Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL REVIEW
The following analysis reviews important factors affecting the
financial condition and results of operations of Capital City Bank
Group, Inc., for the periods shown below. The Company, has made, and
may continue to make, various forward-looking statements with respect
to financial and business matters that involve numerous assumptions,
risks and uncertainties. The following is a list of factors, among
others, that could cause actual results to differ materially from the
forward-looking statements: general and local economic conditions,
competition for the Company's customers from other banking and
financial institutions, government legislation and regulation, changes
in interest rates, the impact of rapid growth, significant changes in
the loan portfolio composition, and other risks described in the
Company's filings with the Securities and Exchange Commission, all of
which are difficult to predict and many of which are beyond the
control of the Company.
This section provides supplemental information which should be read in
conjunction with the consolidated financial statements and related
notes. 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
subsidiaries, collectively, are referred to as "CCBG" or the
"Company." The subsidiary bank is referred to as the "Bank" or "CCB".
The year-to-date averages used in this report are based on daily
balances for each respective year. In certain circumstances, comparing
average balances for the fourth quarter of consecutive years may be
more meaningful than simply analyzing year-to-date averages.
Therefore, where appropriate, quarterly averages have been presented
for analysis and have been noted as such. See Table 2 for annual
averages and Table 14 for financial information presented on a
quarterly basis.
All prior period share and per share data have been adjusted to
reflect a three-for-two stock split effective June 1, 1998, and a two-
for-one stock split effective April 1, 1997 and the pooling-of-
interests for Grady Holding Company.
On May 7, 1999, the Company completed its acquisition of Grady Holding
Company and its subsidiary, First National Bank of Grady County in
Cairo, Georgia. First National Bank of Grady County is a $114 million
asset institution with offices in Cairo and Whigham, Georgia. The
Company issued 21.50 shares for each of the 60,910 shares of First
National Bank of Grady County.
On December 4, 1998, the Company completed its purchase and assumption
transaction with First Union National Bank ("First Union") and
acquired eight of First Union's branch offices which included
deposits. The Company paid a deposit premium of $16.9 million, and
assumed $219 million in deposits and acquired certain real estate.
The deposit premium is being amortized over ten years. Average
balances and earnings of the Company for 1998 were not significantly
impacted by the acquisition.
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 offices which included loans and deposits. The
Company paid a premium of $3.6 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 premium is being amortized over fifteen years.
On October 18, 1997, the Company consolidated its three remaining bank
affiliates into Capital City Bank. See Note 20 in the Notes to
Consolidated Financial Statements for further information.
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 as a purchase. Operating results of First Financial
are included in the Company's consolidated financial statements
presented herein for all periods subsequent to June 30, 1996. On
December 6, 1996, First Federal Bank was merged into the Company's
lead bank, Capital City Bank. Financial comparisons to prior year
periods are not necessarily comparable due to the impact of the
acquisition.
The bank is headquartered in Tallahassee and, as of December 31, 1998,
had forty-four offices covering seventeen counties.
EARNINGS ANALYSIS
In 1998, the Company's earnings were $15.3 million, or $1.51 per basic
share, This compares to earnings of $14.4 million, or $1.44 per
basic share, in 1997, and $13.2 million, or $1.33 per basic share, in
1996. The Company's diluted per share earnings were $1.50 in 1998,
$1.43 in 1997 and $1.33 in 1996, respectively.
On a per diluted share basis, earnings increased 4.9% in 1998 versus
7.5% in 1997. Growth in operating revenues (defined as net interest
income plus noninterest income) of $4.4 million, or 5.9%, was the most
significant factor contributing to increased earnings in 1998. This
and other factors are discussed throughout the Financial Review. A
condensed earnings summary is presented in Table 1.
Table 1
CONDENSED SUMMARY OF EARNINGS
(Dollars in Thousands, Except Per Share Data)(1)
For the Years Ended December 31,
1998 1997 1996
Interest Income $89,010 $84,981 $74,406
Taxable Equivalent Adjustments 1,402 1,610 1,771
Total Interest Income (FTE) 90,412 86,591 76,177
Interest Expense 35,248 32,688 28,560
Net Interest Income (FTE) 55,164 53,903 47,617
Provision for Loan Losses 2,439 2,328 1,863
Taxable Equivalent Adjustments 1,402 1,610 1,771
Net Interest Income After Provision
for Loan Losses 51,323 49,965 43,983
Noninterest Income 22,584 19,484 17,289
Noninterest Expense 50,444 47,836 42,030
Income Before Income Taxes 23,463 21,613 19,242
Income Taxes 8,169 7,212 6,023
Net Income $15,294 $14,401 $13,219
Basic Net Income Per Share $ 1.51 $ 1.44 $ 1.33
Diluted Net Income Per Share $ 1.50 $ 1.43 $ 1.33
(1) All share and per share data have been restated to reflect the
pooling-of-interests of Grady Holding Company and its subsidiaries and
adjusted to reflect the 3-for-2 stock split effective June 1, 1998.
Net Interest Income
Net interest income represents the Company's single largest source of
earnings and is equal to interest income and fees generated by earning
assets less interest expense paid on interest bearing liabilities. An
analysis of the Company's net interest income, including average
yields and rates, is presented in Tables 2 and 3. This information is
presented on a "taxable equivalent" basis to reflect the tax-exempt
status of income earned on certain loans and investments, the majority
of which are state and local government debt obligations.
In 1998, taxable-equivalent net interest income increased $1.3
million, or 2.4%. This follows an increase of $6.3 million, or 13.2%
in 1997, and $7.3 million, or 18.0%, in 1996. Taxable equivalent net
interest income during 1998 is attributable to growth in earning
assets. The favorable impact of asset growth was partially offset by
declining yields reflecting the overall decline in general interest
rates.
Table 2
AVERAGE BALANCES AND INTEREST RATES
(Taxable Equivalent Basis - Dollars in Thousands)
1998 1997 1996
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Loans, Net of Unearned Interest(1)(2) $ 824,197 $76,104 9.23% $ 770,416 $72,365 9.39% $ 631,437 $59,210 9.38%
Taxable Investment Securities 107,484 6,417 5.97 124,576 7,919 6.36 153,031 9,540 6.23
Tax-Exempt Investment Securities(2) 67,297 4,315 6.41 69,956 4,693 6.71 73,962 5,169 6.99
Funds Sold 66,699 3,576 5.36 35,518 1,614 4.54 49,707 2,258 4.54
Total Earning Assets 1,065,677 90,412 8.48 1,000,466 86,591 8.66 908,137 76,177 8.39
Cash & Due From Banks 53,293 53,255 56,406
Allowance For Loan Losses (10,056) (9,736) (8,645)
Other Assets 71,871 64,103 56,582
TOTAL ASSETS $1,180,785 $1,108,088 $1,012,480
Liabilities:
NOW Accounts $ 119,134 $ 2,223 1.87% $ 115,663 $ 1,978 1.71% $ 116,497 $ 2,091 1.79%
Money Market Accounts 86,244 2,562 2.97 83,684 2,510 3.00 88,642 2,622 2.96
Savings Accounts 101,007 2,243 2.22 95,323 2,008 2.11 95,935 2,115 2.20
Other Time Deposits 469,087 25,091 5.35 433,300 22,934 5.29 371,241 19,364 5.22
Total Interest Bearing Deposits 775,472 32,119 4.14 727,970 29,430 4.04 672,315 26,192 3.90
Funds Purchased 37,797 1,842 4.87 31,518 1,659 5.26 25,181 1,229 4.88
Other Short-Term Borrowings 1,190 62 5.21 5,976 315 5.27 7,016 422 6.43
Long-Term Debt 18,041 1,225 6.79 19,412 1,284 6.61 10,895 717 6.31
Total Interest Bearing Liabilities 832,500 35,248 4.23 784,876 32,688 4.16 715,407 28,560 3.99
Noninterest Bearing Deposits 209,647 196,921 184,225
Other Liabilities 14,991 16,343 15,110
TOTAL LIABILITIES 1,057,138 998,140 914,742
Shareowners' Equity:
Common Stock 102 100 100
Additional Paid-In Capital 8,040 5,831 4,825
Retained Earnings 115,505 104,017 92,813
TOTAL SHAREOWNERS' EQUITY 123,647 109,948 97,738
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $1,180,785 $1,108,088 $1,012,480
Interest Rate Spread 4.25% 4.50% 4.40%
Net Interest Income $55,164 $53,903 $47,617
Net Interest Margin(3) 5.18% 5.39% 5.24%
(1) Average balances include nonaccrual loans. Interest income includes fees on
loans of approximately $3,233,000, $2,913,000 and $2,241,000 in 1998, 1997, and
1996, respectively.
