to $44 million. Four of the five offices were merged into existing offices of Capital City Bank. The deposit premium is being amortized over fifteen years. RESULTS OF OPERATIONS Net Income Net income was $3.4 million, or $.39 per basic and diluted share for the second quarter of 1998, a per share increase of 2.6% over the $3.3 million, or $.38 per basic and diluted share for the comparable period in 1997. Net income was $6.5 million, or $.74 per basic and diluted share for the six months ended June 30, 1998, a per share increase of 1.4% over the $6.3 million, or $.73 per basic and diluted share for comparable period in 1997. Operating revenue, which includes net interest income and noninterest income, increased $2.3 million, or 7.3%, over the first half of 1997, and was the most significant factor contributing to the increase in earnings. Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997
Interest and Dividend Income $19,933 $18,865 $39,293 $37,294 Taxable Equivalent Adjustment(1) 343 424 704 851 ------- ------- ------- ------- Interest Income (FTE) 20,276 19,289 39,997 38,145 Interest Expense 7,831 7,360 15,421 14,436 ------- ------- ------- ------- Net Interest Income (FTE) 12,445 11,929 24,576 23,709 Provision for Loan Losses 558 446 1,044 902 Taxable Equivalent Adjustment 343 424 704 851 ------- ------- ------- ------- Net Int. Inc. After Provision 11,544 11,059 22,828 21,956 Noninterest Income 5,638 4,852 10,624 9,302 Noninterest Expense 11,960 10,978 23,529 21,779 ------- ------- ------- ------- Income Before Income Taxes 5,222 4,933 9,923 9,479 Income Taxes 1,775 1,657 3,375 3,161 ------- ------- ------- ------- Net Income $ 3,447 $ 3,276 $ 6,548 $ 6,318 ======= ======= ======= ======= Percent Change 5.22% 17.76% 3.64% 18.12% Return on Average Assets(2) 1.32% 1.31% 1.27% 1.27% Return on Average Equity(2) 13.22% 14.22% 12.76% 13.92% (1) Computed using a statutory tax rate of 35% (2) Annualized
Net Interest Income Second quarter taxable equivalent net interest income increased $516,000, or 4.3%, over the comparable quarter in 1997. Taxable equivalent net interest income for the first half of 1997 increased $867,000, or 3.7%, over the first half of 1997. The increase in both periods is attributable to a higher level of earning assets, reflecting growth in the loan portfolio. Loans purchased in the First Federal-Florida transaction account for a significant portion of the total growth in the average loan portfolio. Table I on page 16 provides a comparative analysis of the Company's average balances and interest rates. For the three and six month periods ended June 30, 1998, taxable-equivalent interest income increased $987,000, or 5.1%, and $1.9 million, or 4.9%, respectively, over the comparable prior year periods. Interest income for both periods has increased due to growth in the loan portfolio. Additionally, in the second quarter the Company recognized $400,000 in accrued but uncollected interest income associated with the resolution of a non-performing loan. Loans which represent the Company's highest yielding asset, increased (on average) $53.6 million, or 7.8% and represented 78.7% of total earning assets for the six months ended June 30, 1998 versus 75.9% for the comparable period in 1997. This favorable shift in the mix of earning assets led to a 6 basis point increase in the yield on earning assets which rose from 8.55% during the first six months of 1997 to 8.61% for the comparable period in 1998. The improvement in yield attributable to loan growth was partially offset by a higher level of liquidity. Interest expense for the three and six month periods ended June 30, 1998, increased $471,000, or 6.4%, and $985,000, or 6.8%, respectively, over the comparable prior year periods. The increase in both periods is primarily due to the assumption of deposits from First Federal-Florida. Certificates of deposit, which generally represent a higher cost of funds than other deposit offerings, increased as a percent of average deposits from 45.7% in the first half of 1997 to 46.7% in 1998. This shift in deposit mix (attributable to the mix of acquired deposits) led to a 16 basis