CAPITAL CITY BANK GROUP INC - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
____________________
FORM
10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ____________ to ____________
(Exact
name of Registrant as specified in its charter)
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Florida
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0-13358
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59-2273542
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(State
of Incorporation)
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(Commission
File Number)
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(IRS
Employer Identification No.)
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217
North Monroe Street, Tallahassee, Florida
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32301
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(Address
of principal executive offices)
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(Zip
Code)
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(850)
402-7000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class Name of Each Exchange on
Which Registered
Common
Stock, $0.01 par
value The
NASDAQ Stock Market LLC
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No [ X
]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
[ ] No [ X ]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X
] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
[ ] Accelerated
filer [ X
] Non-accelerated
filer [ ] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [ X
]
The
aggregate market value of the registrant’s common stock, $0.01 par value
per share, held by non-affiliates of the registrant on June 30, 2007,
the last business day of the registrant’s most recently completed second fiscal
quarter, was approximately $320,596,761 (based on the closing sales price of the
registrant’s common stock on that date). Shares of the registrant’s
common stock held by each officer and director and each person known to the
registrant to own 10% or more of the outstanding voting power of the registrant
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not a
determination for other purposes.
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
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Class
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Outstanding
at February 29, 2008
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Common
Stock, $0.01 par value per share
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17,169,096
shares
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our Proxy Statement for
the Annual Meeting of Shareowners to be held on April 24, 2008, are
incorporated by reference in Part III.
CAPITAL
CITY BANK GROUP, INC.
ANNUAL
REPORT FOR 2007 ON FORM 10-K
TABLE OF CONTENTS
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PART
I
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PAGE
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Item
1.
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4
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Item
1A.
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14
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Item
1B.
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20
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Item
2.
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20
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Item
3.
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20
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Item
4.
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20
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PART
II
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Item
5.
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20
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Item
6.
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22
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Item
7.
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23
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Item
7A.
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50
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Item
8.
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53
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Item
9.
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89
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Item
9A.
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89
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Item
9B.
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91
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PART
III
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Item
10.
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91
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Item
11.
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91
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Item
12.
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91
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Item
13.
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92
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Item
14.
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92
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PART
IV
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Item
15.
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93
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95
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INTRODUCTORY
NOTE
This
Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include, among others,
statements about our beliefs, plans, objectives, goals, expectations, estimates
and intentions that are subject to significant risks and uncertainties and are
subject to change based on various factors, many of which are beyond our
control. The words “may,” “could,” “should,” “would,” “believe,”
“anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and
similar expressions are intended to identify forward-looking
statements.
All
forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from
those set forth in our forward-looking statements.
In
addition to those risks discussed in this Annual Report under Item 1A Risk Factors, factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, without limitation:
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§
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the
frequency and magnitude of foreclosure of our
loans;
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§
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the
effects of our lack of a diversified loan portfolio, including the risks
of geographic and industry
concentrations;
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§
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the
accuracy of our financial statement estimates and assumptions, including
the estimate for our loan loss
provision;
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§
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our
ability to integrate the business and operations of companies and banks
that we have acquired, and those we may acquire in the
future;
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§
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our
need and our ability to incur additional debt or equity
financing;
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§
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the
strength of the United States economy in general and the strength of the
local economies in which we conduct
operations;
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§
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the
effects of harsh weather conditions, including
hurricanes;
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§
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inflation,
interest rate, market and monetary
fluctuations;
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§
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effect
of changes in the stock market and other capital
markets;
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§
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legislative
or regulatory changes;
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§
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our
ability to comply with the extensive laws and regulations to which we are
subject;
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§
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the
willingness of clients to accept third-party products and services rather
than our products and services and vice
versa;
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changes
in the securities and real estate
markets;
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§
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increased
competition and its effect on
pricing;
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technological
changes;
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changes
in monetary and fiscal policies of the U.S.
Government;
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§
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the
effects of security breaches and computer viruses that may affect our
computer systems;
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§
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changes
in consumer spending and saving
habits;
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§
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growth
and profitability of our noninterest
income;
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§
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changes
in accounting principles, policies, practices or
guidelines;
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§
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the
limited trading activity of our common
stock;
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§
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the
concentration of ownership of our common
stock;
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anti-takeover
provisions under federal and state law as well as our Articles of
Incorporation and our Bylaws;
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other
risks described from time to time in our filings with the Securities and
Exchange Commission; and
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our
ability to manage the risks involved in the
foregoing.
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However,
other factors besides those listed in Item 1A Risk Factors or
discussed in this Annual Report also could adversely affect our results, and you
should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. Any forward-looking statements made
by us or on our behalf speak only as of the date they are made. We do
not undertake to update any forward-looking statement, except as required by
applicable law.
PART
I
General
Capital
City Bank Group, Inc. (“CCBG”) is a financial holding company registered under
the Gramm-Leach-Bliley Act of 1999 (“Gramm-Leach-Bliley Act”). CCBG
was incorporated under Florida law on December 13, 1982, to acquire five
national banks and one state bank that all subsequently became part of CCBG’s
bank subsidiary, Capital City Bank (“CCB” or the “Bank”). In this
report, the terms “Company”, “we”, “us”, or “our” mean CCBG and all subsidiaries
included in our consolidated financial statements.
We
provide traditional deposit and credit services, asset management, trust,
mortgage banking, merchant services, bank cards, data processing, and securities
brokerage services through 70 full-service banking locations in Florida,
Georgia, and Alabama. CCB operates these banking
locations.
At
December 31, 2007, we had total consolidated assets of approximately $2.6
billion, total deposits of approximately $2.1 billion and shareowners’ equity
was approximately $292.7 million. Our financial condition and results
of operations are more fully discussed in our consolidated financial
statements.
CCBG’s
principal asset is the capital stock of the Bank. CCB accounted for
approximately 100% of consolidated assets at December 31, 2007, and
approximately 100% of consolidated net income for the year ended December 31,
2007. In addition to our banking subsidiary, we have seven indirect
subsidiaries, Capital City Trust Company, Capital City Mortgage Company
(inactive), Capital City Banc Investments, Inc., Capital City Services Company,
First Insurance Agency of Grady County, Inc., Southern Oaks, Inc., and FNB
Financial Services, Inc., all of which are wholly-owned subsidiaries of CCB, and
two direct subsidiaries CCBG Capital Trust I and CCBG Capital Trust II, both
wholly-owned subsidiaries of CCBG.
Dividends
and management fees received from the Bank are our only source of
income. Dividend payments by the Bank to us depend on the
capitalization, earnings and projected growth of the Bank, and are limited by
various regulatory restrictions. See the section entitled “Regulatory
Considerations” in this Item 1 and Note 15 in the Notes to Consolidated
Financial Statements for additional information. We had a total of
1,097 (full-time equivalent) associates at February 29, 2008. Page 22
contains other financial and statistical information about us.
We have
one reportable segment with the following principal services: Banking
Services, Data Processing Services, Trust and Asset Management Services, and
Brokerage Services.
Banking
Services
CCB is a
Florida chartered full-service bank engaged in the commercial and retail banking
business. Significant services offered by the Bank
include:
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§
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Business Banking – The
Bank provides banking services to corporations and other business
clients. Credit products are available for a wide variety of
general business purposes, including financing for commercial business
properties, equipment, inventories and accounts receivable, as well as
commercial leasing and letters of credit. Treasury management
services and merchant credit card transaction processing services are also
offered.
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§
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Commercial Real Estate Lending
– The Bank provides a wide range of products to meet the financing
needs of commercial developers and investors, residential builders and
developers, and community
development.
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Residential Real Estate
Lending – The Bank provides products to help meet the home
financing needs of consumers, including conventional permanent and
construction/permanent (fixed or adjustable rate) financing arrangements,
and FHA/VA loan products. The bank offers both fixed-rate and
adjustable rate residential mortgage (ARM) loans. As of
December 31, 2007, approximately 16% of the Bank’s loan portfolio
consisted of residential ARM loans. A portion of our loans
originated are sold into the secondary
market.
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The
Bank offers these products through its existing network of branch
offices. Geographical expansion of the delivery of this product
line has occurred over the past three years through the opening of
mortgage lending offices in Gainesville, Florida (Alachua County) and
Thomasville, Georgia (Thomas
County).
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§
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Retail Credit – The
Bank provides a full range of loan products to meet the needs of
consumers, including personal loans, automobile loans, boat/RV loans, home
equity loans, and credit card
programs.
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§
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Institutional Banking –
The
Bank provides banking services to meet the needs of state and local
governments, public schools and colleges, charities, membership and
not-for-profit associations including customized checking and savings
accounts, cash management systems, tax-exempt loans, lines of credit, and
term loans.
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§
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Retail Banking - The
Bank provides a full range of consumer banking services, including
checking accounts, savings programs, automated teller machines (ATMs),
debit/credit cards, night deposit services, safe deposit facilities, and
PC/Internet banking. Clients can use the Capital City Bank
Direct automated phone system to gain 24-hour access to their deposit and
loan account information, and transfer funds between linked
accounts. The Bank is a member of the “Star” ATM Network that
permits banking clients to access cash at ATMs or point of sale
merchants.
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Data
Processing Services
Capital
City Services Company (the “Services Company”) provides data processing services
to financial institutions (including CCB), government agencies and commercial
clients located throughout North Florida and South Georgia. As of
February 29, 2008, the Services Company is providing computer services to eight
correspondent banks, which have relationships with CCB.
Trust
Services and Asset Management
Capital
City Trust Company (the “Trust Company”) is the investment management arm of
CCB. The Trust Company provides asset management for individuals
through agency, personal trust, IRAs and personal investment management
accounts.
Administration
of pension, profit sharing and 401(k) plans is a significant product
line. Associations, endowments and other non-profit entities hire the
Trust Company to manage their investment portfolios. A staff of
well-trained professionals serves individuals requiring the services of a
trustee, personal representative or a guardian. The market value of
trust assets under discretionary management exceeded $781.0 million as of
December 31, 2007, with total assets under administration exceeding $854.0
million.
Brokerage
Services
We offer
access to retail investment products through Capital City Banc Investments,
Inc., a wholly-owned subsidiary of CCB. These products are offered through
INVEST Financial Corporation, a member of FINRA and SIPC. Non-deposit
investment and insurance products are: (1) not FDIC insured; (2) not deposits,
obligations, or guaranteed by any bank; and (3) subject to investment risk,
including the possible loss of principal amount invested. Capital
City Banc Investments, Inc. offers a full line of retail securities products,
including U.S. Government bonds, tax-free municipal bonds, stocks, mutual funds,
unit investment trusts, annuities, life insurance and long-term health
care. We are not an affiliate of INVEST Financial
Corporation.
Expansion
of Business
Since
1984, we have completed 15 acquisitions totaling approximately $1.6 billion in
deposits within existing and new markets. In addition, since 2003, we
have opened 10 new offices to improve service and product delivery within our
markets. Plans are currently being developed for two new office
openings in 2008, including one on Macon, Georgia and one in Palatka, Florida
(replacement office).
We plan
to continue our expansion, emphasizing a combination of growth in existing
markets and acquisitions. The restructuring in late 2007 of our
community banking sales and service model will result in the more tactical focus
on certain higher growth metro markets, including Macon, Tallahassee,
Gainesville, and Hernando/Pasco. Acquisitions will be focused on a
three state area including Florida, Georgia, and Alabama with a particular focus
on acquiring banks and banking offices, which are $100 million to $400 million
in asset size, located on the outskirts of major metropolitan
areas. We will evaluate de novo expansion opportunities in attractive
new markets in the event that acquisition opportunities are not
feasible. Other expansion opportunities that will be evaluated
include asset management and mortgage banking.
Competition
The
banking business is rapidly changing. We operate in a highly
competitive environment, especially with respect to services and
pricing. The on-going consolidation of the banking industry has
altered and continues to significantly alter the competitive environment within
the Florida, Georgia, and Alabama markets. We believe this
consolidation further enhances our competitive position and opportunities in
many of our markets. Our primary market area is 20 counties in
Florida, five counties in Georgia and one county in Alabama. In these
markets, the Bank competes against a wide range of banking and nonbanking
institutions including savings and loan associations, credit unions, money
market funds, mutual fund advisory companies, mortgage banking companies,
investment banking companies, finance companies and other types of financial
institutions.
All of
Florida’s major banking concerns have a presence in Leon
County. CCB’s Leon County deposits totaled $738.3 million, or 34.5%,
of our consolidated deposits at December 31, 2007.
The
following table depicts our market share percentage within each respective
county, based on total commercial bank deposits within the county.
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Market
Share as of June 30,(1)
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2007
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2006
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2005
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Florida
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Alachua
County(2)
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4.7
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%
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5.6
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%
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6.3
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%
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Bradford
County
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47.6
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%
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44.6
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%
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42.6
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%
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Citrus
County
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3.0
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%
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3.3
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%
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3.5
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%
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||||
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Clay
County
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2.0
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%
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2.0
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%
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2.2
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%
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||||
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Dixie
County
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22.9
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%
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20.8
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%
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17.3
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%
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||||
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Gadsden
County
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61.0
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%
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64.9
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%
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68.0
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%
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||||
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Gilchrist
County
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33.6
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%
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47.1
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%
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49.5
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%
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||||
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Gulf
County
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11.7
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%
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14.3
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%
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19.8
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%
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Hernando
County
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1.2
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%
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1.5
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%
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1.4
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%
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||||
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Jefferson
County
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22.8
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%
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24.6
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%
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24.4
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%
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||||
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Leon
County
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16.2
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%
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18.0
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%
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17.5
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%
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||||
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Levy
County
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33.0
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%
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34.4
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%
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33.8
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%
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||||
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Madison
County
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13.1
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%
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14.9
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%
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15.1
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%
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||||
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Pasco
County
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0.2
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%
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0.2
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%
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0.3
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%
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||||
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Putnam
County
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11.1
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%
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12.3
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%
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12.3
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%
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||||
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St.
Johns County(2)
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1.2
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%
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1.5
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%
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2.0
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%
|
||||
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Suwannee
County
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7.7
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%
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11.8
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%
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7.5
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%
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||||
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Taylor
County
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30.1
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%
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28.6
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%
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27.9
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%
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||||
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Wakulla
County(3)
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2.6
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%
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2.9
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%
|
--
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|||||
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Washington
County
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13.8
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%
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17.4
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%
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20.3
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%
|
||||
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Georgia(4)
|
||||||||||
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Bibb
County
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2.5
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%
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2.9
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%
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2.8
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%
|
||||
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Burke
County
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7.8
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%
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9.2
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%
|
9.3
|
%
|
||||
|
Grady
County
|
18.7
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%
|
20.0
|
%
|
19.7
|
%
|
||||
|
Laurens
County
|
19.2
|
%
|
23.8
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%
|
33.1
|
%
|
||||
|
Troup
County
|
6.2
|
%
|
8.2
|
%
|
7.5
|
%
|
||||
|
Alabama
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||||||||||
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Chambers
County
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6.5
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%
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4.7
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%
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3.9
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%
|
||||
|
(1)
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Obtained from the June 30, 2007
FDIC/OTS Summary of Deposits
Report.
|
|
(2)
|
CCB entered market in May
2005.
|
|
(3)
|
CCB entered market in December
2005.
|
|
(4)
|
Does not include Thomas County
where Capital City Bank maintains a residential mortgage lending office
only.
|
The
following table sets forth the number of commercial banks and offices, including
our offices and our competitors' offices, within each of the respective
counties.
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County
|
Number
of
Commercial
Banks
|
Number
of Commercial
Bank
Offices
|
|
Florida
|
||
|
Alachua
|
13
|
65
|
|
Bradford
|
3
|
3
|
|
Citrus
|
16
|
49
|
|
Clay
|
12
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29
|
|
Dixie
|
3
|
4
|
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Gadsden
|
4
|
6
|
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Gilchrist
|
3
|
6
|
|
Gulf
|
6
|
9
|
|
Hernando
|
13
|
41
|
|
Jefferson
|
2
|
2
|
|
Leon
|
14
|
83
|
|
Levy
|
3
|
13
|
|
Madison
|
6
|
6
|
|
Pasco
|
25
|
114
|
|
Putnam
|
6
|
16
|
|
St.
Johns
|
22
|
63
|
|
Suwannee
|
5
|
8
|
|
Taylor
|
3
|
4
|
|
Wakulla
|
4
|
9
|
|
Washington
|
5
|
5
|
|
Georgia
|
||
|
Bibb
|
11
|
55
|
|
Burke
|
5
|
10
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Grady
|
5
|
8
|
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Laurens
|
10
|
19
|
|
Troup
|
10
|
24
|
|
Alabama
|
||
|
Chambers
|
5
|
10
|
Data
obtained from the June 30, 2007 FDIC/OTS Summary of Deposits
Report.
Seasonality
We
believe our commercial banking operations are not generally seasonal in
nature. Public deposits tend to increase with tax collections in the
second and fourth quarters and decline with spending
thereafter.
REGULATORY
CONSIDERATIONS
We must
comply with state and federal banking laws and regulations that control
virtually all aspects of our operations. These laws and regulations
generally aim to protect our depositors, not our shareowners or our
creditors. Any changes in applicable laws or regulations may
materially affect our business and prospects. Such legislative or
regulatory changes may also affect our operations. The following
description summarizes some of the laws and regulations to which we are
subject. References to applicable statutes and regulations are brief
summaries, do not purport to be complete, and are qualified in their entirety by
reference to such statutes and regulations.
The
Company
CCBG is
registered with the Board of Governors of the Federal Reserve System (the
“Federal Reserve”) as a financial holding company under the Gramm-Leach-Bliley
Act and is registered with the Federal Reserve as a bank holding company under
the Bank Holding Company Act of 1956. As a result, we are subject to
supervisory regulation and examination by the Federal Reserve. The
Gramm-Leach-Bliley Act, the Bank Holding Company Act, and other federal laws
subject financial holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory requirements
and activities, including regulatory enforcement actions for violations of laws
and regulations.
Permitted
Activities. The Gramm-Leach-Bliley Act, enacted on November
12, 1999, amended the Bank Holding Company Act by (i) allowing bank holding
companies that qualify as “financial holding companies” to engage in a broad
range of financial and related activities; (ii) allowing insurers and other
financial service companies to acquire banks; (iii) removing restrictions that
applied to bank holding company ownership of securities firms and mutual fund
advisory companies; and (iv) establishing the overall regulatory scheme
applicable to bank holding companies that also engage in insurance and
securities operations. The general effect of the law was to establish a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service
providers. Activities that are financial in nature are broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
In
contrast to financial holding companies, bank holding companies are limited to
managing or controlling banks, furnishing services to or performing services for
its subsidiaries, and engaging in other activities that the Federal Reserve
determines by regulation or order to be so closely related to banking or
managing or controlling banks as to be a proper incident
thereto. Except for the activities relating to financial holding
companies permissible under the Gramm-Leach-Bliley Act, these restrictions will
apply to us. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public that
outweigh possible adverse effects. Possible benefits include greater
convenience, increased competition, and gains in efficiency. Possible
adverse effects include undue concentration of resources, decreased or unfair
competition, conflicts of interest, and unsound banking
practices. Despite prior approval, the Federal Reserve may order a
bank holding company or its subsidiaries to terminate any activity or to
terminate ownership or control of any subsidiary when the Federal Reserve has
reasonable cause to believe that a serious risk to the financial safety,
soundness or stability of any bank subsidiary of that bank holding company may
result from such an activity.
Changes in
Control. Subject to certain exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with the applicable
regulations, require Federal Reserve approval (or, depending on the
circumstances, no notice of disapproval) prior to any person or company
acquiring “control” of a bank or bank holding company. A conclusive presumption
of control exists if an individual or company acquires the power, directly or
indirectly, to direct the management or policies of an insured depository
institution or to vote 25% or more of any class of voting securities of any
insured depository institution. A rebuttable presumption of control exists if a
person or company acquires 10% or more but less than 25% of any class of voting
securities of an insured depository institution and either the institution has
registered securities under Section 12 of the Securities Exchange Act of 1934 or
as we will refer to as the Exchange Act, or no other person will own a greater
percentage of that class of voting securities immediately after the
acquisition.
As a bank
holding company, we are required to obtain prior approval from the Federal
Reserve before (i) acquiring all or substantially all of the assets of a bank or
bank holding company, (ii) acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting stock of any bank or bank holding company
(unless we own a majority of such bank’s voting shares), or (iii) merging or
consolidating with any other bank or bank holding company. In determining
whether to approve a proposed bank acquisition, federal bank regulators will
consider, among other factors, the effect of the acquisition on competition, the
public benefits expected to be received from the acquisition, the projected
capital ratios and levels on a post-acquisition basis, and the acquiring
institution’s record of addressing the credit needs of the communities it
serves, including the needs of low and moderate income neighborhoods, consistent
with the safe and sound operation of the bank, under the Community Reinvestment
Act of 1977.
Under
Florida law, a person or entity proposing to directly or indirectly acquire
control of a Florida bank must first obtain permission from the Florida Office
of Financial Regulation. Florida statutes define “control” as either (a)
indirectly or directly owning, controlling or having power to vote 25% or more
of the voting securities of a bank; (b) controlling the election of a majority
of directors of a bank; (c) owning, controlling, or having power to vote 10% or
more of the voting securities as well as directly or indirectly exercising a
controlling influence over management or policies of a bank; or (d) as
determined by the Florida Office of Financial Regulation. These requirements
will affect us because the Bank is chartered under Florida law and changes in
control of us are indirect changes in control of the Bank.
Tying. Bank
holding companies and their affiliates are prohibited from tying the provision
of certain services, such as extending credit, to other services or products
offered by the holding company or its affiliates, such as deposit
products.
Capital; Dividends; Source of
Strength. The Federal Reserve imposes certain capital
requirements on bank holding companies under the Bank Holding Company Act,
including a minimum leverage ratio and a minimum ratio of “qualifying” capital
to risk-weighted assets. These requirements are described below under “Capital
Regulations.” Subject to its capital requirements and certain other
restrictions, we are able to borrow money to make a capital contribution to the
Bank, and such loans may be repaid from dividends paid from the Bank to
us.
The
ability of the Bank to pay dividends, however, will be subject to regulatory
restrictions that are described below under “Dividends.” We are also able to
raise capital for contributions to the Bank by issuing securities without having
to receive regulatory approval, subject to compliance with federal and state
securities laws.
In
accordance with Federal Reserve policy, we are expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank in
circumstances in which we might not otherwise do so. In furtherance of this
policy, the Federal Reserve may require a financial holding company to terminate
any activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve’s determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a financial holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution’s financial condition.
Capital
City Bank
CCB is a
banking institution that is chartered by and headquartered in the State of
Florida, and it is subject to supervision and regulation by the Florida Office
of Financial Regulation. The Florida Office of Financial Regulation
supervises and regulates all areas of the Bank’s operations including, without
limitation, the making of loans, the issuance of securities, the conduct of the
Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the
payment of dividends, and the establishment or closing of branches. The Bank is
also a member bank of the Federal Reserve System, which makes the Bank’s
operations subject to broad federal regulation and oversight by the Federal
Reserve. In addition, the Bank’s deposit accounts are insured by the Federal
Deposit Insurance Corporation (“FDIC”) to the maximum extent permitted by law,
and the FDIC has certain enforcement powers over the Bank.
As a
state chartered banking institution in the State of Florida, the Bank is
empowered by statute, subject to the limitations contained in those statutes, to
take and pay interest on savings and time deposits, to accept demand deposits,
to make loans on residential and other real estate, to make consumer and
commercial loans, to invest, with certain limitations, in equity securities and
in debt obligations of banks and corporations and to provide various other
banking services on behalf of the Bank’s clients. Various consumer laws and
regulations also affect the operations of the Bank, including state usury laws,
laws relating to fiduciaries, consumer credit and equal credit opportunity laws,
and fair credit reporting. In addition, the Federal Deposit Insurance
Corporation Improvement Act of 1991 (“FDICIA”) prohibits insured state chartered
institutions from conducting activities as principal that are not permitted for
national banks. A bank, however, may engage in an otherwise prohibited activity
if it meets its minimum capital requirements and the FDIC determines that the
activity does not present a significant risk to the deposit insurance
fund.
Reserves. The
Federal Reserve requires all depository institutions to maintain reserves
against some transaction accounts (primarily NOW and Super NOW checking
accounts). The balances maintained to meet the reserve requirements imposed by
the Federal Reserve may be used to satisfy liquidity requirements. An
institution may borrow from the Federal Reserve Bank “discount window” as a
secondary source of funds, provided that the institution meets the Federal
Reserve Bank’s credit standards.
Dividends. The
Bank is subject to legal limitations on the frequency and amount of dividends
that can be paid to us. The Federal Reserve may restrict the ability
of the Bank to pay dividends if such payments would constitute an unsafe or
unsound banking practice. These regulations and restrictions may limit our
ability to obtain funds from the Bank for our cash needs, including funds for
acquisitions and the payment of dividends, interest, and operating
expenses.
In
addition, Florida law also places certain restrictions on the declaration of
dividends from state chartered banks to their holding companies. Pursuant to
Section 658.37 of the Florida Banking Code, the board of directors of state
chartered banks, after charging off bad debts, depreciation and other worthless
assets, if any, and making provisions for reasonably anticipated future losses
on loans and other assets, may quarterly, semi-annually or annually declare a
dividend of up to the aggregate net profits of that period combined with the
bank’s retained net profits for the preceding two years and, with the approval
of the Florida Office of Financial Regulation, declare a dividend from retained
net profits which accrued prior to the preceding two years. Before declaring
such dividends, 20% of the net profits for the preceding period as is covered by
the dividend must be transferred to the surplus fund of the bank until this fund
becomes equal to the amount of the bank’s common stock then issued and
outstanding. A state chartered bank may not declare any dividend if (i) its net
income from the current year combined with the retained net income for the
preceding two years is a loss or (ii) the payment of such dividend would cause
the capital account of the bank to fall below the minimum amount required by
law, regulation, order or any written agreement with the Florida Office of
Financial Regulation or a federal regulatory agency.
Insurance of Accounts and Other
Assessments. The FDIC merged the Bank Insurance Fund and the
Savings Association Insurance Fund to form the Deposit Insurance Fund on March
31, 2006. The deposit accounts of the Bank are currently insured by
the Deposit Insurance Fund generally up to a maximum of $100,000 per separately
insured depositor, except for retirement accounts, which are insured up to
$250,000. The Bank pays its deposit insurance assessments to the
Deposit Insurance Fund.
Effective
January 1, 2007, the FDIC established a risk-based assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. Under the assessment system, the FDIC assigns an institution to
one of four risk categories, with the first category having two sub-categories
based on the institution’s most recent supervisory and capital evaluations,
designed to measure risk. Assessment rates currently range from 0.05% of
deposits for an institution in the highest sub-category of the highest category
to 0.43% of deposits for an institution in the lowest category. The
FDIC is authorized to raise the assessment rates as necessary to maintain the
minimum required 1.25% reserve ratio of premiums held to deposits
insured. The FDIC allows the use of credits for assessments
previously paid.
In
addition, all FDIC insured institutions are required to pay assessments to the
FDIC at an annual rate of approximately 0.0122% of insured deposits to fund
interest payments on bonds issued by the Financing Corporation, an agency of the
federal government established to recapitalize the predecessor to the Savings
Association Insurance Fund. These assessments will continue until the Financing
Corporation bonds mature in 2017 through 2019.
Transactions With
Affiliates. Pursuant to Sections 23A and 23B of the Federal
Reserve Act and Regulation W, the authority of the Bank to engage in
transactions with related parties or “affiliates” or to make loans to insiders
is limited. Loan transactions with an “affiliate” generally must be
collateralized and certain transactions between the Bank and its “affiliates”,
including the sale of assets, the payment of money or the provision of services,
must be on terms and conditions that are substantially the same, or at least as
favorable to the Bank, as those prevailing for comparable nonaffiliated
transactions. In addition, the Bank generally may not purchase securities issued
or underwritten by affiliates.
Loans to
executive officers, directors or to any person who directly or indirectly, or
acting through or in concert with one or more persons, owns, controls or has the
power to vote more than 10% of any class of voting securities of a bank, which
we refer to as 10% Shareholders, or to any political or campaign committee the
funds or services of which will benefit such executive officers, directors, or
10% Shareholders or which is controlled by such executive officers, directors or
10% Shareholders, are subject to Sections 22(g) and 22(h) of the Federal Reserve
Act and its corresponding regulations (Regulation O) and Section 13(k) of the
Exchange Act relating to the prohibition on personal loans to executives which
exempts financial institutions in compliance with the insider lending
restrictions of Section 22(h) of the Federal Reserve Act. Among other things,
these loans must be made on terms substantially the same as those prevailing on
transactions made to unaffiliated individuals and certain extensions of credit
to such persons must first be approved in advance by a disinterested majority of
the entire board of directors. Section 22(h) of the Federal Reserve Act
prohibits loans to any such individuals where the aggregate amount exceeds an
amount equal to 15% of an institution’s unimpaired capital and surplus plus an
additional 10% of unimpaired capital and surplus in the case of loans that are
fully secured by readily marketable collateral, or when the aggregate amount on
all such extensions of credit outstanding to all such persons would exceed the
bank’s unimpaired capital and unimpaired surplus. Section 22(g)
identifies limited circumstances in which the Bank is permitted to extend credit
to executive officers.
Community Reinvestment
Act. The Community Reinvestment Act and its corresponding
regulations are intended to encourage banks to help meet the credit needs of
their service area, including low and moderate income neighborhoods, consistent
with the safe and sound operations of the banks. These regulations
provide for regulatory assessment of a bank’s record in meeting the needs of its
service area. Federal banking agencies are required to make public a
rating of a bank’s performance under the Community Reinvestment
Act. The Federal Reserve considers a bank’s Community Reinvestment
Act rating when the bank submits an application to establish branches, merge, or
acquire the assets and assume the liabilities of another bank. In the
case of a financial holding company, the Community Reinvestment Act performance
record of all banks involved in the merger or acquisition are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other financial holding
company. An unsatisfactory record can substantially delay or block
the transaction. CCB received a satisfactory rating on its most
recent Community Reinvestment Act assessment.
Capital
Regulations. The Federal Reserve has adopted risk-based,
capital adequacy guidelines for financial holding companies and their subsidiary
state-chartered banks that are members of the Federal Reserve System. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
financial holding companies, to account for off-balance sheet exposure, to
minimize disincentives for holding liquid assets and to achieve greater
consistency in evaluating the capital adequacy of major banks throughout the
world. Under these guidelines, assets and off-balance sheet items are assigned
to broad risk categories each with designated weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The
current guidelines require all financial holding companies and federally
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier I Capital. Tier I Capital, which includes
common stockholders’ equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock and trust preferred
securities, less certain goodwill items and other intangible assets, is required
to equal at least 4% of risk-weighted assets. The remainder (“Tier II Capital”)
may consist of (i) an allowance for loan losses of up to 1.25% of risk-weighted
assets, (ii) excess of qualifying perpetual preferred stock, (iii) hybrid
capital instruments, (iv) perpetual debt, (v) mandatory convertible securities,
and (vi) subordinated debt and intermediate-term preferred stock up to 50% of
Tier I Capital. Total capital is the sum of Tier I and Tier II Capital less
reciprocal holdings of other banking organizations’ capital instruments,
investments in unconsolidated subsidiaries and any other deductions as
determined by the appropriate regulator (determined on a case by case basis or
as a matter of policy after formal rule making).
In
computing total risk-weighted assets, bank and financial holding company assets
are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain
off-balance sheet items are given similar credit conversion factors to convert
them to asset equivalent amounts to which an appropriate risk-weight will apply.
Most loans will be assigned to the 100% risk category, except for performing
first mortgage loans fully secured by 1- to 4-family and certain multi-family
residential property, which carry a 50% risk rating. Most investment securities
(including, primarily, general obligation claims on states or other political
subdivisions of the United States) will be assigned to the 20% category, except
for municipal or state revenue bonds, which have a 50% risk-weight, and direct
obligations of the U.S. Treasury or obligations backed by the full faith and
credit of the U.S. Government, which have a 0% risk-weight. In covering
off-balance sheet items, direct credit substitutes, including general guarantees
and standby letters of credit backing financial obligations, are given a 100%
conversion factor. Transaction-related contingencies such as bid bonds, standby
letters of credit backing non-financial obligations, and undrawn commitments
(including commercial credit lines with an initial maturity of more than one
year) have a 50% conversion factor. Short-term commercial letters of credit are
converted at 20% and certain short-term unconditionally cancelable commitments
have a 0% factor.
The
federal bank regulatory authorities have also adopted regulations that
supplement the risk-based guidelines. These regulations generally require banks
and financial holding companies to maintain a minimum level of Tier I Capital to
total assets less goodwill of 4% (the “leverage ratio”). The Federal Reserve
permits a bank to maintain a minimum 3% leverage ratio if the bank achieves a 1
rating under the CAMELS rating system in its most recent examination, as long as
the bank is not experiencing or anticipating significant growth. The CAMELS
rating is a non-public system used by bank regulators to rate the strength and
weaknesses of financial institutions. The CAMELS rating is comprised of six
categories: capital adequacy, asset quality, management, earnings, liquidity,
and sensitivity to market risk.
Banking
organizations experiencing or anticipating significant growth, as well as those
organizations which do not satisfy the criteria described above, will be
required to maintain a minimum leverage ratio ranging generally from 4% to 5%.
The bank regulators also continue to consider a “tangible Tier I leverage ratio”
in evaluating proposals for expansion or new activities. The tangible Tier I
leverage ratio is the ratio of a banking organization’s Tier I Capital, less
deductions for intangibles otherwise includable in Tier I Capital, to total
tangible assets.
Federal
law and regulations establish a capital-based regulatory scheme designed to
promote early intervention for troubled banks and require the FDIC to choose the
least expensive resolution of bank failures. The capital-based regulatory
framework contains five categories of compliance with regulatory capital
requirements, including “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” and “critically
undercapitalized.” To qualify as a “well-capitalized” institution, a bank must
have a leverage ratio of no less than 5%, a Tier I risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. Generally, a financial
institution must be “well capitalized” before the Federal Reserve will approve
an application by a financial holding company to acquire or merge with a bank or
bank holding company.
Under the
regulations, the applicable agency can treat an institution as if it were in the
next lower category if the agency determines (after notice and an opportunity
for hearing) that the institution is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of
a financial institution will increase, and the permissible activities of the
institution will decrease, as it moves downward through the capital categories.
Institutions that fall into one of the three undercapitalized categories may be
required to (i) submit a capital restoration plan; (ii) raise additional
capital; (iii) restrict their growth, deposit interest rates, and other
activities; (iv) improve their management; (v) eliminate management fees; or
(vi) divest themselves of all or a part of their operations. Financial holding
companies controlling financial institutions can be called upon to boost the
institutions’ capital and to partially guarantee the institutions’ performance
under their capital restoration plans.