(2) Interest income includes the effects of taxable equivalent adjustments
using a 35% tax rate to adjust interest on tax-exempt loans and securities to a
taxable equivalent basis.
(3) Tax-equivalent net interest income divided by earning assets.
Table 3
RATE/VOLUME ANALYSIS(1)
(Taxable Equivalent Basis - Dollars in Thousands)
1998 Changes from 1997 1997 Changes from 1996
Due To Due To
Average Average
Total Volume Rate Total Volume Rate
EARNING ASSETS:
Loans, Net of Unearned Interest(2) $3,739 $4,965 $(1,226) $13,155 $13,055 $ 100
Investment Securities
Taxable (1,502) (1,020) (482) (1,621) (1,809) 188
Tax-Exempt (378) (170) (208) (476) (269) (207)
Funds Sold 1,962 1,650 312 (644) (645) 1
Total 3,821 5,425 (1,604) 10,414 10,332 82
Interest Bearing Liabilities:
NOW Accounts 245 (149) 394 (113) (14) (99)
Money Market Accounts 52 (35) 87 (112) (149) 37
Savings Accounts 235 (88) 323 (107) (13) (94)
Other Time Deposits 2,157 (941) 3,098 3,570 3,285 285
Funds Purchased 183 306 (123) 430 334 96
Other Short-Term Borrowings (253) (249) (4) (136) (55) (81)
Long-Term Debt (59) (242) 183 596 563 33
Total 2,560 (1,398) 3,958 4,128 3,951 177
Changes in Net Interest Income $1,261 $6,823 $(5,562) $ 6,286 $ 6,381 $ (95)
(1) This table shows the change in net interest income for comparative periods
based on either changes in average volume or changes in average rates for
earning assets and interest bearing liabilities. Changes which are not solely
due to volume changes or solely due to rate changes have been attributed to rate
changes.
(2) Interest income includes the effects of taxable equivalent adjustments
using a 35% tax rate to adjust interest on tax-exempt loans and securities to a
taxable equivalent basis.
For the year 1998, taxable equivalent interest income increased $3.8
million, or 4.4%, over 1997, compared to an increase of $10.4 million,
or 13.7%, in 1997 over 1996. The Company's taxable equivalent yield
on average earning assets of 8.48% represents a 18 basis point
decrease from 1997, compared to a 27 basis point improvement in 1997
over 1996. During 1998, interest income was positively impacted by
loan growth and the acquisition of First Federal-Florida. This was
partially offset by lower yields on earning assets resulting from the
decline in interest rates and increased competition. The loan
portfolio, which is the largest and highest yielding component of
earning assets, increased from 77.9% in the fourth quarter of 1997 to
81.3% in the comparable quarter of 1998, reflecting the acquisition of
$219 million in deposits from First Union.
Interest expense increased $2.6 million, or 7.8%, over 1997, compared
to an increase of $4.1 million, or 14.5%, in 1997 over 1996. The
higher level of interest expense in 1998 is attributable to the
acquisition of First Federal-Florida. The average rate paid on
interest-bearing liabilities was 4.23% in 1998, compared to 4.16% and
3.99%, in 1997 and 1996, respectively. The increase in the average
rate during 1998 is a direct result of the mix of deposits acquired
from First Federal-Florida and the introduction of a higher yielding
money market account. Certificates of deposit represent a higher cost
deposit product to the Company. Based on averages, certificates as a
percent of total deposits increased to 47.6% in 1998, compared to
46.9% in 1997, and 43.3% in 1996.
The Company's interest rate spread (defined as the taxable equivalent
yield on average earning assets less the average rate paid on interest
bearing liabilities) decreased twenty-five basis points in 1998 and
increased ten basis points in 1997. The decrease in 1998 is
attributable to the lower yield on earning assets resulting from the
lower rate environment. The increase in 1997 was attributable to the
higher yield on earning assets, which was driven by a more favorable
mix of earning assets.
The Company's net interest margin (defined as taxable equivalent
interest income less interest expense divided by average earning
assets) was 5.18% in 1998, compared to 5.39% in 1997 and 5.24% in
1996. In 1998, narrowing margins on the Company's incremental growth
resulted in the decline in the margin to 5.18%, or 21 basis points.
A further discussion of the Company's earning assets and funding
sources can be found in the section entitled "Financial Condition."
Provision for Loan Losses
The provision for loan losses was $2.4 million in 1998 versus $2.3
million in 1997 and $1.9 million in 1996. The provision approximates
total net charge-offs for 1998 and 1997. The Company's credit quality
measures declined slightly with a nonperforming assets ratio of .79%
compared to .37% at year-end 1997, and a net charge-off ratio of .28%
versus .27% in 1997.
At December 31, 1998, the allowance for loan losses totaled $9.8
million compared to $9.7 million in 1997. At year-end 1998, the
allowance represented 1.16% of total loans and 189% of nonperforming
loans. Management considers the allowance to be adequate based on the
current level of nonperforming loans and the estimate of losses
inherent in the portfolio at year-end. See the section entitled
"Financial Condition" for further information regarding the allowance
for loan losses. Selected loss coverage ratios are presented below:
1998 1997 1996
Provision for Loan Losses as a
Multiple of Net Charge-offs 1.1x 1.1x 1.1x
Pre-tax Income Plus Provision
for Loan Losses as a Multiple
of Net Charge-offs 11.4x 11.3x 12.4x
Noninterest Income
In 1998, noninterest income increased $3.1 million, or 15.9%, and
represented 29.0% of operating income, compared to $2.2 million, or
12.7% and 26.5%, respectively, in 1997. The increase in the level of
noninterest income is attributable to all major categories with the
exception of service charges. Factors affecting noninterest income
are discussed below.
Service charges on deposit accounts decreased $453,000, or 5.0%, in
1998, compared to an increase of $526,000, or 6.2%, in 1997. Service
charge revenues in any one year are dependent on the number of
accounts, primarily transaction accounts, and the level of activity
subject to service charges. The decrease in 1998 is primarily
attributable to higher compensating balances and an increase in
charged-off deposit accounts. Fees were increased during the fourth
quarter of 1998, and will favorably impact service charge income in
1999.
Data processing revenues increased $363,000, or 11.5%, in 1998 versus
an increase of $191,000, or 6.4%, in 1997. The data processing center
provides computer services to both financial and non-financial clients
in North Florida and South Georgia. In recent years, revenue gains
have been attributable to growth in processing for both financial and
non-financial clients. In 1998, processing revenues for non-financial
entities represented approximately 48% of the total processing
revenues, down from 51% in 1997, reflecting growth in processing
revenues for financial entities and a decline in revenues for non-
financial entities. In 1998, the Company changed its method of income
recognition on data processing revenues from the cash to the accrual
method. This resulted in a one-time adjustment which increased
revenues by $225,000.
In 1998, trust fees increased $559,000, or 46.5%, compared to $38,000,
or 3.3% in 1997. Increases in both years were attributable to growth
in assets under management. At year-end 1998, assets under management
totaled $261.2 million, reflecting growth of $75.5 million, or 40.6%.
For the comparable period in 1997, assets under management totaled
$185.7 million, reflecting growth of $54.4 million or 41.4%.