point increase in the average rate paid on interest bearing liabilities, which rose from 4.08% in the first half of 1997 to 4.24% in 1998. The Company's interest rate spread (defined as the average federal taxable equivalent yield on earning assets less the average rate paid on interest bearing liabilities) declined from 4.47% in the first half of 1997 to 4.37% in the comparable period for 1998 due to the higher cost of funds. The Company's net interest margin percentage (defined as taxable-equivalent net interest income divided by average earning assets) was 5.31% in the first half of 1997, versus 5.29% in the first half of 1998. The decrease in margin represents the higher costs of funds. Provision for Loan Losses The provision for loan losses was $558,000 and $1.0 million, respectively, for the three and six month periods ended June 30, 1998, compared to $446,000 and $902,000 for the comparable periods in 1997. Net charge-offs were up from the first half of 1997, but remain at low levels relative to the size of the loan portfolio. Nonperforming loans increased $3.2 million, or 195.8%, during the first six months of 1998. As compared to year-end, the reserve for loan losses increased slightly to $8.7 million, and represented 1.17% of total loans versus 1.19%. For a discussion of the Company's nonperforming loans, see the section entitled "Financial Condition." Based on current economic conditions, the low level of nonperforming loans and net charge-offs, it is management's opinion that the reserve for loan losses as of June 30, 1998, is sufficient to provide for losses inherent in the portfolio as of that date. Charge-off activity for the respective periods is set forth below. Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Net Charge-Offs $331,000 $270,000 $619,000 $633,000 Net Charge-Offs (Annualized) as a percent of Average Loans Outstanding, Net of Unearned Interest .18% .16% .17% .19% Noninterest Income Noninterest income increased $792,000, or 16.3%, in the second quarter of 1998 versus the comparable quarter for 1997, and $1.3 million, or 14.2%, for the six months ended June 30, 1998 versus the comparable period for 1997. All major categories except service charges reflected an increase. Service charges on deposit accounts declined $16,000, or 0.8%, and $88,000, or 2.2%, respectively, over the comparable three and six month periods for 1997. The decline for the first six months of 1998, reflects a reduction in the number of accounts, higher compensating balances and an increase in charged-off deposit accounts. Data processing revenues increased $51,000, or 5.4%, and $103,000, or 5.9%, respectively, over the comparable three and six month periods in 1997. The increase reflects higher processing revenues associated with both government agencies and third party banks. Revenue from trust activities increased $201,000, or 79.4%, and $253,000, or 47.9%, respectively, over the comparable three and six month periods in 1997. At June 30, 1998, assets under management totaled $246.3 million compared to 185.7 million at year-end. Other income increased $544,000, or 33.4%, and $1.0 million, or 34.4%, respectively, for the three and six month periods ended June 30, 1998 over the comparable prior year periods. Gains on the sale of residential real estate loans increased $283,000, reflecting the increased volume of loans sold to the secondary market due to the higher level of fixed rate loan production during 1998. The Company recorded a $226,000 gain on the sale of other real estate during the second quarter. ATM fees, interchange commissions, credit life commissions and VISA cardholder fees account for the remaining favorable variance. Noninterest income as a percent of average assets was 2.05% and 1.88%, respectively, for the first half of 1998 and 1997. Noninterest Expense Noninterest expense increased $1.0 million, or 9.0%, and $1.8 million, or 8.0%, respectively, over the comparable three and six month periods in 1997. The increase reflects higher costs in all major expense categories. Compensation expense increased $437,000, or 7.4%, and $1.0 million, or 8.6%, respectively, over the