It should
be noted that the minimum ratios referred to above are merely guidelines and the
bank regulators possess the discretionary authority to require higher
ratios.
We
currently exceed the requirements contained in the applicable regulations,
policies and directives pertaining to capital adequacy, and are unaware of any
material violation or alleged violation of these regulations, policies or
directives.
Anti-money
Laundering. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
“USA PATRIOT Act”) was enacted in response to the terrorist attacks occurring on
September 11, 2001. The USA PATRIOT ACT is intended to strengthen the
U.S. law enforcement and intelligence communities’ ability to work together to
combat terrorism. Title III of the USA PATRIOT Act, the International
Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, amended the
Bank Secrecy Act and adopted additional provisions that increased the
obligations of financial institutions, including the Bank, to identify their
clients, watch for and report upon suspicious transactions, respond to requests
for information by federal banking and law enforcement agencies, and share
information with other financial institutions. In addition, the
collected client identification information must be verified within a reasonable
time after a new account is opened through documentary or non-documentary
methods. All new clients must be screened against any Section 326
government lists of known or suspected terrorists within a reasonable time after
opening an account.
On July
19, 2007, the Federal Reserve and the other federal financial regulatory
agencies issued an interagency policy on the application of section 8(s) of the
Federal Deposit Insurance Act. This provision generally requires each
federal banking agency to issue an order to cease and desist when a bank is in
violation of the requirement to establish and maintain a Bank Secrecy
Act/anti-money laundering (BSA/AML) compliance program. The policy
statement provides that, in addition to the circumstances where the agencies
will issue a cease and desist order in compliance with section 8(s), they may
take other actions as appropriate for other types of BSA/AML program concerns or
for violations of other BSA requirements. The policy statement also
does not address the independent authority of the U.S. Department of the
Treasury’s Financial Crimes Enforcement Network to take enforcement action for
violations of the BSA.
Securities
Activities. On September 19, 2007, the SEC adopted Regulation
R, which implements the bank broker-dealer exceptions enacted in the
Gramm-Leach-Bliley Act. Regulation R affects the way the Bank’s
employees who are not registered with the SEC may be compensated for referrals
to a third-party broker-dealer for which the Bank has entered into a networking
arrangement. In addition, Regulation R broadens the ability of the
Bank to effect securities transactions in a trustee or fiduciary capacity
without registering as a broker, permit banks to effect certain sweep account
transactions, and to accept orders for securities transactions from employee
plan accounts, individual retirement plan accounts, and other similar
accounts. Banks are expected to comply on the first day of their
fiscal year beginning on or after September 1, 2008.
Privacy. Under the
Gramm-Leach-Bliley Act, federal banking regulators adopted rules limiting the
ability of banks and other financial institutions to disclose nonpublic
information about consumers to nonaffiliated third parties. The rules
require disclosure of privacy policies to consumers and, in some circumstances,
allow consumers to prevent disclosure of certain personal information to
nonaffiliated third parties.
Fair and Accurate Credit Transaction
Act of 2003. The Fair and Accurate Credit Transaction Act of
2003, which amended the Fair Credit Reporting Act, enhances consumers’ ability
to combat identity theft, increases the accuracy of consumer reports, allows
consumers to exercise greater control over the type and amount of marketing
solicitations they receive, restricts the use and disclosure of sensitive
medical information, and establishes uniform national standards in the
regulation of consumer reporting.
On
October 31, 2007, the Federal Reserve and the other federal financial regulatory
agencies together with the U.S. Department of the Treasury and the Federal Trade
Commission issued final regulations (Red Flag Regulations) enacting Sections 114
and 315 of the Fair and Accurate Credit Transaction Act of 2003. The
Red Flag Regulations require the Bank to have identity theft policies and
programs in place by no later than November 1, 2008. The Red Flag
Regulations require the surviving bank subsidiary to develop and implement an
identity theft protection program for combating identity theft in connection
with new and existing consumer accounts and other accounts for which there is a
reasonably foreseeable risk of identity theft.
Consumer Laws and
Regulations. The Bank is also subject to other federal and
state consumer laws and regulations that are designed to protect consumers in
transactions with banks. While the list set forth below is not
exhaustive, these laws and regulations include the Truth in Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Check Clearing for the 21st Century
Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Housing Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement
Procedures Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with clients when taking deposits or making loans to such
clients. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of its ongoing client
relations.
Future
Legislative Developments
Various
legislative acts are from time to time introduced in Congress and the Florida
legislature. Such legislation may change banking statutes and the
environment in which our banking subsidiary and we operate in substantial and
unpredictable ways. We cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon our financial condition or results of operations or
that of our banking subsidiary.
Effect
of Governmental Monetary Policies
The
commercial banking business in which the Bank engages is affected not only by
general economic conditions, but also by the monetary policies of the Federal
Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the “discount window,” open market operations, the
imposition of changes in reserve requirements against member banks’ deposits and
assets of foreign branches and the imposition of and changes in reserve
requirements against certain borrowings by banks and their affiliates are some
of the instruments of monetary policy available to the Federal
Reserve. These monetary policies are used in varying combinations to
influence overall growth and distributions of bank loans, investments and
deposits, and this use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve have had a
significant effect on the operating results of commercial banks and are expected
to do so in the future. The monetary policies of the Federal Reserve
are influenced by various factors, including inflation, unemployment, and
short-term and long-term changes in the international trade balance and in the
fiscal policies of the U.S. Government. Future monetary policies and
the effect of such policies on the future business and earnings of the Bank
cannot be predicted.
Income
Taxes
We are
subject to income taxes at the federal level and subject to state taxation based
on the laws of each state in which we operate. We file a consolidated
federal tax return with a fiscal year ending on December 31. We have
filed tax returns for each state jurisdiction affected in 2006 and will do the
same for 2007.
Website
Access to Company's Reports
Our
Internet website is www.ccbg.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, including any
amendments to those reports filed or furnished pursuant to section 13(a) or
15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the
Exchange Act are available free of charge through our website as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission. The information on our
website is not incorporated by reference into this report.
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Risk
Factors
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You
should consider carefully the following risk factors before deciding whether to
invest in our common stock. Our business, including our operating
results and financial condition, could be harmed by any of these
risks. Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially and adversely
affect our business. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment. In assessing these risks, you should also refer to the
other information contained in our filings with the SEC, including our financial
statements and related notes.
Risks
Related to Our Business
The
continuation of current market conditions could adversely impact our
business.
Over the
past 12 months, a combination of rising interest rates and softening real estate
prices throughout the United States, but particularly Florida, culminated in an
industry-wide increase in borrowers unable to make their mortgage payments and
increased foreclosure rates. Lenders in certain sections of the
housing and mortgage markets were forced to close or limit their
operations. In response, financial institutions have tightened their
underwriting standards, limiting the availability of sources of credit and
liquidity. These conditions have already impacted the demand for our
products by clients and by secondary market participants. If these
negative market conditions become more widespread or continue for a prolonged
period our earnings and capital could be negatively impacted.
An
inadequate allowance for loan losses would reduce our earnings.
We are
exposed to the risk that our clients will be unable to repay their loans
according to their terms and that any collateral securing the payment of their
loans will not be sufficient to assure full repayment. This will
result in credit losses that are inherent in the lending business. We
evaluate the collectability of our loan portfolio and provide an allowance for
loan losses that we believe is adequate based upon such factors as:
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the
risk characteristics of various classifications of
loans;
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previous
loan loss experience;
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specific
loans that have loss potential;
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delinquency
trends;
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estimated
fair market value of the
collateral;
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current
economic conditions; and
|
|
§
|
geographic
and industry loan concentrations.
|
If our
estimate of credit losses inherent in the loan portfolio is incorrect, our
earnings could be significantly and adversely affected because our allowance may
not be adequate. Additionally, we may experience losses in our loan
portfolios or encounter adverse trends that require us to significantly increase
our allowance for loan losses in the future, which could also have an adverse
affect on our earnings.
Our concentration in loans secured by
real estate may increase our credit losses, which would negatively affect our
financial results.
Due to
the lack of diversified industry within the markets served by the Bank and the
relatively close proximity of our geographic markets, we have both geographic
concentrations as well as concentrations in the types of loans
funded. Specifically, due to the nature of our markets, a significant
portion of the portfolio has historically been secured with real
estate. As of December 31, 2007, approximately 33.1% and 35.5% of our
$1.9 billion loan portfolio was secured by commercial real estate and
residential real estate, respectively. As of this same date,
approximately 7.4% was secured by property under construction.
A major
change in the real estate market, such as deterioration in the value of
collateral, or in the local or national economy, could adversely affect our
clients’ ability to repay their loans. In the event we are required
to foreclose on a property securing one of our mortgage loans or otherwise
pursue our remedies in order to protect our investment, we may be unable to
recover funds in an amount equal to our projected return on our investment or in
an amount sufficient to prevent a loss to us due to prevailing economic
conditions, real estate values and other factors associated with the ownership
of real property. As a result, the market value of the real estate or
other collateral underlying our loans may not, at any given time, be sufficient
to satisfy the outstanding principal amount of the loans, and consequently, we
would sustain loan losses.
Our loan portfolio includes loans
with a higher risk of loss.
We
originate commercial real estate loans, commercial loans, construction loans,
consumer loans, and residential mortgage loans primarily within our market
area. Commercial real estate, commercial, construction, and consumer
loans may expose a lender to greater credit risk than loans secured by
single-family residential real estate because the collateral securing these
loans may not be sold as easily as single-family residential real
estate. In addition, commercial real estate, commercial and
construction/development loans tend to involve larger loan balances to a single
borrower or groups of related borrowers and are more susceptible to a risk of
loss during a downturn in the business cycle. These loans also have
greater credit risk than residential real estate for the following
reasons:
|
§
|
Commercial Real Estate
Loans. Repayment is dependent on income being generated
in amounts sufficient to cover operating expenses and debt
service. These loans also involve greater risk because they are
generally not fully amortizing over a loan period, but rather have a
balloon payment due at maturity. A borrower’s ability to make a
balloon payment typically will depend on being able to either refinance
the loan or timely sell the underlying
property.
|
|
§
|
Commercial
Loans. Repayment is generally dependent upon the
successful operation of the borrower’s business. In addition,
the collateral securing the loans may depreciate over time, be difficult
to appraise, be illiquid, or fluctuate in value based on the success of
the business.
|
|
§
|
Construction
Loans. The risk of loss is largely dependent on our
initial estimate of whether the property’s value at completion equals or
exceeds the cost of property construction and the availability of take-out
financing. During the construction phase, a number of factors can result in delays
or cost overruns. If our estimate is inaccurate or if actual
construction costs exceed estimates, the value of the property securing
our loan may be insufficient to ensure full repayment when completed
through a permanent loan or by seizure of
collateral.
|
|
§
|
Consumer
Loans. Consumer loans
(such as personal lines of credit) are collateralized, if at all, with
assets that may not provide an adequate source of payment of the loan due
to depreciation, damage, or
loss.
|
If our nonperforming loans continue
to increase, our earnings will suffer.
At
December 31, 2007, our non-performing loans (which consist of non-accrual loans)
totaled $25.1 million, or 1.31% of the total loan portfolio, which is an
increase of $17.1 million, or 212% over non-performing loans at December 31,
2006. At December 31, 2007, our nonperforming assets (which include
foreclosed real estate) were $28.2 million, or 1.08% of total
assets. In addition, the Bank had approximately $28.2 million in
accruing loans that were 30-89 days delinquent as of December 31,
2007. Our non-performing assets adversely affect our net income in
various ways. We do not record interest income on non-accrual loans
or real estate owned. In addition, if our estimate for the recorded
allowance for loan losses proves to be incorrect and our allowance is
inadequate, we will have to increase the allowance accordingly. In
addition, the resolution of non-performing assets requires the active
involvement of management, which can distract them from more profitable
activity.
We
may incur losses if we are unable to successfully manage interest rate
risk.
Our
profitability depends largely on the Bank’s net interest income, which is the
difference between income on interest-earning assets such as loans and
investment securities, and expense on interest-bearing liabilities such as
deposits and our borrowings. We are unable to predict changes in
market interest rates, which are affected by many factors beyond our control
including inflation, recession, unemployment, money supply, domestic and
international events and changes in the United States and other financial
markets. Our net interest income may be reduced if: (i) more
interest-earning assets than interest-bearing liabilities reprice or mature
during a time when interest rates are declining or (ii) more
interest-bearing liabilities than interest-earning assets reprice or mature
during a time when interest rates are rising.
Changes
in the difference between short- and long-term interest rates may also harm our
business. For example, short-term deposits may be used to fund
longer-term loans. When differences between short-term and long-term
interest rates shrink or disappear, the spread between rates paid on deposits
and received on loans could narrow significantly, decreasing our net interest
income.
If market
interest rates rise rapidly, interest rate adjustment caps may limit increases
in the interest rates on adjustable rate loans, thus reducing our net interest
income because we may need to pay the higher rates on our deposits and
borrowings while being limited on the re-pricing of these loans due to the
interest rate caps.
An
economic downturn in Florida and Georgia could hinder our ability to operate
profitably and have an adverse impact on our operations.
Our
interest-earning assets are heavily concentrated in mortgage loans secured by
properties located in Florida and Georgia. As of December 31, 2007,
substantially all of our loans secured by real estate are secured by properties
located in Florida and Georgia. The concentration of our loans in
these areas subjects us to risk that a downturn in the economy or recession in
those areas could result in a decrease in loan originations and increases in
delinquencies and foreclosures, which would more greatly affect us than if our
lending were more geographically diversified. In addition, since a
large portion of our portfolio is secured by properties located in Florida, the
occurrence of a natural disaster, such as a hurricane, could result in a decline
in loan originations, a decline in the value or destruction of mortgaged
properties and an increase in the risk of delinquencies, foreclosures or loss on
loans originated by us in that state. We may suffer losses if there
is a decline in the value of the properties underlying our mortgage loans that
would have an adverse impact on our operations.
Since
we engage in lending secured by real estate and may be forced to foreclose on
the collateral property and own the underlying real estate, we may be subject to
the increased costs associated with the ownership of real property, which could
result in reduced net income.
Since we
originate loans secured by real estate, we may have to foreclose on the
collateral property to protect our investment and may thereafter own and operate
such property, in which case we are exposed to the risks inherent in the
ownership of real estate.
The
amount that we, as a mortgagee, may realize after a default is dependent upon
factors outside of our control, including, but not limited to:
|
§
|
general
or local economic conditions;
|
|
§
|
neighborhood
values;
|
|
§
|
interest
rates;
|
|
§
|
real
estate tax rates;
|
|
§
|
operating
expenses of the mortgaged
properties;
|
|
§
|
supply
of and demand for rental units or
properties;
|
|
§
|
ability
to obtain and maintain adequate occupancy of the
properties;
|
|
§
|
zoning
laws;
|
|
§
|
governmental
rules, regulations and fiscal policies;
and
|
|
§
|
acts
of God.
|
Certain
expenditures associated with the ownership of real estate, principally real
estate taxes and maintenance costs, may adversely affect the income from the
real estate. Therefore, the cost of operating real property may
exceed the rental income earned from such property, and we may have to advance
funds in order to protect our investment or we may be required to dispose of the
real property at a loss.
We
may not be able to successfully manage our growth or implement our growth
strategies, which may adversely affect our results of operations and financial
condition.
During
the last five years, we have experienced significant growth, and a key aspect of
our business strategy is our continued growth and expansion. Our
ability to manage our growth successfully will depend on whether we can maintain
capital levels adequate to support our growth, maintain cost controls and asset
quality and successfully integrate any businesses we acquire into our
organization.
Our
earnings growth relies, at least in part, on strategic
acquisitions. Our ability to grow through selective acquisitions of
financial institutions or branches will depend on successfully identifying,
acquiring and integrating those institutions or branches. We may be
unable to identify attractive acquisition candidates, make acquisitions on
favorable terms or successfully integrate any acquired institutions or
branches. In addition, we may fail to realize the growth
opportunities and cost savings we anticipate to be derived from our
acquisitions. Growth through acquisitions causes us to take on
additional risks such as the risks of unknown or contingent liabilities,
exposure to potential asset quality issues from acquired institutions, and the
diversion of our management’s time and attention from our existing business and
operations. Finally, it is possible that during the integration
process of our acquisitions, we could lose key associates or the ability to
maintain relationships with clients.
As we
continue to implement our growth strategy by opening new offices or through
strategic acquisitions, we expect to incur increased personnel, occupancy and
other operating expenses. In the case of new offices, we must absorb
those higher expenses while we begin to generate new deposits, and there is a
further time lag involved in redeploying new deposits into attractively priced
loans and other higher yielding earning assets.
We
may need additional capital resources in the future and these capital resources
may not be available when needed or at all.
We may
need to incur additional debt or equity financing in the future to make
strategic acquisitions or investments or for future growth. Such
financing may not be available to us on acceptable terms or at all.
Confidential client information
transmitted through our online banking service is vulnerable to security
breaches and computer viruses, which could expose us to litigation and adversely
affect our reputation and our ability to generate
deposits.
We
provide our clients the ability to bank online. The secure
transmission of confidential information over the Internet is a critical element
of banking online. Our network could be vulnerable to unauthorized
access, computer viruses, phishing schemes and other security
problems. We may be required to spend significant capital and other
resources to protect against the threat of security breaches and computer
viruses, or to alleviate problems caused by security breaches or
viruses. To the extent that our activities or the activities of our
clients involve the storage and transmission of confidential information,
security breaches and viruses could expose us to claims, litigation and other
possible liabilities. Any inability to prevent security breaches or
computer viruses could also cause existing clients to lose confidence in our
systems and could adversely affect our reputation and our ability to generate
deposits.
We
must comply with the Bank Secrecy Act and other anti-money laundering statutes
and regulations.
Since
September 11, 2001, banking regulators have intensified their focus on
anti-money laundering and Bank Secrecy Act compliance requirements, particularly
the anti-money laundering provisions of the USA PATRIOT Act. There is
also increased scrutiny of our compliance with the rules enforced by the Office
of Foreign Assets Control. In order to comply with regulations,
guidelines and examination procedures in this area, we have been required to
adopt new policies and procedures and to install new systems. We
cannot be certain that the policies, procedures and systems we have in place
will permit us to fully comply with these laws. Furthermore,
financial institutions that we have already acquired or may acquire in the
future may or may not have had adequate policies, procedures and systems to
fully comply with these laws. Whether our own policies, procedures
and systems are deficient or the policies, procedures and systems of the
financial institutions that we have already acquired or may acquire in the
future are deficient, we would be subject to liability, including fines and
regulatory actions such as restrictions on our ability to pay dividends and to
obtain regulatory approvals necessary to proceed with certain aspects of our
business plan, including our acquisition plans.
Our
controls and procedures may fail or be circumvented.
We
regularly review and update our internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or
circumvention of our controls and procedures or failure to comply with
regulations related to controls and procedures could have a material adverse
effect on our business, results of operations and financial
condition.
We
are exposed to operational risk because of providing certain services, which
could adversely affect our results of operations.
We are
exposed to operational risk because of providing various fee-based services
including electronic banking, item processing, data processing, correspondent
banking, merchant services, and asset management. Operational risk is
the risk of loss resulting from errors related to transaction processing,
breaches of the internal control system and compliance requirements, fraud by
employees or persons outside the company or business interruption due to system
failures or other events. We continually assess and monitor
operational risk in our business lines and provide for disaster and business
recovery planning including geographical diversification of our facilities;
however, the occurrence of various events including unforeseeable and
unpreventable events such as hurricanes or other natural disasters could still
damage our physical facilities or our computer systems or software, cause delay
or disruptions to operational functions, impair our clients, vendors and
counterparties and negatively impact our results of
operations. Operational risk also includes potential legal or
regulatory actions that could arise because of noncompliance with applicable
laws and regulatory requirements that could have an adverse affect on our
reputation.
Our
future success is dependent on our ability to compete effectively in the highly
competitive banking industry.
We face
vigorous competition from other banks and other financial institutions,
including savings and loan associations, savings banks, finance companies and
credit unions for deposits, loans and other financial services in our market
area. A number of these banks and other financial institutions are
significantly larger than we are and have substantially greater access to
capital and other resources, as well as larger lending limits and branch
systems, and offer a wider array of banking services. To a limited
extent, we also compete with other providers of financial services, such as
money market mutual funds, brokerage firms, consumer finance companies,
insurance companies and governmental organizations which may offer more
favorable financing than we can. Many of our non-bank competitors are
not subject to the same extensive regulations that govern us. As a
result, these non-bank competitors have advantages over us in providing certain
services. This competition may reduce or limit our margins and our
market share and may adversely affect our results of operations and financial
condition.
We
are subject to extensive regulation that could restrict our activities and
impose financial requirements or limitations on the conduct of our business and
limit our ability to receive dividends from the Bank.
The Bank
is subject to extensive regulation, supervision and examination by the Florida
Office of Financial Regulation, the Federal Reserve, and the FDIC. As
a member of the Federal Home Loan Bank, the Bank must also comply with
applicable regulations of the Federal Housing Finance Board and the Federal Home
Loan Bank. Regulation by these agencies is intended primarily for the
protection of our depositors and the deposit insurance fund and not for the
benefit of our shareowners. The Bank’s activities are also regulated
under consumer protection laws applicable to our lending, deposit and other
activities. A sufficient claim against us under these laws could have
a material adverse effect on our results. Please refer to the Section
entitled “Business – Regulatory Considerations” of this Report.
Risks
Related to an Investment in Our Common Stock
Limited
trading activity for shares of our common stock may contribute to price
volatility.
While our
common stock is listed and traded on The NASDAQ Global Select Market, there has
been limited trading activity in our common stock. The average daily
trading volume of our common stock over the twelve-month period ending December
31, 2007 was approximately 39,385 shares. Due to the limited trading
activity of our common stock, relativity small trades may have a significant
impact on the price of our common stock.
Our
insiders have substantial control over matters requiring shareowner approval,
including changes of control.
Our
insiders who own more than 5% of our common stock, directors, and executive
officers, beneficially owned approximately 42.97% of the outstanding shares of
our stock as of February 29, 2008. Accordingly, these principal
shareowners, directors, and executive officers, if acting together, may be able
to influence or control matters requiring approval by our shareowners, including
the election of directors and the approval of mergers, acquisitions or other
extraordinary transactions.
They may
also have interests that differ from yours and may vote in a way with which you
disagree and which may be adverse to your interests. The
concentration of ownership may have the effect of delaying, preventing or
deterring a change of control of our company, could deprive our shareowners of
an opportunity to receive a premium for their common stock as part of a sale of
our company and might ultimately affect the market price of our common
stock.
Our
Articles of Incorporation, Bylaws, and certain laws and regulations may prevent
or delay transactions you might favor, including a sale or merger of
CCBG.
CCBG is
registered with the Federal Reserve as a financial holding company under the
Gramm-Leach-Bliley Act and is a bank holding company under the Bank Holding
Company Act. As a result, we are subject to supervisory regulation
and examination by the Federal Reserve. The Gramm-Leach-Bliley Act,
the Bank Holding Company Act, and other federal laws subject financial holding
companies to particular restrictions on the types of activities in which they
may engage, and to a range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and
regulations.
Provisions
of our Articles of Incorporation, Bylaws, certain laws and regulations and
various other factors may make it more difficult and expensive for companies or
persons to acquire control of us without the consent of our Board of
Directors. It is possible, however, that you would want a takeover
attempt to succeed because, for example, a potential buyer could offer a premium
over the then prevailing price of our common stock.
For
example, our Articles of Incorporation permit our Board of Directors to issue
preferred stock without shareowner action. The ability to issue
preferred stock could discourage a company from attempting to obtain control of
us by means of a tender offer, merger, proxy contest or
otherwise. Additionally, our Articles of Incorporation and Bylaws
divide our Board of Directors into three classes, as nearly equal in size as
possible, with staggered three-year terms. One class is elected each
year. The classification of our Board of Directors could make it more
difficult for a company to acquire control of us. We are also subject
to certain provisions of the Florida Business Corporation Act and our Articles
of Incorporation that relate to business combinations with interested
shareowners. Other provisions in our Articles of Incorporation or
Bylaws that may discourage takeover attempts or make them more difficult
include:
|
§
|
Supermajority
voting requirements to remove a director from
office;
|
|
§
|
Provisions
regarding the timing and content of shareowner proposals and
nominations;
|
|
§
|
Supermajority
voting requirements to amend Articles of Incorporation unless approval is
received by a majority of “disinterested
directors”
|
|
§
|
Absence
of cumulative voting; and
|
|
§
|
Inability
for shareowners to take action by written
consent.
|
|
Unresolved
Staff Comments
|
None.
Item
2. Properties
We are
headquartered in Tallahassee, Florida. Our executive office is in the Capital
City Bank building located on the corner of Tennessee and Monroe Streets in
downtown Tallahassee. The building is owned by the Bank, but is
located on land leased under a long-term agreement.
The
Bank's Parkway Office is located on land leased from the Smith Interests General
Partnership L.L.P. in which several directors and officers have an
interest. The annual lease provides for payments of approximately
$118,000, to be adjusted for inflation in future years.
As of
February 29, 2008, the Bank had 70 banking locations. Of the 70
locations, the Bank leases the land, buildings, or both at 14 locations and owns
the land and buildings at the remaining 56.
|
Legal
Proceedings
|
We are
party to lawsuits and claims arising out of the normal course of business. In
management's opinion, there are no known pending claims or litigation, the
outcome of which would, individually or in the aggregate, have a material effect
on our consolidated results of operations, financial position, or cash
flows.
|
Submission of Matters to a Vote
of Security Holders
|
None.
PART
II
|
Market for the Registrant's
Common Equity, Related Shareowner Matters, and Issuer Purchases of Equity
Securities
|
Common
Stock Market Prices and Dividends
Our
common stock trades on the NASDAQ Global Select Market under the symbol
"CCBG."
The
following table presents the range of high and low closing sales prices reported
on the NASDAQ Global Select Market and cash dividends declared for each quarter
during the past two years. We had a total of 1,750 shareowners of
record as of February 29, 2008.
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
Fourth
Qtr.
|
Third
Qtr.
|
Second
Qtr.
|
First
Qtr.
|
Fourth
Qtr.
|
Third
Qtr.
|
Second
Qtr.
|
First
Qtr.
|
|||||||||||||||||||||||||
|
Common
stock price:
|
||||||||||||||||||||||||||||||||
|
High
|
$ | 34.00 | $ | 36.40 | $ | 33.69 | $ | 35.91 | $ | 35.98 | $ | 33.25 | $ | 35.39 | $ | 37.97 | ||||||||||||||||
|
Low
|
24.60 | 27.69 | 29.12 | 29.79 | 30.14 | 29.87 | 29.51 | 33.79 | ||||||||||||||||||||||||
|
Close
|
28.22 | 31.20 | 31.34 | 33.30 | 35.30 | 31.10 | 30.20 | 35.55 | ||||||||||||||||||||||||
|
Cash
dividends declared per share
|
.1850 | .1750 | .1750 | .1750 | .1750 | .1625 | .1625 | .1625 | ||||||||||||||||||||||||
Future
payment of dividends will be subject to determination and declaration by our
Board of Directors. Florida law limits our payment of
dividends. There are also legal limits on the frequency and amount of
dividends that CCB can pay us. See subsection entitled "Capital; Dividends;
Sources of Strength" in the Business section on page 9, in the Management's
Discussion and Analysis of Financial Condition and Operating Results on page 44
and Note 15 in the Notes to Consolidated Financial Statements. These
restrictions may limit our ability to pay dividends to our
shareowners. As of February 29, 2008, we do not believe these
restrictions will impair our ability to declare and pay our routine and
customary dividends.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
The
following table contains information about all purchases made by or on behalf of
us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the
Exchange Act) of shares or other units of any class of our equity securities
that is registered pursuant to Section 12 of the Exchange Act.
|
Period
|
Total
number
of
shares
purchased
|
Average
price
paid
per
share
|
Total
number of
shares
purchased as
part
of our share
repurchase program(1)
|
Maximum
Number
of
shares that
may
yet be purchased
under
our share
repurchase
program
|
|||||
|
October
1, 2007 to
October
31, 2007
|
69,338
|
$29.44
|
1,905,716
|
766,159
|
|||||
|
November
1, 2007 to
November
30, 2007
|
222,004
|
26.86
|
2,119,720
|
552,155
|
|||||
|
December
1, 2007 to
December
31, 2007
|
164,481
|
29.72
|
2,284,201
|
387,674
|
|||||
|
Total
|
455,823
|
$28.28
|
2,284,201
|
387,674
|
|||||
|
(1)
|
This
balance represents the number of shares that were repurchased through the
Capital City Bank Group, Inc. Share Repurchase Program (the “Program”),
which was approved on March 30, 2000, and modified by our Board on January
24, 2002, March 22, 2007, and November 11, 2007 under which we were
authorized to repurchase up to 2,671,875 shares of our common
stock. The Program is flexible and shares are acquired from the
public markets and other sources using free cash flow. There is
no predetermined expiration date for the Program. No shares are
repurchased outside of the Program. In November 2007, 8,000
shares were purchased by an affiliated purchaser that was outside of the
Program.
|
Performance
Graph
This
performance graph compares the cumulative total shareholder return on our common
stock with the cumulative total shareholder return of the NASDAQ Composite Index
and the SNL Financial LC $1B-$5B Bank Index for the past five
years. The graph assumes that $100 was invested on December 31,
2002 in our common stock and each of the above indices, and that all dividends
were reinvested. The shareholder return shown below represents past
performance and should not be considered indicative of future
performance.
|
Period
Ending
|
||||||||||||||||||
|
Index
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
||||||||||||
|
Capital
City Bank Group, Inc.
|
$ | 100.00 | $ | 149.36 | $ | 138.15 | $ | 144.18 | $ | 151.39 | $ | 123.89 | ||||||
|
NASDAQ
Composite
|
100.00 | 150.01 | 162.89 | 165.13 | 180.85 | 198.60 | ||||||||||||
|
SNL
$1B-$5B Bank Index
|
100.00 | 135.99 | 167.83 | 164.97 | 190.90 | 139.06 | ||||||||||||
|
Item 6. Selected
Financial Data
|
|
|
For
the Years Ended December 31,
|
||||||||||||||||||||
|
(Dollars in Thousands, Except
Per Share Data)(1)
(3)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Interest
Income
|
$ | 165,323 | $ | 165,893 | $ | 140,053 | $ | 101,525 | $ | 94,830 | ||||||||||
|
Net
Interest Income
|
112,241 | 119,136 | 109,990 | 86,084 | 79,991 | |||||||||||||||
|
Provision
for Loan Losses
|
6,163 | 1,959 | 2,507 | 2,141 | 3,436 | |||||||||||||||
|
Net
Income
|
29,683 | 33,265 | 30,281 | 29,371 | 25,193 | |||||||||||||||
|
Per
Common Share:
|
||||||||||||||||||||
|
Basic
Net Income
|
$ | 1.66 | $ | 1.79 | $ | 1.66 | $ | 1.74 | $ | 1.53 | ||||||||||
|
Diluted
Net Income
|
1.66 | 1.79 | 1.66 | 1.74 | 1.52 | |||||||||||||||
|
Cash
Dividends Declared
|
.710 | .663 | .619 | .584 | .525 | |||||||||||||||
|
Book
Value
|
17.03 | 17.01 | 16.39 | 14.51 | 15.27 | |||||||||||||||
|
Key
Performance Ratios:
|
||||||||||||||||||||
|
Return
on Average Assets
|
1.18 | % | 1.29 | % | 1.22 | % | 1.46 | % | 1.40 | % | ||||||||||
|
Return
on Average Equity
|
9.68 | 10.48 | 10.56 | 13.31 | 12.82 | |||||||||||||||
|
Net
Interest Margin (FTE)
|
5.25 | 5.35 | 5.09 | 4.88 | 5.01 | |||||||||||||||
|
Dividend
Pay-Out Ratio
|
42.77 | 37.01 | 37.35 | 33.62 | 34.51 | |||||||||||||||
|
Equity
to Assets Ratio
|
11.19 | 12.15 | 11.65 | 10.86 | 10.98 | |||||||||||||||
|
Asset
Quality:
|
||||||||||||||||||||
|
Allowance
for Loan Losses
|
$ | 18,066 | $ | 17,217 | $ | 17,410 | $ | 16,037 | $ | 12,429 | ||||||||||
|
Allowance
for Loan Losses to Loans
|
0.95 | % | 0.86 | % | 0.84 | % | 0.88 | % | 0.93 | % | ||||||||||
|
Nonperforming
Assets
|
28,163 | 8,731 | 5,550 | 5,271 | 7,301 | |||||||||||||||
|
Nonperforming
Assets to Loans + ORE
|
1.47 | 0.44 | 0.27 | 0.29 | 0.54 | |||||||||||||||
|
Allowance
to Nonperforming Loans
|
71.92 | 214.09 | 331.11 | 345.18 | 529.80 | |||||||||||||||
|
Net
Charge-Offs to Average Loans
|
0.27 | 0.11 | 0.13 | 0.22 | 0.27 | |||||||||||||||
|
Averages
for the Year:
|
||||||||||||||||||||
|
Loans,
Net
|
$ | 1,934,850 | $ | 2,029,397 | $ | 1,968,289 | $ | 1,538,744 | $ | 1,318,080 | ||||||||||
|
Earning
Assets
|
2,183,528 | 2,258,277 | 2,187,672 | 1,789,843 | 1,624,680 | |||||||||||||||
|
Total
Assets
|
2,507,217 | 2,581,078 | 2,486,733 | 2,006,745 | 1,804,895 | |||||||||||||||
|
Deposits
|
1,990,446 | 2,034,931 | 1,954,888 | 1,599,201 | 1,431,808 | |||||||||||||||
|
Subordinated
Notes
|
62,887 | 62,887 | 50,717 | 5,155 | - | |||||||||||||||
|
Long-Term
Borrowings
|
37,936 | 57,260 | 70,216 | 59,462 | 55,594 | |||||||||||||||
|
Shareowners'
Equity
|
306,617 | 317,336 | 286,712 | 220,731 | 196,588 | |||||||||||||||
|
Year-End
Balances:
|
||||||||||||||||||||
|
Loans,
Net
|
$ | 1,915,850 | $ | 1,999,721 | $ | 2,067,494 | $ | 1,828,825 | $ | 1,341,632 | ||||||||||
|
Earning
Assets
|
2,272,829 | 2,270,410 | 2,299,677 | 2,113,571 | 1,648,818 | |||||||||||||||
|
Total
Assets
|
2,616,327 | 2,597,910 | 2,625,462 | 2,364,013 | 1,846,502 | |||||||||||||||
|
Deposits
|
2,142,344 | 2,081,654 | 2,079,346 | 1,894,886 | 1,474,205 | |||||||||||||||
|
Subordinated
Notes
|
62,887 | 62,887 | 62,887 | 30,928 | - | |||||||||||||||
|
Long-Term
Borrowings
|
26,731 | 43,083 | 69,630 | 68,453 | 46,475 | |||||||||||||||
|
Shareowners'
Equity
|
292,675 | 315,770 | 305,776 | 256,800 | 202,809 | |||||||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Basic
Average Shares Outstanding
|
17,909,396 | 18,584,519 | 18,263,855 | 16,805,696 | 16,528,109 | |||||||||||||||
|
Diluted
Average Shares Outstanding
|
17,911,587 | 18,609,839 | 18,281,243 | 16,810,926 | 16,563,986 | |||||||||||||||
|
Shareowners
of Record(2)
|
1,750 | 1,805 | 1,716 | 1,598 | 1,512 | |||||||||||||||
|
Banking
Locations(2)
|
70 | 69 | 69 | 60 | 57 | |||||||||||||||
|
Full-Time
Equivalent Associates(2)
|
1,097 | 1,056 | 1,013 | 926 | 795 | |||||||||||||||
|
(1)
|
All
share and per share data have been adjusted to reflect the 5-for-4 stock
split effective July 1, 2005, and the 5-for-4 stock split effective June
13, 2003.
|
|
(2)
|
As
of the record date. The record date is on or about March 1st of the
following year.
|
|
(3)
|
The consolidated financial
statements reflect the acquisitions of Quincy State Bank on March 19,
2004, Farmers and Merchants Bank of Dublin on October 15, 2004, and First
Alachua Banking Corporation on May 20,
2005.
|
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations
|
Management’s
discussion and analysis ("MD&A") provides supplemental information, which
sets forth the major factors that have affected our financial condition and
results of operations and should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Annual Report on Form
10-K. The MD&A is divided into subsections entitled "Business
Overview," "Financial Overview," "Results of Operations," "Financial Condition,"
"Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and
"Accounting Policies." The following information should provide a
better understanding of the major factors and trends that affect our earnings
performance and financial condition, and how our performance during 2007
compares with prior years. Throughout this section, Capital City Bank
Group, Inc., and its subsidiary, collectively, are referred to as "CCBG,"
"Company," "we," "us," or "our."