Other noninterest income increased $2.5 million, or 41.2%, in 1998
versus an increase of $1.5 million, or 32.4% in 1997. The increase in
1998 was attributable to ATM fees, brokerage revenues, interchange
commission fees and gains on the sale of real estate loans. The
Company realized gains on the sale of real estate loans totaling
approximately $1.5 million in 1998 compared to $803,000 in 1997.
Interchange commission fees increased $383,000, or 61.7% from 1997.
The increase in other noninterest income in 1997 was attributable to
ATM fees, gains recognized on the sale of real estate loans and gains
on the sale of bank assets.
Noninterest income as a percent of average assets was 1.91% in 1998
compared to 1.76% in 1997 and 1.71% in 1996.
Noninterest Expense
Noninterest expense for 1998 was $50.4 million, an increase of $2.6
million, or 5.5%, over 1997, compared with an increase of $5.8
million, or 13.8%, in 1997 over 1996. Factors impacting the Company's
noninterest expense during 1998 and 1997 are discussed below.
The Company's aggregate compensation expense in 1998 totaled $26.6
million, an increase of $678,000, or 2.6%,over 1997. Salaries
increased $1.5 million due to normal raises and additions to staff.
In addition to acquisitions, the Company added staff to capitalize on
competitive opportunities arising as a result of mergers of other
commercial banks within its market. Offsetting the increase in
salaries were reductions in pension expense and stock incentives. In
1997, total compensation increased $3.1 million, or 13.7%, over 1996.
Salaries increased $2.3 million due to normal raises, the full-year
impact of First Financial associates and a $317,000 charge associated
with restructuring. Additionally, a 93% increase in the Company's
stock price contributed to a $460,000, or 62.1%, increase in stock
compensation covered under the Company's Associate Incentive Plan.
Occupancy expense (including furniture, fixtures & equipment)
increased by $566,000, or 6.9%, in 1998, compared to $961,000, or
13.2%, in 1997. The increase in 1998 was attributable to higher cost
for maintenance and repair which increased $502,000, or 18.7%. The
increase in 1997 was attributable to higher depreciation and other
FF&E expense. Offsetting these increases in 1997 was a reduction in
maintenance and repairs.
Other noninterest expense increased $1.4 million and $1.7 million in
1998 and 1997, or 10.0% and 14.3%, respectively. The increase in 1998
was attributable to: (1) an increase in amortization expense of
approximately $335,000 due to the acquisitions of First Federal-
Florida and First Union offices; (2) an increase in advertising costs
of $463,000 due to greater product and market development; and (3) an
increase in printing and supplies costs of $143,000. The increase in
1997 was attributable to: (1) an increase in amortization expense of
approximately $300,000 due to the acquisition of First Financial
offices; (2) a one-time restructuring charge of $338,000 incurred by
the Company to consolidate its three remaining subsidiary banks into
Capital City Bank; (3) an increase in advertising expense of $180,000
due to the Company's enhanced focus on promoting products and the
acquisition of First Financial; and (4) an increase in credit card
processing fees, ORE expense and other miscellaneous expenses of
$259,000, $130,000 and $225,000, respectively.
Net noninterest expense ratio (defined as noninterest income minus
noninterest expense less amortization as a percent of average assets)
was 2.26% in 1998 compared to 2.42% in 1997 and 2.39% in 1996. The
Company's efficiency ratio (expressed as noninterest expenses, net of
intangible amortization, as a percent of taxable equivalent operating
revenues) was 63.4%, 63.1% (excluding restructuring charges), and
63.9% in 1998, 1997, and 1996, respectively.
Income Taxes
The consolidated provision for federal and state income taxes was $8.2
million in 1998 compared to $7.2 million in 1997 and $6.0 million in
1996. The increase in the tax provision over the last three years is
primarily attributable to the higher level of taxable income.
The effective tax rate was 34.8% in 1998, 33.4% in 1997, and 31.3% in
1996. These rates differ from the statutory tax rates due primarily
to tax-exempt income. The increase in the effective tax rate is
primarily attributable to the decreasing level of tax-exempt income
relative to pre-tax income and an increase in the statutory tax rate
for income greater than $10 million. Tax-exempt income (net of the
adjustment for disallowed interest) as a percent of pre-tax income was
18.0% in 1998, 21.7% in 1997, and 26.9% in 1996.
FINANCIAL CONDITION
Average assets increased $72.7 million, or 6.6%, from $1.2 billion in
1997 to $1.1 billion in 1998. Average earning assets increased to
$1.1 billion in 1998, a $65.2 million, or 6.5%, increase over 1997.
Average loans increased $53.8 million, or 7.0%, and accounted for
82.5% of the total growth in average earning assets. Loan growth in
1998 was funded primarily through deposits acquired through
acquisitions and maturities in the investment portfolio.
Table 2 provides information on average balances while Table 4
highlights the changing mix of the Company's earning assets over the
last three years.
Loans
Local markets were generally improved during 1998. Loan demand was
steady and internal growth was spread evenly throughout the year. The
First Federal-Florida acquisition completed in the first quarter of
1998 increased the number of markets served and enhanced the Company's
line of mortgage products and services. Price and product competition
remained strong during 1998 and there continues to be an increased
demand for fixed rate, longer-term financing. Areas that reflected
stronger demand were real estate, home equity and indirect automobile
lending.
Although management is continually evaluating alternative sources of
revenue, lending is a major component of the Company's business and is
key to profitability. While management strives to grow the Company's
loan portfolio, it can do so only by adhering to sound banking
principles applied in a prudent and consistent manner. Management
consistently strives to identify opportunities to increase loans
outstanding and enhance the portfolio's overall contribution to
earnings.
Table 4
SOURCES OF EARNING ASSET GROWTH
(Average Balances - Dollars in Thousands)
1997 to Percentage Components
1998 of Total of Total Earning Assets
Change Change 1998 1997 1996
Loans:
Commercial, Financial
and Agricultural $(4,284) (6.6)% 8.0% 8.3% 9.2%
Real Estate - Construction 2,740 4.2 4.5 4.5 4.0
Real Estate - Mortgage 41,000 62.9 49.9 49.1 42.1
Consumer 14,325 22.0 14.9 15.1 14.2
Total Loans 53,781 82.5 77.3 77.0 69.5
Securities:
Taxable (17,092) (26.2) 10.1 12.4 16.9
Tax-Exempt (2,659) (4.1) 6.3 7.0 8.1
Total Securities (19,751) (30.3) 16.4 19.4 25.0
Funds Sold 31,181 47.8 6.3 3.6 5.5
Total Earning Assets $65,211 100.0% 100.0% 100.0% 100.0%
The Company's average loan-to-deposit ratio increased from 83.3% in
1997 to 83.7% in 1998. It declined to a level of 78.8% in the fourth
quarter of 1998 compared to 84.8% in the fourth quarter of 1997. This
compares to an average loan-to-deposit ratio in 1996 of 73.7%. The
lower average quarterly loan-to-deposit ratio reflects the assumption
of deposits from First Union.
Real estate construction and mortgage loans, combined, represented
70.3% of total loans (net of unearned interest) in 1998 versus 70.1%
in 1997. See the section entitled "Risk Element Assets" for a
discussion concerning loan concentrations.
The composition of the Company's loan portfolio at December 31, for
each of the past five years is shown in Table 5. Table 6 arrays the
Company's total loan portfolio as of December 31, 1998, based upon
maturities. Demand loans and overdrafts are reported in the category
of one year or less. As a percent of the total portfolio, loans with
fixed interest rates have increased from 37.4% in 1997 to 41.6% in
1998.
Allowance for Loan Losses
Management attempts to maintain the allowance for loan losses at a
level sufficient to provide for estimated losses inherent in the loan
portfolio. The allowance for loan losses is established through a
provision charged to expense. Loans are charged against the allowance
when management believes collection of the principal is unlikely.