comparable three and six month periods of 1997, reflecting annual raises and an increase in full-time equivalent employees of 31. During the first quarter of 1998, the Company added staff to capitalize on competitive opportunities arising as a result of mergers of other commercial banks within its market. Occupancy expense, including premises, furniture, fixtures and equipment increased $105,000, or 5.5%, and $68,000, or 1.7%, respectively, over the comparable three and six month periods in 1997. The increase is primarily attributable increased costs for maintenance and repairs offset partially by a reduction in other FF&E costs. Other noninterest expense increased $446,000, or 14.1%, and $679,000, or 11.0%, respectively, over the comparable three and six month periods in 1997. The increase was attributable to professional fees of $326,000, advertising of $167,000, printing and supplies cost of $115,000, and intangible amortization of $75,000. Professional fees reflect costs associated with completion of an extensive review of the Bank's operations. The increase in advertising is attributable to greater product development and market development. Annualized net noninterest expense (noninterest income minus noninterest expense, net of intangibles) as a percent of average assets was 2.40% in the first half of 1998 versus 2.43% for the first half of 1997. The Company's efficiency ratio (noninterest expense, net of intangibles, expressed as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 65.27% in the first half of 1998 compared to 64.65% for the comparable period in 1997. The increase in the efficiency ratio reflects rising costs as noted above. Income Taxes The provision for income taxes increased $118,000, or 7.1%, during the second quarter and $214,000, or 6.8%, during the first six months of 1998, relative to the comparable prior year periods. The Company's effective tax rate for the first half of 1998 was 34.0% versus 33.4% for the comparable period in 1997. 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 half of 1998 as compared to the first half of 1997. FINANCIAL CONDITION Average balances for the first half of 1998 reflect the acquisition of First Federal-Florida which was completed on January 31, 1998. Table I on Page 16 presents average balances for the three and six month periods ended June 30, 1998 and 1997. The Company's average assets increased to $1.04 billion at the end of the second quarter of 1998 from $999.9 million in the first half of 1997. Average earning assets were $936.0 million for the six months ended June 30, 1998 versus $899.6 million for the comparable period in 1997. The most significant shift in the mix of earning assets occurred through growth in the loan portfolio. The increase in the loan portfolio reflects the First Federal-Florida acquisition and internal loan growth. Maturities in the investment portfolio were used to fund loan growth and improve overall liquidity. Average loans increased $53.6 million, or 7.8%, over the comparable period in 1997. Loan growth has occurred in all of the portfolios, with the most significant increase in real estate. Loans as a percent of average earning assets increased to 78.7% for the second quarter of 1998, compared to 75.9% for the second quarter of 1997. The investment portfolio is a significant component of the Company's operations and, as such, it functions as a key element of liquidity and asset/liability management. As of June 30, 1998, the average investment portfolio declined $49.7 million, or 25.7%, from the comparable period in 1997. The decline in the investment portfolio was used to fund loan growth and provide additional liquidity. 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 tax, as a separate component of shareowners' equity. At June 30, 1998, shareowners' equity included a net unrealized gain of $542,000 compared to a net gain of $567,000 at December 31, 1997. At June 30, 1998, the Company's nonperforming loans were $4.6 million versus $1.6 million at year-end 1997 and $1.9 million at June 30, 1997. The net increase in 1998 is attributable to two relationships. Specific reserves have been established for anticipated losses. As a percent of nonperforming loans, the allowance for loan losses represented 182% at June 30, 1998 versus 512% at December 31, 1997 and 442% at June 30, 1997. 