In this
MD&A, we present an operating efficiency ratio and an operating net
noninterest expense as a percent of average assets ratio, both of which are not
calculated based on accounting principles generally accepted in the United
States ("GAAP"), but that we believe provide important information regarding our
results of operations. Our calculation of the operating efficiency
ratio is computed by dividing noninterest expense less intangible amortization
and merger expenses, by the sum of tax equivalent net interest income and
noninterest income. We calculate our operating net noninterest
expense as a percent of average assets by subtracting noninterest expense
excluding intangible amortization and merger expenses from noninterest
income. Management uses these non-GAAP measures as part of its
assessment of its performance in managing noninterest expenses. We
believe that excluding intangible amortization and merger expenses in our
calculations better reflect our periodic expenses and is more reflective of
normalized operations.
Although
we believe the above-mentioned non-GAAP financial measures enhance investors’
understanding of our business and performance these non-GAAP financial measures
should not be considered an alternative to GAAP. In addition, there
are material limitations associated with the use of these non-GAAP financial
measures such as the risks that readers of our financial statements may disagree
as to the appropriateness of items included or excluded in these measures and
that our measures may not be directly comparable to other companies that
calculate these measures differently. Our management compensates for
these limitations by providing detailed reconciliations between GAAP information
and the non-GAAP financial measure as detailed below.
Reconciliation
of operating efficiency ratio to efficiency ratio:
|
For
the Years Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Efficiency
ratio
|
70.13 | % | 68.87 | % | 68.46 | % | ||||||
|
Effect
of intangible amortization and merger expenses
|
(3.36 | )% | (3.45 | )% | (3.67 | )% | ||||||
|
Operating
efficiency ratio
|
66.77 | % | 65.42 | % | 64.79 | % | ||||||
Reconciliation
of operating net noninterest expense ratio:
|
For
the Years Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
noninterest expense as a percent of average assets
|
2.50 | % | 2.56 | % | 2.44 | % | ||||||
|
Effect
of intangible amortization and merger expenses
|
(0.13 | )% | (0.24 | )% | (0.24 | )% | ||||||
|
Operating
net noninterest expense as a percent of average assets
|
2.37 | % | 2.32 | % | 2.20 | % | ||||||
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K, including this MD&A section, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
include, among others, statements about our beliefs, plans, objectives, goals,
expectations, estimates and intentions that are subject to significant risks and
uncertainties and are subject to change based on various factors, many of which
are beyond our control. The words "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and
similar expressions are intended to identify forward-looking
statements.
All
forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from
those set forth in our forward-looking statements. Please see the
Introductory Note and Item 1A
Risk Factors of this Annual Report for a discussion of factors that
could cause our actual results to differ materially from those in the
forward-looking statements.
However,
other factors besides those listed in Item 1A Risk Factors or
discussed in this Annual Report also could adversely affect our results, and you
should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. Any forward-looking statements made
by us or on our behalf speak only as of the date they are made. We do
not undertake to update any forward-looking statement, except as required by
applicable law.
BUSINESS
OVERVIEW
We are a
financial holding company headquartered in Tallahassee, Florida and we are the
parent of our wholly-owned subsidiary, Capital City Bank (the "Bank" or
"CCB"). The Bank offers a broad array of products and services
through a total of 70 full-service offices located in Florida, Georgia, and
Alabama. The Bank also has a two mortgage lending offices located in
Florida and one additional Georgia community. The Bank offers
commercial and retail banking services, as well as trust and asset management,
merchant services, retail securities brokerage and data processing
services.
Our
profitability, like most financial institutions, is dependent to a large extent
upon net interest income, which is the difference between the interest received
on earning assets, such as loans and securities, and the interest paid on
interest-bearing liabilities, principally deposits and
borrowings. Results of operations are also affected by the provision
for loan losses, operating expenses such as salaries and employee benefits,
occupancy and other operating expenses including income taxes, and noninterest
income such as service charges on deposit accounts, asset management and trust
fees, retail securities brokerage fees, mortgage banking revenues, merchant
service fees, and data processing revenues.
Our
philosophy is to grow and prosper, building long-term relationships based on
quality service, high ethical standards, and safe and sound banking
practices. We maintain a locally oriented, community-based focus,
which is augmented by experienced, centralized support in select specialized
areas. Our local market orientation is reflected in our network of
banking office locations, experienced community executives with a dedicated
President for each market, and community boards which support our focus on
responding to local banking needs. We strive to offer a broad array
of sophisticated products and to provide quality service by empowering
associates to make decisions in their local markets.
Our
long-term vision is to continue our expansion, emphasizing a combination of
growth in existing markets and acquisitions. Acquisitions will
continue to be focused on a three state area including Florida, Georgia, and
Alabama with a particular focus on financial institutions, which are $100
million to $400 million in asset size and generally located on the outskirts of
major metropolitan areas. Five markets have been identified, four in
Florida and one in Georgia, in which management will proactively pursue
expansion opportunities. These markets include Alachua, Marion,
Hernando, and Pasco counties in Florida and the western panhandle in Florida and
Bibb and surrounding counties in central Georgia. We continue to
evaluate de novo expansion opportunities in attractive new markets in the event
that acquisition opportunities are not feasible. Expansion
opportunities that will be evaluated include asset management and mortgage
banking.
Recent
Acquisition. On May 20, 2005, we completed our merger with
First Alachua Banking Corporation ("FABC"), headquartered in Alachua,
Florida. We issued approximately 906,000 shares of common stock and
paid approximately $29.0 million in cash for a total purchase price of $58.0
million. FABC's wholly-owned subsidiary, First National Bank of
Alachua, had $228.3 million in assets at closing with seven offices in Alachua
County and an eighth office in Hastings, Florida, which is in St. Johns
County.
FINANCIAL
OVERVIEW
A summary
overview of our financial performance for 2007 versus 2006 is provided
below.
2007
Financial Performance Highlights –
|
§
|
2007
earnings of $29.7 million, or $1.66 per diluted share, decreases of 10.8%
and 7.3%, respectively, over
2006.
|
|
§
|
Decline
in earnings was attributable to lower net interest income and a higher
loan loss provision, partially offset by an increase in noninterest
income.
|
|
§
|
Tax
equivalent net interest income fell 5.2% over 2006 due to higher interest
expense driven by higher average rates and an unfavorable shift in deposit
mix as clients sought higher yielding deposit products, and a $75.0
million reduction in the level of average earning
assets.
|
|
§
|
Net
interest margin percentage declined 10 basis points from 2006 driven by
both a higher cost of funds and an increase in foregone interest income
associated with a higher level of nonperforming
assets.
|
|
§
|
Noninterest
income grew 6.7% over 2006 due primarily to higher deposit fees, data
processing fees, and card fees.
|
|
§
|
Noninterest
expense was very well controlled during the year and increased only .35%
from 2006, including a litigation reserve accrual of $1.9
million related to lawsuits filed against Visa
U.S.A.
|
|
§
|
Loan
loss provision increased $4.2 million from 2006 due to a higher level of
net charge-offs ($5.3 million, or .27% of average loans in 2007) and a
higher level of required reserves reflective of the current credit
environment that has been impacted by a slowdown in housing and real
estate markets. At year-end 2007, the allowance for loan losses
was .95% of outstanding loans and provided coverage of 72% of
nonperforming loans.
|
|
§
|
Share
repurchase activity continued in 2007 with 1,404,364 shares being
repurchased during the year. We remain well-capitalized with a
risk based capital ratio of 14.05%.
|
RESULTS
OF OPERATIONS
Net
income for 2007 totaled $29.7 million ($1.66 per diluted share) compared to
$33.3 million ($1.79 per diluted share) in 2006 and $30.3 million ($1.66 per
diluted share) in 2005. Earnings per share reflect the repurchase of
1,404,364 common shares during 2007 and 164,596 common shares during
2006.
The
earnings decline in 2007 of $3.6 million, or $0.13 per diluted share, reflects
lower operating revenues (defined as the total of net interest income and
noninterest income) of $3.2 million, an increase in the loan loss provision of
$4.2 million, and slightly higher noninterest expense of $0.4 million, partially
offset by lower income taxes of $4.2 million.
The
growth in earnings for 2006 of $3.0 million, or $0.13 per diluted share, was
primarily attributable to growth in operating revenue of $15.5 million and a
reduction in the loan loss provision of $0.5 million, partially offset by an
increase in noninterest expense of $11.8 million and income taxes of $1.3
million. The increase in operating revenue was driven by an 8.3%
increase in net interest income and a 13.0% increase in noninterest
income. The increase in revenues and expenses is partially
attributable to our acquisition of the First National Bank of Alachua in May
2005.
A
condensed earnings summary for the last three years is presented in Table 1
below:
Table
1
CONDENSED
SUMMARY OF EARNINGS
|
For
the Years Ended December 31,
|
||||||||||
|
(Dollars in Thousands, Except
Per Share Data)(1)
|
2007
|
2006
|
2005
|
|||||||
|
Interest
Income
|
$
|
165,323
|
$
|
165,893
|
$
|
140,053
|
||||
|
Taxable
Equivalent Adjustments
|
2,420
|
1,812
|
1,222
|
|||||||
|
Total
Interest Income (FTE)
|
167,743
|
167,705
|
141,275
|
|||||||
|
Interest
Expense
|
53,082
|
46,757
|
30,063
|
|||||||
|
Net
Interest Income (FTE)
|
114,661
|
120,948
|
111,212
|
|||||||
|
Provision
for Loan Losses
|
6,163
|
1,959
|
2,507
|
|||||||
|
Taxable
Equivalent Adjustments
|
2,420
|
1,812
|
1,222
|
|||||||
|
Net
Interest Income After Provision for Loan Losses
|
106,078
|
117,177
|
107,483
|
|||||||
|
Noninterest
Income
|
59,300
|
55,577
|
49,198
|
|||||||
|
Noninterest
Expense
|
121,992
|
121,568
|
109,814
|
|||||||
|
Income
Before Income Taxes
|
43,386
|
51,186
|
46,867
|
|||||||
|
Income
Taxes
|
13,703
|
17,921
|
16,586
|
|||||||
|
Net
Income
|
$
|
29,683
|
$
|
33,265
|
$
|
30,281
|
||||
|
Basic
Net Income Per Share
|
$
|
1.66
|
$
|
1.79
|
$
|
1.66
|
||||
|
Diluted
Net Income Per Share
|
$
|
1.66
|
$
|
1.79
|
$
|
1.66
|
||||
|
(1)
|
All share and per share data have
been adjusted to reflect the 5-for-4 stock split effective July 1,
2005.
|
Net
Interest Income
Net
interest income represents our 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. We provide an analysis of our net
interest income, including average yields and rates in Tables 2 and
3. We provide this information 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 2007,
our taxable equivalent net interest income decreased $6.3 million, or
5.2%. This follows an increase of $9.7 million, or 8.8%, in 2006, and
an increase of $23.9 million, or 27.4%, in 2005. The decrease in our
taxable equivalent net interest income in 2007 resulted from an increase in
interest expense driven by higher average rates, an unfavorable shift in our
deposit mix as clients sought higher yielding deposit products, and a $75
million reduction in the level of average earning assets.
For the
year 2007, taxable equivalent interest income was constant compared to 2006 at
$167.7 million, and increased $26.4 million, or 18.7%, in 2006 over
2005. Taxable equivalent interest income was favorably impacted by
the higher rate environment in 2007 as compared to 2006, resulting in higher
yields on our earning assets during 2007, but the higher yields were offset by a
net decrease in average earning assets of $74.7 million and an increase in
foregone interest income attributable to the rising level of nonperforming
assets, which increased from $8.7 million at year-end 2006 to $28.2 million at
year-end 2007. The higher rate environment during 2007 produced a 26
basis point improvement in the yield on earning assets, which increased from
7.42% in 2006 to 7.68% for 2007. This compares to a 96 basis point
improvement in 2006 over 2005. As shown in Table 3, increases to
interest income in the investment securities portfolio and funds sold where
offset by a decline in the loan portfolio attributable to a $94.5 million
decline in average loans during 2007. Interest income is expected to
decline during 2008, reflecting the lower interest rate environment stemming
from reductions in the Federal Reserve’s target rate during the fourth quarter
and the impact of foregone interest income associated with the current level of
nonperforming assets.
Interest
expense increased $6.3 million, or 13.5%, over 2006, and $16.7 million, or
55.5%, in 2006 over 2005. The increase was a result of higher average
interest rates in 2007 and an unfavorable shift in the deposit mix as clients
sought higher yielding deposit products. Interest expense on other
long–term borrowings declined from the prior year attributable to maturing FHLB
advances which were not renewed or replaced during the year. The
average rate paid on interest bearing liabilities in 2007 increased 39 basis
points compared to 2006, reflecting the factors mentioned
above. Interest expense is expected to trend downward in 2008 driven
by the lower rate environment, offset partially by a continued shift to higher
yielding deposits.
Our
interest rate spread (defined as the taxable equivalent yield on average earning
assets less the average rate paid on interest bearing liabilities) decreased 13
basis points in 2007 compared to 2006 and increased 11 basis points in 2006
compared to 2005. The decrease in 2007 was primarily attributable to
the higher rates paid on deposits.
Our net
interest margin (defined as taxable equivalent interest income less interest
expense divided by average earning assets) was 5.25% in 2007, compared to 5.35%
in 2006 and 5.09% in 2005. In 2007, the decline was a result of a 36
basis point increase in our cost of funds, partially offset by a 26 basis point
increase in the earning asset yield.
During
the last four months of 2007, the Federal Reserve reduced the federal funds rate
by 100 basis points. Additionally, Capital City Bank was the
beneficiary of some large balance deposit transfers from the Florida State Board
of Administration’s Local Government Investment Pool. These new
deposits took the form of negotiated public deposits and resulted in a
significant increase (in excess of $200 million) in the bank’s NOW accounts late
in the fourth quarter. Both of these events impacted net interest
income and the net interest margin percentage during the fourth
quarter. Overall, by aggressively lowering deposit interest rates,
management believes we have been fairly successful in neutralizing the impact of
the Federal Reserve’s interest rate reductions. While the higher cost
public funds have been priced to produce a positive interest rate spread and
will add to net interest income, the margin is thin, and therefore, due to the
volume of these new deposits, there will be an adverse impact on our net
interest margin percentage going forward. A further discussion of
both of these events can be found in the sections entitled "Financial Condition"
and “Results of Operations – Fourth Quarter 2007.”
Table
2
AVERAGE
BALANCES AND INTEREST RATES
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||
|
(Taxable
Equivalent Basis - Dollars in Thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||
|
Loans,
Net of Unearned Interest(1)(2)
|
$
|
1,934,850
|
$
|
155,434
|
8.03
|
%
|
$
|
2,029,397
|
$
|
157,227
|
7.75
|
%
|
$
|
1,968,289
|
$
|
133,665
|
6.79
|
%
|
||||||||||
|
Taxable
Investment Securities
|
103,840
|
4,949
|
4.76
|
112,392
|
4,851
|
4.31
|
142,406
|
4,250
|
2.98
|
|||||||||||||||||||
|
Tax-Exempt
Investment Securities(2)
|
84,849
|
4,447
|
5.24
|
74,634
|
3,588
|
4.81
|
49,252
|
2,369
|
4.81
|
|||||||||||||||||||
|
Funds
Sold
|
59,989
|
2,913
|
4.79
|
41,854
|
2,039
|
4.81
|
27,725
|
991
|
3.53
|
|||||||||||||||||||
|
Total
Earning Assets
|
2,183,528
|
167,743
|
7.68
|
%
|
2,258,277
|
167,705
|
7.42
|
%
|
2,187,672
|
141,275
|
6.46
|
%
|
||||||||||||||||
|
Cash
& Due From Banks
|
86,692
|
100,237
|
105,787
|
|||||||||||||||||||||||||
|
Allowance
for Loan Losses
|
(17,535
|
)
|
(17,486
|
)
|
(17,081
|
)
|
||||||||||||||||||||||
|
Other
Assets
|
254,532
|
240,050
|
210,355
|
|||||||||||||||||||||||||
|
TOTAL
ASSETS
|
$
|
2,507,217
|
$
|
2,581,078
|
$
|
2,486,733
|
||||||||||||||||||||||
|
LIABILITIES
|
||||||||||||||||||||||||||||
|
NOW
Accounts
|
$
|
$557,060
|
$
|
10,748
|
1.93
|
%
|
$
|
518,671
|
$
|
7,658
|
1.48
|
%
|
$
|
430,601
|
$
|
2,868
|
.67
|
%
|
||||||||||
|
Money
Market Accounts
|
397,193
|
13,667
|
3.44
|
370,257
|
11,687
|
3.16
|
275,830
|
4,337
|
1.57
|
|||||||||||||||||||
|
Savings
Accounts
|
119,700
|
279
|
0.23
|
134,033
|
278
|
0.21
|
152,890
|
292
|
0.19
|
|||||||||||||||||||
|
Other
Time Deposits
|
474,728
|
19,993
|
4.21
|
507,283
|
17,630
|
3.48
|
550,821
|
13,637
|
2.48
|
|||||||||||||||||||
|
Total
Interest Bearing Deposits
|
1,548,681
|
44,687
|
2.89
|
%
|
1,530,244
|
37,253
|
2.43
|
%
|
1,410,142
|
21,134
|
1.50
|
%
|
||||||||||||||||
|
Short-Term
Borrowings
|
66,397
|
2,871
|
4.31
|
78,700
|
3,074
|
3.89
|
97,863
|
2,854
|
2.92
|
|||||||||||||||||||
|
Subordinated
Notes Payable
|
62,887
|
3,730
|
5.93
|
62,887
|
3,725
|
5.92
|
50,717
|
2,981
|
5.88
|
|||||||||||||||||||
|
Other
Long-Term Borrowings
|
37,936
|
1,794
|
4.73
|
57,260
|
2,705
|
4.72
|
70,216
|
3,094
|
4.41
|
|||||||||||||||||||
|
Total
Interest Bearing Liabilities
|
1,715,901
|
53,082
|
3.09
|
%
|
1,729,091
|
46,757
|
2.70
|
%
|
1,628,938
|
30,063
|
1.85
|
%
|
||||||||||||||||
|
Noninterest
Bearing Deposits
|
441,765
|
504,687
|
544,746
|
|||||||||||||||||||||||||
|
Other
Liabilities
|
42,934
|
29,964
|
26,337
|
|||||||||||||||||||||||||
|
TOTAL
LIABILITIES
|
2,200,600
|
2,263,742
|
2,200,021
|
|||||||||||||||||||||||||
|
SHAREOWNERS'
EQUITY
|
||||||||||||||||||||||||||||
|
TOTAL
SHAREOWNERS' EQUITY
|
306,617
|
317,336
|
286,712
|
|||||||||||||||||||||||||
|
TOTAL
LIABILITIES & EQUITY
|
$
|
2,507,217
|
$
|
2,581,078
|
$
|
2,486,733
|
||||||||||||||||||||||
|
Interest
Rate Spread
|
4.59
|
%
|
4.72
|
%
|
4.61
|
%
|
||||||||||||||||||||||
|
Net
Interest Income
|
$
|
114,661
|
$
|
120,948
|
$
|
111,212
|
||||||||||||||||||||||
|
Net
Interest Margin(3)
|
5.25
|
%
|
5.35
|
%
|
5.09
|
%
|
||||||||||||||||||||||
|
(1)
|
Average
balances include nonaccrual loans. Interest income includes
loan fees of $3.0 million, $3.8 million, and $3.1 million in 2007, 2006,
and 2005, respectively.
|
|
(2)
|
Interest
income includes the effects of taxable equivalent adjustments using a 35%
tax rate.
|
|
(3)
|
Taxable
equivalent net interest income divided by average earning
assets.
|
Table
3
RATE/VOLUME ANALYSIS (1)
|
2007
Changes From 2006
|
2006
Changes From 2005
|
||||||||||||||||||
|
Due
to Average
|
Due
to Average
|
||||||||||||||||||
|
(Taxable
Equivalent Basis - Dollars in Thousands)
|
Total
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
|||||||||||||
|
Earning
Assets:
|
|||||||||||||||||||
|
Loans,
Net of Unearned Interest (2)
|
$
|
(1,792
|
)
|
$
|
(7,465
|
)
|
$
|
5,673
|
$
|
23,562
|
$
|
5,760
|
$
|
17,802
|
|||||
|
Investment
Securities:
|
|||||||||||||||||||
|
Taxable
|
99
|
(350
|
)
|
449
|
601
|
(689
|
)
|
1,290
|
|||||||||||
|
Tax-Exempt
(2)
|
858
|
491
|
367
|
1,219
|
1,220
|
(1
|
)
|
||||||||||||
|
Funds
Sold
|
873
|
883
|
(10
|
)
|
1,048
|
444
|
604
|
||||||||||||
|
Total
|
38
|
(6,441
|
)
|
6,479
|
26,430
|
6,735
|
19,695
|
||||||||||||
|
Interest
Bearing Liabilities:
|
|||||||||||||||||||
|
NOW
Accounts
|
3,090
|
567
|
2,523
|
4,790
|
586
|
4,204
|
|||||||||||||
|
Money
Market Accounts
|
1,979
|
850
|
1,129
|
7,350
|
1,485
|
5,865
|
|||||||||||||
|
Savings
Accounts
|
2
|
(29
|
)
|
31
|
(14
|
)
|
(36
|
)
|
22
|
||||||||||
|
Time
Deposits
|
2,364
|
(1,131
|
)
|
3,495
|
3,993
|
(1,078
|
)
|
5,071
|
|||||||||||
|
Short-Term
Borrowings
|
(204)
|
(424
|
)
|
220
|
221
|
(586
|
)
|
807
|
|||||||||||
|
Subordinated
Notes Payable
|
5
|
0
|
5
|
744
|
715
|
29
|
|||||||||||||
|
Long-Term
Borrowings
|
(911
|
)
|
(913
|
)
|
2
|
(390
|
)
|
(571
|
)
|
181
|
|||||||||
|
Total
|
6,325
|
(1,080
|
)
|
7,405
|
16,694
|
515
|
16,179
|
||||||||||||
|
Changes
in Net Interest Income
|
$
|
(6,287
|
)
|
$
|
(5,361
|
)
|
$
|
(926
|
)
|
$
|
9,736
|
$
|
6,220
|
$
|
3,516
|
||||
|
(1)
|
This
table shows the change in taxable equivalent 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.
|
Provision
for Loan Losses
The
provision for loan losses was $6.2 million in 2007, compared to $2.0 million in
2006 and $2.5 million in 2005. The increase for 2007 was attributable
to an increase in net charge-offs and a higher level of required reserves
reflective of the current credit environment that has been impacted by a
slowdown in housing and real estate markets. The lower loan loss
provision in 2006 generally reflected a lower level of net
charge-offs. The loan loss provision in 2005 was positively impacted
by a re-assessment of the allowance for loan losses to reflect the changing risk
profile associated with the Bank’s sale of its credit card portfolio during the
third quarter of 2004 and the integration of acquisitions.
Net
charge-offs for 2007 totaled $5.3 million, or .27% of average loans for the year
compared to $2.1 million, or .11% for 2006 and $2.5 million, or .13% for
2005. At December 31, 2007, the allowance for loan losses totaled
$18.1 million compared to $17.2 million in 2006 and $17.4 million in
2005. At year-end 2007, the allowance represented .95% of total loans
and provided coverage of 72% 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" and Tables 7
and 8 for further information regarding the allowance for loan
losses.
Noninterest
Income
Noninterest
income increased $3.7 million, or 6.7% and $6.4 million or 13.0%, in 2007 and
2006, respectively compared to the immediately preceding year. In
both periods all categories enjoyed appreciable gains with the exception of
mortgage banking, which has been adversely impacted by the slowdown in
residential housing market.
The table
below reflects the major components of noninterest income.
|
For
the Years Ended December 31,
|
|||||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||
|
Noninterest
Income:
|
|||||||||
|
Service
Charges on Deposit Accounts
|
$ | 26,130 | $ | 24,620 | $ | 20,740 | |||
|
Data
Processing
|
3,133 | 2,723 | 2,610 | ||||||
|
Asset
Management Fees
|
4,700 | 4,600 | 4,419 | ||||||
|
Retail
Brokerage Fees
|
2,510 | 2,091 | 1,322 | ||||||
|
Gain/(Loss)
on Sale/Call of Investment Securities
|
14 | (4 | ) | 9 | |||||
|
Mortgage
Banking Revenues
|
2,596 | 3,235 | 4,072 | ||||||
|
Merchant
Fees(1)
|
7,257 | 6,978 | 6,174 | ||||||
|
Interchange
Fees(1)
|
3,757 | 3,105 | 2,239 | ||||||
|
ATM/Debit
Card Fees(1)
|
2,692 | 2,519 | 2,206 | ||||||
|
Other
|
6,511 | 5,710 | 5,407 | ||||||
|
Total
Noninterest Income
|
$ | 59,300 | $ | 55,577 | $ | 49,198 | |||
(1)
Together called “Bank Card Fees”
Various
significant components of noninterest income are discussed in more detail
below.
Service Charges on Deposit
Accounts. Deposit service charge fees increased $1.5 million,
or 6.1%, in 2007, compared to an increase of $3.9 million, or 18.7%, in
2006. Deposit service charge revenues in any one year are dependent
on the number of accounts, primarily transaction accounts, the level of activity
subject to service charges, and the collection rate. The increase in
deposit fees in both years was due to higher overdraft and nonsufficient funds
("NSF") fees reflecting higher activity levels, partially attributable to the
growth in our "Absolutely Free” checking account product, and
improved fee collection efforts. The improvement in fees for 2006
also reflects growth in deposit accounts attributable to the First National Bank
of Alachua acquisition.
Asset Management
Fees. In 2007, asset management fees increased $100,000, or
2.2%, versus an increase of $181,000, or 4.1%, in 2006. At year-end
2007, assets under management totaled $781.3 million, reflecting net growth of
$27.8 million, or 3.7% over 2006. At year-end 2006, assets under
management totaled $753.5 million, reflecting net growth of $60.5 million, or
8.7% over 2005. The increase in 2007 primarily reflects growth in new
business, while the improvement in 2006 reflects both new business growth and
improved asset returns.
Mortgage Banking
Revenues. In 2007, mortgage banking revenues decreased
$639,000, or 19.8%, compared to a decrease of $838,000, or 20.6% in
2006. The decline in both years reflects lower production due to the
slower housing market. We generally sell all fixed rate residential
loan production into the secondary market. Market conditions, the
level of interest rates, and the percent of fixed rate production have
significant impacts on our mortgage banking revenues.
Bank Card Fees. Card
fees (including merchant service fees, interchange fees, and ATM/debit card
fees) increased $1.1 million, or 8.7% in 2007, compared to an increase of $2.0
million, or 18.7% in 2006. Merchant services fees increased $279,000,
or 4.0% in 2007 compared to $805,000, or 13.0% in 2006. The
improvement in both periods is directly related to growth in merchant card
transaction volume primarily driven by growth in our client
base. Interchange fees increased $651,000, or 21.0% in 2007 compared
to $866,000, or 38.7% in 2006, and ATM/debit card fees improved $173,000, or
6.8% in 2007 compared to $313,000, or 14.2% in 2006. The higher
interchange and ATM/debit card fees for both periods reflect an increase in our
card base primarily associated with growth in transaction deposit
accounts.
Noninterest
income as a percent of average assets was 2.37% in 2007, compared to 2.15% in
2006, and 1.98% in 2005. Higher deposit fees and card fees drove the
improvement in 2006 and 2007. Noninterest income as a percent of
taxable equivalent operating revenues was 34.1% in 2007, up from 31.5% in 2006
reflecting growth in noninterest income and a slight reduction in the level of
operating revenues.
Noninterest
Expense
Noninterest
expense grew by $424,000, or 0.35%, over 2006, including a $1.9 million
litigation reserve recorded in the fourth quarter of
2007. Compensation expense reflects reduced expense levels for
performance based incentive plans and lower pension expense. Lower
expense for courier also contributed positively. A pre-tax charge of
$1.9 million was recorded during the fourth quarter of 2007 to establish a
litigation reserve related to Visa U.S.A.’s “covered” litigation. The
reserve is based on Capital City Bank’s proportionate membership interest in
Visa U.S.A. and represents a contingent liability to cover potential settlement
costs associated with various lawsuits filed against Visa U.S.A. This
litigation reserve is discussed in more detail below.
Noninterest
expense increased $11.8 million, or 10.7%, in 2006 due to higher expense for
compensation, occupancy, intangible amortization, and interchange
fees. The increase reflects a full twelve months of expenses for the
operations of First National Bank of Alachua, which was acquired in May
2005.
The table
below reflects the major components of noninterest expense.
|
For
the Years Ended December 31,
|
||||||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Noninterest
Expense:
|
||||||||||
|
Salaries
|
$ | 49,206 | $ | 46,604 | $ | 40,978 | ||||
|
Associate
Benefits
|
11,073 | 14,251 | 12,709 | |||||||
|
Total
Compensation
|
60,279 | 60,855 | 53,687 | |||||||
|
Premises
|
9,347 | 9,395 | 8,293 | |||||||
|
Equipment
|
9,890 | 9,911 | 8,970 | |||||||
|
Total
Occupancy
|
19,237 | 19,306 | 17,263 | |||||||
|
Legal
Fees
|
1,739 | 1,734 | 1,827 | |||||||
|
Professional
Fees
|
3,855 | 3,402 | 3,825 | |||||||
|
Processing
Services
|
1,994 | 1,863 | 1,481 | |||||||
|
Advertising
|
3,742 | 4,285 | 4,275 | |||||||
|
Travel
and Entertainment
|
1,470 | 1,664 | 1,414 | |||||||
|
Printing
and Supplies
|
2,124 | 2,472 | 2,372 | |||||||
|
Telephone
|
2,373 | 2,323 | 2,493 | |||||||
|
Postage
|
1,565 | 1,145 | 1,195 | |||||||
|
Intangible
Amortization
|
5,834 | 6,085 | 5,440 | |||||||
|
Merger
Expense
|
- | - | 438 | |||||||
|
Interchange
Fees
|
6,118 | 6,010 | 5,402 | |||||||
|
Courier
Service
|
641 | 1,307 | 1,360 | |||||||
|
Miscellaneous
|
11,021 | 9,117 | 7,342 | |||||||
|
Total
Other
|
42,476 | 41,407 | 38,864 | |||||||
|
Total
Noninterest Expense
|
$ | 121,992 | $ | 121,568 | $ | 109,814 | ||||
Compensation. Salaries
and associate benefits expense decreased $577,000, or 0.95% from 2006 primarily
attributable to lower expense for pension ($1.4 million) and stock based
compensation ($2.0 million). A $2.6 million, or 6.0% increase in
associate salaries partially offset these declines. Pension expense
declined as a result of large contributions and strong investment returns on
pension plan assets over the past three years, and an increase in the
weighted-average discount rate from 2006 to 2007. The lower expense
for stock based compensation is reflective of performance goals not being met
during 2007.
In 2006,
salaries and benefits increased $7.2 million, or 13.4%, over
2005. The increase in compensation was driven by higher expense for
associate salaries ($5.4 million), payroll taxes ($300,000), associate insurance
($329,000), pension plan ($378,000), and stock-based compensation
($705,000). The increase in associate salaries and payroll tax
expense reflects the addition of First National Bank of Alachua associates in
May 2005, annual merit/market based raises for associates, and lower realized
loan cost. Realized loan cost reflects the impact of Statement of
Financial Accounting Standards (“SFAS”) No. 91 "Accounting for Nonrefundable
Fees and Costs Associated with Acquiring Loans", which requires deferral and
amortization of loan costs that are accounted for as a credit offset to salary
expense. The decrease in the number of loans originated in 2006
reduced the amount of this offset. The increase in expense for
insurance and pension benefits is reflective of an increase in eligible
participants. The higher pension expense is also due to a lower
discount rate used for the 2006 expense projection. Higher stock
based compensation reflects an increase in plan participants and higher target
awards due to the adoption of our new Stock-based Incentive Compensation Plan,
which rewards our senior management team for meeting certain earnings
performance milestones.