Management evaluates the adequacy of the allowance for loan losses on
a quarterly basis. The evaluations are based on the collectibility of
loans and take into consideration such factors as growth and
composition of the loan portfolio, evaluation of potential losses,
past loss experience and general economic conditions. As part of
these evaluations, management reviews all loans which have been
classified internally or through regulatory examination and, if
appropriate, allocates a specific reserve to each of these individual
loans. Further, management establishes a general reserve to provide
for losses inherent in the loan portfolio which are not specifically
identified. The general reserve is based upon management's evaluation
of the current and forecasted operating and economic environment
coupled with historical experience. The allowance for loan losses is
compared against the sum of the specific reserves plus the general
reserve and adjustments are made, as appropriate. Table 7 analyzes
the activity in the allowance over the past five years.
Table 5
LOANS BY CATEGORY
(Dollars in Thousands)
As of December 31,
1998 1997 1996 1995 1994
Commercial, Financial and
Agricultural $ 91,246 $ 82,641 $ 82,724 $ 67,975 $ 59,972
Real Estate - Construction 51,790 51,098 46,415 32,848 28,109
Real Estate - Mortgage 542,044 492,778 472,052 288,716 280,627
Consumer 159,137 148,934 143,935 120,629 113,583
Total Loans, Net of
Unearned Interest $844,217 $775,451 $745,126 $510,168 $482,291
Table 6
LOAN MATURITIES
(Dollars in Thousands)
Maturity PeriodS
Over One Over
One Year Through Five
Or Less Five Years Years Total
Commercial, Financial and
Agricultural $ 49,257 $ 37,679 $ 4,310 $ 91,246
Real Estate 110,274 65,573 417,987 593,834
Consumer 43,008 114,334 1,795 159,137
Total $202,539 $217,586 $424,092 $844,217
Loans with Fixed Rates $ 97,967 $179,983 $ 73,161 $351,111
Loans with Floating or
Adjustable Rates 104,572 37,603 350,931 493,106
Total $202,539 $217,586 $424,092 $844,217
The allowance for loan losses at December 31, 1998 of $9.8 million
compares to $9.7 million at year-end 1997. The allowance as a percent
of total loans was 1.16% in 1998 versus 1.25% in 1997. There can be
no assurance that in particular periods the Company will not sustain
loan losses which are substantial in relation to the size of the
allowance. When establishing the allowance, management makes various
estimates regarding the value of collateral and future economic
events. Actual experience may differ from these estimates. It is
management's opinion that the allowance at December 31, 1998, is
adequate to absorb losses from loans in the portfolio as of year-end.
Table 8 provides an allocation of the allowance for loan losses to
specific loan categories for each of the past five years. The
allocation of the allowance is developed using management's best
estimates based upon available information such as regulatory
examinations, internal loan reviews and historical data and trends.
The allocation by loan category reflects a base level allocation
derived primarily by analyzing the level of problem loans, specific
reserves and historical charge-off data. Current and forecasted
economic conditions, and other judgmental factors which cannot be
easily quantified (e.g. concentrations), are not presumed to be
included in the base level allocations, but instead are covered by the
unallocated portion of the reserve. The Company faces a geographic
concentration as well as a concentration in real estate lending. Both
risks are cyclical in nature and must be considered in establishing
the overall allowance for loan losses. Reserves in excess of the base
level reserves are maintained in order to properly reserve for the
losses inherent in the Company's portfolio due to these concentrations
and anticipated periods of economic difficulties. As part of its YEAR
2000 contingency plan (discussed on page 55), the Company has reviewed
its significant borrowers and allocated reserves to address the impact
of the YEAR 2000 issue.
Table 7
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
For the Years Ended December 31,
1998 1997 1996 1995 1994
Balance at Beginning of Year $9,662 $9,450 $7,522 $8,412 $8,324
Acquired Reserves - - 1,769 - -
Charge-Offs:
Commercial, Financial
and Agricultural 127 568 594 601 719
Real Estate-Construction 15 31 - - -
Real Estate-Mortgage 1,011 485 119 139 330
Consumer 2,004 1,978 1,691 1,310 926
Total Charge-Offs 3,157 3,062 2,404 2,050 1,975
Recoveries:
Commercial, Financial
and Agricultural 72 378 235 204 125
Real Estate - Construction 142 - 3 - -
Real Estate - Mortgage 176 83 - 10 15
Consumer 493 485 462 413 389
Total Recoveries 883 946 700 627 529
Net Charge-Offs 2,274 2,116 1,704 1,423 1,446
Provision for Loan Losses 2,439 2,328 1,863 533 1,534
Balance at End of Year $9,827 $9,662 $9,450 $7,522 $8,412
Ratio of Net Charge-Offs
Year to Average Loans Out-Standing,
Net of Unearned Interest .28% .28% .27% .29% .31%
Allowance for Loan Losses as a
Percent of Loans, Net of
Unearned Interest,at End of Year 1.16% 1.25% 1.27% 1.47% 1.74%
Allowance for Loan Losses as a
Multiple of Net Charge-Offs 4.32x 4.57x 5.55x 5.29x 5.82x
Risk Element Assets
Risk element assets consist of nonaccrual loans, renegotiated loans,
other real estate, loans past due 90 days or more, potential problem
loans and loan concentrations. Table 9 depicts certain categories of
the Company's risk element assets as of December 31, for each of the
last five years. Potential problem loans and loan concentrations are
discussed within the narrative portion of this section.
The Company's nonperforming loans increased $3.6 million, or 219.0%,
from a level of $1.6 million at December 31, 1997 to $5.2 million at
December 31, 1998. During 1998, loans totaling approximately $7.8
million were added, while loans totaling $4.2 million were removed
from nonaccruing status. Of the $7.8 million added, $3.6 million was
attributable to two relationships. Of the $4.2 million removed from
the nonaccrual category, $1.5 million consisted of principal
reductions, $1.0 million represented loans transferred to ORE, $1.0
million consisted of loans brought current and returned to an accrual
status and loans refinanced, and $700,000 were charged off. Where
appropriate, management has allocated specific reserves to absorb
anticipated losses. A majority of the Company's charge-offs in 1998
were in the consumer portfolio where loans are charged off based on
past due status and are not recorded as nonaccruing loans.
Table 8
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
1998 1997 1996 1995 1994
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Allow- Category Allow- Category Allow- Category Allow- Category Allow- Category
ance To Total ance To Total ance To Total ance To Total ance To Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Commercial, Financial
and Agricultural $1,330 10.8% $ 665 10.7% $ 605 11.1% $ 708 13.3% $ 492 12.4%
Real Estate:
Construction 468 6.1 382 6.6 274 6.2 177 6.4 208 5.8
Mortgage 2,664 64.2 2,078 63.5 3,282 63.4 2,886 56.6 3,273 58.2
Consumer 2,175 18.9 2,137 19.2 1,875 19.3 1,213 23.7 1,073 23.6
Not Allocated 3,190 - 4,400 - 3,414 - 2,538 - 3,366 -
Total $9,827 100.0% $9,662 100.0% $9,450 100.0% $7,522 100.0% $8,412 100.0%
Table 9
RISK ELEMENT ASSETS
(Dollars in Thousands)
As of December 31,
1998 1997 1996 1995 1994
Nonaccruing Loans $4,996 $1,403 $2,811 $3,151 $4,304
Restructured 195 224 262 1,686 1,694
Total Nonperforming Loans 5,191 1,627 3,073 4,837 5,998
Other Real Estate 1,468 1,244 1,489 1,001 1,675
Total Nonperforming Assets $6,659 $2,871 $4,562 $5,838 $7,673
Past Due 90 Days or More $1,124 $ 994 $ 638 $ 317 $ 364
Nonperforming Loans to Loans,
Net of Unearned Interest .61% .21% .41% .95% 1.24%
Nonperforming Assets to Loans,
Net of Unearned Interest,
Plus Other Real Estate .79% .37% .61% 1.14% 1.59%
Nonperforming Assets to Capital(1) 4.80% 2.28% 4.06% 5.81% 8.37%
Reserve to Nonperforming Loans 189.31% 593.85% 307.52% 155.51% 140.25%
(1) For computation of this percentage, "capital" refers to
shareowners' equity plus the allowance for loan losses.