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 $1.8 million at June 30, 1998 versus $1.2 million at December 31, 1997 and $2.0 million at June 30, 1997. The ratio of nonperforming assets to loans plus other real estate was .88% at June 30, 1998 compared to .41% at December 31, 1997 and .54% at June 30, 1997. Average deposits increased 3.1% from the $841.3 million for the first half of 1997, to $867.5 million for the first half of 1998. The growth in deposits is attributable to the acquisition of First Federal-Florida. During 1998, interest bearing deposits have continued to decline due to the anticipated run-off from prior acquisitions and strong competition. For the first half of 1998, average certificates of deposit represented 46.7% of total deposits compared to 45.7% for the comparable prior year period. This shift in mix has contributed to a slight compression in the Company's net interest margin which averaged 5.29% in the first half of 1998 versus 5.31% in 1997. The ratio of average noninterest bearing deposits to total deposits was 22.0% for the first half of 1998 compared to 21.7% for the first half of 1997. For the same periods, the ratio of average interest bearing liabilities to average earning assets was 78.4% and 79.3%, respectively. The change in both ratios is primarily attributable to the increase in noninterst bearing deposits. 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 deposits, 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, including the Federal Home Loan Bank. Additionally, the parent company maintains a $25 million revolving line of credit. As of June 30, 1998 there was $12.0 million outstanding under this facility. During the first half of 1998, principal reductions on the line of credit totaled $1.0 million. The Company's equity capital was $106.9 million as of June 30, 1998, compared to $100.5 million as of December 31, 1997. Management continues to monitor its capital position in relation to its level of assets with the objective of maintaining a "well capitalized" position. The leverage ratio was 9.0% at June 30, 1998 versus 9.2% at December 31, 1997. Further, the Company's risk-adjusted capital ratio of 14.65% 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 June 30, 1998, these regulations and covenants did not impair the Company's (or its subsidiary's) ability to declare and pay dividends or to meet other existing obligations. During the first six months of 1998, shareowners' equity increased $6.4 million, or 12.9%, on an annualized basis. Growth in equity during the first six months was positively impacted by net income of $6.5 million and stock issuances of $1.8 million. Dividends paid during the first six months totaled $1.9 million, or $.22 per share. The Company's common stock had a book value of $12.08 per share at June 30, 1998 compared to $11.45 at December 31, 1997. Pursuant to the Company's stock repurchase program adopted in 1989, the Company has repurchased 790,740 shares (split adjusted) of its common stock. In the first half of 1998, there were no shares repurchased. YEAR 2000 COMPLIANCE In 1996, Capital City Bank Group initiated the process of preparing its computer systems and applications for the Year 2000. This process involves modifying or replacing certain hardware and software maintained by the Company as well as communicating with external service providers to ensure they are taking the necessary actions required to remedy their Year 2000 issues. The Company expects to have substantially all of the system and application changes completed by the end of 1998 . The Company believes that its level of preparedness is appropriate and testing will be completed by year-end. While it is not possible, at present, to give an accurate estimate of the cost of the work, these costs may be material to the Company's results of operations in one or more fiscal quarters or years, but are not expected to have a material adverse impact on the long-term results of operations, liquidity, or consolidated financial position of the Company. The expected completion date of the project is based upon the Company's current best estimates TABLE I AVERAGE BALANCES & INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands) FOR THREE MONTHS ENDED JUNE 30 1998 1997 Balance Interest Rate Balance Interest Rate