Occupancy. Occupancy
expense (including furniture, fixtures and equipment) decreased by $69,000, or
0.36% in 2007, compared to a $2.0 million, or 11.8% increase in
2006. For 2007, we realized a decrease in depreciation (furniture,
fixtures, and equipment) expense of $472,000 and maintenance and repairs
(buildings) expense of $254,000. Partially offsetting these declines
were increases in maintenance and repairs (furniture, fixtures, and equipment)
expense of $273,000 and software license expense of $230,000. The
reduction in depreciation (furniture, fixtures, and equipment) was due to
several large capital assets that became fully depreciated during
2007. The lower expense for maintenance and repairs (buildings)
reflects management’s efforts to better manage this expense. The
increase in expense for maintenance and repairs (furniture, fixtures, and
equipment) primarily reflects the cost of new/replacement telecommunications and
network cabling associated with the implementation of voice over IP and remote
office capture technology during 2007. The increase in software
license expense primarily reflects the purchase of certain technology aimed at
improving our sales monitoring, operational procedures, and budgeting/planning
efforts.
The
increase in 2006 was due to higher expense for depreciation ($895,000),
maintenance and repairs - for our buildings as well as furniture, fixtures, and
equipment ($276,000), utilities ($343,000), maintenance agreements ($364,000),
and building insurance ($143,000). The increase in depreciation is
due to the addition of First National Bank of Alachua offices as well as
renovations. An increase in our general maintenance expense
associated with banking offices, core processing/networking systems and ATMs
drove the increase in maintenance and repairs. Utility expense
increased due to a mid-year rate hike and the addition of First National Bank of
Alachua in May 2005. The increase in expense for maintenance
agreements is primarily due to an increase in core processing and networking
costs partially attributable to enhancement of our back-up and recovery
capabilities. The addition of new/replacement offices, office
renovations, and an insurance premium increase drove the increase in building
insurance.
Other. Other
noninterest expense increased $1.3 million, or 3.7%, in 2007, compared to $2.5
million, or 6.5% in 2006. The increase in 2007 was primarily
attributable to a pre-tax charge of $1.9 million, which was recorded in the
fourth quarter of 2007 to establish a litigation reserve. The Bank is
a member of Visa U.S.A. and this reserve was established in connection with
lawsuits filed against Visa U.S.A., which is generally referred to as the
“Covered” litigation. We currently anticipate that our proportional
share of the proceeds of Visa’s planned IPO will more than offset any
liabilities related to our pro-rata share of the “Covered”
litigation. The nature and circumstances regarding this charge, which
is expected to be reversed upon consummation of Visa Inc.’s planned IPO, is
explained in Form 8-Ks filed with the SEC on January 10, 2008 and January 22,
2008.
The
increase in 2006 was attributable primarily to higher expense for: (1)
processing services - $382,000, (2) travel and entertainment - $250,000, (3)
intangible amortization - $645,000, (4) interchange fees - $608,000, and (5)
miscellaneous - $1.4 million. The increase in processing services is
due to the addition of core processing system applications and system upgrade
and enhancements. The higher expense for travel and entertainment is
due primarily to an increase in associate training and company events during the
year. The increase in intangible amortization reflects new core
deposit amortization from the First National Bank of Alachua
acquisition. The increase in interchange fees is due to increased
merchant card transaction volume. Miscellaneous expense grew due to
increases in other losses, ATM/debit card production, associate hiring and
training expense.
The
operating net noninterest expense ratio (defined as noninterest income minus
noninterest expense, net of intangible amortization and merger expenses, as a
percent of average assets) was 2.27% in 2007 compared to 2.32% in 2006, and
2.20% in 2005. Our operating efficiency ratio (expressed as
noninterest expense, net of intangible amortization and merger expenses, as a
percent of taxable equivalent net interest income plus noninterest income) was
66.8%, 65.4%, and 64.8% in 2007, 2006 and 2005, respectively. During
2007, we took steps to strengthen our expense control procedures, including
enhancement of current expense policies, creation of an expense control
committee to focus on identifying cost savings strategies, and improve
accountability for expense management across our various divisions – these
efforts will continue and are now part of our strategic planning
process. The increase in the operating efficiency ratio during 2007
is reflective of a lower level of operating revenues (tax equivalent net
interest income plus noninterest income).
Income
Taxes
The
consolidated provision for federal and state income taxes was $13.7 million in
2007, compared to $17.9 million in 2006, and $16.6 million in
2005. Lower taxable income drove the decline in the tax provision for
2007. The increases in 2006 and 2005 were due to higher taxable
income driven by earnings growth. Lower tax-exempt income also
contributed to the increase in 2005.
The
effective tax rate was 31.6% in 2007, 35.0% in 2006, and 35.4% in
2005. These rates differ from the combined federal and state
statutory tax rates due primarily to tax-exempt income on loans and
securities. The 2007 effective tax rate was positively impacted by a
higher level of tax-free loan income and a fourth quarter true-up of our
deferred tax liabilities which resulted in a net reduction in our income tax
provision of $937,000.
FINANCIAL
CONDITION
Average
assets totaled $2.5 billion, a decrease of $73.9 million, or 2.9%, in 2007
versus the comparable period in 2006. Average earning assets for 2007
were $2.2 billion, representing a decrease of $74.7 million, or 3.3%, over
2006. A decline in average loans of $94.5 million, or 4.7%, partially
offset by an increase to average funds sold of $8.1 million, or 43.3% were the
reasons for the earning asset decrease in 2007. We discuss these
variances in more detail below.
Table 2
provides information on average balances and rates, Table 3 provides an analysis
of rate and volume variances, and Table 4 highlights the changing mix of our
earning assets over the last three years.
Loans
Average
loans decreased $94.5 million, or 4.7%, over the comparable period in
2006. Loans as a percent of average earning assets declined to 88.6%
in 2007, down from the 2006 level of 90.0%. Our loan has
declined due to a high level of principal pay-downs and loan pay-offs,
including the pay-off of several larger commercial loans, and a slowing of
lending activity. Minimal growth during 2007 was experienced in the
consumer portfolio, primarily in auto finance and home equity lines of
credit. Average loans during the fourth quarter of 2007 increased
slightly from the linked quarter attributable to a slowing in loan
pay-offs.
Although
management is continually evaluating alternative sources of revenue, lending is
a major component of our business and is key to our
profitability. While we strive to identify opportunities to increase
loans outstanding and enhance the portfolio's overall contribution to earnings,
we will only do so by adhering to sound lending principles applied in a prudent
and consistent manner. Thus, we will not relax our underwriting standards in
order to achieve designated growth goals.
Table
4
SOURCES
OF EARNING ASSET GROWTH
|
2006
to
|
Percentage
|
Components
of
|
||||||||||||||||||
|
2007
|
Of
Total
|
Average Earning Assets
|
||||||||||||||||||
|
(Average
Balances – Dollars In Thousands)
|
Change
|
Change
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Loans:
|
||||||||||||||||||||
|
Commercial,
Financial, and Agricultural
|
(12,244 | ) | (16.0 | )% | 9.5 | % | 9.7 | % | 9.5 | % | ||||||||||
|
Real
Estate – Construction
|
(15,711 | ) | (21.0 | )% | 7.3 | % | 7.8 | % | 6.9 | % | ||||||||||
|
Real
Estate – Commercial
|
(29,417 | ) | (39.0 | )% | 29.2 | % | 29.5 | % | 31.4 | % | ||||||||||
|
Real
Estate – Residential
|
(38,282 | ) | (51.0 | )% | 31.5 | % | 32.2 | % | 31.3 | % | ||||||||||
|
Consumer
|
1,107 | 1.0 | % | 11.2 | % | 10.7 | % | 10.9 | % | |||||||||||
|
Total
Loans
|
(94,547 | ) | (126.00 | )% | 88.7 | % | 89.9 | % | 90.0 | % | ||||||||||
|
Investment
Securities:
|
||||||||||||||||||||
|
Taxable
|
(8,552 | ) | (12.0 | )% | 4.8 | % | 5.0 | % | 6.5 | % | ||||||||||
|
Tax-Exempt
|
10,215 | 14.0 | % | 3.8 | % | 3.2 | % | 2.3 | % | |||||||||||
|
Total
Securities
|
1,663 | 2.0 | % | 8.6 | % | 8.2 | % | 8.8 | % | |||||||||||
|
Funds
Sold
|
18,135 | 24.0 | % | 2.7 | % | 1.9 | % | 1.2 | % | |||||||||||
|
Total
Earning Assets
|
$ | (74,749 | ) | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Our
average loan-to-deposit ratio decreased to 97.2% in 2007 from 99.7% in
2006. This compares to an average loan-to-deposit ratio in 2005 of
100.7%. The lower loan-to-deposit ratios reflect declining loan
balances, which until the fourth quarter of 2007, have declined for seven
straight quarters.
The
composition of our loan portfolio at December 31, for each of the past five
years is shown in Table 5. Table 6 arrays our total loan portfolio as
of December 31, 2007, based upon maturities. As a percent of the
total portfolio, loans with fixed interest rates represent 36.4% as of December
31, 2007, versus 35.7% at December 31, 2006.
Table
5
LOANS
BY CATEGORY
|
As
of December 31,
|
|||||||||||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||
|
Commercial,
Financial and Agricultural
|
$ | 208,864 | $ | 229,327 | $ | 218,434 | $ | 206,474 | $ | 160,048 | |||||
|
Real
Estate - Construction
|
142,248 | 179,072 | 160,914 | 140,190 | 89,149 | ||||||||||
|
Real
Estate - Commercial
|
634,920 | 643,885 | 718,741 | 655,426 | 391,250 | ||||||||||
|
Real
Estate - Residential
|
680,800 | 709,735 | 723,336 | 600,375 | 467,790 | ||||||||||
|
Consumer
|
249,018 | 237,702 | 246,069 | 226,360 | 233,395 | ||||||||||
|
Total
Loans, Net of Unearned Interest
|
$ | 1,915,850 | $ | 1,999,721 | $ | 2,067,494 | $ | 1,828,825 | $ | 1,341,632 | |||||
Table
6
LOAN
MATURITIES
|
Maturity
Periods
|
||||||||||||
|
(Dollars
in Thousands)
|
One
Year
or
Less
|
Over
One
Through
Five
Years
|
Over
Five
Years
|
Total
|
||||||||
|
Commercial,
Financial and Agricultural
|
$ | 83,469 | $ | 93,283 | $ | 32,112 | $ | 208,864 | ||||
|
Real
Estate
|
377,077 | 224,994 | 855,897 | 1,457,968 | ||||||||
|
Consumer(1)
|
31,134 | 208,611 | 9,273 | 249,018 | ||||||||
|
Total
|
$ | 491,680 | $ | 526,888 | $ | 897,282 | $ | 1,915,850 | ||||
|
Loans
with Fixed Rates
|
$ | 321,011 | $ | 346,198 | $ | 31,206 | $ | 698,415 | ||||
|
Loans
with Floating or Adjustable Rates
|
170,669 | 180,690 | 866,076 | 1,217,435 | ||||||||
|
Total
|
$ | 491,680 | $ | 526,888 | $ | 897,282 | $ | 1,915,850 | ||||
|
(1)
|
Demand loans and overdrafts are
reported in the category of one year or
less.
|
Allowance
for Loan Losses
Management
believes it maintains the allowance for loan losses at a level sufficient to
provide for the estimated credit losses inherent in the loan portfolio as of the
balance sheet date. Credit losses arise from the borrowers’ inability
or unwillingness to repay, and from other risks inherent in the lending process
including collateral risk, operations risk, concentration risk, and economic
risk. As such, all related risks of lending are considered when assessing the
adequacy of the allowance. The allowance for loan losses is
established through a provision charged to expense. Loans are charged
against the allowance when management believes collection of the principal is
unlikely. The allowance for loan losses is based on management's
judgment of overall credit quality. This is a significant estimate based on a
detailed analysis of the loan portfolio. The balance can and will
change based on changes in the assessment of the portfolio's overall credit
quality and other risk factors both internal and external to us.
Management
evaluates the adequacy of the allowance for loan losses on a quarterly
basis. Loans that have been identified as impaired are reviewed for
adequacy of collateral, with a specific reserve assigned to those loans when
necessary. A loan is deemed impaired when, based on current
information and events, it is probable that the company will not be able to
collect all amounts due (principal and interest payments), according to the
contractual terms of the loan agreement. All loan relationships that
exceed $100,000 are reviewed for impairment. The evaluation is based
on current financial condition of the borrower or current payment status of the
loan.
The
method used to assign a specific reserve depends on whether repayment of the
loan is dependent on liquidation of collateral. If repayment is dependent on the
sale of collateral, the reserve is equivalent to the recorded investment in the
loan less the fair value of the collateral after estimated sales
expenses. If repayment is not dependent on the sale of collateral,
the reserve is equivalent to the recorded investment in the loan less the
estimated cash flows discounted using the loan’s effective interest rate. The
discounted value of the cash flows is based on the anticipated timing of the
receipt of cash payments from the borrower. The reserve allocations
assigned to impaired loans are sensitive to the extent market conditions or the
actual timing of cash receipts change.
Once
specific reserves have been assigned to impaired loans, general reserves are
assigned to the remaining portfolio. General reserves are assigned to
various homogenous loan pools, including commercial, commercial real estate,
construction, residential 1-4 family, home equity, and
consumer. General reserves are assigned based on historical loan loss
ratios (by pool) and are adjusted for various internal and external
environmental factors unique to each loan pool.
The
allowance for loan losses is compared against the sum of the specific reserves
assigned to impaired loans plus the general reserves assigned to the remaining
portfolio. The unallocated portion of the allowance is monitored on a
regular basis and adjusted based on management’s determination of estimation
risk. Table 7 analyzes the activity in the allowance over the past
five years.
The
allowance for loan losses was $18.1 million at December 31, 2007 and $17.2
million at December 31, 2006. As a percent of total loans (net of
overdrafts), the allowance was 0.95% in 2007 and 0.86% in 2006. The
allowance for loan losses reflects management’s current estimate of the credit
quality of our loan portfolio. While there can be no assurance that
we will not sustain loan losses in a particular period that are substantial in
relation to the size of the allowance, management’s assessment of the loan
portfolio does not indicate a likelihood of this occurrence. It is
management’s opinion that the allowance at December 31, 2007 is adequate to
absorb losses inherent in the loan portfolio at year-end.
Table 8
provides an allocation of the allowance for loan losses to specific loan types
for each of the past five years. The reserve allocations, as
calculated using the above methodology, are assigned to specific loan categories
corresponding to the type represented within the components
discussed. There was a significant change in the reserve allocation
in 2004 as noted by reserves held for the consumer loan, commercial real estate,
and commercial portfolios. The Bank's credit card portfolio, which
previously accounted for up to one-third of net loan losses annually, was sold
in August 2004, thus reducing the reserves required to support consumer
loans. The large increase in 2004 for reserves held for commercial
real estate and commercial loans was due to the acquisition of loans from
Farmers and Merchants Bank of Dublin in late 2004. Additionally,
First National Bank of Alachua was acquired during 2005, which pushed total
reserves higher.
Table
7
ANALYSIS
OF ALLOWANCE FOR LOAN LOSSES
|
For
the Years Ended December 31,
|
|||||||||||||||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||
|
Balance
at Beginning of Year
|
$ | 17,217 | $ | 17,410 | $ | 16,037 | $ | 12,429 | $ | 12,495 | |||||||||
|
Acquired
Reserves
|
- | - | 1,385 | 5,713 | - | ||||||||||||||
|
Reserve
Reversal(1)
|
- | - | - | (800 | ) | - | |||||||||||||
|
Charge-Offs:
|
|||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
1,462 | 841 | 1,287 | 873 | 426 | ||||||||||||||
|
Real
Estate - Construction
|
166 | - | - | - | - | ||||||||||||||
|
Real
Estate - Commercial
|
709 | 346 | 255 | 48 | 91 | ||||||||||||||
|
Real
Estate - Residential
|
1,429 | 280 | 321 | 191 | 228 | ||||||||||||||
|
Consumer
|
3,451 | 2,516 | 2,380 | 3,946 | 3,794 | ||||||||||||||
|
Total
Charge-Offs
|
7,217 | 3,983 | 4,243 | 5,058 | 4,539 | ||||||||||||||
|
Recoveries:
|
|||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
174 | 246 | 180 | 81 | 142 | ||||||||||||||
|
Real
Estate - Construction
|
- | - | - | - | - | ||||||||||||||
|
Real
Estate - Commercial
|
14 | 17 | 3 | 14 | - | ||||||||||||||
|
Real
Estate - Residential
|
36 | 11 | 37 | 188 | 18 | ||||||||||||||
|
Consumer
|
1,679 | 1,557 | 1,504 | 1,329 | 877 | ||||||||||||||
|
Total
Recoveries
|
1,903 | 1,831 | 1,724 | 1,612 | 1,037 | ||||||||||||||
|
Net
Charge-Offs
|
5,314 | 2,152 | 2,519 | 3,446 | 3,502 | ||||||||||||||
|
Provision
for Loan Losses
|
6,163 | 1,959 | 2,507 | 2,141 | 3,436 | ||||||||||||||
|
Balance
at End of Year
|
$ | 18,066 | $ | 17,217 | $ | 17,410 | $ | 16,037 | $ | 12,429 | |||||||||
|
Ratio
of Net Charge-Offs to Average Loans Outstanding
|
.27 | % | .11 | % | .13 | % | .22 | % | .27 | % | |||||||||
|
Allowance
for Loan Losses as a Percent of Loans at End of Year
|
.94 | % | .86 | % | .84 | % | .88 | % | .93 | % | |||||||||
|
Allowance
for Loan Losses as a Multiple of Net Charge-Offs
|
3.40 | x | 8.00 | x | 6.91 | x | 4.65 | x | 3.55 | x | |||||||||
|
(1)
|
Reflects recapture of reserves
allocated to the credit card portfolio sold in August
2004.
|
Table
8
ALLOCATION
OF ALLOWANCE FOR LOAN LOSSES
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
Allowance
Amount
|
Percent
of
Loans
in
Each
Category
To
Total
Loans
|
Allowance
Amount
|
Percent
of
Loans
in
Each
Category
To
Total
Loans
|
Allowance
Amount
|
Percent
of
Loans
in
Each
Category
To
Total
Loans
|
Allowance
Amount
|
Percent
of
Loans
in
Each
Category
To
Total
Loans
|
Allowance
Amount
|
Percent
of
Loans
in
Each
Category
To
Total
Loans
|
||||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
$
|
$3,106
|
10.9
|
%
|
$
|
3,900
|
11.5
|
%
|
$
|
3,663
|
10.6
|
%
|
$
|
4,341
|
11.3
|
%
|
$
|
2,824
|
11.9
|
%
|
||||||||||
|
Real
Estate:
|
||||||||||||||||||||||||||||||
|
Construction
|
3,117
|
7.4
|
745
|
9.0
|
762
|
7.8
|
578
|
7.7
|
313
|
6.6
|
||||||||||||||||||||
|
Commercial
|
4,372
|
33.1
|
5,996
|
32.2
|
6,352
|
34.7
|
6,296
|
35.8
|
2,831
|
29.2
|
||||||||||||||||||||
|
Residential
|
3,733
|
35.6
|
1,050
|
35.5
|
1,019
|
35.0
|
705
|
32.8
|
853
|
34.9
|
||||||||||||||||||||
|
Consumer
|
2,790
|
13.0
|
3,081
|
11.8
|
3,105
|
11.9
|
2,966
|
12.4
|
4,169
|
17.4
|
||||||||||||||||||||
|
Not
Allocated
|
948
|
-
|
2,445
|
-
|
2,509
|
-
|
1,151
|
-
|
1,439
|
-
|
||||||||||||||||||||
|
Total
|
$
|
$18,066
|
100.0
|
%
|
$
|
17,217
|
100.0
|
%
|
$
|
17,410
|
100.0
|
%
|
$
|
16,037
|
100.0
|
%
|
$
|
12,429
|
100.0
|
%
|
||||||||||
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 our risk
element assets as of December 31 for each of the last five years. We
discuss potential problem loans and loan concentrations within the narrative
portion of this section.
Our
nonperforming loans increased $17.1 million, or 212%, from a level of $8.0
million at December 31, 2006. During 2007, we added loans totaling
approximately $39.8 million to non-accruing status, while removing loans
totaling $22.7 million. Of the $22.7 million removed, $2.3 million
consisted of principal reductions and loan payoffs, $4.6 million represented
loans transferred to other real estate, $14.3 million consisted of loans brought
current and returned to an accrual status, and $1.5 million was charged
off. The increase in nonaccrual loans is partly attributable to the
addition of three large loan relationships to nonaccrual status during the
fourth quarter of 2007. Two of the aforementioned loans totaling $4.8
million are to borrowers employed in the real estate market and the other loan
relationship totaling $5.9 million consists of loans to a commercial
business. The make-up of nonaccrual loans (by loan type) at year-end
was as follows (in millions): commercial - $0.6, construction - $6.5, commercial
real estate - $11.4, and residential real estate - $6.6. Management
has allocated specific reserves to absorb anticipated losses on these
nonperforming loans.
We review
loans for potential impairment on a quarterly basis. A loan is
deemed impaired when, based on current information and events, it is probable
that the company will not be able to collect all amounts due (principal and
interest payments), according to the contractual terms of the loan
agreement. When a loan is considered impaired, we review our exposure to
credit loss. If credit loss is probable, a specific reserve is
allocated to absorb the anticipated loss. We had $36.6 million in
loans considered impaired at December 31, 2007. We have established
specific reserves for these loans in the amount of $4.7 million.
Table
9
RISK
ELEMENT ASSETS
|
As
of December 31,
|
|||||||||||||||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||
|
Nonaccruing
Loans
|
$ | 25,119 | $ | 8,042 | $ | 5,258 | $ | 4,646 | $ | 2,346 | |||||||||
|
Restructured
|
- | - | - | - | - | ||||||||||||||
|
Total
Nonperforming Loans
|
25,119 | 8,042 | 5,258 | 4,646 | 2,346 | ||||||||||||||
|
Other
Real Estate Owned
|
3,043 | 689 | 292 | 625 | 4,955 | ||||||||||||||
|
Total
Nonperforming Assets
|
$ | 28,162 | $ | 8,731 | $ | 5,550 | $ | 5,271 | $ | 7,301 | |||||||||
|
Past
Due 90 Days or More
|
416 | 135 | 309 | $ | 605 | $ | 328 | ||||||||||||
|
Nonperforming
Loans/Loans
|
1.31 | % | .40 | % | .25 | % | .25 | % | .17 | % | |||||||||
|
Nonperforming
Assets/Loans Plus Other Real Estate
|
1.47 | % | .44 | % | .27 | % | .29 | % | .54 | % | |||||||||
|
Nonperforming
Assets/Capital(1)
|
9.06 | % | 2.62 | % | 1.72 | % | 1.93 | % | 3.39 | % | |||||||||
|
Allowance/Nonperforming
Loans
|
71.92 | % | 214.09 | % | 331.11 | % | 345.18 | % | 529.80 | % | |||||||||
|
(1)
|
For computation of this
percentage, "Capital" refers to shareowners' equity plus the allowance for
loan losses.
|
We
recognize interest on non-accrual loans only when payments are
received. We apply cash payments collected on non-accrual loans
against the principal balance or recognize it as interest income based upon
management’s expectations as to the ultimate collectability of principal and
interest in full. If interest on non-accruing loans had been
recognized on a fully accruing basis, we would have recorded an additional
$922,000 of interest income for the year ended December 31, 2007.
Other
real estate totaled $3.0 million at December 31, 2007, versus $689,000 at
December 31, 2006. This category includes property owned by the Bank
that was acquired either through foreclosure procedures or by receiving a deed
in lieu of foreclosure. During 2007, we added properties totaling
$3.5 million, and partially or completely liquidated properties totaling $1.1
million, resulting in a net increase in other real estate of approximately $2.4
million.
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 $10.2 million at
December 31, 2007, compared to $11.8 million at year-end 2006.
Loans
past due 90 days or more and still on accrual status totaled $416,000 at
year-end, up from $135,000 at the previous year-end.
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 amount exceeds
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, we have both geographic concentrations as well as concentrations in the
types of loans funded. Specifically, due to the nature of our
markets, a significant portion of the portfolio has historically been secured
with real estate.
While we
have a majority of our loans (76.1%) secured by real estate, the primary types
of real estate collateral are commercial properties and 1-4 family residential
properties. At December 31, 2007, commercial real estate mortgage
loans and residential real estate mortgage loans accounted for 33.1% and 35.5%,
respectively, of the loan portfolio.
Our real
estate loan portfolio, while subject to cyclical pressures, is not unusually
speculative in nature and is originated at amounts that are within or exceed
regulatory guidelines for collateral values. Management anticipates
no significant reduction in the percentage of real estate loans to total loans
outstanding.
Management
is continually analyzing its loan portfolio in an effort to identify and resolve
problem assets as quickly and efficiently as possible. As of December
31, 2007, management believes it has identified and adequately reserved for such
problem assets. However, management recognizes that many factors can
adversely impact various segments of our 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 2007,
our average investment portfolio increased $1.7 million, or 0.9%, from 2006 and
decreased $4.6 million, or 2.4%, from 2005 to 2006. As a percentage
of average earning assets, the investment portfolio represented 8.6% in 2007,
compared to 8.3% in 2006. In 2007, the increase in the average
balance of the investment portfolio was primarily due to the reinvestment of a
portion of the interest earned on these investments. In 2006, the
decline in the average balance of the investment portfolio was primarily due to
the timing of reinvesting maturities. In 2008, we will closely
monitor liquidity levels to assess the need to purchase additional
investments.
In 2007,
average taxable investments decreased $8.6 million, or 7.6%, while tax-exempt
investments increased $10.2 million, or 13.7%. We changed the mix
because tax-exempt securities offered a more attractive
spread compared to taxable securities during the year. Management
will continue to purchase "bank qualified" municipal issues when it considers
the yield to be attractive and we can do so without adversely impacting our tax
position. As of December 31, 2007, we have the ability to purchase
additional tax-exempt securities without adverse tax consequences.
The
investment portfolio is a significant component of our operations and, as such,
it functions as a key element of liquidity and asset/liability
management. As of December 31, 2007, all securities are classified as
available-for-sale. The classification of securities as
available-for-sale offers management full flexibility in managing our liquidity
and interest rate sensitivity without adversely impacting our regulatory capital
levels. Securities in the available-for-sale portfolio are recorded
at fair value with unrealized gains and losses associated with these securities
recorded net of tax, in the accumulated other comprehensive loss component of
shareowners' equity. At December 31, 2007, shareowners' equity
included a net unrealized gain in the investment portfolio of $0.4 million,
compared to a net unrealized loss of $0.8 million at December 31,
2006. It is neither management's intent nor practice to participate
in the trading of investment securities for the purpose of recognizing gains and
therefore we do not maintain a trading portfolio.
The
average maturity of the total portfolio at December 31, 2007 and 2006 was 1.63
and 1.75 years, respectively. See Table 10 for a breakdown of maturities by
investment type.
The
weighted average taxable equivalent yield of the investment portfolio at
December 31, 2007 was 5.08%, versus 4.72% in 2006. The higher rates for the
first three quarters allowed purchases of securities with yields higher than
those of maturing bonds. The fed rate cuts will have an
unfavorable impact on investment income in 2008. The quality of the
municipal portfolio at year-end is depicted on page 41. 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 our
shareowners' equity at December 31, 2007. Due diligence is
continually performed on the investment portfolio, namely the municipal
bonds. Special attention is given to municipal bond insurers to
ensure diversification, and the strength of the bonds’ underlying rating is
being considered in any new purchases. Our mortgage bank security
portfolio is high quality and has no subprime market exposure.
Table 10
and Note 2 in the Notes to Consolidated Financial Statements present a detailed
analysis of our investment securities as to type, maturity and
yield.
Table
10
MATURITY
DISTRIBUTION OF INVESTMENT SECURITIES
|
As
of December 31,
|
||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
Amortized
Cost
|
Market
Value
|
Weighted(1)
Average
Yield
|
Amortized
Cost
|
Market
Value
|
Weighted(1)
Average
Yield
|
Amortized
Cost
|
Market
Value
|
Weighted(1)
Average
Yield
|
|||||||||||||||||||
|
U.S.
GOVERNMENTS
|
||||||||||||||||||||||||||||
|
Due
in 1 year or less
|
$
|
36,441
|
$
|
36,570
|
4.62
|
%
|
$
|
17,329
|
$
|
17,150
|
3.45
|
%
|
$
|
58,032
|
$
|
57,621
|
2.30
|
%
|
||||||||||
|
Due
over 1 year through 5 years
|
25,264
|
25,493
|
4.46
|
56,388
|
55,978
|
4.64
|
24,296
|
23,662
|
3.52
|
|||||||||||||||||||
|
Due
over 5 years through 10 years
|
-
|
-
|
-
|
-
|
-
|
-
|
1,970
|
1,948
|
3.57
|
|||||||||||||||||||
|
Due
over 10 years
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
TOTAL
|
61,705
|
62,063
|
4.56%
|
73,717
|
73,128
|
4.36
|
84,298
|
83,231
|
2.68
|
|||||||||||||||||||
|
STATES
& POLITICAL SUBDIVISIONS
|
||||||||||||||||||||||||||||
|
Due
in 1 year or less
|
25,675
|
25,697
|
5.19
|
31,438
|
31,300
|
4.21
|
21,097
|
21,048
|
4.66
|
|||||||||||||||||||
|
Due
over 1 year through 5 years
|
64,339
|
64,304
|
5.38
|
52,183
|
51,922
|
5.25
|
32,130
|
31,702
|
4.11
|
|||||||||||||||||||
|
Due
over 5 years through 10 years
|
-
|
-
|
-
|
-
|
-
|
-
|
384
|
393
|
6.53
|
|||||||||||||||||||
|
Due
over 10 years
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
TOTAL
|
90,014
|
90,001
|
5.32%
|
83,621
|
83,222
|
4.86
|
53,611
|
53,143
|
4.34
|
|||||||||||||||||||
|
MORTGAGE-BACKED
SECURITIES(2)
|
||||||||||||||||||||||||||||
|
Due
in 1 year or less
|
4,125
|
4,117
|
4.23
|
3,568
|
3,571
|
5.37
|
339
|
337
|
3.97
|
|||||||||||||||||||
|
Due
over 1 year through 5 years
|
15,043
|
15,070
|
4.89
|
14,942
|
14,732
|
4.58
|
14,958
|
14,685
|
4.12
|
|||||||||||||||||||
|
Due
over 5 years through 10 years
|
7,166
|
7,100
|
5.21
|
4,734
|
4,593
|
5.02
|
5,651
|
5,509
|
5.09
|
|||||||||||||||||||
|
Due
over 10 years
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
TOTAL
|
26,334
|
26,287
|
4.87%
|
23,244
|
22,896
|
4.79
|
20,948
|
20,531
|
4.38
|
|||||||||||||||||||
|
OTHER
SECURITIES
|
||||||||||||||||||||||||||||
|
Due
in 1 year or less
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
Due
over 1 year through 5 years
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
Due
over 5 years through 10 years
|
1,000
|
1,061
|
5.00
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
Due
over 10 years(3)
|
11,307
|
11,307
|
5.90
|
12,648
|
12,648
|
5.78
|
14,114
|
14,114
|
4.75
|
|||||||||||||||||||
|
TOTAL
|
12,307
|
12,368
|
5.90
|
12,648
|
12,648
|
5.78
|
14,114
|
14,114
|
4.75
|
|||||||||||||||||||
|
TOTAL
INVESTMENT SECURITIES
|
$
|
190,360
|
$
|
190,719
|
5.08
|
%
|
$
|
193,230
|
$
|
191,894
|
4.72
|
%
|
$
|
172,971
|
$
|
171,019
|
3.57
|
%
|
||||||||||
|
(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.
|
|
(3)
|
Federal
Home Loan Bank Stock and Federal Reserve Bank Stock are included in this
category for weighted average yield, but do not have stated
maturities.
|
AVERAGE
MATURITY
|
As
of December 31,
|
|||||||||||
|
(In
Years)
|
2007
|
2006
|
2005
|
||||||||
|
U.S.
Governments
|
1.09 | 1.76 | 1.01 | ||||||||
|
States
and Political Subdivisions
|
1.48 | 1.39 | 1.31 | ||||||||
|
Mortgage-Backed
Securities
|
3.47 | 3.05 | 5.05 | ||||||||
|
Other
Securities
|
- | - | - | ||||||||
|
TOTAL
|
1.63 | 1.75 | 1.65 | ||||||||
MUNICIPAL
PORTFOLIO QUALITY
(Dollars
in Thousands)
|
Moody's
Rating
|
Amortized
Cost
|
Percentage
|
||||||
|
AAA
|
$ | 84,041 | 93.36 | % | ||||
|
AA-1
|
- | - | ||||||
|
AA-2
|
- | - | ||||||
|
AA-3
|
- | - | ||||||
|
AA
|
- | - | ||||||
|
Not
Rated(1)
|
5,973 | 6.64 | ||||||
|
Total
|
$ | 90,014 | 100.00 | % | ||||
|
(1)
|
All of the securities not rated
by Moody's are rated "AA" or higher by
S&P.
|
Deposits
and Funds Purchased
In 2007,
average total deposits of $1.99 billion decreased $44.5 million, or 2.2%, over
the comparable year. Our noninterest bearing deposits and
certificates of deposit declined $62.9 million and $32.5 million,
respectively. Savings balances declined by $14.3 million from the
prior year. Average noninterest bearing deposits as a percent of
average total deposits declined from 24.8% in 2006 to 22.2% in 2007, which is
partially attributable to the natural disintermediation that occurs in a higher
rate environment as clients seek higher yielding deposit
products. The decrease in certificates of deposit reflects
management’s strategy to manage the overall mix of deposits and not compete with
higher rate paying competitors for this funding source unless the relationship
is profitable and warrants retention. Partially offsetting the
declines above were increases in NOW and money market deposits reflecting growth
in our interest bearing “Absolutely Free” checking accounts and our negotiated
rate deposit products.
Compared
to the linked third quarter of 2007, average deposits increased $62.6 million,
or 3.2% due to a significant increase in the level of public funds, a portion of
which is attributable to normal seasonal activity, while the balance is due to
changing market conditions. During the fourth quarter, several local
government entities, which are clients, transferred significant balances from
the State Board of Administration's Local Government Investment Pool to the
Bank. These balances are reflected in our NOW account deposits, which
increased, based on monthly averages, from $521 million in September to $719
million in December. While this growth added to our net interest
income, public funds are generally higher cost deposits, which drove our average
cost of funds up and thereby lowered our net interest margin percentage for the
quarter. Although these deposits are higher rate negotiated deposits,
the changing market conditions offer an excellent opportunity to further
cultivate these relationships and take advantage of both lending and asset
management opportunities. As is normal with seasonal deposits,
management expects deposit levels to decline during the first quarter of
2008.