The majority of nonaccrual loans are collateralized with real estate.
Management continually reviews these loans and believes specific
reserve allocations are sufficient to cover the loss exposure
associated with these loans.
Interest on nonaccrual loans is generally recognized only when
received. Cash collected on nonaccrual loans is applied against the
principal balance or recognized as interest income based upon
management's expectations as to the ultimate collectibility of
principal and interest in full. If interest on nonaccruing loans had
been recognized on a fully accruing basis, interest income recorded
would have been $384,000 higher for the year ended December 31, 1998.
Restructured loans are those with reduced interest rates or deferred
payment terms due to deterioration in the financial position of the
borrower.
Other real estate totaled $1.5 million at December 31, 1998 versus
$1.2 million at December 31, 1997. This category includes property
owned by Capital City Bank which was acquired either through
foreclosure procedures or by receiving a deed in lieu of foreclosure.
During 1998, the Company added properties totaling $1.9 million
(including parcels of bank premises) and partially or completely
liquidated properties totaling $1.6 million, resulting in a net
increase in other real estate of $300,000. Management does not
anticipate any significant losses associated with other real estate.
Potential problem loans are defined as those loans which are now
current but where management has doubt as to the borrower's ability to
comply with present loan repayment terms. Potential problem loans
totaled $325,000 at December 31, 1998.
Loan concentrations are considered to exist when there are amounts
loaned to a multiple number of borrowers engaged in similar activities
which cause them to be similarly impacted by economic or other
conditions and such amounts exceed 10% of total loans. Due to the
lack of diversified industry within the markets served by the Bank and
the relatively close proximity of the markets, the Company has both
geographic concentrations as well as concentrations in the types of
loans funded. Further, due to the nature of the Company's markets, a
significant portion of the portfolio is associated either directly or
indirectly with real estate. At December 31, 1998, approximately
70.3% of the portfolio consisted of real estate loans. Residential
properties comprise approximately 68.1% of the real estate portfolio.
Management is continually analyzing its loan portfolio in an effort to
identify and resolve its problem assets as quickly and efficiently as
possible. As of December 31, 1998, management believes it has
identified and adequately reserved for such problem assets. However,
management recognizes that many factors can adversely impact various
segments of its markets, creating financial difficulties for certain
borrowers. As such, management continues to focus its attention on
promptly identifying and providing for potential losses as they arise.
Investment Securities
In 1998, the Company's average investment portfolio decreased $19.8
million, or 10.2%, compared to a decrease of $32.5 million, or 14.3%
in 1997. As a percentage of average earning assets, the investment
portfolio represented 16.4% in 1998, compared to 19.4% in 1997.
During the fourth quarter of 1998, the Company purchased approximately
$200.0 million in investment securities as a result of the assumption
of deposits from First Union, increasing the portfolio to 28.9% of
earning assets.
In 1998, average taxable investments decreased $17.1 million, or
13.7%, while tax-exempt investments decreased $2.7 million, or 3.8%.
Since the enactment of the Tax Reform Act of 1986, which significantly
reduced the tax benefits associated with tax-exempt investments,
management has monitored the level of tax-exempt investments. The tax-
exempt portfolio, as a percent of average earning assets, has declined
from 18.9% in 1986 to 6.3% in 1998. Management continues to purchase
"bank qualified" municipal issues when it considers the yield to be
attractive and the Company can do so without adversely impacting its
tax position. As part of the addition to the portfolio discussed
above, municipal securities, totaling approximately $28.6 million,
were purchased during the fourth quarter.
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 may be classified as held-
to-maturity, available-for-sale or trading. As of December 31, 1998,
all securities are classified as available-for-sale. Classifying
securities as available-for-sale offers management full flexibility in
managing its liquidity and interest rate sensitivity without adversely
impacting its regulatory capital levels. 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, in
the accumulated other comprehensive income component of shareowners'
equity. At December 31, 1998, shareowners' equity included a net
unrealized gain of $678,000, compared to $607,000 at December 31,
1997. It is neither management's intent nor practice to participate
in the trading of investment securities for the purpose of recognizing
gains and therefore the Company does not maintain a trading portfolio.
The average maturity of the total portfolio at December 31, 1998 and
1997, was 2.98 and 1.93 years, respectively. See Table 10 for a
breakdown of maturities by portfolio.
The weighted average taxable-equivalent yield of the investment
portfolio at December 31, 1998, was 5.75% versus 6.48% in 1997. The
quality of the municipal portfolio at such date is depicted in the
chart below. There were no investments in obligations, other than
U.S. Governments, of any one state, municipality, political
subdivision or any other issuer that exceeded 10% of the Company's
shareowners' equity at December 31, 1998.
Table 10 and Note 3 in Notes to Consolidated Financial Statements
present a detailed analysis of the Company's investment securities as
to type, maturity and yield.
MUNICIPAL PORTFOLIO QUALITY
(Dollars in Thousands)
Moody's Rating Amortized Cost Percentage
AAA $58,450 61.6%
AA-1 2,684 2.8
AA-2 1,831 1.9
AA-3 2,456 2.6
AA 1,493 1.6
A-1 3,275 3.4
A-2 1,077 1.1
A 3,507 3.7
BAA 424 .5
Not Rated(1) 19,721 20.8
Total $94,918 100.0%
(1) Of the securities not rated by Moody's, $13.0 million are rated
"A" or higher by S&P.
Table 10
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
(Dollars in Thousands)
As of December 31, 1998
Weighted
Amortized Cost Market Value Average Yield(1)
U. S. GOVERNMENTS
Due in 1 year or less $ 29,034 $ 29,164 5.59%
Due over 1 year thru 5 years 75,666 75,620 5.43
Due over 5 years thru 10 years - - -
Due over 10 years - - -
TOTAL 104,700 104,784 5.48
STATE & POLITICAL SUBDIVISIONS
Due in 1 year or less 12,927 13,013 6.35
Due over 1 year thru 5 years 44,775 45,603 6.37
Due over 5 years thru 10 years 37,216 37,436 5.74
Due over 10 years - - -
TOTAL 94,918 96,052 6.12
MORTGAGE-BACKED SECURITIES(2)
Due in 1 year or less 30 30 6.04
Due over 1 year thru 5 years 92,163 91,926 5.81
Due over 5 years thru 10 years 990 989 5.81
Due over 10 years - - -
TOTAL 93,183 92,945 5.81
OTHER SECURITIES
Due in 1 Year or less 39,468 39,427 5.45
Due over 1 year thru 5 years 32,125 32,244 5.51
Due over 5 years thru 10 years 1,553 1,589 5.98
Due over 10 years* 4,576 4,556 6.91
TOTAL 77,722 77,816 5.57
Total Investment Securities $370,523 $371,597 5.75%
*Federal Home Loan Bank Stock and Federal Reserve Bank Stock do not have
stated maturities.
(1) Weighted average yields are calculated on the basis of the
amortized cost of the security. The weighted average yields on tax-
exempt obligations are computed on a taxable-equivalent basis using a
35% tax rate.
(2) Based on weighted average life.
AVERAGE MATURITY (In Years)
AS OF DECEMBER 31, 1998
U.S. Governments 2.32
State and Political Subdivisions 3.52
Mortgage-Backed Securities 4.14
Other Securities 1.83
TOTAL 2.98
Deposits And Funds Purchased
Average total deposits increased from $924.9 million in 1997 to $985.1
million in 1998, representing an increase of $60.2 million, or 6.5%,
compared with an increase of $68.4 million, or 8.0%, in 1997. In
1998, the annual average increase is attributable to the acquisition
of First Federal-Florida offices and internal growth. In 1997, the
increase is attributable to the acquisition of First Financial.
In the fourth quarter of 1998, deposits averaged $1.06 billion,
compared to $925.0 million for the same period in 1997. The Company
continues to experience a notable increase in competition for
deposits, in terms of both rate and product. The Company introduced
CashPower, a higher yielding money market product in the fourth
quarter of 1998. The new CashPower product represents 26.9% of the
money market balance at year end 1998.