ASSETS Loans, Net of Unearned Interest(1) $ 741,914 $17,274 9.34% $687,280 $15,842 9.24% Taxable Investment Securities 80,032 1,214 6.09% 119,414 1,886 6.34% Tax-Exempt Investment Securities(2) 62,610 1,029 6.57% 70,168 1,204 6.87% Funds Sold 54,414 759 5.59% 26,108 357 5.47% ---------- ------- ---- -------- ------- ---- Total Earning Assets 938,970 20,276 8.66% 902,970 19,289 8.57% Cash & Due From Banks 49,842 44,635 Allowance for Loan Losses (8,617) (8,362) Other Assets 66,647 60,645 ---------- -------- TOTAL ASSETS $1,046,842 $999,888 ========== ======== LIABILITIES NOW Accounts $ 105,358 $ 557 2.12% $100,006 $ 418 1.68% Money Market Accounts 76,463 541 2.84% 80,732 620 3.08% Savings Accounts 88,541 472 2.14% 86,976 436 2.01% Other Time Deposits 411,087 5,467 5.33% 389,801 5,112 5.26% ---------- ------- ---- -------- ------ ---- Total Int. Bearing Deposits 681,449 7,037 4.14% 657,515 6,586 4.02% Funds Purchased 37,859 498 5.28% 27,976 377 5.40% Other Borrowed Funds 985 16 6.37% 6,490 99 6.17% Long-Term Debt 16,315 280 6.88% 17,475 298 6.83% ---------- ------- ---- -------- ------ ---- Total Int. Bearing Liabilities 736,608 7,831 4.26% 709,456 7,360 4.16% Noninterest Bearing Deposits 190,638 185,332 Other Liabilities 15,016 12,725 ---------- -------- TOTAL LIABILITIES 942,262 907,513 SHAREOWNERS' EQUITY Common Stock 88 87 Surplus 7,867 5,435 Retained Earnings 96,625 86,853 ---------- -------- TOTAL SHAREOWNERS' EQUITY 104,580 92,375 ---------- -------- TOTAL LIABILITIES & EQUITY $1,046,842 $999,888 ========== ======== Interest Rate Spread 4.40% 4.41% ==== ==== Net interest Income $12,445 $11,929 ======= ======= Net Interest Margin 5.31% 5.30% ==== ====
FOR SIX MONTHS ENDED JUNE 30 1998 1997 Balance Interest Rate Balance Interest Rate
ASSETS Loans, Net of Unearned Interest(1) $ 736,588 $33,918 9.29% $683,035 $31,279 9.23% Taxable Investment Securities 80,719 2,479 6.19% 122,020 3,826 6.32% Tax-Exempt Investment Securities(2) 62,844 2,070 6.59% 71,203 2,424 6.81% Funds Sold 55,876 1,530 5.52% 23,316 616 5.31% ---------- ------- ---- -------- ------- ---- Total Earning Assets 936,027 39,997 8.61% 899,574 38,145 8.55% Cash & Due From Banks 49,820 47,392 Allowance for Loan Losses (8,504) (8,318) Other Assets 65,497 61,210 ---------- -------- TOTAL ASSETS $1,042,840 $999,858 ========== ======== LIABILITIES NOW Accounts $ 107,618 $ 1,070 2.01% $105,011 $ 923 1.77% Money Market Accounts 76,704 1,080 2.84% 80,310 1,199 3.01% Savings Accounts 87,131 912 2.11% 89,075 887 2.01% Other Time Deposits 404,997 10,748 5.35% 384,722 9,939 5.21% ---------- ------- ---- -------- ------- ---- Total Int. Bearing Deposits 676,450 13,810 4.12% 659,118 12,948 3.96% Funds Purchased 40,229 1,023 5.13% 29,866 750 5.06% Other Borrowed Funds 1,023 28 5.45% 6,386 136 4.30% Long-Term Debt 16,167 560 6.98% 17,753 602 6.83% ---------- ------- ---- -------- ------- ---- Total Int. Bearing Liabilities 733,869 15,421 4.24% 713,123 14,436 4.08% Noninterest Bearing Deposits 191,058 182,208 Other Liabilities 14,421 13,029 ---------- -------- TOTAL LIABILITIES 939,348 908,360 SHAREOWNERS' EQUITY Common Stock 88 87 Surplus 7,650 5,353 Retained Earnings 95,754 86,058 ---------- -------- TOTAL SHAREOWNERS' EQUITY 103,492 91,498 ---------- -------- TOTAL LIABILITIES & EQUITY $1,042,840 $999,858 ========== ======== Interest Rate Spread 4.37% 4.47% ==== ==== Net Interest Income $24,576 $23,709 ======= ======= Net Interest Margin 5.29% 5.31% ==== ==== (1) Average balances include nonaccrual loans. Interest income includes fees on loans of approximately $723,000 and $1.5 million, for the three and six months ended June 30, 1998, versus $480,000 and $1.5 million, for the comparable periods ended June 30, 1997. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.