Table 2
provides an analysis of our average deposits, by category, and average rates
paid thereon for each of the last three years. Table 11 reflects the shift in
our 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
short-term borrowings, which include federal funds purchased, securities sold
under agreements to repurchase, Federal Home Loan Bank advances (maturing in
less than one year), and other borrowings, decreased $12.3 million, or
15.6%. The decrease is attributable to a $15.8 million decrease in
other borrowings primarily attributable to maturities of FHLB advances, and a
$0.8 million decrease in funds purchased, partially offset by a $4.3 million
increase in repurchase agreements. See Note 8 in the Notes to
Consolidated Financial Statements for further information on short-term
borrowings.
Table
11
SOURCES
OF DEPOSIT GROWTH
|
2006 to
|
Percentage
|
Components
of
|
|||||||||
|
2007
|
of
Total
|
Total
Deposits
|
|||||||||
|
(Average
Balances - Dollars in Thousands)
|
Change
|
Change
|
2007
|
2006
|
2005
|
||||||
|
Noninterest
Bearing Deposits
|
$
|
(62,922)
|
(141.4)
|
%
|
22.2
|
%
|
24.8
|
%
|
27.9
|
%
|
|
|
NOW
Accounts
|
38,389
|
86.3
|
28.0
|
25.5
|
22.0
|
||||||
|
Money
Market Accounts
|
26,936
|
60.6
|
20.0
|
18.2
|
14.1
|
||||||
|
Savings
|
(14,333)
|
(32.2)
|
6.0
|
6.6
|
7.8
|
||||||
|
Time
Deposits
|
(32,555)
|
(73.2)
|
23.9
|
24.9
|
28.2
|
||||||
|
Total
Deposits
|
$
|
(44,485)
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|
Table
12
MATURITY
DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR OVER
|
December
31, 2007
|
|||||
|
(Dollars
in Thousands)
|
Time
Certificates of Deposit
|
Percent
|
|||
|
Three
months or less
|
$
|
34,043
|
26.24
|
%
|
|
|
Over
three through six months
|
31,235
|
24.07
|
|||
|
Over
six through twelve months
|
52,823
|
40.71
|
|||
|
Over
twelve months
|
11,656
|
8.98
|
|||
|
Total
|
$
|
129,757
|
100.00
|
%
|
|
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Liquidity
for a banking institution is the availability of funds to meet increased loan
demand and excessive deposit withdrawals. Management monitors our
financial position in an effort to ensure we have ready access to sufficient
liquid funds to meet normal transaction requirements, can 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 (e.g.,
collection of interest and fees), federal funds sold, loan and investment
maturities, our bank lines of credit, approved lines for the purchase of federal
funds by CCB, and Federal Home Loan Bank advances.
We ended
2007 with $166.6 million in liquidity, an increase of $87.5 million from the
previous year-end. On a year-to-date average basis, liquidity
increased $18.1 million from 2006. The increase in average liquidity
was primarily the result of the decline in loans partially offset by the decline
in deposits and the repurchase of $43 million in our common stock during the
year. The higher level of liquidity at year-end was a result of the
aforementioned deposit growth experienced during the fourth quarter of
2007.
Borrowings
At
December 31, 2007, we had $38.7 million in borrowings outstanding to the Federal
Home Loan Bank of Atlanta ("FHLB") consisting of 32 notes. Seven
notes totaling $12.2 million are classified as short-term borrowings with the
remaining notes classified as long-term borrowings with maturities ranging from
2009 to 2023. The interest rates are fixed and the weighted average
rate at December 31, 2007 was 4.70%. Required cash payments (including principal
reductions and maturities) for the FHLB advances are detailed in Table
13. Approximately $28.6 million of the aforementioned FHLB debt is
related to match-term funding for loans originated by the
Bank. During 2007, we obtained one advance from the FHLB for $1.7
million with a fixed rate of 5.31% and maturing in 2014. The FHLB
notes are collateralized by a blanket floating lien on all 1-4 family
residential mortgage loans, commercial real estate mortgage loans, and home
equity mortgage loans. See Note 9 in the Notes to Consolidated
Financial Statements for additional information on these
borrowings.
Table
13
CONTRACTUAL
CASH OBLIGATIONS
Table 13
sets forth certain information about contractual cash obligations at December
31, 2007.
|
Payments
Due By Period
|
|||||||||||||||
|
(Dollars
in Thousands)
|
<
1 Yr
|
1 –
3 Yrs
|
3 –
5 Yrs
|
>
5 Years
|
Total
|
||||||||||
|
Federal
Home Loan Bank Advances
|
$ | 14,604 | $ | 5,493 | $ | 5,157 | $ | 13,403 | $ | 38,657 | |||||
|
Subordinated
Notes Payable
|
- | - | - | 62,887 | 62,887 | ||||||||||
|
Operating
Lease Obligations
|
1,425 | 2,318 | 1,398 | 5,700 | 10,841 | ||||||||||
|
Time
Deposit Maturities
|
408,041 | 57,101 | 2,231 | - | 467,373 | ||||||||||
|
Liability
for Unrecognized Tax Benefits
|
95 | 179 | 1,502 | 2,031 | 3,807 | ||||||||||
|
Total
Contractual Cash Obligations
|
$ | 424,165 | $ | 65,091 | $ | 10,288 | $ | 84,021 | $ | 583,565 | |||||
We issued
two junior subordinated deferrable interest notes to wholly owned Delaware
statutory trusts. The first note for $30.9 million was issued to CCBG
Capital Trust I in November 2004. The second note for $32.0 million
was issued to CCBG Capital Trust II in May 2005. See Note 9 in the
Notes to Consolidated Financial Statements for additional information on these
borrowings. The interest payments for the CCBG Capital Trust I
borrowing are due quarterly at a fixed rate of 5.71% for five years, then
adjustable annually to LIBOR plus a margin of 1.90%. This note
matures on December 31, 2034. The proceeds of this borrowing were
used to partially fund the Farmers and Merchants Bank of Dublin acquisition in
2004. The interest payments for the CCBG Capital Trust II borrowing
are due quarterly at a fixed rate of 6.07% for five years, then adjustable
quarterly to LIBOR plus a margin of 1.80%. This note matures on June
15, 2035. The proceeds of this borrowing were used to partially fund
the First National Bank of Alachua acquisition in 2005.
We
anticipate that our capital expenditures will approximate $20.0 million over the
next twelve months. These capital expenditures are expected to consist primarily
of new office construction, office equipment and furniture, and technology
purchases. Management believes that these capital expenditures can be
funded with existing resources internally without impairing our ability to meet
our on-going obligations.
Capital
We
continue to maintain a strong capital position. The ratio of
shareowners' equity to total assets at year-end was 11.19%, 12.15%, and 11.65%,
in 2007, 2006, and 2005, respectively. Management believes its strong
capital base not only offers protection against adverse developments that may
arise during the course of an economic downturn, but it also places the company
in a position to take advantage of opportunities that arise, including
investments, acquisitions, and/or stock purchases.
We are
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 I Capital. As of December
31, 2007, we exceeded these capital guidelines with a total risk-based capital
ratio of 14.05% and a Tier 1 ratio of 13.05%, compared to 14.95% and 14.00%,
respectively, in 2006. As allowed by Federal Reserve Board capital
guidelines the trust preferred securities issued by CCBG Capital Trust I and
CCBG Capital Trust II are included as Tier I Capital in our capital
calculations previously noted. See Note 9 in the Notes to
Consolidated Financial Statements for additional information on our two trust
preferred security offerings. See Note 14 in the Notes to
Consolidated Financial Statements for additional information as to our capital
adequacy.
A
tangible leverage ratio is also used in connection with the risk-based capital
standards and is defined as Tier I 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, 2007, we had a leverage ratio of 10.41%
compared to 11.30% in 2006. The slight decreases in capital ratios at December
31, 2007 reflect both balance sheet growth and the repurchase of $43.0 million
in CCBG common stock during 2007.
Shareowners'
equity as of December 31, for each of the last three years is presented
below:
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
Common
Stock
|
172 | 185 | 186 | ||||||||
|
Additional
Paid-in Capital
|
38,243 | 80,654 | 83,304 | ||||||||
|
Retained
Earnings
|
260,325 | 243,242 | 223,532 | ||||||||
|
Subtotal
|
298,740 | 324,081 | 307,022 | ||||||||
|
Accumulated
Other Comprehensive (Loss), Net of Tax
|
(6,065 | ) | (8,311 | ) | (1,246 | ) | |||||
|
Total
Shareowners' Equity
|
$ | 292,675 | $ | 315,770 | $ | 305,776 | |||||
At
December 31, 2007, our common stock had a book value of $17.03 per diluted share
compared to $17.01 in 2006. Book value is impacted by the net
unrealized gains and losses on investment securities
available-for-sale. At December 31, 2007, the net unrealized gain was
$.4 million compared to a net unrealized loss of $.8 million in
2006. Beginning in 2006, book value has been impacted by the
recording of our unfunded pension liability through other comprehensive income
in accordance with SFAS 158. At December 31, 2007, the net pension
liability reflected in other comprehensive income was $6.3 million compared to
$7.5 million at December 31, 2006.
Our Board
of Directors has authorized the repurchase of up to 2,671,875 shares of our
outstanding common stock. The purchases are made in the open market
or in privately negotiated transactions. Through December 31, 2007,
we have repurchased a total of 2,284,201 shares at an average purchase price of
$26.05 per share. During 2007, we repurchased 1,404,364 shares at an
average purchase price of $30.75.
We offer
an Associate Incentive Plan under which certain associates are eligible to earn
shares of our common stock based upon achieving established performance
goals. In 2007, we issued 32,799 shares, valued at approximately $1.2
million under this plan related to the 2006 financial performance
goal. No shares were earned under this plan in 2007.
We also
offer stock purchase plans, which permit our associates and directors to
purchase shares at a 10% discount. In 2007, 35,659 shares, valued at
approximately $1.1 million (before 10% discount), were issued under these
plans.
Dividends
Adequate
capital and financial strength is paramount to our stability and the stability
of our subsidiary bank. Cash dividends declared and paid should not
place unnecessary strain on our capital levels. When determining the
level of dividends the following factors are considered:
|
§
|
Compliance
with state and federal laws and
regulations;
|
|
§
|
Our
capital position and our ability to meet our financial
obligations;
|
|
§
|
Projected
earnings and asset levels; and
|
|
§
|
The
ability of the Bank and us to fund
dividends.
|
Although
we believe a consistent dividend payment is favorably viewed by the financial
markets and our shareowners, our Board of Directors will declare dividends only
if we are considered to have adequate capital. Future capital
requirements and corporate plans are considered when the Board considers a
dividend payment.
Dividends
declared and paid totaled $.7100 per share in 2007. For the first
through the third quarters of 2007 we declared and paid a dividend of $.1750 per
share. The dividend was raised 5.7% in the fourth quarter of 2007
from $.1750 per share to $.1850 per share. We paid dividends of
$.6625 per share in 2006 and $.6185 per share in 2005. The dividend
payout ratio was 42.77%, 37.01%, and 37.35% for 2007, 2006 and 2005,
respectively. Total cash dividends declared per share in 2007
represented a 4.1% increase over 2006. All share and per share data
has been adjusted to reflect the five-for-four stock split effective July 1,
2005.
OFF-BALANCE
SHEET ARRANGEMENTS
We do not
currently engage in the use of derivative instruments to hedge interest rate
risks. However, we are a party to financial instruments with
off-balance sheet risks in the normal course of business to meet the financing
needs of our clients.
At
December 31, 2007, we had $437.8 million in commitments to extend credit
and $17.4 million in standby letters of credit. Commitments to
extend credit are agreements to lend to a client so long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of
credit are conditional commitments issued by us to guarantee the performance of
a client to a third party. We use the same credit policies in
establishing commitments and issuing letters of credit as we do for on-balance
sheet instruments.
If
commitments arising from these financial instruments continue to require funding
at historical levels, management does not anticipate that such funding will
adversely impact our ability to meet on-going obligations. In the
event these commitments require funding in excess of historical levels,
management believes current liquidity, available advances from the FHLB and
investment security maturities provide a sufficient source of funds to meet
these commitments.
Fourth
Quarter, 2007 Financial Results
For the
fourth quarter, earnings totaled $7.7 million, or $.44 per diluted share
compared to $7.2 million, or $.41 per diluted share, in the previous
quarter. A favorable variance in operating revenues of $1.0 million
was partially offset by unfavorable variances in the loan loss provision of
$147,000 and noninterest expense of $1.7 million. The increase in
operating revenues reflects higher noninterest income of $1.4 million, partially
offset by lower net interest income of $365,000, while the increase in operating
expenses reflects the recognition of a $1.9 million litigation reserve
associated with our membership in Visa U.S.A. We also trued-up our
deferred tax liabilities which favorably impacted tax expense by $937,000 in the
fourth quarter.
For the
fourth quarter, tax equivalent net interest income decreased $321,000, or 1.1%,
compared to the previous quarter driven primarily by the loss of interest income
associated with a higher level of non-performing assets. The net
interest margin decreased 17 basis points to 5.10% for the quarter reflecting a
higher level of nonperforming assets and a shift in the mix of our interest
bearing deposits. The earning asset yield declined 25 basis points to
7.50% due primarily to a 20 basis point decline in the loan yield and a 75 basis
point reduction in the yield on short-term (over-night) investments, reflecting
rate reductions by the Federal Reserve totaling 100 basis points between
September 18th and
December 11th; and an
increasing level of nonperforming assets during the
quarter. Approximately 6 basis points of the 25 basis point reduction
in yield are attributable to a higher level of non-performing
assets. The average cost of funds declined eight basis points
reflecting a reduction of average rates paid in response to the Federal
Reserve’s rate cuts; however, a significant portion of this benefit was offset
by the influx of higher costs public funds as noted below.
The
provision for loan losses increased $147,000 over the third quarter to $1.7
million. The reserve as a percentage of total loans (net of
overdrafts) was .95% at both the end of the fourth quarter and third
quarter. For the fourth quarter, net charge-offs totaled $1.6
million, or .34% of average loans compared to $1.0 million, or .21% for previous
quarter with consumer loans accounting for $486,000, or 88% of the
increase.
Noninterest
income for the fourth quarter of $15.8 million was $1.4 million, or 9.6% higher
than the previous quarter. Higher deposit service fees ($870,000),
data processing fees ($77,000), and bankcard fees ($105,000) drove the
improvement for the quarter. Miscellaneous income also increased for
the quarter driven by gains realized on the sale of a banking office ($540,000)
and the sale of shares of Mastercard ($149,000). These favorable
variances were partially offset by a reduction in mortgage banking revenues
($217,000) and asset management fees ($100,000).
Noninterest
expense for the fourth quarter increased $1.7 million, or 5.7% over the prior
quarter due to a contingency loss accrual in the amount of $1.9 million ($1.2
million after-tax or $.07 per share) related to the company’s membership in the
Visa U.S.A. network. Excluding the impact of the aforementioned loss
accrual and a variance in pension expense ($0.2 million in pension expense was
recorded in the fourth quarter as compared to approximately $1.7 million per
quarter in prior quarters), core operating expenses increased $1.3 million due
primarily to higher salary expense ($587,000) and advertising expense
($275,000). Salary expense increased due to the true-up of
performance based incentive accruals, slightly higher base salary expense, and a
lower credit offset to salary expense from FASB 91 loan cost. The
increase in advertising expense is due to an increase in Absolutely-Free
Checking advertising costs driven by the addition of a new office, and a planned
brand recognition advertising campaign that began in the second half of the
year.
For the
quarter, earning assets averaged $2.191 billion, up from $2.145 billion in the
third quarter. The increase is primarily attributable to an increase
in deposits, which is discussed in more detail below. Average loans
for the fourth quarter increased $0.8 million to $1.908 billion, which
represents the first quarterly increase in two years. The increase in
tax-free loans ($4.9 million) is a seasonal variation which typically decreases
in the following quarter.
At
month-end December, nonperforming assets totaled $28.2 million compared to $14.1
million at the previous quarter-end. The level of non-accrual loans
increased $12.7 million during the quarter to $25.1 million. There
was a significant level of activity in the non-accrual loan category for the
quarter, but a majority of the increase can be attributed to three large loan
relationships totaling $10.7 million. Two of these loans totaling
$4.8 million are to borrowers in the real estate market and the other loan
relationship totaling $5.9 million consists of loans to a commercial
business. Other real estate owned increased by $1.4
million. The nonperforming asset ratio and nonperforming loans
coverage ratio were 1.47% and 71.9% at quarter-end compared to .74% and 145.5%,
respectively, at the end of the third quarter reflecting a rising level of
nonperforming loans during the quarter.
Average
deposits for the quarter increased $62.6 million, or 3.2% from the third quarter
due primarily to an increase in NOW accounts ($82.6), partially offset by a
reduction in DDA accounts ($16.1 million). On a period-end basis,
negotiated NOW accounts increased $211 million, or 114%, from $185 million at
the end of September to $396 million at the end of December. While a
portion of the increase is normal seasonal activity, a majority of this increase
reflects the movement from the State Board of Administration’s Local Government
Investment Pool, which encountered issues regarding the quality of its
investments and began to suffer large withdrawals and eventually had to freeze
the fund on November 29, 2007. CCB has been a beneficiary of this
movement of funds to banks. Generally, these are expensive deposits
priced at a spread below the Fed funds rate. Although profitable, the
margin on these deposits is thin. As noted above, this influx of
higher cost deposits had a significant impact on our cost of funds and,
therefore, our net interest margin percentage.
ACCOUNTING
POLICIES
Critical
Accounting Policies
The
consolidated financial statements and accompanying Notes to Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make
various estimates and assumptions (see Note 1 in the Notes to Consolidated
Financial Statements). We believe that, of our significant accounting
policies, the following may involve a higher degree of judgment and
complexity.
Allowance for Loan
Losses. The allowance for loan losses is established through a
charge to the provision for loan losses. Provisions are made to reserve for
estimated losses in loan balances. The allowance for loan losses is a
significant estimate and we evaluate the allowance quarterly for
adequacy. The use of different estimates or assumptions could produce
a different required allowance, and thereby a larger or smaller provision
recognized as expense in any given reporting period. A further
discussion of the allowance for loan losses can be found in the section entitled
"Allowance for Loan Losses" and Note 1 in the Notes to Consolidated Financial
Statements.
Intangible
Assets. Intangible assets consist primarily of goodwill, core
deposit assets, and other identifiable intangibles that were recognized in
connection with various acquisitions. Goodwill represents the excess
of the cost of acquired businesses over the fair market value of their
identifiable net assets. We perform an impairment review on an annual
basis to determine if there has been impairment of our goodwill. We
have determined that no impairment existed at December 31,
2007. Impairment testing requires management to make significant
judgments and estimates relating to the fair value of its reporting
unit. Significant changes to these estimates may have a material
impact on our reported results.
Core
deposit assets represent the premium we paid for core deposits. Core
deposit intangibles are amortized on the straight-line method over various
periods ranging from 5-10 years. Generally, core deposits refer to
nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW,
money market and savings. We make certain estimates relating to the
useful life of these assets, and rate of run-off based on the nature of the
specific assets and the client bases acquired. If there is a reason
to believe there has been a permanent loss in value, management will assess
these assets for impairment. Any changes in the original estimates
may materially affect reported earnings.
Pension Assumptions. We have a defined
benefit pension plan for the benefit of substantially all of our
associates. Our funding policy with respect to the pension plan is to
contribute amounts to the plan sufficient to meet minimum funding requirements
as set by law. Pension expense, reflected in the Consolidated
Statements of Income in noninterest expense as "Salaries and Associate
Benefits," is determined by an external actuarial valuation based on assumptions
that are evaluated annually as of December 31, the measurement date for the
pension obligation. The Consolidated Statements of Financial
Condition reflect an accrued pension benefit cost due to funding levels and
unrecognized actuarial amounts. The most significant assumptions used
in calculating the pension obligation are the weighted-average discount rate
used to determine the present value of the pension obligation, the
weighted-average expected long-term rate of return on plan assets, and the
assumed rate of annual compensation increases. These assumptions are
re-evaluated annually with the external actuaries, taking into consideration
both current market conditions and anticipated long-term market
conditions.
The
weighted-average discount rate is determined by matching the anticipated
Retirement Plan cash flows to a long-term corporate Aa-rated bond index and
solving for the underlying rate of return, which investing in such securities
would generate. This methodology is applied consistently from
year-to-year. The discount rate utilized in 2007 was
6.00%. The estimated impact to 2007 pension expense of a 25 basis
point increase or decrease in the discount rate would have been a decrease of
approximately $293,000 and an increase of approximately $306,000,
respectively. We anticipate using a 6.25% discount rate in
2008.
The
weighted-average expected long-term rate of return on plan assets is determined
based on the current and anticipated future mix of assets in the
plan. The assets currently consist of equity securities, U.S.
Government and Government agency debt securities, and other securities
(typically temporary liquid funds awaiting investment). The
weighted-average expected long-term rate of return on plan assets utilized for
2007 was 8.0%. The estimated impact to pension expense of a 25 basis
point increase or decrease in the rate of return would have been an approximate
$159,000 decrease or increase, respectively. We anticipate using a
rate of return on plan assets for 2008 of 8.0%.
The
assumed rate of annual compensation increases of 5.50% in 2007 is based on
expected trends in salaries and the employee base. This assumption is
not expected to change materially in 2008.
Detailed
information on the pension plan, the actuarially determined disclosures, and the
assumptions used are provided in Note 12 of the Notes to Consolidated Financial
Statements.
Recent
Accounting Pronouncements
Statement
of Financial Accounting Standards (“SFAS”)
SFAS No. 141,
“Business Combinations (Revised 2007).” SFAS 141R replaces SFAS 141,
“Business Combinations,” and applies to all transactions and other events in
which one entity obtains control over one or more other businesses.
SFAS 141R requires an acquirer, upon initially obtaining control of
another entity, to recognize the assets, liabilities and any non-controlling
interest in the acquiree at fair value as of the acquisition date.
Contingent consideration is required to be recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of
that consideration may be determinable beyond a reasonable doubt. This
fair value approach replaces the cost-allocation process required under
SFAS 141 whereby the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their estimated fair value.
SFAS 141R requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under SFAS 141. Under
SFAS 141R, the requirements of SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities,” would have to be met in order to
accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5,
“Accounting for Contingencies.” SFAS 141R is effective for
business combinations closing on or after January 1, 2009. We
are in the process of reviewing the impact of SFAS 141R.
SFAS No. 154,
“Accounting Changes and Error Corrections, a Replacement of APB Opinion
No. 20 and FASB Statement No. 3.” SFAS 154
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to a newly adopted accounting principle.
Previously, most changes in accounting principle were recognized by
including the cumulative effect of changing to the new accounting principle in
net income of the period of the change. SFAS 154 carries forward the
guidance in APB Opinion 20 “Accounting Changes,” requiring justification of a
change in accounting principle on the basis of preferability.
SFAS 154 also carries forward without change the guidance contained
in APB Opinion 20, for reporting the correction of an error in previously issued
financial statements and for a change in an accounting estimate. The
adoption of SFAS 154 on January 1, 2006 did not significantly impact our
financial statements.
SFAS No. 157,
"Fair Value Measurements." SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. SFAS 157 is effective on January 1, 2008 and
is not expected to have a significant impact on our financial
statements.
SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of Financial Accounting Standards Board (“FASB”) Statements
No. 87, 88 106, and 132(R)." SFAS 158 requires an employer to
recognize the over-funded or under-funded status of defined benefit
postretirement plans as an asset or a liability in its statement of financial
position. The funded status is measured as the difference between
plan assets at fair value and the benefit obligation (the projected benefit
obligation for pension plans or the accumulated benefit obligation for other
postretirement benefit plans). An employer is also required to
measure the funded status of a plan as of the date of its year-end statement of
financial position with changes in the funded status recognized through
comprehensive income. SFAS 158 also requires certain disclosures
regarding the effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of gains or losses, prior service costs or
credits, and the transition asset or obligation. We recognized the
funded status of our defined benefit pension plan in our financial statements
for the year ended December 31, 2006.
SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement
No. 115." SFAS 159 permits entities to choose to measure
eligible items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings at each subsequent reporting date. The fair
value option (i) may be applied instrument by instrument, with certain
exceptions, (ii) is irrevocable (unless a new election date occurs) and
(iii) is applied only to entire instruments and not to portions of
instruments. SFAS 159 is effective for us on January 1, 2008 and
is not expected to have a significant impact on our financial
statements.
SFAS No. 160,
“Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB Statement No. 51.” SFAS 160 amends Accounting Research
Bulletin (ARB) No. 51, “Consolidated Financial Statements,” to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as a component of equity in the consolidated
financial statements. Among other requirements, SFAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest. SFAS 160 is effective on January 1,
2009 and is not expected to have a significant impact on our financial
statements.
Financial
Accounting Standards Board Interpretations
In July
2006, the FASB issued FIN 48 which defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
"more-likely-than-not" to be sustained by the taxing authority. The
recently issued literature also provides guidance on the derecognition,
measurement and classification of income tax uncertainties, along with any
related interest and penalties. FIN 48 also includes guidance
concerning accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded income tax
uncertainties. The differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the amounts
reported after adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. FIN 48 became
effective for us in the first quarter of 2007 and did not have a material impact
on our financial statements.
Emerging
Issues Task Force
In March
2007, the FASB ratified the consensus the Emerging Issues Task Force (“EITF”)
reached regarding EITF Issue No. 06-10, “Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements” (“Issue 06-10”), which
provides accounting guidance for postretirement benefits related to collateral
assignment split-dollar life insurance arrangements, whereby the employee owns
and controls the insurance policies. The consensus concludes that an
employer should recognize a liability for the postretirement benefit in
accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions” (“Statement 106”) or Accounting Principles Board Opinion
No. 12 (“APB 12”), as well as recognize an asset based on the substance of the
arrangement with the employee. Issue 06-10 is effective for fiscal
years beginning after December 15, 2007 with early application
permitted. We are in the process of reviewing the potential impact of
Issue 06-10.
In
September 2006, the FASB ratified the consensus the EITF reached regarding EITF
Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“Issue
06-4”), which provides accounting guidance for postretirement benefits related
to endorsement split-dollar life insurance arrangements, whereby the employer
owns and controls the insurance policies. The consensus concludes
that an employer should recognize a liability for the postretirement benefit in
accordance with Statement 106 or APB 12. In addition, the consensus
states that an employer should also recognize an asset based on the substance of
the arrangement with the employee. Issue 06-4 is effective for fiscal
years beginning after December 15, 2007 with early application
permitted. We are in the process of reviewing the potential impact of
Issue 06-4.
In
September 2006, the FASB ratified the consensus the EITF reached regarding EITF
Issue No. 06-5, “Accounting for Purchases of Life Insurance — Determining
the Amount That Could Be Realized in Accordance with FASB Technical Bulletin
No. 85-4, Accounting for Purchases of Life Insurance.” FASB
Technical Bulletin No. 85-4 requires that the amount that could be realized
under the insurance contract as of the date of the statement of financial
position should be reported as an asset. Since the issuance of FASB
Technical Bulletin No. 85-4, there has been diversity in practice in the
calculation of the amount that could be realized under insurance
contracts. Issue No. 06-5 concludes that we should consider any
additional amounts (e.g., cash stabilization reserves and deferred acquisition
cost taxes) included in the contractual terms of the insurance policy other than
the cash surrender value in determining the amount that could be realized in
accordance with FASB Technical Bulletin No. 85-4. We adopted
this standard in the first quarter of 2007 and it did not have a significant
impact on our financial statements.
SEC
Staff Accounting Bulletin
Staff
Accounting Bulletin (“SAB”) No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements." SAB 108 addresses how the effects of prior year
uncorrected errors must be considered in quantifying misstatements in the
current year financial statements. The effects of prior year
uncorrected errors include the potential accumulation of improper amounts that
may result in a material misstatement on the balance sheet or the reversal of
prior period errors in the current period that result in a material misstatement
of the current period income statement amounts. Adjustments to
current or prior period financial statements would be required in the event that
after application of various approaches for assessing materiality of a
misstatement in current period financial statements and consideration of all
relevant quantitative and qualitative factors, a misstatement is determined to
be material. We adopted SAB 108 in December 2006 and analyzed
the impact of prior uncorrected misstatements under the guidance set forth in
the pronouncement.
Two
techniques are used by companies in practice to accumulate and quantify
misstatements — the “rollover” approach and the “iron curtain”
approach. The rollover approach, which is the approach we previously used,
quantifies a misstatement based on the amount of the error originating in the
current year income statement. Thus, this approach ignores the effects of
correcting the portion of the current year balance sheet misstatement that
originated in prior years. The iron curtain approach quantifies a
misstatement based on the effects of correcting the misstatement existing in the
balance sheet at the end of the current year, irrespective of the misstatement’s
year(s) of origination. Subsequent to adoption, SAB No.
108 requires registrants to begin using both approaches to evaluate prior year
misstatements.
Use of
the rollover approach resulted in an accumulation of misstatements to our
statements of financial condition that were deemed immaterial to the financial
statements because the amounts that originated in each year were quantitatively
and qualitatively immaterial. Under the iron curtain approach, the
accumulation of misstatements, when aggregated, were deemed to be material to
our financial statements in the current reporting period.
We
elected, as allowed under SAB 108, to reflect the effect of initially applying
this guidance by adjusting the carrying amount of the impacted accounts as of
the beginning of 2006 and recording an offsetting adjustment to the opening
balance of retained earnings in 2006. We recorded a cumulative effect
adjustment to decrease retained earnings by $1.2 million (after-tax) for the
adoption of SAB 108. We evaluated the impact of these adjustments on
previous periods presented in the consolidated financial statements,
individually and in the aggregate, under the rollover method and concluded that
they were immaterial to those periods’ consolidated financial
statements.
The
following table presents a description of the two adjustments included in the
cumulative adjustment to retained earnings. These adjustments were
identified by us in the normal course of performing our internal control
activities:
|
Adjustment
|
Description
|
Years
Impacted
|
|||||
|
Operating
Leases
|
$
|
715,000
|
Establish
deferred rent payable due to difference in using straight-line accounting
method for operating leases (required per SFAS 13) versus cash-basis
accounting
|
1990
- 2006
|
|||
|
Supplies
|
$
|
518,000
|
Overstatement
of prepaid supply account due to improper recognition of sales tax and
freight charges when supplies were used
|
1998
- 2006
|
|||
|
Total
|
$
|
1,233,000
|
|||||
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
|
Overview
Market
risk management arises from changes in interest rates, exchange rates, commodity
prices, and equity prices. We have risk management policies to
monitor and limit exposure to market risk and do not participate in activities
that give rise to significant market risk involving exchange rates, commodity
prices, or equity prices. In asset and liability management
activities, policies are in place that are designed to minimize structural
interest rate risk.
Interest
Rate Risk Management
The
normal course of business activity exposes us to interest rate
risk. Fluctuations in interest rates may result in changes in the
fair market value of our financial instruments, cash flows and net interest
income. We seek to avoid fluctuations in our net interest margin and
to maximize net interest income within acceptable levels of risk through periods
of changing interest rates. Accordingly, our interest rate sensitivity and
liquidity are monitored on an ongoing basis by our Asset and Liability Committee
("ALCO"), which oversees market risk management and establishes risk measures,
limits and policy guidelines for managing the amount of interest rate risk and
its effects on net interest income and capital. A variety of measures
are used to provide for a comprehensive view of the magnitude of interest rate
risk, the distribution of risk, the level of risk over time and the exposure to
changes in certain interest rate relationships.
ALCO
continuously monitors and manages the balance between interest rate-sensitive
assets and liabilities. ALCO's objective is to manage the impact of
fluctuating market rates on net interest income within acceptable
levels. In order to meet this objective, management may adjust the
rates charged/paid on loans/deposits or may shorten/lengthen the duration of
assets or liabilities within the parameters set by ALCO.
Our
financial assets and liabilities are classified as
other-than-trading. An analysis of the other-than-trading financial
components including the fair values, are presented in Table 14. This
table presents our consolidated interest rate sensitivity position as of
year-end 2007 based upon certain assumptions as set forth in the Notes to
the Table. The objective of interest rate sensitivity analysis is to
measure the impact on our net interest income due to fluctuations in interest
rates. The asset and liability values presented in Table 14 may not
necessarily be indicative of our interest rate sensitivity over an extended
period of time.
We expect
declining rates to have an unfavorable impact on the net interest margin,
subject to the magnitude and timeframe over which the rate changes
occur. However, as general interest rates rise or fall, other factors
such as current market conditions and competition may impact how we respond to
changing rates and thus impact the magnitude of change in net interest
income. Non-maturity deposits offer management greater discretion as
to the direction, timing, and magnitude of interest rate changes and can have a
material impact on our interest rate sensitivity. In addition, the
relative level of interest rates as compared to the current yields/rates of
existing assets/liabilities can impact both the direction and magnitude of the
change in net interest margin as rates rise and fall from one period to the
next.
Inflation
The
impact of inflation on the banking industry differs significantly from that of
other industries in which a large portion of total resources are invested in
fixed assets such as property, plant and equipment.
Assets
and liabilities of financial institutions are virtually all monetary in nature,
and therefore are primarily impacted by interest rates rather than changing
prices. While the general level of inflation underlies most interest rates,
interest rates react more to changes in the expected rate of inflation and to
changes in monetary and fiscal policy. Net interest income and the
interest rate spread are good measures of our ability to react to changing
interest rates and are discussed in further detail in the section entitled
"Results of Operations."