As of year-end 1998, deposits totaled $1.3 billion, an increase of
$331 million over the year-end 1997. This increase primarily reflects
growth through acquisitions (approximately $275 million) and the
introduction of the CashPower account.
Table 2 provides an analysis of the Company's average deposits, by
category, and average rates paid thereon for each of the last three
years. Table 11 reflects the shift in the Company's deposit mix over
the last three years and Table 12 provides a maturity distribution of
time deposits in denominations of $100,000 and over.
Average funds purchased, which include federal funds purchased and
securities sold under agreements to repurchase, increased $6.3
million, or 19.9%. See Note 8 in the Notes to Consolidated Financial
Statements for further information.
Table 11
SOURCES OF DEPOSIT GROWTH
(Average Balances - Dollars in Thousands)
1997 to Percentage
1998 of Total Components of Total Deposits
Change Change 1998 1997 1996
Noninterest Bearing
Deposits $12,726 21.1% 21.3% 21.1% 21.5%
NOW Accounts 3,471 5.8 12.1 12.5 13.6
Money Market Accounts 2,560 4.3 8.8 9.2 10.4
Savings 5,684 9.4 10.2 10.3 11.2
Other Time Deposits 35,787 59.4 47.6 46.9 43.3
Total Deposits $60,228 100.0% 100.0% 100.0% 100.0%
Table 12
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR OVER
(Dollars in Thousands)
December 31, 1998
Time Certificates of Deposit Percent
Three months or less $ 50,309 41.8%
Over three through six months 29,761 24.8
Over six through twelve months 28,866 24.0
Over twelve months 11,276 9.4
Total $120,212 100.0%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a banking institution is the availability of funds to
meet increased loan demand and/or excessive deposit withdrawals.
Management monitors the Company's financial position to ensure it has
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 include cash
received through ordinary business activities (i.e. collection of
interest and fees), federal funds sold, loan and investment
maturities, bank lines of credit for the Company and approved lines
for the purchase of federal funds by CCB.
As of December 31, 1998, the Company had a $25.0 million credit
facility under which $17 million was currently available. The
facility offers the Company an unsecured, revolving line of credit for
a period of three years which matures in November 2001. Upon
expiration of the revolving line of credit, the outstanding balance
may be converted to a term loan and repaid over a period of seven
years. The term loan is to be secured by stock of a subsidiary bank
equal to at least 125% of the principal balance of the term loan. The
Company, at its option, may select from various loan rates including
Prime, LIBOR or the lenders' Cost of Funds rate ("COF"), plus or minus
increments thereof. The LIBOR or COF rates may be fixed for a period
of up to six months. The Company also has the option to select fixed
rates for periods of one through five years. On July 1, 1996, the
Company borrowed $15.0 million in connection with the acquisition of
First Financial. In 1998, the Company reduced the amount of debt to
$8.0 million. The average interest rate during 1998 was 7.11%.
The Company's credit facility imposes certain limitations on the level
of the Company's equity capital, and federal and state regulatory
agencies have established regulations which govern the payment of
dividends to a bank holding company by its bank subsidiaries. Based
on the Company's current financial condition, these limitations and/or
regulations do not impair the Company's ability to meet its cash
obligations or limit the Company's ability to pay future dividends on
its common stock at current payout rate.
At December 31, 1998, the Company had $10.4 million in long-term debt
outstanding to the Federal Home Loan Bank of Atlanta. The debt
consists of ten loans. The interest rates are fixed and the weighted
average rate at December 31, 1998 was 6.10%. Required annual principal
reductions approximate $541,000, with the remaining balances due at
maturity ranging from 2005 to 2018. The debt was used to match-fund
selected lending activities and is secured investment securities and
by first mortgage residential real estate loans which are included in
the Company's loan portfolio. See Note 9 in the Notes to Consolidated
Financial Statements for additional information as to the Company's
long-term debt.
The Company is a party to financial instruments with off-balance-sheet
risks in the normal course of business to meet the financing needs of
its customers. At December 31, 1998, the Company had $251.9 million
in commitments to extend credit and $2.3 million in standby letters of
credit. Commitments to extend credit are agreements to lend to a
customer so long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. The Company uses the same credit policies
in establishing commitments and issuing letters of credit as it does
for on-balance-sheet instruments. If commitments arising from these
financial instruments continue to require funding at historical
levels, management does not anticipate that such funding will
adversely impact its ability to meet on-going obligations.
It is anticipated capital expenditures will approximate $6.0 to $7.0
million over the next twelve months. Management believes these
capital expenditures can be funded internally without impairing the
Company's ability to meet its on-going obligations.
Shareowners' equity as of December 31, for each of the last three
years is presented below.
Shareowners' Equity
(Dollars in Thousands)
1998 1997 1996
Common Stock $ 102 $ 101 $ 100
Additional Paid-in Capital 8,561 6,544 4,942
Retained Earnings 119,521 108,555 97,881
Subtotal 128,184 115,200 102,923
Accumulated Other Comprehensive
Income, Net of Tax 678 607 86
Total Shareowners' Equity $128,862 $115,807 $103,009
The Company continues to maintain a strong capital position. The
ratio of shareowners' equity to total assets at year-end was 8.93%,
10.37% and 9.17%, in 1998, 1997 and 1996, respectively. The lower
capital ratio in 1998 compared to 1997 reflects the acquisitions of
First Federal-Florida and First Union offices. Both acquisitions were
accounted for as a purchase.
The Company is subject to risk-based capital guidelines that measure
capital relative to risk weighted assets and off-balance-sheet
financial instruments. Capital guidelines issued by the Federal
Reserve Board require bank holding companies to have a minimum total
risk-based capital ratio of 8.00%, with at least half of the total
capital in the form of Tier 1 capital. Capital City Bank Group, Inc.,
exceeded these capital guidelines, with a total risk-based capital
ratio of 11.11% and a Tier 1 ratio of 10.14%, compared to 15.67% and
14.43%, respectively, in 1997.
In addition, a tangible leverage ratio is now being used in connection
with the risk-based capital standards and is defined as Tier 1 capital
divided by average assets. The minimum leverage ratio under this
standard is 3% for the highest-rated bank holding companies which are
not undertaking significant expansion programs. An additional 1% to
2% may be required for other companies, depending upon their
regulatory ratings and expansion plans. On December 31, 1998, the
Company had a leverage ratio of 7.84% compared to 9.65% in 1997. See
Note 13 in the Notes to Consolidated Financial Statements for
additional information as to the Company's capital adequacy.
Dividends declared and paid totaled $.43 per share in 1998. During
the fourth quarter of 1998 the quarterly dividend was raised nine
percent from $.11 per share to $.12 per share. The Company declared
dividends of $.37 per share in 1997 and $.34 per share in 1996. The
dividend payout ratio was 28.2%, 26.1%, and 25.5% for 1998, 1997 and
1996, respectively. Dividends declared per share in 1998 represented
a 16.2% increase over 1997.
At December 31, 1998, the Company's common stock had a book value of
$12.70 per share compared to $11.54 in 1997. Beginning in 1994, book
value has been impacted by the net unrealized gains and losses on
investment securities available-for-sale. At December 31, 1998, the
net unrealized gain was $678,000. At December 31, 1997, the Company
had a net unrealized gain of $607,000 and thus the net impact on
equity for the year was an increase in book value of $71,000.
The Company began a stock repurchase plan in 1989, which remains in
effect and provides for the repurchase of up to 900,000 shares. As of
December 31, 1998, the Company had repurchased 790,740 shares under
the plan. No shares were repurchased during 1998.
The Company offers an Associate Incentive Plan under which certain
associates are eligible to earn shares of CCBG stock based upon
achieving established performance goals. The Company issued 48,508
shares in 1998 under this plan.
The Company also offers stock purchase plans to its associates and
directors. In 1998, 30,314 shares were issued under these plans.