Item 3. Quantitative and Qualitative Disclosure for Market Risk Overview Market risk management arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company has risk management policies to monitor and limit exposure to market risk. Capital City Bank Group does not actively participate in exchange rates, commodities or equities. 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 Capital City Bank Group to interest rate risk. Fluctuations in interest rates may result in changes in the fair market value of the Company's financial instruments, cash flows and net interest income. Capital City Bank Group's asset/liability management process manages the Company's interest rate risk. The financial assets and liabilities of the Company are classified as other- than-trading. An analysis of the other-than-trading financial components, including the fair values, are presented in Table II on page 18. This table presents the Company's consolidated interest rate sensitivity position as of June 30, 1998 based upon certain assumptions as set-forth in the notes to the Table. The objective of interest rate sensitivity analysis is to measure the impact on the Company's net interest income due to fluctuations in interest rates. The asset and liability fair values presented in Table II may not necessarily be indicative of the Company's interest rate sensitivity over an extended period of time. The Company is currently liability sensitive which generally indicates that in a period of rising interest rates the net interest margin will be adversely impacted as the velocity and/or volume of liabilities being repriced exceeds assets. However, as general interest rates rise or fall, other factors such as current market conditions and competition may impact how the Company responds to changing rates and thus impact the magnitude of change in net interest income. Table II FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS(1) (Dollars in Thousands)
Other Than Trading Portfolio June 30, 1998 Market Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Value Loans Fixed Rate $ 33,243 $ 23,619 $ 40,542 $ 42,643 $ 38,531 $ 80,889 $259,467 $261,617 Average Interest Rate 9.26% 10.26% 9.82% 9.13% 8.89% 8.08% 8.99% Floating Rate(2) 386,422 46,682 25,340 10,786 11,405 6,101 486,736 480,769 Average Interest Rate 8.94% 7.58% 8.58% 8.07% 8.75% 9.44% 8.78% Investment Securities(3) Fixed Rate 65.614 19,338 14,444 8,416 5,467 11,714 124,993 $124,993 Average Interest Rate 6.16% 5.72% 6.47% 6.70% 6.59% 6.45% 6.21% Floating Rate 0 10,047 3,866 0 0 506 14,419 14,419 Average Interest Rate 0 6.48% 6.34% 0 0 6.29% 6.43% Other Earning Assets Fixed Rates 0 0 0 0 0 0 0 0 Average Interest Rates 0 0 0 0 0 0 0 Floating Rates 55,800 0 0 0 0 4,790 60,589 60,589 Average Interest Rates 5.35% 0 0 0 0 4.62% 5.49% Total Financial Assets $541,079 $99,686 $ 84,192 $ 61,845 $ 55,403 $103,999 $946,204 952,387 Average Interest Rates 8.28% 7.75% 8.71% 8.61% 8.63% 7.81% 8.25% Deposits(4) Fixed Rate Deposits $354,870 $ 38,266 $ 14,365 $ 2,852 $ 1,892 $ 0 $412,245 414,170 Average Interest Rates 5.21% 5.68% 5.58% 5.47% 5.74% 0 5.27% Floating Rate Deposits 267,133 0 0 0 0 0 267,133 267,133 Average Interest Rates 2.18% 0 0 0 0 0 2.18% Other Interest Bearing Liabilities Fixed Rate Debt 235 239 243 247 251 2,585 3,800 3,801 Average Interest Rate 6.14% 6.14% 6.14% 6.14% 6.14% 6.14% 6.14% Floating Rate Debt 60,461 0 0 0 0 0 60,461 60,461 Average Interest Rate 5.32% 0 0 0 0 0 5.32% Total Financial Liabilities $682,699 $ 38,504 $ 14,608 $ 3,099 $ 2,143 $ 2,585 $743,639 $745,565 Average interest Rate 4.04% 5.68% 5.59% 5.52% 5.79% 6.14% 4.17% (1) Based upon expected cash-flows, unless otherwise indicated. (2) Based upon a combination of expected maturities and repricing opportunities. (3) Based upon contractual maturity, except for callable and floating rate securities, which are based on expected maturity and weighted average life, respectively. (4) Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as floating rate deposits in 1998. Other time deposit balances are classified according to maturity.
PART II. OTHER INFORMATION Items 1-3. Not applicable Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Capital City Bank Group, Inc. was held on April 24, 1998. Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's solicitations. The following summarizes all matters voted upon at this meeting. 1. The following directors were elected for terms expiring as noted. These individuals served on the Board of Directors prior to the Annual Meeting. The number of votes cast were as follows: For terms to expire at Against/ Abstentions/ the 2001 annual meeting: For Withheld Broker Non-Votes Cader B. Cox, III 4,935,743 0 0 William G. Smith, Jr. 4,935,743 0 0 2. The shareowners ratified the selection of Arthur Andersen LLP as the independent auditors for the Company for 1998. The number of votes cast were as follows: Against/ Abstentions/ For Withheld Broker Non-Votes 4,935,248 130 365 Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (A) Exhibits Not applicable (B) Reports on Form 8-K The Company did not file any reports on Form 8-K during the period ended June 30, 1998. 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 13, 1998