Table
14
FINANCIAL
ASSETS AND LIABILITIES MARKET RISK ANALYSIS (1)
Other
Than Trading Portfolio
|
As
of December 31, 2007
|
||||||||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
Year
1
|
Year
2
|
Year
3
|
Year
4
|
Year
5
|
Beyond
|
Total
|
Fair
Value(5)
|
||||||||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
$ | 306,159 | $ | 145,265 | $ | 99,036 | $ | 39,048 | $ | 23,130 | $ | 22,374 | $ | 635,012 | $ | 664,241 | ||||||||||||||||
|
Average
Interest Rate
|
6.76 | % | 8.11 | % | 8.05 | % | 8.48 | % | 8.56 | % | 6.68 | % | 7.44 | % | ||||||||||||||||||
|
Floating
Rate(2)
|
1,047,020 | 134,999 | 65,503 | 8,884 | 6,687 | 17,725 | 1,280,818 | 1,336,486 | ||||||||||||||||||||||||
|
Average
Interest Rate
|
7.75 | % | 7.69 | % | 7.70 | % | 7.89 | % | 8.05 | % | 8.14 | % | 7.75 | % | ||||||||||||||||||
|
Investment
Securities(3)
|
||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
96,458 | 49,810 | 33,051 | 4,271 |
2022
|
2,279 | 187,891 | 187,891 | ||||||||||||||||||||||||
|
Average
Interest Rate
|
3.58 | % | 3.96 | % | 3.72 | % | 4.60 | % | 5.15 | % | 5.27 | % | 3.76 | % | ||||||||||||||||||
|
Floating
Rate
|
2,287 | - | - | - | - | - | 2,287 | 2,287 | ||||||||||||||||||||||||
|
Average
Interest Rate
|
5.12 | % | - | - | - | - | - | 5.12 | % | |||||||||||||||||||||||
|
Other
Earning Assets
|
||||||||||||||||||||||||||||||||
|
Floating
Rate
|
166,260 | - | - | - | - | - | 166,260 | 166,260 | ||||||||||||||||||||||||
|
Average
Interest Rate
|
4.24 | % | - | - | - | - | - | 4.24 | % | |||||||||||||||||||||||
|
Total
Financial Assets
|
$ | 1,618,184 | $ | 330,074 | $ | 197,590 | $ | 52,203 | $ | 31,839 | $ | 42,378 | $ | 2,272,268 | $ | 2,357,165 | ||||||||||||||||
|
Average
Interest Rate
|
4.27 | % | 7.31 | % | 7.21 | % | 8.06 | % | 8.23 | % | 7.21 | % | 5.16 | % | ||||||||||||||||||
|
Deposits(4)
|
||||||||||||||||||||||||||||||||
|
Fixed
Rate Deposits
|
$ | 409,537 | $ | 43,005 | $ | 11,476 | $ | 2,619 | $ | 2,073 | $ | 158 | $ | 468,868 | $ | 420,251 | ||||||||||||||||
|
Average
Interest Rate
|
4.31 | % | 4.22 | % | 3.99 | % | 4.05 | % | 3.96 | % | 4.91 | % | 4.29 | % | ||||||||||||||||||
|
Floating
Rate Deposits
|
1,240,914 | - | - | - | - | - | 1,240,914 | 1,240,914 | ||||||||||||||||||||||||
|
Average
Interest Rate
|
2.25 | % | - | - | - | - | - | 2.25 | % | |||||||||||||||||||||||
|
Other
Interest Bearing
|
||||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Fixed
Rate Debt
|
2,977 | 3,368 | 3,120 | 3,077 | 3,233 | 10,956 | 26,731 | 28,284 | ||||||||||||||||||||||||
|
Average
Interest Rate
|
4.82 | % | 4.84 | % | 4.89 | % | 4.97 | % | 4.97 | % | 4.90 | % | 4.90 | % | ||||||||||||||||||
|
Floating
Rate Debt
|
52,553 | 31,506 | 31,959 | - | - | 116,018 | 116,393 | |||||||||||||||||||||||||
|
Average
Interest Rate
|
3.71 | % | 2.99 | % | 6.07 | % | 6.07 | % | - | - | 3.35 | % | ||||||||||||||||||||
|
Total
Financial Liabilities
|
$ | 1,705,981 | $ | 77,879 | $ | 46,555 | $ | 5,696 | $ | 5,306 | $ | 11,114 | $ | 1,852,531 | $ | 1,805,842 | ||||||||||||||||
|
Average
interest Rate
|
2.80 | % | 2.54 | % | 5.48 | % | 4.55 | % | 4.57 | % | 4.90 | % | 2.88 | % | ||||||||||||||||||
|
(1)
|
Based upon expected cash flows
unless otherwise indicated.
|
|
(2)
|
Based upon a combination of
expected maturities and re-pricing
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 re-priced at any time, therefore, all
such balances are included as floating rate deposits. Time deposit
balances are classified according to
maturity.
|
|
(5)
|
Fair
value of loans does not include a reduction for the allowance for loan
losses.
|
|
|
|
Item
8. Financial Statements and Supplementary Data
Table
15
QUARTERLY
FINANCIAL DATA (Unaudited)
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
(Dollars
in Thousands, Except Per Share Data)
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||||||||||||||
|
Summary
of Operations:
|
||||||||||||||||||||||||||||||||
|
Interest
Income
|
$ | 40,786 | $ | 41,299 | $ | 41,724 | $ | 41,514 | $ | 42,600 | $ | 42,512 | $ | 41,369 | $ | 39,412 | ||||||||||||||||
|
Interest
Expense
|
13,241 | 13,389 | 13,263 | 13,189 | 13,003 | 12,289 | 11,182 | 10,282 | ||||||||||||||||||||||||
|
Net
Interest Income
|
27,545 | 27,910 | 28,461 | 28,325 | 29,597 | 30,223 | 30,187 | 29,130 | ||||||||||||||||||||||||
|
Provision
for Loan Losses
|
1,699 | 1,552 | 1,675 | 1,237 | 460 | 711 | 121 | 667 | ||||||||||||||||||||||||
|
Net
Interest Income After
Provision
for Loan Losses
|
25,846 | 26,358 | 26,786 | 27,088 | 29,137 | 29,512 | 30,066 | 28,463 | ||||||||||||||||||||||||
|
Noninterest
Income
|
15,823 | 14,431 | 15,084 | 13,962 | 14,385 | 14,144 | 14,003 | 13,045 | ||||||||||||||||||||||||
|
Noninterest
Expense
|
31,614 | 29,919 | 29,897 | 30,562 | 29,984 | 30,422 | 31,070 | 30,092 | ||||||||||||||||||||||||
|
Income
Before Provision for Income Taxes
|
10,055 | 10,870 | 11,973 | 10,488 | 13,538 | 13,234 | 12,999 | 11,416 | ||||||||||||||||||||||||
|
Provision
for Income Taxes
|
2,391 | 3,699 | 4,082 | 3,531 | 4,688 | 4,554 | 4,684 | 3,995 | ||||||||||||||||||||||||
|
Net
Income
|
$ | 7,664 | $ | 7,171 | $ | 7,891 | $ | 6,957 | $ | 8,850 | $ | 8,680 | $ | 8,315 | $ | 7,421 | ||||||||||||||||
|
Net
Interest Income (FTE)
|
$ | 28,196 | $ | 28,517 | $ | 29,050 | $ | 28,898 | $ | 30,152 | $ | 30,745 | $ | 30,591 | $ | 29,461 | ||||||||||||||||
|
Per
Common Share:
|
||||||||||||||||||||||||||||||||
|
Net
Income Basic
|
$ | 0.44 | $ | 0.41 | $ | 0.43 | $ | 0.38 | $ | 0.48 | $ | 0.47 | $ | 0.44 | $ | 0.40 | ||||||||||||||||
|
Net
Income Diluted
|
0.44 | 0.41 | 0.43 | 0.38 | 0.48 | 0.47 | 0.44 | 0.40 | ||||||||||||||||||||||||
|
Dividends
Declared
|
0.185 | 0.175 | 0.175 | 0.175 | 0.175 | 0.163 | 0.163 | 0.163 | ||||||||||||||||||||||||
|
Diluted
Book Value
|
17.03 | 16.95 | 16.87 | 16.97 | 17.01 | 17.18 | 16.81 | 16.65 | ||||||||||||||||||||||||
|
Market
Price:
|
||||||||||||||||||||||||||||||||
|
High
|
34.00 | 36.40 | 33.69 | 35.91 | 35.98 | 33.25 | 35.39 | 37.97 | ||||||||||||||||||||||||
|
Low
|
24.60 | 27.69 | 29.12 | 29.79 | 30.14 | 29.87 | 29.51 | 33.79 | ||||||||||||||||||||||||
|
Close
|
28.22 | 31.20 | 31.34 | 33.30 | 35.30 | 31.10 | 30.20 | 35.55 | ||||||||||||||||||||||||
|
Selected
Average
|
||||||||||||||||||||||||||||||||
|
Balances:
|
||||||||||||||||||||||||||||||||
|
Loans
|
$ | 1,908,069 | $ | 1,907,235 | $ | 1,944,969 | $ | 1,980,224 | $ | 2,003,719 | $ | 2,025,112 | $ | 2,040,656 | $ | 2,048,642 | ||||||||||||||||
|
Earning
Assets
|
2,191,230 | 2,144,737 | 2,187,236 | 2,211,560 | 2,238,066 | 2,241,158 | 2,278,817 | 2,275,667 | ||||||||||||||||||||||||
|
Assets
|
2,519,682 | 2,467,703 | 2,511,252 | 2,530,790 | 2,557,357 | 2,560,155 | 2,603,090 | 2,604,458 | ||||||||||||||||||||||||
|
Deposits
|
2,016,736 | 1,954,160 | 1,987,418 | 2,003,726 | 2,028,453 | 2,023,523 | 2,047,755 | 2,040,248 | ||||||||||||||||||||||||
|
Shareowners’
Equity
|
299,342 | 301,536 | 309,352 | 316,484 | 323,903 | 318,041 | 315,794 | 311,461 | ||||||||||||||||||||||||
|
Common
Equivalent Average Shares:
|
||||||||||||||||||||||||||||||||
|
Basic
|
17,444 | 17,709 | 18,089 | 18,409 | 18,525 | 18,530 | 18,633 | 18,652 | ||||||||||||||||||||||||
|
Diluted
|
17,445 | 17,719 | 18,089 | 18,420 | 18,569 | 18,565 | 18,653 | 18,665 | ||||||||||||||||||||||||
|
Ratios:
|
||||||||||||||||||||||||||||||||
|
Return
on Assets
|
1.21 | % | 1.15 | % | 1.26 | % | 1.11 | % | 1.37 | % | 1.35 | % | 1.28 | % | 1.16 | % | ||||||||||||||||
|
Return
on Equity
|
10.16 | % | 9.44 | % | 10.23 | % | 8.91 | % | 10.84 | % | 10.83 | % | 10.56 | % | 9.66 | % | ||||||||||||||||
|
Net
Interest Margin (FTE)
|
5.10 | % | 5.27 | % | 5.33 | % | 5.29 | % | 5.35 | % | 5.45 | % | 5.38 | % | 5.25 | % | ||||||||||||||||
|
Efficiency
Ratio
|
68.51 | % | 66.27 | % | 64.44 | % | 67.90 | % | 63.99 | % | 64.35 | % | 66.23 | % | 67.20 | % | ||||||||||||||||
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
|
PAGE
|
|
|
54
|
|
|
56
|
|
|
57
|
|
|
58
|
|
|
59
|
|
|
60
|
Report of Independent Registered Public Accounting
Firm
The Board
of Directors and Shareholders of Capital City Bank Group, Inc.
We have
audited the accompanying consolidated statement of financial condition of
Capital City Bank Group, Inc. and subsidiary as of December 31, 2007, and the
related consolidated statements of income, changes in shareowners’ equity, and
cash flows for the year then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Capital City Bank
Group, Inc. and subsidiary at December 31, 2007 and the consolidated results of
their operations and their cash flows for the year ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Capital City Bank Group, Inc.’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
13, 2008 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Birmingham,
Alabama
March 13,
2008
Report
of Independent Registered Public Accounting Firm
The Board
of Directors
Capital
City Bank Group, Inc.:
We have
audited the accompanying consolidated statement of financial condition of
Capital City Bank Group, Inc. and subsidiary (the Company) as of
December 31, 2006 and the related consolidated statements of income,
changes in shareowners’ equity and cash flows for the years ended
December 31, 2006 and 2005. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Capital City Bank Group,
Inc. and subsidiary as of December 31, 2006 and the results of their
operations and their cash flows for the years ended December 31, 2006 and
2005, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 123R, Share Based
Payment, as of January 1, 2006, SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132R, as of December 31, 2006 and Staff
Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, as of January 1, 2006.
/s/ KPMG
LLP
Orlando,
Florida
March 14,
2007
Certified
Public Accountants
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
As
of December 31,
|
|||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
|||||
|
ASSETS
|
|||||||
|
Cash
and Due From Banks
|
$ | 93,437 | $ | 98,769 | |||
|
Federal
Funds Sold and Interest Bearing Deposits
|
166,260 | 78,795 | |||||
|
Total
Cash and Cash Equivalents
|
259,697 | 177,564 | |||||
|
Investment
Securities, Available-for-Sale
|
190,719 | 191,894 | |||||
|
Loans,
Net of Unearned Interest
|
1,915,850 | 1,999,721 | |||||
|
Allowance
for Loan Losses
|
(18,066 | ) | (17,217 | ) | |||
|
Loans,
Net
|
1,897,784 | 1,982,504 | |||||
|
Premises
and Equipment, Net
|
98,612 | 86,538 | |||||
|
Goodwill
|
84,811 | 84,811 | |||||
|
Other
Intangible Assets
|
13,757 | 19,591 | |||||
|
Other
Assets
|
70,947 | 55,008 | |||||
|
Total
Assets
|
$ | 2,616,327 | $ | 2,597,910 | |||
|
LIABILITIES
|
|||||||
|
Deposits:
|
|||||||
|
Noninterest
Bearing Deposits
|
$ | 432,659 | $ | 490,014 | |||
|
Interest
Bearing Deposits
|
1,709,685 | 1,591,640 | |||||
|
Total
Deposits
|
2,142,344 | 2,081,654 | |||||
|
Short-Term
Borrowings
|
53,131 | 65,023 | |||||
|
Subordinated
Notes Payable
|
62,887 | 62,887 | |||||
|
Other
Long-Term Borrowings
|
26,731 | 43,083 | |||||
|
Other
Liabilities
|
38,559 | 29,493 | |||||
|
Total
Liabilities
|
2,323,652 | 2,282,140 | |||||
|
SHAREOWNERS'
EQUITY
|
|||||||
|
Preferred
Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and
outstanding
|
- | - | |||||
|
Common
Stock, $.01 par value; 90,000,000 shares authorized; 17,182,553 and
18,518,398 shares issued and outstanding at December 31, 2007 and December
31, 2006, respectively
|
172 | 185 | |||||
|
Additional
Paid-In Capital
|
38,243 | 80,654 | |||||
|
Retained
Earnings
|
260,325 | 243,242 | |||||
|
Accumulated
Other Comprehensive Loss, Net of Tax
|
(6,065 | ) | (8,311 | ) | |||
|
Total
Shareowners' Equity
|
292,675 | 315,770 | |||||
|
Total
Liabilities and Shareowners' Equity
|
$ | 2,616,327 | $ | 2,597,910 | |||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
For
the Years Ended December 31,
|
|||||||||||
|
(Dollars in Thousands, Except
Per Share Data)(1)
|
2007
|
2006
|
2005
|
||||||||
|
INTEREST
INCOME
|
|||||||||||
|
Interest
and Fees on Loans
|
$ | 154,567 | $ | 156,666 | $ | 133,268 | |||||
|
Investment
Securities:
|
|||||||||||
|
U.S.
Treasury
|
574 | 453 | 412 | ||||||||
|
U.S.
Government Agencies and Corporations
|
3,628 | 3,605 | 3,223 | ||||||||
|
States
and Political Subdivisions
|
2,894 | 2,337 | 1,545 | ||||||||
|
Other
Securities
|
747 | 793 | 614 | ||||||||
|
Funds
Sold
|
2,913 | 2,039 | 991 | ||||||||
|
Total
Interest Income
|
165,323 | 165,893 | 140,053 | ||||||||
|
INTEREST
EXPENSE
|
|||||||||||
|
Deposits
|
44,687 | 37,253 | 21,134 | ||||||||
|
Short-Term
Borrowings
|
2,871 | 3,075 | 2,854 | ||||||||
|
Subordinated
Notes Payable
|
3,730 | 3,725 | 2,981 | ||||||||
|
Other
Long-Term Borrowings
|
1,794 | 2,704 | 3,094 | ||||||||
|
Total
Interest Expense
|
53,082 | 46,757 | 30,063 | ||||||||
|
NET
INTEREST INCOME
|
112,241 | 119,136 | 109,990 | ||||||||
|
Provision
for Loan Losses
|
6,163 | 1,959 | 2,507 | ||||||||
|
Net
Interest Income After
|
|||||||||||
|
Provision
for Loan Losses
|
106,078 | 117,177 | 107,483 | ||||||||
|
NONINTEREST
INCOME
|
|||||||||||
|
Service
Charges on Deposit Accounts
|
26,130 | 24,620 | 20,740 | ||||||||
|
Data
Processing
|
3,133 | 2,723 | 2,610 | ||||||||
|
Asset
Management Fees
|
4,700 | 4,600 | 4,419 | ||||||||
|
Securities
Transactions
|
14 | (4 | ) | 9 | |||||||
|
Mortgage
Banking Revenues
|
2,596 | 3,235 | 4,072 | ||||||||
|
Bank
Card Fees
|
13,706 | 12,602 | 10,619 | ||||||||
|
Other
|
9,021 | 7,801 | 6,729 | ||||||||
|
Total
Noninterest Income
|
59,300 | 55,577 | 49,198 | ||||||||
|
NONINTEREST
EXPENSE
|
|||||||||||
|
Salaries
and Associate Benefits
|
60,279 | 60,855 | 53,687 | ||||||||
|
Occupancy,
Net
|
9,347 | 9,395 | 8,293 | ||||||||
|
Furniture
and Equipment
|
9,890 | 9,911 | 8,970 | ||||||||
|
Intangible
Amortization
|
5,834 | 6,085 | 5,440 | ||||||||
|
Merger
Expense
|
- | - | 438 | ||||||||
|
Other
|
36,642 | 35,322 | 32,986 | ||||||||
|
Total
Noninterest Expense
|
121,992 | 121,568 | 109,814 | ||||||||
|
INCOME
BEFORE INCOME TAXES
|
43,386 | 51,186 | 46,867 | ||||||||
|
Income
Taxes
|
13,703 | 17,921 | 16,586 | ||||||||
|
NET
INCOME
|
$ | 29,683 | $ | 33,265 | $ | 30,281 | |||||
|
BASIC
NET INCOME PER SHARE
|
$ | 1.66 | $ | 1.79 | $ | 1.66 | |||||
|
DILUTED
NET INCOME PER SHARE
|
$ | 1.66 | $ | 1.79 | $ | 1.66 | |||||
|
Average
Basic Common Shares Outstanding
|
17,909 | 18,585 | 18,264 | ||||||||
|
Average
Diluted Common Shares Outstanding
|
17,912 | 18,610 | 18,281 | ||||||||
|
(1)
|
All
share and per share data have been adjusted to reflect the 5-for-4 stock
split effective July 1, 2005.
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
|
(Dollars in Thousands, Except
Per Share Data)(1)
|
Common
Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
(Loss)
Income,
Net
of Taxes
|
Total
|
||||||||||||||
|
Balance,
December 31, 2004
|
$ | 177 | $ | 52,328 | $ | 204,648 | $ | (353 | $ | 256,800 | |||||||||
|
Comprehensive
Income:
|
|||||||||||||||||||
|
Net
Income
|
- | - | 30,281 | - | - | ||||||||||||||
|
Net
Change in Unrealized Loss On Available-for-Sale Securities (net of
tax)
|
- | - | - | (893 | ) | - | |||||||||||||
|
Total
Comprehensive Income
|
- | - | - | - | 29,388 | ||||||||||||||
|
Cash
Dividends ($.584 per share)
|
- | - | (11,397 | ) | - | (11,397 | ) | ||||||||||||
|
Stock
Performance Plan Compensation
|
- | 968 | - | - | 968 | ||||||||||||||
|
Issuance
of Common Stock
|
9 | 30,008 | - | - | 30,017 | ||||||||||||||
|
Balance,
December 31, 2005
|
186 | 83,304 | 223,532 | (1,246 | ) | 305,776 | |||||||||||||
|
Cumulative
Effect Adjustment upon adoption of SAB No. 108 (net of
tax)
|
- | - | (1,233 | ) | - | (1,233 | ) | ||||||||||||
|
Balance
(adjusted), December 31, 2005
|
186 | 83,304 | 222,299 | (1,246 | ) | 304,543 | |||||||||||||
|
Comprehensive
Income:
|
|||||||||||||||||||
|
Net
Income
|
- | - | 33,265 | - | - | ||||||||||||||
|
Net
Change in Unrealized Loss On Available-for-Sale Securities (net of
tax)
|
- | - | - | 412 | - | ||||||||||||||
|
Total
Comprehensive Income
|
- | - | - | - | 33,677 | ||||||||||||||
|
Establish
Pension Liability upon adoption of SFAS No. 158 (net of
tax)
|
- | - | - | (7,477 | ) | (7,477 | ) | ||||||||||||
|
Cash
Dividends ($.663 per share)
|
- | - | (12,322 | ) | - | (12,322 | ) | ||||||||||||
|
Stock
Performance Plan Compensation
|
- | 1,673 | - | - | 1,673 | ||||||||||||||
|
Issuance
of Common Stock
|
1 | 1,035 | - | - | 1,036 | ||||||||||||||
|
Repurchase
of Common Stock
|
(2 | ) | (5,358 | ) | - | - | (5,360 | ) | |||||||||||
|
Balance,
December 31, 2006
|
185 | 80,654 | 243,242 | (8,311 | ) | 315,770 | |||||||||||||
|
Comprehensive
Income:
|
|||||||||||||||||||
|
Net
Income
|
- | - | 29,683 | - | - | ||||||||||||||
|
Net
Change in Unrealized Loss On Available-for-Sale Securities (net of
tax)
|
- | - | - | 1,080 | |||||||||||||||
|
Net
Change in Funded Status of Defined Pension Plan and SERP Plan (net of
tax)
|
- | - | - | 1,166 | |||||||||||||||
|
Total
Comprehensive Income
|
- | - | - | - | 31,929 | ||||||||||||||
|
Miscellaneous
– Other
|
- | - | 223 | - | 223 | ||||||||||||||
|
Cash
Dividends ($.710 per share)
|
- | - | (12,823 | ) | - | (12,823 | ) | ||||||||||||
|
Stock
Performance Plan Compensation
|
- | 265 | - | - | 265 | ||||||||||||||
|
Issuance
of Common Stock
|
1 | 571 | - | - | 572 | ||||||||||||||
|
Repurchase
of Common Stock
|
(14 | ) | (43,247 | ) | - | - | (43,261 | ) | |||||||||||
|
Balance,
December 31, 2007
|
$ | 172 | $ | 38,243 | $ | 260,325 | $ | (6,065 | ) | $ | 292,675 | ||||||||
|
(1)
|
All
share, per share, and shareowners' equity data have been adjusted to
reflect the 5-for-4 stock split effective July 1
2005.
|
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
the Years Ended December 31,
|
|||||||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||
|
Net
Income
|
$ | 29,683 | $ | 33,265 | $ | 30,281 | |||||
|
Adjustments
to Reconcile Net Income to Cash Provided by Operating
Activities:
|
|||||||||||
|
Provision
for Loan Losses
|
6,163 | 1,959 | 2,507 | ||||||||
|
Depreciation
|
6,338 | 6,795 | 5,899 | ||||||||
|
Net
Securities Amortization
|
279 | 582 | 1,454 | ||||||||
|
Amortization
of Intangible Assets
|
5,834 | 6,085 | 5,440 | ||||||||
|
(Gain)Loss
on Securities Transactions
|
(14 | ) | 4 | (9 | ) | ||||||
|
Origination of
Loans Held-for-Sale
|
(158,390 | ) | (190,945 | ) | (219,171 | ) | |||||
|
Proceeds
From Sales of Loans Held-for-Sale
|
162,835 | 194,569 | 227,853 | ||||||||
|
Net
Gain From Sales of Loans Held-for Sale
|
(2,596 | ) | (3,235 | ) | (4,072 | ) | |||||
|
Non-Cash
Compensation
|
265 | 1,673 | 968 | ||||||||
|
Deferred
Income Taxes
|
1,328 | 1,614 | 182 | ||||||||
|
Net
Increase in Other Assets
|
(12,894 | ) | (11,327 | ) | (11,839 | ) | |||||
|
Net
Increase in Other Liabilities
|
8,115 | 5,148 | 9,264 | ||||||||
|
Net
Cash Provided by Operating Activities
|
46,946 | 46,187 | 48,757 | ||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||
|
Securities
Available-for-Sale:
|
|||||||||||
|
Purchases
|
(56,289 | ) | (102,628 | ) | (45,717 | ) | |||||
|
Sales
|
- | 283 | 35,142 | ||||||||
|
Payments,
Maturities, and Calls
|
58,894 | 81,500 | 81,783 | ||||||||
|
Net
Decrease (Increase) in Loans
|
74,058 | 64,213 | (127,715 | ) | |||||||
|
Net
Cash Acquired From Acquisitions
|
- | - | 37,412 | ||||||||
|
Purchase
of Premises & Equipment
|
(18,613 | ) | (20,145 | ) | (18,336 | ) | |||||
|
Proceeds
From Sales of Premises & Equipment
|
203 | 630 | 897 | ||||||||
|
Net
Cash Provided By (Used In) Investing Activities
|
58,253 | 23,853 | (36,534 | ) | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||
|
Net
Increase (Decrease) in Deposits
|
60,690 | 2,308 | (17,125 | ) | |||||||
|
Net
Decrease in Short-Term Borrowings
|
(12,263 | ) | (31,412 | ) | (33,085 | ) | |||||
|
Proceeds
from Subordinated Notes Payable
|
- | - | 31,959 | ||||||||
|
(Decrease)
Increase in Other Long-Term Borrowings
|
(10,618 | ) | 3,250 | 23,600 | |||||||
|
Repayment
of Other Long-Term Borrowings
|
(5,363 | ) | (16,335 | ) | (2,380 | ) | |||||
|
Dividends
Paid
|
(12,823 | ) | (12,322 | ) | (11,397 | ) | |||||
|
Repurchase
of Common Stock
|
(43,261 | ) | (5,360 | ) | - | ||||||
|
Issuance
of Common Stock
|
572 | 1,036 | 1,019 | ||||||||
|
Net
Cash Used In Financing Activities
|
(23,066 | ) | (58,835 | ) | (7,409 | ) | |||||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
82,133 | 11,205 | 4,814 | ||||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
177,564 | 166,359 | 161,545 | ||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 259,697 | $ | 177,564 | $ | 166,359 | |||||
|
SUPPLEMENTAL
DISCLOSURES:
|
|||||||||||
|
Interest
Paid on Deposits
|
$ | 44,510 | $ | 36,509 | $ | 19,964 | |||||
|
Interest
Paid on Debt
|
$ | 8,463 | $ | 9,688 | $ | 8,754 | |||||
|
Taxes
Paid
|
$ | 12,431 | $ | 16,797 | $ | 15,923 | |||||
|
Loans
Transferred to Other Real Estate
|
$ | 3,494 | $ | 1,018 | $ | 2,689 | |||||
|
Cumulative
Effect Adjustment to Beginning Retained Earnings – SAB
108
|
$ | - | $ | 1,233 | $ | - | |||||
|
Cumulative
Effect Adjustment to Other Comprehensive Income to Record Minimum Pension
Liability – SFAS 158
|
$ | - | $ | 7,477 | $ | - | |||||
|
Issuance
of Common Stock as Non-Cash Compensation
|
$ | 1,160 | $ | 711 | $ | 339 | |||||
|
Transfer
of Current Portion of Long-Term Borrowings
to
Short-Term Borrowings
|
$ | 12,318 | $ | 13,061 | $ | 20,043 | |||||
The
accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
Notes to Consolidated Financial Statements
Note
1
SIGNIFICANT
ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements include the accounts of Capital City Bank
Group, Inc. ("CCBG"), and its wholly-owned subsidiary, Capital City Bank ("CCB"
or the "Bank" and together with CCBG, the "Company"). All material
inter-company transactions and accounts have been eliminated.
The
Company, which operates in a single reportable business segment comprised of
commercial banking within the states of Florida, Georgia, and Alabama, follows
accounting principles generally accepted in the United States of America and
reporting practices applicable to the banking industry. The
principles which materially affect the financial position, results of operations
and cash flows are summarized below.
The
Company determines whether it has a controlling financial interest in an entity
by first evaluating whether the entity is a voting interest entity or a variable
interest entity under accounting principles generally accepted in the United
States of America. Voting interest entities are entities in which the total
equity investment at risk is sufficient to enable the entity to finance itself
independently and provide the equity holders with the obligation to absorb
losses, the right to receive residual returns and the right to make decisions
about the entity’s activities. The Company consolidates voting
interest entities in which it has all, or at least a majority of, the voting
interest. As defined in applicable accounting standards, variable
interest entities (VIEs) are entities that lack one or more of the
characteristics of a voting interest entity. A controlling financial
interest in an entity is present when an enterprise has a variable interest, or
a combination of variable interests, that will absorb a majority of the entity’s
expected losses, receive a majority of the entity’s expected residual returns,
or both. The enterprise with a controlling financial interest, known as the
primary beneficiary, consolidates the VIE. CCBG's wholly-owned
subsidiaries, CCBG Capital Trust I (established November 1, 2004) and CCBG
Capital Trust II (established May 24, 2005) are VIEs for which the Company is
not the primary beneficiary. Accordingly, the accounts of these
entities are not included in the Company’s consolidated financial
statements.
Certain
items in prior financial statements have been reclassified to conform to the
current presentation. All acquisitions during the reported periods
were accounted for using the purchase method. Accordingly, the
operating results of the acquired companies are included with the Company’s
results of operations since their respective dates of acquisition.
On July
1, 2005, the Company executed a five-for-four stock split in the form of a 25%
stock dividend, payable to shareowners of record as of the close of business on
June 17, 2005. All share, per share, and shareowners' equity data
have been adjusted to reflect the stock split.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could vary from these
estimates. Material estimates that are particularly susceptible to
significant changes in the near-term relate to the determination of the
allowance for loan losses, income taxes, loss contingencies, and valuation of
goodwill and other intangibles and their respective analysis of
impairment.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash and due from banks, interest-bearing deposits in
other banks, and federal funds sold. Generally, federal funds are purchased
and sold for one-day periods and all other cash equivalents have a maturity of
90 days or less. The Company is required to maintain average reserve
balances with the Federal Reserve Bank based upon a percentage of
deposits. The average amounts of these reserve balances for the years
ended December 31, 2007 and 2006 were $25.8 million and $18.7 million,
respectively.
Investment
Securities
Investment
securities available-for-sale is carried at fair value and represents securities
that are available to meet liquidity and/or other needs of the
Company. Gains and losses are recognized and reported separately in
the Consolidated Statements of Income upon realization or when impairment of
values is deemed to be other than temporary. In estimating
other-than-temporary impairment losses, management considers, (i) the
length of time and the extent to which the fair value has been less than cost,
(ii) the financial condition and near-term prospects of the issuer, and
(iii) the intent and ability of the Company to retain its investment in the
issuer for a period of time sufficient to allow for anticipated recovery in fair
value. Gains or losses are recognized using the specific identification
method. Unrealized holding gains and losses for securities
available-for-sale are excluded from the Consolidated Statements of Income and
reported net of taxes in the accumulated other comprehensive income component of
shareowners' equity until realized. Accretion and amortization are
recognized on the effective yield method over the life of the
securities.
Loans
Loans are
stated at the principal amount outstanding, net of unearned income. Interest
income is accrued on the effective yield method based on outstanding
balances. Fees charged to originate loans and direct loan origination
costs are deferred and amortized over the life of the loan as a yield
adjustment. The Company defines loans as past due when one full
payment is past due or a contractual maturity is over 30 days
late. The accrual of interest is generally suspended on loans more
than 90 days past due with respect to principal or interest. When a
loan is placed on nonaccrual status, all previously accrued and uncollected
interest is reversed against current income. Interest income on
nonaccrual loans is recognized on a cash basis when the ultimate collectability
is no longer considered doubtful. Loans are returned to accrual
status when the principal and interest amounts contractually due are brought
current and future payments are reasonably assured. Loans
are charged-off (if unsecured) or written-down (if secured) when losses are
probable and reasonably quantifiable.
Loans
Held For Sale
Certain
residential mortgage loans are originated for sale in the secondary mortgage
loan market. Additionally, certain other loans are periodically
identified to be sold. The Company has the ability and intent to sell
these loans and they are classified as loans held for sale and carried at the
lower of cost or estimated fair value. At December 31, 2007 and
December 31, 2006, the Company had $2.8 million and $4.2 million, respectively,
in loans classified as held for sale which were committed to be purchased by
third party investors. Fair value is determined on the basis of rates
quoted in the respective secondary market for the type of loan held for
sale. Loans are generally sold with servicing released at a premium
or discount from the carrying amount of the loans. Such premium or discount is
recognized as mortgage banking revenue at the date of sale. Fixed
commitments may be used at the time loans are originated or identified for sale
to mitigate interest rate risk. The fair value of fixed commitments
to originate and sell loans held for sale is not material.
Allowance
for Loan Losses
The
allowance for loan losses is a reserve established through a provision for loan
losses charged to expense, which represents management’s best estimate of
probable losses that have been incurred within the existing portfolio of
loans. The allowance is that amount considered adequate to absorb
losses inherent in the loan portfolio based on management’s evaluation of credit
risk as of the balance sheet date.
The
allowance for loan losses includes allowance allocations calculated in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS 118, and allowance allocations calculated in accordance with
SFAS 5, "Accounting for Contingencies." The level of the
allowance reflects management’s continuing evaluation of specific credit risks,
loan loss experience, current loan portfolio quality, present economic
conditions and unidentified losses inherent in the current loan portfolio, as
well as trends in the foregoing. This evaluation is inherently
subjective, as it requires estimates that are susceptible to significant
revision as more information becomes available.
The
Company’s allowance for loan losses consists of three components:
(i) specific valuation allowances established for probable losses on
specific loans deemed impaired; (ii) valuation allowances calculated for
specific homogenous loan pools based on, but not limited to, historical loan
loss experience, current economic conditions, levels of past due loans, and
levels of problem loans; (iv) an unallocated allowance that reflects
management’s determination of estimation risk.
Long-Lived
Assets
Premises
and equipment is stated at cost less accumulated depreciation, computed on the
straight-line method over the estimated useful lives for each type of asset with
premises being depreciated over a range of 10 to 40 years, and equipment being
depreciated over a range of 3 to 10 years. Additions, renovations and
leasehold improvements to premises are capitalized and depreciated over the
lesser of the useful life or the remaining lease term. Repairs and
maintenance are charged to noninterest expense as incurred.
Intangible
assets, other than goodwill, consist of core deposit intangible assets, and
client relationship and non-compete assets that were recognized in connection
with various acquisitions. Core deposit intangible assets are
amortized on the straight-line method over various periods, with the majority
being amortized over an average of 5 to 10 years. Other identifiable
intangibles are amortized on the straight-line method over their estimated
useful lives.
Long-lived
assets are evaluated for impairment if circumstances suggest that their carrying
value may not be recoverable, by comparing the carrying value to estimated
undiscounted cash flows. If the asset is deemed impaired, an
impairment charge is recorded equal to the carrying value less the fair
value.
Goodwill
Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") prohibits the Company from amortizing goodwill and requires
the Company to identify reporting units to which the goodwill relates for
purposes of assessing potential impairment of goodwill on an annual basis, or
more frequently, if events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. In accordance with the
guidelines in SFAS 142, the Company determined it has one goodwill reporting
unit. As of December 31, 2007, the Company performed its annual
impairment review and concluded that no impairment adjustment was
necessary.