The Board of Directors approved a Dividend Reinvestment and Optional
Stock Purchase Plan for the Company in December, 1996. Shares for
this plan were purchased in the open market. In 1997, 14,052 shares
were issued under this plan. In 1998, no shares were issued under
this plan.
The Company offers a 401(k) Plan which enables associates to defer a
portion of their salary on a pre-tax basis. The plan covers
substantially all of the Company associates who meet the minimum age
requirement. The Plan is designed to enable participants to elect to
have an amount withheld from their compensation in any plan year and
placed in the 401(k) Plan trust account. Matching contributions from
the Company can be made up to 6% of the participant's compensation.
During 1998, no contributions were made by the Company. The
participants may choose to invest their contributions into seven
investment funds, including CCBG common stock.
Inflation
The impact of inflation on the banking industry differs significantly
from that of other industries in which a large portion of total
resources are invested in fixed assets such as property, plant and
equipment.
Assets and liabilities of financial institutions are virtually all
monetary in nature, and therefore are primarily impacted by interest
rates rather than changing prices. While the general level of
inflation underlies most interest rates, interest rates react more to
change in the expected rate of inflation and to changes in monetary
and fiscal policy. Net interest income and the interest rate spread
are good measures of the Company's ability to react to changing
interest rates and are discussed in further detail in the section
entitled "Earnings Analysis."
YEAR 2000 COMPLIANCE
Introduction
The YEAR 2000 issue creates challenges with respect to the automated
systems used by financial institutions and other companies. Many
programs and systems are not able to recognize the year 2000, or that
the new millennium is a leap year. The problem is not limited to
computer systems. YEAR 2000 issues will potentially effect every
system that has an embedded microchip containing this flaw.
The YEAR 2000 challenge impacts the Company as many of its
transactions are date sensitive. The Company also is effected by the
ability of its vendors, suppliers, customers and other third parties
to be YEAR 2000 compliant.
State of Readiness
The Company is committed to addressing the YEAR 2000 challenges in a
prompt and responsible manner and has dedicated significant resources
to do so. An assessment of the Company's automated systems and third
party operations was completed and a plan has been implemented. The
Company's YEAR 2000 compliance plan ("Y2K Plan") has nine phases.
These phases are (1) project management, (2) awareness, (3)
assessment, (4) renovation, (5) testing and implementation, (6) risk
assessment, (7) customer awareness, (8) contingency planning, and (9)
verification. The Company has substantially completed phases one,
two, three, four, five, six, and eight, although appropriate follow-up
activities are continuing to occur. The Company will continue the
testing and implementation phases of the Y2K Plan throughout the
remainder of the year, and has adopted a comprehensive customer
awareness program (phase seven).
(1) Project Management: The Company has assigned primary
responsibility for the YEAR 2000 project to the President of Capital
City Services Company, a wholly owned subsidiary of Capital City Bank
Group, Inc. Also, the Company has hired an outside consultant to
assist in project administration. Monthly updates are provided to
senior management and quarterly updates are provided to the Board of
Directors in order to assist them in overseeing the Company's
readiness.
(2) Awareness: The Company has defined the YEAR 2000 problem and
gained executive level support for allocation of the resources
necessary to renovate and/or upgrade all systems. A YEAR 2000 team
has been established and meets regularly. The strategy developed for
YEAR 2000 compliance covers in-house systems, service bureaus for
systems that are outsourced, vendors, auditors, customers, and
suppliers.
(3) Assessment: The Company has completed this phase of the
compliance plan. Information Technology "IT" and non-IT systems have
been assessed and mission critical applications that could potentially
be affected have been identified. Mission critical is defined as
anything that may have a material adverse effect on the Company if not
YEAR 2000 compliant.
(4) Renovation: The Company is upgrading and replacing IT and
non-IT systems where appropriate, and all such replacements were
complete by June 30, 1999.
(5) Testing and Implementation: The Company's testing of Mission
Critical systems was approximately 99% complete by June 30, 1999.
Throughout 1999, the Company will continue to test IT and non-IT
systems and applications already implemented for YEAR 2000 compliance.
As systems test successfully for YEAR 2000 compliance, they will be
certified as compliant and accepted for implementation.
(6) Risk Assessment: Lending officers have been trained on YEAR 2000
issues and have documented YEAR 2000 readiness of borrowers.
Significant borrowers were mailed a questionnaire and have been
assigned a YEAR 2000 risk rating by the Company. Appropriate response
to current and future credit requests will take their YEAR 2000 status
into consideration. A similar assessment was conducted of deposit
customers relative to liquidity risk. Investment and funding
strategies have been planned to ameliorate any potential risk in this
area.
(7) Customer Awareness: During the second quarter of 1999, the
Company initiated a comprehensive plan to increase customer awareness
of the YEAR 2000 issue and to inform customers of the bank's efforts
to become compliant. This plan includes posting information on the
Company's web site, distribution of quarterly press releases,
statement stuffers and lobby brochures. Associate training was
conducted to assure that customers are provided with accurate
information about the Company's Y2K readiness.
(8) Contingency Planning: The Company has drafted a Business
Resumption/Contingency Plan for the YEAR 2000. This plan will
incorporate back-up systems and procedures for Core business
processes, should any unforeseen disruptions occur. This plan was
substantially completed by June 30, 1999.
(9) Verification: The Verification process will take place
subsequent to the actual Century Date Change. This will involve
verifying successful transition to the YEAR 2000 of all systems and
applications, at all critical dates and functions to the YEAR 2000.
Monitoring and reporting protocol has been established for this phase.
Estimated Costs to Address the Company's YEAR 2000 Issues
Costs directly related to YEAR 2000 issues are estimated to be
$780,000 from 1998 to 2000, of which approximately 85% has been spent
as of June 30, 1999. Approximately 75% of the total spending
represents costs to modify existing systems. Costs incurred by the
Company prior to 1998 were immaterial. This estimate assumes that the
Company will not incur significant YEAR 2000 related costs on behalf
of its vendors, suppliers, customers and other third parties.
Risks of the Company's YEAR 2000 Issues
The YEAR 2000 presents certain risks to the Company and its
operations. Some risks are present because the Company purchased
technology applications from other parties who face YEAR 2000
challenges and additional risks that are inherent in the business of
banking. Management has identified the following potential risks
which could have a material adverse effect on the Company's business.
1. The Company's subsidiary bank may experience a liquidity problem
if there are a significant amount of deposits withdrawn by customers
who have uncertainties associated with the YEAR 2000. The Company has
implemented a contingency plan to ensure there are appropriate levels
of funding available.
2. The Company's operations could be materially affected by the
failure of third parties who provide mission critical IT and non-IT
systems. The Company has identified its mission critical third
parties and will monitor their Y2K Plan progress. In response to this
concern, the Company has identified and contacted the third parties
who provide mission critical applications. The Company has received
YEAR 2000 compliance assurances from third parties who provide mission
critical applications and will continue to monitor and test their
efforts for YEAR 2000 compliance.
3. The Company's ability to operate effectively in the YEAR 2000
could be adversely affected by the ability to communicate and to
access utilities. The Company is in the process of incorporating a
contingency plan for addressing this situation.
4. The Company's subsidiary bank lends significant amounts to
businesses and contractors in our market area. If the businesses are
adversely affected by the YEAR 2000 issues, their ability to repay
loans could be impaired and increased credit risk could affect the
Company's financial performance. As part of the Company's Y2K Plan,
the Company has identified its significant borrowers, and has
documented their YEAR 2000 readiness and risk to the Company.
5. Sanctions could be imposed against the Company if it does not meet
deadlines or follow timetables established by the federal and state
governmental agencies which regulate the Company and its subsidiaries.
The Company has incorporated the regulatory guidelines for YEAR 2000
into its Y2K Plan.