Foreclosed
Assets
Assets
acquired through or instead of loan foreclosure are held for sale and are
initially recorded at the lower of cost or fair value less estimated selling
costs when acquired. Costs after acquisition are generally expensed.
If the fair value of the asset declines, a write-down is recorded through
expense. The valuation of foreclosed assets is subjective in nature and
may be adjusted in the future because of changes in economic conditions.
Foreclosed assets are included in other assets in the accompanying consolidated
balance sheets and totaled $3.0 million and $0.7 million at
December 31, 2007 and 2006.
Loss
Contingencies
Loss
contingencies, including claims and legal actions arising in the ordinary course
of business are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated.
Income
Taxes
The
Company files a consolidated federal income tax return and each subsidiary files
a separate state income tax return.
Income
tax expense is the total of the current year income tax due or refundable and
the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount that is expected to be
realized. Deferred tax assets are recognized for net operating losses
that expires beginning in 2022 because the benefit is more likely than not to be
realized.
The
Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized
as a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination. For
tax positions not meeting the "more likely than not" test, no tax benefit is
recorded. The adoption had no material affect on the Company’s
financial statements.
The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense.
Earnings
Per Common Share
Basic
earnings per common share is based on net income divided by the weighted-average
number of common shares outstanding during the period excluding non-vested
stock. Diluted earnings per common share include the dilutive effect
of stock options and non-vested stock awards granted using the treasury stock
method. A reconciliation of the weighted-average shares used in
calculating basic earnings per common share and the weighted average common
shares used in calculating diluted earnings per common share for the reported
periods is provided in Note 13 — Earnings Per Share.
Comprehensive
Income
Comprehensive
income includes all changes in shareowners’ equity during a period, except those
resulting from transactions with shareholders. Besides net income,
other components of the Company’s comprehensive income include the after tax
effect of changes in the net unrealized gain/loss on securities available for
sale and changes in the funded status of defined benefit and SERP
plans. Comprehensive income is reported in the accompanying
consolidated statements of changes in shareowners’ equity.
In the
Company’s 2006 Form 10-K, a SFAS 158 transition adjustment in the amount of
$(7,477), net of tax, was recognized as a component of 2006 Comprehensive Income
in the Consolidated Statements of Changes in Shareowners’ Equity and in Note 21
– Comprehensive Income. This adjustment was misapplied as a component
of 2006 Comprehensive Income. The table below reflects the
misapplication of this adjustment at December 31, 2006.
|
As
Reported
|
Misapplied
|
As
Revised
|
||||||||||
|
Statements
of Changes in Stockholders’ Equity - Comprehensive Income
|
$ | 26,200 | $ | 7,477 | $ | 33,677 | ||||||
|
Note
21 – Comprehensive Income – Net Other Comprehensive Gain
(Loss)
|
$ | (7,065 | ) | $ | 7,477 | $ | 412 | |||||
The
Company has corrected the Comprehensive Income presentation in the appropriate
schedules within the 2007 Form 10-K. These corrections did not have
an affect on the Consolidated Statements of Financial Condition or Consolidated
Statements of Income.
Stock
Based Compensation
On
January 1, 2006, the Company changed its accounting policy related to
stock-based compensation in connection with the adoption of Statement of
Financial Accounting Standards No. 123R, "Share-Based Payment (Revised 2004)"
("SFAS 123R"). See Note 11 – Stock-Based Compensation for additional
information.
Recent
Accounting Pronouncements
Statement
of Financial Accounting Standards (“SFAS’)
SFAS No. 141,
“Business Combinations (Revised 2007).” SFAS 141R replaces SFAS 141,
“Business Combinations,” and applies to all transactions and other events in
which one entity obtains control over one or more other businesses.
SFAS 141R requires an acquirer, upon initially obtaining control of
another entity, to recognize the assets, liabilities and any non-controlling
interest in the acquiree at fair value as of the acquisition date.
Contingent consideration is required to be recognized and measured at fair
value on the date of acquisition rather than at a later date when the amount of
that consideration may be determinable beyond a reasonable doubt. This
fair value approach replaces the cost-allocation process required under
SFAS 141 whereby the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their estimated fair value.
SFAS 141R requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under SFAS 141. Under
SFAS 141R, the requirements of SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities,” would have to be met in order to
accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5,
“Accounting for Contingencies.” SFAS 141R is effective for business
combinations closing on or after January 1, 2009. The Company is
in the process of reviewing the impact of SFAS 141R.
SFAS No. 154,
“Accounting Changes and Error Corrections, a Replacement of APB Opinion
No. 20 and FASB Statement No. 3.” SFAS 154
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to a newly adopted accounting principle.
Previously, most changes in accounting principle were recognized by
including the cumulative effect of changing to the new accounting principle in
net income of the period of the change. SFAS 154 carries forward the
guidance in APB Opinion 20 “Accounting Changes,” requiring justification of a
change in accounting principle on the basis of preferability.
SFAS 154 also carries forward without change the guidance contained
in APB Opinion 20, for reporting the correction of an error in previously issued
financial statements and for a change in an accounting estimate. The
adoption of SFAS 154 on January 1, 2006 did not significantly impact the
Company’s financial statements.
SFAS No. 157,
"Fair Value Measurements." SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 is effective on January 1, 2008 and is not expected to have a
significant impact on the Company’s financial statements.
SFAS No. 158,
"Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of Financial Accounting Standards Board (“FASB”) Statements
No. 87, 88 106, and 132(R)." SFAS 158 requires an employer to
recognize the over-funded or under-funded status of defined benefit
postretirement plans as an asset or a liability in its statement of financial
position. The funded status is measured as the difference between
plan assets at fair value and the benefit obligation (the projected benefit
obligation for pension plans or the accumulated benefit obligation for other
postretirement benefit plans). An employer is also required to
measure the funded status of a plan as of the date of its year-end statement of
financial position with changes in the funded status recognized through
comprehensive income. SFAS 158 also requires certain disclosures
regarding the effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of gains or losses, prior service costs or
credits, and the transition asset or obligation. The Company
recognized the funded status of their defined benefit pension plan in the
financial statements for the year ended December 31, 2006.
SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement
No. 115." SFAS 159 permits entities to choose to measure
eligible items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings at each subsequent reporting date. The fair
value option (i) may be applied instrument by instrument, with certain
exceptions, (ii) is irrevocable (unless a new election date occurs) and
(iii) is applied only to entire instruments and not to portions of
instruments. SFAS 159 is effective January 1, 2008 and is not
expected to have a significant impact on the Company’s financial
statements.
SFAS No. 160,
“Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB Statement No. 51.” SFAS 160 amends Accounting Research
Bulletin (ARB) No. 51, “Consolidated Financial Statements,” to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160
clarifies that a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as a component of equity in the consolidated
financial statements. Among other requirements, SFAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest. SFAS 160 is effective on January 1,
2009 and is not expected to have a significant impact on the Company’s financial
statements.
Financial
Accounting Standards Board Interpretations
In July
2006, the FASB issued FIN 48 which defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
"more-likely-than-not" to be sustained by the taxing authority. The
recently issued literature also provides guidance on the de-recognition,
measurement and classification of income tax uncertainties, along with any
related interest and penalties. FIN 48 also includes guidance
concerning accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded income tax
uncertainties. The differences between the amounts recognized in the
statements of financial position prior to the adoption of FIN 48 and the amounts
reported after adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. FIN 48 became
effective in the first quarter of 2007 and did not have a material impact on the
Company’s financial statements.
Emerging
Issues Task Force
In March
2007, the FASB ratified the consensus the Emerging Issues Task Force (“EITF”)
reached regarding EITF Issue No. 06-10, “Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements” (“Issue 06-10”), which
provides accounting guidance for postretirement benefits related to collateral
assignment split-dollar life insurance arrangements, whereby the employee owns
and controls the insurance policies. The consensus concludes that an
employer should recognize a liability for the postretirement benefit in
accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions” (“Statement 106”) or Accounting Principles Board Opinion
No. 12 (“APB 12”), as well as recognize an asset based on the substance of the
arrangement with the employee. Issue 06-10 is effective for fiscal
years beginning after December 15, 2007 with early application
permitted. The Company is in the process of reviewing the potential
impact of Issue 06-10.
In
September 2006, the FASB ratified the consensus the EITF reached regarding EITF
Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“Issue
06-4”), which provides accounting guidance for postretirement benefits related
to endorsement split-dollar life insurance arrangements, whereby the employer
owns and controls the insurance policies. The consensus concludes
that an employer should recognize a liability for the postretirement benefit in
accordance with Statement 106 or APB 12. In addition, the consensus
states that an employer should also recognize an asset based on the substance of
the arrangement with the employee. Issue 06-4 is effective for fiscal
years beginning after December 15, 2007 with early application
permitted. The Company is in the process of reviewing the potential impact
of Issue 06-4.
In
September 2006, the FASB ratified the consensus the EITF reached regarding EITF
Issue No. 06-5, “Accounting for Purchases of Life Insurance — Determining
the Amount That Could Be Realized in Accordance with FASB Technical Bulletin
No. 85-4, Accounting for Purchases of Life Insurance.” FASB
Technical Bulletin No. 85-4 requires that the amount that could be realized
under the insurance contract as of the date of the statement of financial
position should be reported as an asset. Since the issuance of FASB
Technical Bulletin No. 85-4, there has been diversity in practice in the
calculation of the amount that could be realized under insurance
contracts. Issue No. 06-5 concludes that the Company should
consider any additional amounts (e.g., cash stabilization reserves and deferred
acquisition cost taxes) included in the contractual terms of the insurance
policy other than the cash surrender value in determining the amount that could
be realized in accordance with FASB Technical Bulletin
No. 85-4. The Company adopted this standard in the first quarter
of 2007 with no significant impact on their financial statements.
SEC
Staff Accounting Bulletin
Staff
Accounting Bulletin (“SAB”) No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements." SAB 108 addresses how the effects of prior year
uncorrected errors must be considered in quantifying misstatements in the
current year financial statements. The effects of prior year
uncorrected errors include the potential accumulation of improper amounts that
may result in a material misstatement on the balance sheet or the reversal of
prior period errors in the current period that result in a material misstatement
of the current period income statement amounts. Adjustments to
current or prior period financial statements would be required in the event that
after application of various approaches for assessing materiality of a
misstatement in current period financial statements and consideration of all
relevant quantitative and qualitative factors, a misstatement is determined to
be material. The Company adopted SAB 108 in December 2006 and
analyzed the impact of prior uncorrected misstatements under the guidance set
forth in the pronouncement.
Two
techniques are used by companies in practice to accumulate and quantify
misstatements — the “rollover” approach and the “iron curtain”
approach. The rollover approach, which is the approach the Company
previously used, quantifies a misstatement based on the amount of the error
originating in the current year income statement. Thus, this approach
ignores the effects of correcting the portion of the current year balance sheet
misstatement that originated in prior years. The iron curtain approach
quantifies a misstatement based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement’s year(s) of origination. Subsequent to adoption,
SAB No. 108 requires registrant’s to begin using both approaches to evaluate
prior year misstatements.
Use of
the rollover approach by the Company resulted in an accumulation of
misstatements to the Company’s statements of financial condition that were
deemed immaterial to the financial statements because the amounts that
originated in each year were quantitatively and qualitatively
immaterial. Under the iron curtain approach, the accumulation of
misstatements, when aggregated, were deemed to be material to the Company’s
financial statements in the current reporting period.
The
Company elected, as allowed under SAB 108, to reflect the effect of initially
applying this guidance by adjusting the carrying amount of the impacted accounts
as of the beginning of 2006 and recording an offsetting adjustment to the
opening balance of retained earnings in 2006. The Company recorded a
cumulative effect adjustment to decrease retained earnings by $1.2 million
(after-tax) for the adoption of SAB 108. The Company evaluated the
impact of these adjustments on previous periods presented in the consolidated
financial statements, individually and in the aggregate, under the rollover
method and concluded that they were immaterial to those periods’ consolidated
financial statements.
The
following table presents a description of the two adjustments included in the
cumulative adjustment to retained earnings. These adjustments were
identified by management in the normal course of performing their internal
control activities:
|
Adjustment
|
Description
|
Years
Impacted
|
|||
|
Operating
Leases
|
$
|
715,000
|
Establish
deferred rent payable due to difference in using straight-line accounting
for operating leases (required per SFAS 13) versus cash-basis
accounting
|
1990
- 2006
|
|
|
Supplies
|
$
|
518,000
|
Overstatement
of prepaid supply account due to improper recognition of sales tax and
freight charges when supplies were used
|
1998
- 2006
|
|
|
Total
|
$
|
1,233,000
|
|||
Note
2
INVESTMENT
SECURITIES
Investment Portfolio
Composition. The amortized cost and related market value of investment
securities available-for-sale at December 31, were as follows:
|
2007
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Market
Value
|
|||||||||||
|
U.S.
Treasury
|
$ | 16,216 | $ | 97 | $ | - | $ | 16,313 | |||||||
|
U.S.
Government Agencies and Corporations
|
45,489 | 295 | 34 | 45,750 | |||||||||||
|
States
and Political Subdivisions
|
90,014 | 164 | 177 | 90,001 | |||||||||||
|
Mortgage-Backed
Securities
|
26,334 | 85 | 132 | 26,287 | |||||||||||
|
Other
Securities(1)
|
12,307 | 61 | 0 | 12,368 | |||||||||||
|
Total
Investment Securities
|
$ | 190,360 | $ | 702 | $ | 343 | $ | 190,719 | |||||||
|
2006
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Market
Value
|
|||||||||||
|
U.S.
Treasury
|
$ | 12,098 | $ | 16 | $ | 49 | $ | 12,065 | |||||||
|
U.S.
Government Agencies and Corporations
|
61,619 | 37 | 593 | 61,063 | |||||||||||
|
States
and Political Subdivisions
|
83,621 | 16 | 415 | 83,222 | |||||||||||
|
Mortgage-Backed
Securities
|
23,244 | 23 | 371 | 22,896 | |||||||||||
|
Other
Securities(1)
|
12,648 | - | - | 12,648 | |||||||||||
|
Total
Investment Securities
|
$ | 193,230 | $ | 92 | $ | 1,428 | $ | 191,894 | |||||||
|
(1)
|
Includes FHLB and FRB stock
recorded at cost of $6.5 million and $4.8 million, respectively, at
December 31, 2007 and $7.8 million and $4.8 million, respectively, at
December 31, 2006.
|
Securities
with an amortized cost of $77.2 million and $87.6 million at December 31, 2007
and 2006, respectively, were pledged to secure public deposits and for other
purposes.
The
Company’s subsidiary, Capital City Bank, as a member of the Federal Home Loan
Bank (“FHLB”) of Atlanta, is required to own capital stock in the FHLB of
Atlanta based generally upon the balances of residential and commercial real
estate loans, and FHLB advances. FHLB stock of $6.5 million which is
included in other securities, is pledged to secure FHLB advances. No
ready market exists for this stock, and it has no quoted market
value. However, redemption of this stock has historically been at par
value.
Investment Sales. The total
proceeds from the sale or call of investment securities and the gross realized
gains and losses from the sale or call of such securities for each of the last
three years are as follows:
|
(Dollars
in Thousands)
|
Year
|
Total
Proceeds
|
Gross
Realized
Gains
|
Gross
Realized
Losses
|
|||||||||
|
2007
|
$ | 53,011 | $ | 14 | $ | - | |||||||
|
2006
|
$ | 283 | $ | - | $ | 4 | |||||||
|
2005
|
$ | 35,142 | $ | 9 | $ | - | |||||||
Maturity Distribution. As of
December 31, 2007, the Company's investment securities had the following
maturity distribution based on contractual maturities:
|
(Dollars
in Thousands)
|
Amortized
Cost
|
Market
Value
|
||||
|
Due
in one year or less
|
$
|
66,240
|
$
|
66,384
|
||
|
Due
after one through five years
|
104,647
|
104,867
|
||||
|
Due
after five through ten years
|
8,166
|
8,161
|
||||
|
No
Maturity
|
11,307
|
11,307
|
||||
|
Total
Investment Securities
|
$
|
190,360
|
$
|
190,719
|
||
Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Other Than Temporarily Impaired
Securities. Securities with unrealized losses at year-end not recognized
in income by period of time unrealized losses have existed are as
follows:
|
December
31, 2007
|
||||||||||||||||||||||||
|
Less
Than
12
months
|
Greater
Than
12
Months
|
Total
|
||||||||||||||||||||||
|
(Dollars
in Thousands)
|
Market
Value
|
Unrealized
Losses
|
Market
Value
|
Unrealized
Losses
|
Market
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
U.S.
Treasury
|
$ | 12,258 | $ | - | $ | - | $ | - | $ | 12,258 | $ | - | ||||||||||||
|
U.S.
Government Agencies and Corporations
|
39,278 | 16 | 6,471 | 18 | 45,749 | 34 | ||||||||||||||||||
|
States
and Political Subdivisions
|
70,701 | 147 | 13,924 | 30 | 84,625 | 177 | ||||||||||||||||||
|
Mortgage-Backed
Securities
|
14,058 | 4 | 10,376 | 128 | 24,434 | 132 | ||||||||||||||||||
|
Total
Investment Securities
|
$ | 136,295 | $ | 167 | $ | 30,771 | $ | 176 | $ | 167,066 | $ | 343 | ||||||||||||
|
December
31, 2006
|
||||||||||||||||||||||||
|
Less
Than
12
months
|
Greater
Than
12
Months
|
Total
|
||||||||||||||||||||||
|
(Dollars
in Thousands)
|
Market
Value
|
Unrealized
Losses
|
Market
Value
|
Unrealized
Losses
|
Market
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
U.S.
Treasury
|
$ | 12,065 | $ | 49 | $ | - | $ | - | $ | 12,065 | $ | 49 | ||||||||||||
|
U.S.
Government Agencies and Corporations
|
29,308 | 172 | 30,242 | 421 | 59,550 | 593 | ||||||||||||||||||
|
States
and Political Subdivisions
|
46,576 | 219 | 30,087 | 196 | 76,663 | 415 | ||||||||||||||||||
|
Mortgage-Backed
Securities
|
9,156 | 1 | 13,560 | 370 | 22,716 | 371 | ||||||||||||||||||
|
Total
Investment Securities
|
$ | 97,105 | $ | 441 | $ | 73,889 | $ | 987 | $ | 170,994 | $ | 1,428 | ||||||||||||
At
December 31, 2007, the Company had securities of $190.4 million with net
unrealized gains of $.4 million on these securities. Of the total,
$136.3 million with unrealized losses of $0.2 million have been in a loss
position for less than 12 months and $30.8 million, with unrealized losses of
$.2 million, have been in a loss position for longer than 12
months. The Company believes that these securities are only
temporarily impaired and that the full principal will be collected as
anticipated.
Of the
total, $58.0 million, or 34.7%, is either a direct obligation of the U.S.
Government or its agencies and are in a loss position because they were acquired
when the general level of interest rates was lower than that on December 31,
2007. As of December 31, 2007, $24.4 million, or 14.6% are
mortgage-backed securities that are obligations of U.S. Government sponsored
entities. The mortgage-backed securities are in a loss position due
to either the lower interest rate at time of purchase or due to accelerated
prepayments driven by the low rate environment. The remaining $84.6
million, or 50.7%, of the securities in a loss position are municipal bonds
which all maintain satisfactory ratings by a credit rating
agency. The municipal bonds are also in a loss position due to the
lower interest rate environment at the time of purchase.
Because
the declines in the market value of these investments are attributable to
changes in interest rates and not credit quality and because the Company has the
ability and intent to hold these investments until there is a recovery in fair
value, which may be maturity, the Company does not consider these investments to
be other-than-temporarily impaired at December 31, 2007.
Note
3
LOANS
Loan Portfolio Composition.
At December 31, the composition of the Company's loan portfolio was as
follows:
|
(Dollars
in Thousands)
|
2007
|
2006
|
|||||
|
Commercial,
Financial and Agricultural
|
$ | 208,864 | $ | 229,327 | |||
|
Real
Estate - Construction
|
142,248 | 179,072 | |||||
|
Real
Estate - Commercial Mortgage
|
634,920 | 643,885 | |||||
|
Real
Estate – Residential(1)
|
485,608 | 531,968 | |||||
|
Real
Estate - Home Equity
|
192,428 | 173,597 | |||||
|
Real
Estate - Loans Held-for-Sale
|
2,764 | 4,170 | |||||
|
Consumer
|
249,018 | 237,702 | |||||
|
Total
Loans, Net of Unearned Interest
|
$ | 1,915,850 | $ | 1,999,721 | |||
Net
deferred fees included in loans at December 31, 2007 and December 31, 2006 were
$1.6 million and $1.5 million, respectively.
(1)
Includes loans in process with outstanding balances of $7.4 million and $11.5
million for 2007 and 2006, respectively.
Concentrations of
Credit. Substantially all of the Company's lending activity
occurs within the states of Florida, Georgia, and Alabama. A large
majority of the Company's loan portfolio (76.1%) consists of loans secured by
real estate, the primary types of collateral being commercial properties and
residential properties. At December 31, 2007, commercial real estate
mortgage loans and residential real estate mortgage loans accounted for 33.1%
and 35.5% of the loan portfolio, respectively. As of December 31,
2007, there were no concentrations of loans related to any single borrower or
industry in excess of 10% of total loans.
Nonperforming/Past Due Loans.
Nonaccruing loans amounted to $25.1 million and $8.0 million, at December 31,
2007 and 2006, respectively. There were no restructured loans at
December 31, 2007 or 2006. 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 collectability 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
$922,000, $483,000, and $186,000 higher for the years ended December 31, 2007,
2006, and 2005, respectively. Accruing loans past due more than 90
days totaled $416,000 at December 31, 2007 and $135,000 at December 31,
2006.
Note
4
ALLOWANCE
FOR LOAN LOSSES
An
analysis of the changes in the allowance for loan losses for the years ended
December 31, is as follows:
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
Balance,
Beginning of Year
|
$ | 17,217 | $ | 17,410 | $ | 16,037 | |||||
|
Acquired
Reserves
|
- | - | 1,385 | ||||||||
|
Provision
for Loan Losses
|
6,163 | 1,959 | 2,507 | ||||||||
|
Recoveries
on Loans Previously Charged-Off
|
1,903 | 1,830 | 1,724 | ||||||||
|
Loans
Charged-Off
|
(7,217 | ) | (3,982 | ) | (4,243 | ) | |||||
|
Balance,
End of Year
|
$ | 18,066 | $ | 17,217 | $ | 17,410 | |||||
Impaired Loans. Selected
information pertaining to impaired loans, at December 31, is as
follows:
|
2007
|
2006
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Valuation
Balance
|
Valuation
Allowance
|
Valuation
Balance
|
Valuation
Allowance
|
||||||||||||
|
Impaired
Loans:
|
||||||||||||||||
|
With
Related Credit Allowance
|
$ | 21,615 | $ | 4,702 | $ | 6,085 | $ | 2,255 | ||||||||
|
Without
Related Credit Allowance
|
15,019 | - | 4,574 | - | ||||||||||||
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
Average
Recorded Investment in Impaired Loans
|
$ | 23,922 | $ | 12,782 | $ | 9,786 | |||||
|
Interest
Income on Impaired Loans
|
|||||||||||
|
Recognized
|
$ | 761 | $ | 398 | $ | 218 | |||||
|
Collected
in Cash
|
761 | 398 | 218 | ||||||||
Interest
payments received on impaired loans are recorded as interest income unless
collection of the remaining recorded investment is doubtful, at which time
payments received are recorded as reduction of principal.
Note
5
INTANGIBLE
ASSETS
The
Company had intangible assets of $98.6 million and $104.4 million at December
31, 2007 and December 31, 2006, respectively. Intangible assets at
December 31, were as follows:
|
2007
|
2006
|
||||||||||||||
|
(Dollars
in Thousands)
|
Gross
Amount
|
Accumulated
Amortization
|
Gross
Amount
|
Accumulated
Amortization
|
|||||||||||
|
Core
Deposits Intangibles
|
$ | 47,176 | $ | 34,598 | $ | 47,176 | $ | 28,955 | |||||||
|
Goodwill
|
84,811 | - | 84,811 | - | |||||||||||
|
Customer
Relationship Intangible
|
1,867 | 688 | 1,867 | 497 | |||||||||||
|
Non-Compete
Agreement
|
537 | 537 | 537 | 537 | |||||||||||
|
Total
Intangible Assets
|
$ | 134,391 | $ | 35,823 | $ | 134,391 | $ | 29,989 | |||||||
Net Core Deposit
Intangibles. As of December 31, 2007 and December 31, 2006,
the Company had net core deposit intangibles of $12.6 million and $18.2 million,
respectively. Amortization expense for the twelve months of 2007,
2006 and 2005 was $5.6 million, $5.6 million, and $5.0 million,
respectively. The estimated annual amortization expense (in millions)
for the next five years is expected to be approximately $5.5, $3.9, $3.9, $2.4,
and $0.6 per year.
Goodwill. As of
December 31, 2007 and December 31, 2006, the Company had goodwill of $84.8
million. Goodwill is the Company's only intangible asset that is no
longer subject to amortization under the provisions of SFAS 142. On
December 31, 2007, the Company performed its annual impairment review and
concluded that no impairment adjustment was necessary.
Other. As of
December 31, 2007, the Company had a client relationship intangible, net of
accumulated amortization, of $1.2 million. This intangible was booked
as a result of the March 2004 acquisition of trust client relationships from
Synovus Trust Company. Amortization expense for 2007 was
$191,000. Estimated annual amortization expense is $191,000 based on
use of a 10-year useful life. The Company also had a non-compete
intangible during 2006 which became fully amortized at the end of
2006. This intangible was booked as a result of the October 2004
acquisition of Farmers and Merchants Bank of Dublin. Amortization expense for
this intangible during 2006 was $250,000.
Note
6
PREMISES
AND EQUIPMENT
The
composition of the Company's premises and equipment at December 31, was as
follows:
|
(Dollars
in Thousands)
|
2007
|
2006
|
|||||
|
Land
|
$ | 22,722 | $ | 22,597 | |||
|
Buildings
|
90,335 | 78,676 | |||||
|
Fixtures
and Equipment
|
55,783 | 52,129 | |||||
|
Total
|
168,840 | 153,402 | |||||
|
Accumulated
Depreciation
|
(70,228 | ) | (66,864 | ) | |||
|
Premises
and Equipment, Net
|
$ | 98,612 | $ | 86,538 | |||
Note
7
DEPOSITS
Interest
bearing deposits, by category, as of December 31, were as follows:
|
(Dollars
in Thousands)
|
2007
|
2006
|
|||||
|
NOW
Accounts
|
$ | 744,093 | $ | 599,433 | |||
|
Money
Market Accounts
|
386,619 | 384,568 | |||||
|
Savings
Accounts
|
111,600 | 125,500 | |||||
|
Time
Deposits
|
467,373 | 482,139 | |||||
|
Total
|
$ | 1,709,685 | $ | 1,591,640 | |||
At
December 31, 2007 and 2006, $5.6 million and $3.1 million, respectively, in
overdrawn deposit accounts were reclassified as loans.
Deposits
from certain directors, executive officers, and their related interests totaled
$47.6 million and $30.7 million at December 31, 2007 and 2006,
respectively.
Time
deposits in denominations of $100,000 or more totaled $129.7 million and $135.0
million at December 31, 2007 and December 31, 2006, respectively.
At
December 31, 2007, the scheduled maturities of time deposits were as
follows:
|
(Dollars
in Thousands)
|
|||
|
2008
|
$
|
408,041
|
|
|
2009
|
43,277
|
||
|
2010
|
11,205
|
||
|
2011
|
2,619
|
||
|
2012
and thereafter
|
2,231
|
||
|
Total
|
$
|
467,373
|
|
Interest
expense on deposits for the three years ended December 31, was as
follows:
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
NOW
Accounts
|
$ | 10,748 | $ | 7,658 | $ | 2,868 | |||||
|
Money
Market Accounts
|
13,666 | 11,687 | 4,337 | ||||||||
|
Savings
Accounts
|
280 | 278 | 292 | ||||||||
|
Time
Deposits < $100,000
|
13,990 | 12,087 | 9,247 | ||||||||
|
Time
Deposits > $100,000
|
6,003 | 5,543 | 4,390 | ||||||||
|
Total
|
$ | 44,687 | $ | 37,253 | $ | 21,134 | |||||
Note
8
SHORT-TERM
BORROWINGS
Short-term
borrowings included the following:
|
(Dollars
in Thousands)
|
Federal
Funds
Purchased
|
Securities
Sold
Under
Repurchase
Agreements
|
Other
Short-Term
Borrowings
|
|||||||
|
2007
|
||||||||||
|
Balance
at December 31,
|
$
|
7,550
|
$
|
32,806
|
$
|
12,775
|
(1)
|
|||
|
Maximum
indebtedness at any month end
|
26,400
|
47,047
|
13,664
|
|||||||
|
Daily
average indebtedness outstanding
|
15,812
|
38,683
|
11,902
|
|||||||
|
Average
rate paid for the year
|
4.89
|
%
|
4.11
|
%
|
4.17
|
%
|
||||
|
Average
rate paid on period-end borrowings
|
2.47
|
%
|
3.32
|
%
|
4.29
|
%
|
||||
|
2006
|
||||||||||
|
Balance
at December 31,
|
$
|
11,950
|
$
|
38,022
|
$
|
15,051
|
(1)
|
|||
|
Maximum
indebtedness at any month end
|
39,225
|
55,321
|
34,738
|
|||||||
|
Daily
average indebtedness outstanding
|
16,645
|
34,335
|
27,720
|
|||||||
|
Average
rate paid for the year
|
4.82
|
%
|
3.79
|
%
|
3.47
|
%
|
||||
|
Average
rate paid on period-end borrowings
|
4.61
|
%
|
3.79
|
%
|
3.90
|
%
|
||||
|
2005
|
||||||||||
|
Balance
at December 31,
|
$
|
11,925
|
$
|
38,702
|
$
|
32,346
|
||||
|
Maximum
indebtedness at any month end
|
26,825
|
65,206
|
67,122
|
|||||||
|
Daily
average indebtedness outstanding
|
31,644
|
39,784
|
26,435
|
|||||||
|
Average
rate paid for the year
|
3.36
|
%
|
2.30
|
%
|
3.32
|
%
|
||||
|
Average
rate paid on period-end borrowings
|
3.88
|
%
|
3.21
|
%
|
3.48
|
%
|
||||
|
(1)
|
Includes
FHLB debt and TT&L (client tax deposits) balance of $12.2 million and
$0.6 million, respectively at December 31, 2007 and $13.0 million and $2.0
million, respectively at December 31,
2006.
|
Note
9
LONG-TERM
BORROWINGS
Federal Home Loan Bank
Notes. At December 31, Federal Home Loan Bank advances
included:
|
(Dollars
in Thousands)
|
2007
|
2006
|
||||
|
Due
on February 13, 2007, fixed rate of 3.05%(1)
|
- | 3,000 | ||||
|
Due
on April 24, 2007, fixed rate of 7.30%(1)
|
- | 23 | ||||
|
Due
on September 10, 2007, fixed rate of 4.29%(1)
|
- | 10,000 | ||||
|
Due
on May 30, 2008, fixed rate of 2.50%(1)
|
21 | 61 | ||||
|
Due
on June 13, 2008, fixed rate of 5.40%(1)
|
72 | 214 | ||||
|
Due
on September 8, 2008, fixed rate of 4.32%(1)
|
10,000 | 10,000 | ||||
|
Due
on November 10, 2008, fixed rate of 4.12%(1)
|
2,105 | 2,189 | ||||
|
Due
on October 19, 2009, fixed rate of 3.69%
|
302 | 470 | ||||
|
Due
on November 10, 2010, fixed rate of 4.72%
|
695 | 722 | ||||
|
Due
on December 31, 2010, fixed rate of 3.85%
|
524 | 699 | ||||
|
Due
on December 18, 2012, fixed rate of 4.84%
|
542 | 566 | ||||
|
Due
on March 18, 2013, fixed rate of 6.37%
|
499 | 571 | ||||
|
Due
on June 17, 2013, fixed rate of 3.53%
|
692 | 793 | ||||
|
Due
on June 17, 2013, fixed rate of 3.85%
|
85 | 89 | ||||
|
Due
on June 17, 2013, fixed rate of 4.11%
|
1,660 | 1,720 | ||||
|
Due
on September 23, 2013, fixed rate of 5.64%
|
727 | 824 | ||||
|
Due
on January 26, 2014, fixed rate of 5.79%
|
1,131 | |||||
|
Due
on January 27, 2014, fixed rate of 5.79%
|
1,641 | 1,191 | ||||
|
Due
on March 10, 2014, fixed rate of 4.21%
|
505 | 571 | ||||
|
Due
on May 27, 2014, fixed rate of 5.92%
|
386 | 435 | ||||
|
Due
on June 2, 2014, fixed rate of 4.52%
|
2,726 | 3,078 | ||||
|
Due
on July 20, 2016, fixed rate of 6.27%
|
1,016 | 1,134 | ||||
|
Due
on October 3, 2016, fixed rate of 5.41%
|
265 | 295 | ||||
|
Due
on October 31, 2016, fixed rate of 5.16%
|
589 | 656 | ||||
|
Due
on June 27, 2017, fixed rate of 5.53%
|
665 | 735 | ||||
|
Due
on October 31, 2017, fixed rate of 4.79%
|
819 | 903 | ||||
|
Due
on December 11, 2017, fixed rate of 4.78%
|
728 | 802 | ||||
|
Due
on February 26, 2018, fixed rate of 4.36%
|
1,735 | 1,906 | ||||
|
Due
on September 18, 2018, fixed rate of 5.15%
|
516 | 564 | ||||
|
Due
on November 5, 2018, fixed rate of 5.10%
|
3,364 | 3,499 | ||||
|
Due
on December 3, 2018, fixed rate of 4.87%
|
541 | 590 | ||||
|
Due
on December 17, 2018, fixed rate of 6.33%
|
1,401 | 1,486 | ||||
|
Due
on December 24, 2018, fixed rate of 6.29%
|
- | 681 | ||||
|
Due
on February 16, 2021, fixed rate of 3.00%
|
776 | 814 | ||||
|
Due
on January 18, 2022, fixed rate of 5.25%
|
1,033 | 3,250 | ||||
|
Due
on May 30, 2023, fixed rate of 2.50%
|
896 | 933 | ||||
|
Total
Outstanding
|
$ | 38,657 | $ | 55,464 | ||
|
(1)
|
$12.2
million is classified as short-term
borrowings.
|
The
contractual maturities of FHLB debt for the five years subsequent to December
31, 2007, are as follows:
|
(Dollars
in Thousands)
|
|||
|
2008
|
$
|
14,604
|
(1)
|
|
2009
|
2,465
|
||
|
2010
|
3,028
|
||
|
2011
|
2,322
|
||
|
2012
|
2,835
|
||
|
2013
and thereafter
|
13,403
|
||
|
Total
|
$
|
38,657
|
|
|
(1)
|
$12.2
million is classified as short-term
borrowings.
|
The FHLB
advances are collateralized by a blanket floating lien on all 1-4 family
residential mortgage loans, commercial real estate mortgage loans, and home
equity mortgage loans. Interest on the FHLB advances is paid on a monthly
basis.