Contingency Plan
Contingency plans for YEAR 2000 related interruptions have been
developed and will include, but not be limited to, the development of
emergency backup and recovery procedures, remediation of existing
systems parallel with installation of new systems, replacing
electronic applications with manual processes, and identification of
alternate suppliers. All plans were substantially completed by June
30, 1999.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board "FASB" issued
Statement of Financial Accounting Standards "SFAS" No. 133 "Accounting
for Derivative Instruments of Hedging Activities" as amended. 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, 2000. The adoption of this standard is
not expected to 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.
Effective January 1, 1998, the Company adopted 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.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share".
SFAS 128 provides new accounting and reporting standards for reporting
basic and diluted earnings per share. The adoption of this standard
on January 1, 1997 did not have a material impact on the reported
results of operations of the Company.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information About Capital Structure". SFAS 129 provides new
accounting and reporting standards for disclosing information about an
entity's capital structure. The adoption of this standard on January
1, 1997 did not have a material impact on the reported results of
operation of the Company.
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS 125 provides new accounting and reporting standards for sales,
securitizations, and servicing of receivables and other financial
assets, for certain secured borrowing and collateral transactions, and
for extinguishment of liabilities. The adoption of this standard on
January 1, 1997, did not have a material impact on the financial
condition or results of operations of the Company.
Item 7A. Quantitative and Qualitative Disclosure About 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 rate risk 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 13.
This table presents the Company's consolidated interest rate
sensitivity position as of year-end 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 values presented in Table 13 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 13
FINANCIAL ASSETS AND LIABILITITES MARKET RISK ANALYSIS(1)
(Dollars in Thousands)
Other Than Trading Portfolio
December 31,
Fair
1999 2000 2001 2002 2003 Beyond Total Value
Loans
Fixed Rate $ 89,458 $ 33,645 $ 53,607 $ 45,939 $ 46,792 $ 73,161 $ 342,602 $ 347,280
Average Interest Rate 9.90% 10.22% 9.78% 9.24% 8.87% 7.43% 9.16%
Floating Rate(2) 388,384 43,862 21,462 14,384 13,117 20,406 501,615 508,294
Average Interest Rate 8.55% 7.86% 8.27% 8.63% 8.20% 8.09% 8.45%
Investment Securities(3)
Fixed Rate 97,971 52,885 28,049 39,609 21,408 119,666 359,588 359,588
Average Interest Rate 5.78% 5.59% 6.11% 6.59% 5.75% 5.72% 5.85%
Floating Rate - 10,770 729 - - 510 12,009 12,009
Average Interest Rate - 6.39% 5.71% - - 6.29% 6.34%
Other Earning Assets
Fixed Rates - - - - - - - -
Average Interest Rates - - - - - - -
Floating Rates 53,500 - - - - 10,151 63,651 63,651
Average Interest Rates 5.20% - - - - 4.15 4.37%
Total Financial Assets $629,313 $141,162 $103,847 $ 99,932 $ 81,317 $223,894 $1,279,465 $1,290,822
Average Interest Rates 8.02% 7.46% 8.45% 8.10% 7.94% 6.43% 7.72%
Deposits(4)
Fixed Rate Deposits $470,472 $ 75,001 $ 12,741 $ 6,442 $ 2,961 $ 177 $ 567,794 $571,111
Average Interest Rates 5.14% 5.45% 5.32% 5.32% 5.03% 5.93% 5.19%
Floating Rate Deposits 374,608 - - - - - 374,608 374,608
Average Interest Rates 2.31% - - - - - 2.31%
Other Interest Bearing
Liabilities
Fixed Rate Debt 23,263 559 743 394 407 7,102 32,468 33,057
Average Interest Rate 2.68% 5.79% 5.52% 6.02% 6.01% 6.14% 3.64%
Floating Rate Debt 34,199 - - - - - 34,199 34,199
Average Interest Rate 4.38% - - - - - 4.38%
Total Financial Liabilities $902,542 $ 75,560 $ 13,484 $ 6,836 $ 3,368 $ 7,279 $1,009,069 $1,012,975
Average interest Rate 3.88% 5.45% 5.33% 5.36% 5.15% 6.13% 4.05%
(1) Based upon expected cash flows, unless otherwise indicated.
(2) Based upon a combination of expected maturities and repricing
opportunities.
(3) Based upon contractual maturity, except for callable and floating rate
securities, which are based on expected maturity
and weighted average life, respectively.
(4) Savings, NOW and money market accounts can be repriced at any time,
therefore, all such balances are included as floating
rates deposits in 1999. Other time deposits balances are classified
according to maturity.
Item 8. Financial Statements and Supplementary Data
Table 14
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except Per Share Data)(1)
1998 1997
Fourth Third Second First Fourth Third Second First
Summary of Operations:
Interest Income $ 22,904 $ 21,974 $ 22,402 $ 21,730 $ 21,431 $ 21,733 $ 21,211 $ 20,606
Interest Expense 9,224 8,673 8,822 8,529 8,261 8,320 8,237 7,894
Net Interest Income 13,680 13,301 13,580 13,201 13,170 13,413 12,974 12,712
Provision for
Loan Loss 657 618 618 546 597 709 506 516
Net interest Income
After Provision
for Loan Loss 13,023 12,683 12,962 12,655 12,573 12,704 12,468 12,196
Noninterest Income 6,260 5,271 5,847 5,206 5,066 4,581 5,137 4,695
Merger Expense 115 - - - - - - -
Noninterest Expense 13,150 12,090 12,747 12,342 12,757 11,790 11,746 11,527
Income Before
Provision for
Income Taxes 6,018 5,864 6,062 5,519 4,882 5,495 5,859 5,364
Provision for
Income Taxes 2,146 2,057 2,065 1,901 1,563 1,861 1,985 1,798
Net Income $ 3,872 $ 3,807 $ 3,997 $ 3,618 $ 3,319 $ 3,634 $ 3,874 $ 3,566
Net Interest
Income (FTE) $ 14,046 $ 13,640 $ 13,922 $ 13,557 $ 13,523 $ 13,819 $ 13,398 $ 13,139
Per Common Share:
Net Income Basic $ .39 $ .37 $ .39 $ .36 $ .33 $ .37 $ .39 $ .36
Net Income Diluted .38 .37 .39 .36 .32 .37 .39 .36
Dividends Declared .11 .11 .10 .10 .09 .09 .09 .09
Book Value 12.69 12.43 12.10 11.80 11.45 11.16 11.16 11.02
Market Price(2):
High 31.00 33.13 32.67 32.67 27.33 23.50 21.50 21.33
Low 24.13 19.00 29.75 29.25 23.00 20.83 19.33 14.00
Close 27.63 29.13 31.38 31.67 27.00 23.17 20.83 20.17
Selected Average
Balances:
Total Assets $1,257,934 $1,148,404 $1,156,186 $1,147,054 $1,108,788 $1,106,713$1,101,962 $1,098,426
Earning Assets 1,131,933 1,038,981 1,043,578 1,035,971 998,037 1,003,039 998,462 987,332
Loans, Net of Unearned 834,315 819,755 823,432 809,949 777,895 784,116 766,885 753,664
Total Deposits 1,059,192 954,652 962,719 952,511 916,952 924,297 925,649 922,780
Total Shareowners'
Equity 128,250 123,728 121,686 119,455 113,750 112,591 106,355 103,884
Common Equivalent
Shares:
Basic 10,158 10,158 10,140 10,123 10,067 10,055 10,004 9,998
Diluted 10,179 10,158 10,140 10,123 10,167 10,055 10,004 9,998
Ratios:
ROA 1.22% 1.32% 1.39% 1.28% 1.19% 1.30% 1.41% 1.30%
ROE 11.98% 12.20% 13.18% 12.28% 11.58% 13.01% 14.61% 13.77%
Net Interest
Margin (FTE) 4.92% 5.21% 5.35% 5.31% 5.38% 5.47% 5.38% 5.34%
(1) A All share and per share data have been restated to reflect the
pooling-of-interests of Grady Holding Company and its subsidiaries and
adjusted to reflect the 3-for-2 stock split effective June 1, 1998.
(2) Prior to February 3, 1997, there was not an established trading market
for the common stock of Capital City Bank Group, Inc.