Repurchase Agreements -
Term. At December 31, the Company maintained one long-term
repurchase agreement for $0.3 million collateralized by bank-owned
securities. The agreement has a stated maturity of January
2009. Interest is payable upon maturity.
Junior Subordinated Deferrable
Interest Notes. The Company has issued two junior subordinated
deferrable interest notes to wholly owned Delaware statutory
trusts. The first note for $30.9 million was issued to CCBG Capital
Trust I. The second note for $32.0 million was issued to CCBG Capital
Trust II. The two trusts are considered variable interest entities for which the
Company is not the primary beneficiary. Accordingly, the accounts of
the trusts are not included in the Company’s consolidated financial statements.
See Note 1 - Summary of Significant Accounting Policies for additional
information about the Company’s consolidation policy. Details of the
Company’s transaction with the two trusts are provided below.
In
November 2004, CCBG Capital Trust I issued $30.0 million of trust preferred
securities which represent beneficial interest in the assets of the
trust. The interest rate is fixed at 5.71% for a period of five
years, then adjustable annually to LIBOR plus a margin of 1.90%. The
trust preferred securities will mature on December 31, 2034, and are redeemable
upon approval of the Federal Reserve in whole or in part at the option of the
Company at any time after December 31, 2009 and in whole at any time upon
occurrence of certain events affecting their tax or regulatory capital
treatment. Distributions on the trust preferred securities are payable quarterly
on March 31, June 30, September 30, and December 31 of each
year. CCBG Capital Trust I also issued $928,000 of common equity
securities to CCBG. The proceeds of the offering of trust preferred
securities and common equity securities were used to purchase a $30.9 million
junior subordinated deferrable interest note issued by the Company, which has
terms substantially similar to the trust preferred securities.
In May
2005, CCBG Capital Trust II issued $31.0 million of trust preferred securities
which represent beneficial interest in the assets of the trust. The
interest rate is fixed at 6.07% for a period of five years, then adjustable
quarterly to LIBOR plus a margin of 1.80%. The trust preferred
securities will mature on June 15, 2035, and are redeemable upon approval of the
Federal Reserve in whole or in part at the option of the Company at
any time after May 20, 2010 and in whole at any time upon occurrence of certain
events affecting their tax or regulatory capital treatment. Distributions on the
trust preferred securities are payable quarterly on March 15, June 15, September
15, and December 15 of each year. CCBG Capital Trust II also issued
$959,000 of common equity securities to CCBG. The proceeds of the
offering of trust preferred securities and common equity securities were used to
purchase a $32.0 million junior subordinated deferrable interest note issued by
the Company, which has terms substantially similar to the trust preferred
securities.
The
Company has the right to defer payments of interest on the two notes at any time
or from time to time for a period of up to twenty consecutive quarterly interest
payment periods. Under the terms of each note, in the event that
under certain circumstances there is an event of default under the note or the
Company has elected to defer interest on the note, the Company may not, with
certain exceptions, declare or pay any dividends or distributions on its capital
stock or purchase or acquire any of its capital stock. The Company is current on
the interest payment obligations and has not executed the right to defer
interest payments on the notes.
The
Company has entered into agreements to guarantee the payments of distributions
on the trust preferred securities and payments of redemption of the trust
preferred securities. Under these agreements, the Company also
agrees, on a subordinated basis, to pay expenses and liabilities of the two
trusts other than those arising under the trust preferred
securities. The obligations of the Company under the two junior
subordinated notes, the trust agreements establishing the two trusts, the
guarantee and agreement as to expenses and liabilities, in aggregate, constitute
a full and conditional guarantee by the Company of the two trusts' obligations
under the two trust preferred security issuances.
Despite
the fact that the accounts of CCBG Capital Trust I and CCBG Capital Trust II are
not included in the Company’s consolidated financial statements, the $30.0
million and $31.0 million, respectively, in trust preferred securities issued by
these subsidiary trusts are included in the Tier I Capital of Capital City
Bank Group, Inc. as allowed by Federal Reserve guidelines.
Note
10
INCOME
TAXES
The
provision for income taxes reflected in the statements of income is comprised of
the following components:
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
Current:
|
|||||||||||
|
Federal
|
$ | 13,603 | $ | 14,780 | $ | 15,114 | |||||
|
State
|
280 | 1,527 | 1,290 | ||||||||
|
Deferred:
|
|||||||||||
|
Federal
|
(32 | ) | 1,384 | 156 | |||||||
|
State
|
(148 | ) | 230 | 26 | |||||||
|
Total
|
$ | 13,703 | $ | 17,921 | $ | 16,586 | |||||
Income
taxes provided were different than the tax expense computed by applying the
statutory federal income tax rate of 35% to pre-tax income as a result of the
following:
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
Tax
Expense at Federal Statutory Rate
|
$ | 15,185 | $ | 17,915 | $ | 16,403 | |||||
|
Increases
(Decreases) Resulting From:
|
|||||||||||
|
Tax-Exempt
Interest Income
|
(1,630 | ) | (1,334 | ) | (1,054 | ) | |||||
|
State
Taxes, Net of Federal Benefit
|
86 | 1,142 | 856 | ||||||||
|
Other
|
62 | 198 | 381 | ||||||||
|
Actual
Tax Expense
|
$ | 13,703 | $ | 17,921 | $ | 16,586 | |||||
Deferred
income tax liabilities and assets result from differences between assets and
liabilities measured for financial reporting purposes and for income tax return
purposes. These assets and liabilities are measured using the enacted
tax rates and laws that are currently in effect. The net deferred tax
asset and the temporary differences comprising that balance at December 31, 2007
and 2006 are as follows:
|
(Dollars
in Thousands)
|
2007
|
2006
|
|||||
|
Deferred
Tax Assets attributable to:
|
|||||||
|
Allowance
for Loan Losses
|
$ | 7,110 | $ | 6,659 | |||
|
Associate
Benefits
|
510 | 700 | |||||
|
Unrealized
Losses on Investment Securities
|
- | 503 | |||||
|
Accrued
Pension/SERP
|
3,964 | 4,795 | |||||
|
Interest
on Nonperforming Loans
|
603 | 170 | |||||
|
State
Net Operating Loss Carry Forwards
|
511 | 399 | |||||
|
Intangible
Assets
|
95 | 70 | |||||
|
Core
Deposit Intangible
|
1,360 | 278 | |||||
|
Contingency
Reserve
|
746 | - | |||||
|
Accrued
Expense
|
611 | 612 | |||||
|
Leases
|
464 | 449 | |||||
|
Other
|
517 | 386 | |||||
|
Total
Deferred Tax Assets
|
$ | 16,491 | $ | 15,021 | |||
|
Deferred
Tax Liabilities attributable to:
|
|||||||
|
Depreciation
on Premises and Equipment
|
$ | 3,290 | $ | 4,434 | |||
|
Deferred
Loan Fees and Costs
|
3,887 | 2,550 | |||||
|
Unrealized
Gains on Investment Securities
|
113 | - | |||||
|
Intangible
Assets
|
1,619 | 1,319 | |||||
|
Accrued
Pension/SERP
|
4,669 | 2,321 | |||||
|
Securities
Accretion
|
25 | 25 | |||||
|
Market
Value on Loans Held for Sale
|
59 | 122 | |||||
|
Other
|
68 | 223 | |||||
|
Total
Deferred Tax Liabilities
|
13,730 | 10,994 | |||||
|
Net
Deferred Tax Assets
|
$ | 2,761 | $ | 4,027 | |||
In the
opinion of management, it is more likely than not that all of the deferred tax
assets will be realized; therefore, a valuation allowance is not
required. At year-end 2007, the Company had state net operating loss
carry-forwards of approximately $14.0 million which expire at various dates from
2022 through 2027.
Changes
in net deferred income tax assets were:
|
(Dollars
in Thousands)
|
2007
|
2006
|
|||||
|
Balance
at Beginning of Year
|
$ | 4,027 | $ | 380 | |||
|
Change
in Accounting Method – Adoption of SFAS No. 158 and SAB No.
108
|
- | 5,463 | |||||
|
Income
Tax Expense From Change in Pension Liability
|
(830 | ) | - | ||||
|
Income
Tax Expense From Change in Unrealized Losses on Available-for-Sale
Securities
|
(616 | ) | (202 | ) | |||
|
Deferred
Income Tax Expense on Continuing Operations
|
180 | (1,614 | ) | ||||
|
Balance
at End of Year
|
$ | 2,761 | $ | 4,027 | |||
The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Income Tax Uncertainties" ("FIN 48"), on January 1, 2007. There was
no material effect on its financial condition or results of operations as a
result of implementing FIN 48. The Company had unrecognized tax
benefits at January 1, 2007 and December 31, 2007 of $2.0 million and $3.3
million, respectively, of which $2.2 million would increase income from
continuing operations, and thus impact the Company’s effective tax rate, if
ultimately recognized into income.
A
reconciliation of the beginning and ending unrecognized tax benefit is as
follows:
|
(Dollars
in Thousands)
|
2007
|
|||
|
Balance
at January 1, 2007
|
$
|
2,021
|
||
|
Addition
Based on Tax Positions Related to Prior Years
|
252
|
|||
|
Addition
Based on Tax Positions Related to
Current Years
|
981
|
|||
|
Balance
at December 31, 2007
|
$
|
3,254
|
||
It is the
Company’s policy to recognize interest and penalties accrued relative to
unrecognized tax benefits in their respective federal or state income tax
accounts. The total amount of interest and penalties recorded in the
income statement for the year ended December 31, 2007 was $409,000, and the
amount accrued for penalties and interest at December 31, 2007 was
$553,000.
The
Company and its subsidiaries file a consolidated U.S. federal income tax return,
as well as filing various returns in states where the Company is doing
business. The Company is no longer subject to U.S. federal or state
tax examinations for years before 2004. No material change to the
Company’s unrecognized tax positions is expected over the next 12
months.
Note
11
STOCK-BASED
COMPENSATION
In
accordance with the Company’s adoption of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), in the first quarter of 2003, the cost
related to stock-based associate compensation included in net income has been
accounted for under the fair value method in all reported periods.
On
January 1, 2006, the Company adopted SFAS 123R “Share-Based Payment”
(Revised). The Company continues to include the cost of its
share-based compensation plans in net income under the fair value
method.
As of
December 31, 2007, the Company had four stock-based compensation plans,
consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate
Stock Purchase Plan ("ASPP"), the 2005 Director Stock Purchase Plan ("DSPP"),
and the 2011 Incentive Plan (“2011 Plan”). Total compensation expense
associated with these plans for years 2005 through 2007 was approximately $0.8
million, $1.2 million, and $0.2 million, respectively.
AIP. The Company's
AIP allows the Company's Board of Directors to award key associates various
forms of equity-based incentive compensation. Under the AIP, the
Company adopted the Stock-Based Incentive Plan (the "Incentive Plan"), effective
January 1, 2006, which is a performance-based equity bonus plan for selected
members of management, including all executive officers. Under the
Incentive Plan, all participants are eligible to earn performance shares,
payable in the form of restricted stock, on an annual basis. Annual
awards are tied to an internally established annual earnings
target. The grant-date fair value of an annual compensation award is
approximately $1.5 million. In addition, each plan participant is
eligible to receive from the Company a tax supplement bonus equal to 31% of the
stock award value at the time of issuance. A total of 43,437 shares
are eligible for issuance annually.
At the
end of each calendar year, the Compensation Committee of the Company’s Board of
Directors will confirm whether the performance goals have been met prior to the
payout of any awards. Any performance shares earned under the
Incentive Plan will be issued in the calendar quarter following the calendar
year in which the shares were earned. A total of 32,799 shares were
issued under this plan during the first quarter of 2007 related to the 2006
award.
The
Company did not recognize any expense for the year 2007 related to the Incentive
Plan as the Company’s performance did not achieve the earnings performance
goal. The Company recognized expense of $1.1 million in 2006 for the
Incentive Plan. Under a substantially similar predecessor plan, the
Company recognized expense of $0.6 million in 2005. A total of
875,000 shares of common stock have been reserved for issuance under the
AIP. To date, the Company has issued 60,892 shares of common stock
under the AIP.
Executive Stock Option
Agreement. In 2006 and 2005, under the provisions of the AIP,
the Company's Board of Directors approved stock option agreements for a key
executive officer (William G. Smith, Jr. - Chairman, President and CEO,
CCBG). Similar stock option agreements were approved in 2004 and
2003. These agreements grant a non-qualified stock option award upon
achieving certain annual earnings per share conditions set by the Board, subject
to certain vesting requirements. The options granted under the
agreements have a term of ten years and vest at a rate of one-third on each of
the first, second, and third anniversaries of the date of
grant. Under the 2004 and 2003 agreements, 37,246 and 23,138 options,
respectively, were issued, none of which have been exercised. The
fair value of a 2004 option was $13.42, and the fair value of a 2003 option was
$11.64. The exercise prices for the 2004 and 2003 options are $32.69
and $32.96, respectively. Under the 2006 and 2005 agreements, the
earnings per share conditions were not met; therefore, no expense was recognized
related to these agreements. In accordance with the provisions of
SFAS 123R and SFAS 123, the Company recognized expenses in 2005 through 2007 of
approximately $193,000, $205,000, and $125,000, respectively, related to the
2004 and 2003 agreements. In 2007, the Company replaced its practice
of entering into a stock option arrangement by establishing a Performance Share
Unit Plan under the provisions of the AIP that allows the executive to earn
shares based on the compound annual growth rate in diluted earnings per share
over a three-year period. The details of this program for the
executive are outlined in a Form 8-K filing dated January 31,
2007. No expense related to this plan was recognized in 2007 as
results fell short of the earnings performance goal.
A summary
of the status of the Company’s option shares as of December 31, 2007 is
presented below:
|
Options
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||
|
Outstanding
at January 1, 2007
|
60,384 | $ | 32.79 | $ | 7.9 | $ | 151,355 | |||||
|
Granted
|
- | - | - | - | ||||||||
|
Exercised
|
- | - | - | - | ||||||||
|
Forfeited
or expired
|
- | - | - | - | ||||||||
|
Outstanding
at December 31, 2007
|
60,384 | $ | 32.79 | $ | 6.9 | $ | - | |||||
|
Exercisable
at December 31, 2007
|
47,720 | $ | 32.79 | $ | 6.9 | $ | - | |||||
DSPP. The
Company's DSPP allows the directors to purchase the Company's common stock at a
price equal to 90% of the closing price on the date of
purchase. Stock purchases under the DSPP are limited to the amount of
the directors' annual retainer and meeting fees. The DSPP has 93,750
shares reserved for issuance. A total of 30,866 shares have been
issued since the inception of the DSPP. For 2007, the Company issued
12,128 shares under the DSPP and recognized approximately $33,000 in expense
related to this plan. For 2006, the Company issued 12,149 shares and
recognized approximately $37,000 in expense related to the DSPP. For
2005, the Company issued 6,589 shares and recognized approximately $26,000 in
expense under the DSPP.
ASPP. Under the
Company's ASPP, substantially all associates may purchase the Company's common
stock through payroll deductions at a price equal to 90% of the lower of the
fair market value at the beginning or end of each six-month offering
period. Stock purchases under the ASPP are limited to 10% of an
associate's eligible compensation, up to a maximum of $25,000 (fair market value
on each enrollment date) in any plan year. Shares are issued at the
beginning of the quarter following each six-month offering
period. The ASPP has 593,750 shares of common stock reserved for
issuance. A total of 59,812 shares have been issued since inception
of the ASPP. For 2007, the Company issued 23,531 shares under the
ASPP and recognized approximately $102,000 in expense related to this
plan. For 2006, the Company issued 19,435 shares and recognized
approximately $90,000 in expense related to the ASPP. For 2005,
the Company issued 16,846 shares and recognized approximately $90,000 in expense
under the ASPP.
Based on
the Black-Scholes option pricing model, the weighted average estimated fair
value of each of the purchase rights granted under the ASPP Plan was $5.82 for
2007. For 2006 and 2005, the weighted average fair value purchase
right granted was $5.65 and $5.77, respectively. In calculating
compensation, the fair value of each stock purchase right was estimated on the
date of grant using the following weighted average assumptions:
|
2007
|
2006
|
2005
|
||||||||||
|
Dividend
yield
|
2.1 | % | 1.9 | % | 1.9 | % | ||||||
|
Expected
volatility
|
25.5 | % | 23.5 | % | 28.0 | % | ||||||
|
Risk-free
interest rate
|
4.8 | % | 4.5 | % | 2.6 | % | ||||||
|
Expected
life (in years)
|
0.5 | 0.5 | 0.5 | |||||||||
2011Incentive Plan. The
Company's 2011 Incentive Plan was adopted by the Company in January 2004 and
provides each associate an award (cash, equity or combination cash/equity) of
$2,010 if the Company achieves a certain internally established earnings target.
Under the 2011 Incentive Plan, the associate is required to be employed by
the Company at the time the goal is achieved. Associates not employed
by the company (i.e. new associates) at the time of the grant, are provided a
pro-rated award amount depending on their length of service. The
expense associated with the equity portion of this plan for the years 2005-2007
was approximately $131,000, $189,000, and $113,000, respectively. The
expense for the cash portion of this plan for the same periods was approximately
$165,000, $234,000, and $113,000, respectively.
Subsequent Event (unaudited). On
February 15, 2008, the Company issued a Form 8-K announcing it was terminating
its 2011 initiative due to determination that the Company would not, based on
current economic conditions, be able to achieve its earnings growth
goal. As a result, the Company terminated its 2011 Incentive Plan and
approximately $440,000 in expense accrual related to this incentive plan will be
reversed in the first quarter of 2008. The Company plans to replace
the 2011 Incentive Plan with a new plan containing internal goals that are
appropriate for the current market environment.
Note
12
EMPLOYEE
BENEFIT PLANS
Pension
Plan
The
Company sponsors a noncontributory pension plan covering substantially all of
its associates. Benefits under this plan generally are based on the
associate's years of service and compensation during the years immediately
preceding retirement. The Company's general funding policy is to
contribute amounts deductible for federal income tax purposes.
The
defined benefit pension plan for Farmers and Merchants Bank of Dublin was merged
into the Company's pension plan as of December 31, 2005. The
following table details on a consolidated basis the components of pension
expense, the funded status of the plan, amounts recognized in the Company's
consolidated statements of financial condition, and major assumptions used to
determine these amounts.
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
Change
in Projected Benefit Obligation:
|
|||||||||||
|
Benefit
Obligation at Beginning of Year
|
$ | 68,671 | $ | 64,131 | $ | 54,529 | |||||
|
Service
Cost
|
4,903 | 4,930 | 4,352 | ||||||||
|
Interest
Cost
|
3,967 | 3,622 | 3,253 | ||||||||
|
Actuarial
(Gain)/Loss
|
(1,420 | ) | (1,421 | ) | 2,752 | ||||||
|
Benefits
Paid
|
(5,759 | ) | (3,267 | ) | (3,501 | ) | |||||
|
Expenses
Paid
|
(244 | ) | (149 | ) | (75 | ) | |||||
|
Plan
Change
|
- | 825 | - | ||||||||
|
Acquisitions
|
- | - | 2,821 | ||||||||
|
Projected
Benefit Obligation at End of Year
|
$ | 70,118 | $ | 68,671 | $ | 64,131 | |||||
|
Accumulated
Benefit Obligation at End of Year
|
$ | 51,256 | $ | 49,335 | $ | 45,645 | |||||
|
Change
in Plan Assets:
|
|||||||||||
|
Fair
Value of Plan Assets at Beginning of Year
|
$ | 66,554 | $ | 52,277 | $ | 41,125 | |||||
|
Actual
Return on Plan Assets
|
3,602 | 6,342 | 1,737 | ||||||||
|
Employer
Contributions
|
11,500 | 11,350 | 10,500 | ||||||||
|
Benefits
Paid
|
(5,759 | ) | (3,267 | ) | (3,501 | ) | |||||
|
Expenses
Paid
|
(244 | ) | (149 | ) | (75 | ) | |||||
|
Acquisitions
|
- | - | 2,491 | ||||||||
|
Fair
Value of Plan Assets at End of Year
|
$ | 75,653 | $ | 66,553 | $ | 52,277 | |||||
|
Reconciliation
of Funded Status:
|
|||||||||||
|
Funded
Status
|
$ | * | $ | * | $ | (11,853 | ) | ||||
|
Unrecognized
Net Actuarial Losses
|
* | * | 14,823 | ||||||||
|
Unrecognized
Prior Service Cost
|
* | * | 1,302 | ||||||||
|
Prepaid
(Accrued) Benefit Cost
|
$ | * | $ | * | $ | 4,272 | |||||
|
Amounts
Recognized in the Consolidated Statements of Financial
Condition:
|
|||||||||||
|
Other
Assets
|
$ | 5,535 | $ | - | $ | * | |||||
|
Other
Liabilities
|
- | 2,117 | * | ||||||||
|
Amounts
(Pre-Tax) Recognized in Accumulated Other Comprehensive
Income:
|
|||||||||||
|
Net
Actuarial Losses
|
$ | 8,622 | $ | 9,601 | $ | * | |||||
|
Prior
Service Cost
|
1,611 | 1,912 | * | ||||||||
|
*Not Applicable due to adoption
of SFAS No. 158
effective 12/31/2006
|
|||||||||||
|
Components
of Net Periodic Benefit Costs:
|
|||||||||||
|
Service
Cost
|
$ | 4,903 | $ | 4,930 | $ | 4,352 | |||||
|
Interest
Cost
|
3,967 | 3,622 | 3,410 | ||||||||
|
Expected
Return on Plan Assets
|
(5,083 | ) | (4,046 | ) | (3,373 | ) | |||||
|
Amortization
of Prior Service Costs
|
301 | 215 | 215 | ||||||||
|
Transition
Obligation Recognition
|
- | - | 11 | ||||||||
|
Recognized
Net Actuarial Loss
|
1,039 | 1,598 | 1,324 | ||||||||
|
Net
Periodic Benefit Cost
|
$ | 5,127 | $ | 6,319 | $ | 5,939 | |||||
|
Assumptions:
|
|||||||||||
|
Weighted-average
used to determine benefit obligations:
|
|||||||||||
|
Discount
Rate
|
6.25 | % | 6.00 | % | 5.75 | % | |||||
|
Expected
Return on Plan Assets
|
8.00 | % | 8.00 | % | 8.00 | % | |||||
|
Rate
of Compensation Increase
|
5.50 | % | 5.50 | % | 5.50 | % | |||||
|
Measurement
Date
|
12/31/07
|
12/31/06
|
12/31/05
|
||||||||
|
Weighted-average
used to determine net cost:
|
|||||||||||
|
Discount
Rate
|
6.00 | % | 5.75 | % | 6.00 | % | |||||
|
Expected
Return on Plan Assets
|
8.00 | % | 8.00 | % | 8.00 | % | |||||
|
Rate
of Compensation Increase
|
5.50 | % | 5.50 | % | 5.50 | % | |||||
Other Comprehensive
Income. The estimated amounts (dollars in thousands) that will
be amortized from accumulated other comprehensive income into net periodic
benefit cost in 2008 are as follows:
|
Actuarial
Loss
|
$ | 890 | ||
|
Prior
Service Cost
|
301 | |||
| $ | 1,191 |
Return on Plan
Assets. The overall expected long-term rate of return on
assets is a weighted-average expectation for the return on plan
assets. The Company considers historical performance and current
benchmarks to arrive at expected long-term rates of return in each asset
category. The Company assumed that 65% of its portfolio would be
invested in equity securities, with the remainder invested in debt
securities.
Plan Assets. The Company’s
pension plan asset allocation at year-end 2007 and 2006, and the target asset
allocation for 2008 are as follows:
|
Target
Allocation
|
Percentage
of Plan
Assets
at Year-End(1)
|
||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Equity
Securities
|
65 | % | 58 | % | 55 | % | |||||
|
Debt
Securities
|
30 | % | 27 | % | 18 | % | |||||
|
Real
Estate
|
- | - | 1 | % | |||||||
|
Cash
Equivalent
|
5 | % | 15 | % | 26 | % | |||||
|
Total
|
100 | % | 100 | % | 100 | % | |||||
|
(1)
|
Represents asset allocation at
year-end which may differ from the average target allocation for the year
due to the year-end cash contribution to the
plan.
|
The
Company’s pension plan assets are overseen by the CCBG Retirement
Committee. Capital City Trust Company acts as the investment manager
for the plan. The investment strategy is to maximize return on
investments while minimizing risk. The Company believes the best way
to accomplish this goal is to take a conservative approach to its investment
strategy by investing in high-grade equity and debt securities.
Expected Benefit
Payments. As of December 31, 2007, expected benefit payments
related to the Company's defined benefit pension plan were as
follows:
|
2008
|
$ | 3,803,091 | ||
|
2009
|
3,776,819 | |||
|
2010
|
3,715,534 | |||
|
2011
|
4,563,901 | |||
|
2012
|
5,547,476 | |||
|
2013
through 2017
|
36,465,818 | |||
| $ | 57,872,639 |
Contributions. The
following table details the amounts contributed to the pension plan in 2007 and
2006, and the expected amount to be contributed in 2008.
|
2007
|
2006
|
Expected
2008(1)
|
|||
|
Actual
Contributions
|
$
11,500,000
|
$
11,350,000
|
$
10,000,000
|
(1)
Estimate of 2008 maximum allowable contribution.
Supplemental
Executive Retirement Plan
The
Company has a Supplemental Executive Retirement Plan ("SERP") covering selected
executive officers. Benefits under this plan generally are based on
the executive officer's years of service and compensation during the years
immediately preceding retirement.
The
following table details the components of the SERP’s periodic benefit cost, the
funded status of the plan, amounts recognized in the Company's consolidated
statements of financial condition, and major assumptions used to determine these
amounts.
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
Change
in Projected Benefit Obligation:
|
|||||||||||
|
Benefit
Obligation at Beginning of Year
|
$ | 4,018 | $ | 3,878 | $ | 3,601 | |||||
|
Service
Cost
|
83 | 123 | 133 | ||||||||
|
Interest
Cost
|
208 | 230 | 207 | ||||||||
|
Actuarial
(Gain) Loss
|
(603 | ) | 62 | (63 | ) | ||||||
|
Plan
Change
|
- | (274 | ) | - | |||||||
|
Projected
Benefit Obligation at End of Year
|
$ | 3,706 | $ | 4,019 | $ | 3,878 | |||||
|
Accumulated
Benefit Obligation at End of Year
|
$ | 2,603 | $ | 2,252 | $ | 2,295 | |||||
|
Reconciliation
of Funded Status:
|
|||||||||||
|
Unfunded
Status
|
$ | * | $ | * | $ | (3,878 | ) | ||||
|
Unrecognized
Net Actuarial Loss
|
* | * | 734 | ||||||||
|
Unrecognized
Prior Service Cost
|
* | * | 388 | ||||||||
|
Accrued
Benefit Cost
|
* | * | $ | (2,756 | ) | ||||||
|
Amounts
Recognized in the Consolidated Statements of Financial
Condition:
|
|||||||||||
|
Other
Liabilities
|
$ | 3,706 | $ | 4,019 | $ | * | |||||
|
Amounts
(Pre-Tax) Recognized in Accumulated Other Comprehensive
Income:
|
|||||||||||
|
Net
Actuarial (Gain) Loss
|
$ | 3 | $ | 608 | $ | * | |||||
|
Prior
Service Cost
|
44 | 52 | * | ||||||||
|
*
Not Applicable due to adoption of SFAS No. 158 effective
12/31/2006
|
|||||||||||
|
Components
of Net Periodic Benefit Costs:
|
|||||||||||
|
Service
Cost
|
$ | 83 | $ | 123 | $ | 133 | |||||
|
Interest
Cost
|
208 | 230 | 207 | ||||||||
|
Amortization
of Prior Service Cost
|
7 | 61 | 61 | ||||||||
|
Recognized
Net Actuarial Loss
|
8 | 100 | 77 | ||||||||
|
Net
Periodic Benefit Cost
|
$ | 306 | $ | 514 | $ | 478 | |||||
|
Assumptions:
|
|||||||||||
|
Weighted-average
used to determine the benefit obligations:
|
|||||||||||
|
Discount
Rate
|
6.25 | % | 6.00 | % | 5.75 | % | |||||
|
Rate
of Compensation Increase
|
5.50 | % | 5.50 | % | 5.50 | % | |||||
|
Measurement
Date
|
12/31/07
|
12/31/06
|
12/31/05
|
||||||||
|
Weighted-average
used to determine the net cost:
|
|||||||||||
|
Discount
Rate
|
6.00 | % | 5.75 | % | 6.00 | % | |||||
|
Rate
of Compensation Increase
|
5.50 | % | 5.50 | % | 5.50 | % | |||||
Expected Benefit Payments. As
of December 31, 2007, expected benefit payments related to the Company's SERP
were as follows:
|
2008
|
$ | 87,468 | ||
|
2009
|
187,469 | |||
|
2010
|
230,238 | |||
|
2011
|
300,865 | |||
|
2012
|
366,840 | |||
|
2013
through 2017
|
2,950,973 | |||
| $ | 4,123,853 |
401(k)
Plan
The
Company has a 401(k) Plan which enables associates to defer a portion of their
salary on a pre-tax basis. The plan covers substantially all
associates of the Company who meet minimum age requirements. The plan
is designed to enable participants to elect to have an amount from 1% to 15% of
their compensation withheld in any plan year placed in the 401(k) Plan trust
account. Matching contributions from the Company are made up to 6% of the
participant's compensation for eligible associates. During 2007,
2006, and 2005, the Company made matching contributions of $299,000, $273,000
and $154,000, respectively. The participant may choose to invest
their contributions into sixteen investment funds available to 401(k)
participants, including the Company’s common stock. A total of 50,000
shares of CCBG common stock have been reserved for issuance. These
shares have historically been purchased in the open market.
Other
Plans
The
Company has a Dividend Reinvestment and Optional Stock Purchase
Plan. A total of 250,000 shares have been reserved for
issuance. In recent years, shares for the Dividend Reinvestment and
Optional Stock Purchase Plan have been acquired in the open market and, thus,
the Company did not issue any shares under this plan in 2007, 2006 and
2005.
Note
13
EARNINGS
PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
|
(Dollars
in Thousands, Except Per Share Data)
|
2007
|
2006
|
2005
|
||||||||
|
Numerator:
|
|||||||||||
|
Net
Income
|
$ | 29,683 | $ | 33,265 | $ | 30,281 | |||||
|
Denominator:
|
|||||||||||
|
Denominator
for Basic Earnings Per Share Weighted-Average Shares
|
17,909,396 | 18,584,519 | 18,263,855 | ||||||||
|
Effects
of Dilutive Securities Stock Compensation Plans
|
2,191 | 25,320 | 17,388 | ||||||||
|
Denominator
for Diluted Earnings Per Share Adjusted Weighted-Average Shares and
Assumed Conversions
|
17,911,587 | 18,609,839 | 18,281,243 | ||||||||
|
Basic
Earnings Per Share
|
$ | 1.66 | $ | 1.79 | $ | 1.66 | |||||
|
Diluted
Earnings per Share
|
$ | 1.66 | $ | 1.79 | $ | 1.66 | |||||
Note
14
CAPITAL
The
Company is subject to various regulatory capital requirements which involve
quantitative measures of the Company's assets, liabilities and certain
off-balance sheet items. The Company's capital amounts and
classification are subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require that the Company
maintain amounts and ratios (set forth in the table below) of total and Tier I
Capital to risk-weighted assets, and of Tier I Capital to average
assets. As of December 31, 2007, the Company met all capital adequacy
requirements to which it is subject.
A summary
of actual, required, and capital levels necessary to be considered
well-capitalized for Capital City Bank Group, Inc. consolidated and its banking
subsidiary, Capital City Bank, as of December 31, 2007 and December 31, 2006 are
as follows:
|
Actual
|
Required
For
Capital
Adequacy
Purposes
|
To
Be Well-
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|||||||||||||||||
|
(Dollars in Thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
As of December 31, 2007:
|
|||||||||||||||||||
|
Tier
I Capital:
|
|||||||||||||||||||
|
CCBG
|
$
|
261,172
|
13.05
|
%
|
$
|
80,047
|
4.00
|
%
|
*
|
*
|
|||||||||
|
CCB
|
260,720
|
13.05
|
%
|
79,934
|
4.00
|
%
|
119,901
|
6.00
|
%
|
||||||||||
|
Total
Capital:
|
|||||||||||||||||||
|
CCBG
|
281,125
|
14.05
|
%
|
160,094
|
8.00
|
%
|
*
|
*
|
|||||||||||
|
CCB
|
278,787
|
13.95
|
%
|
159,868
|
8.00
|
%
|
199,835
|
10.00
|
%
|
||||||||||
|
Tier
I Leverage:
|
|||||||||||||||||||
|
CCBG
|
261,172
|
10.41
|
%
|
80,047
|
4.00
|
%
|
*
|
*
|
|||||||||||
|
CCB
|
260,720
|
10.42
|
%
|
79,934
|
4.00
|
%
|
99,917
|
5.00
|
%
|
||||||||||
|
As of December 31,
2006:
|
|||||||||||||||||||
|
Tier
I Capital:
|
|||||||||||||||||||
|
CCBG
|
$
|
280,679
|
14.00
|
%
|
$
|
80,191
|
4.00
|
%
|
*
|
*
|
|||||||||
|
CCB
|
273,425
|
13.66
|
%
|
80,055
|
4.00
|
%
|
120,082
|
6.00
|
%
|
||||||||||
|
Total
Capital:
|
|||||||||||||||||||
|
CCBG
|
299,783
|
14.95
|
%
|
160,382
|
8.00
|
%
|
*
|
*
|
|||||||||||
|
CCB
|
290,642
|
14.52
|
%
|
160,109
|
8.00
|
%
|
200,137
|
10.00
|
%
|
||||||||||
|
Tier
I Leverage:
|
|||||||||||||||||||
|
CCBG
|
280,679
|
11.30
|
%
|
80,191
|
4.00
|
%
|
*
|
*
|
|||||||||||
|
CCB
|
273,425
|
11.03
|
%
|
80,055
|
4.00
|
%
|
100,068
|
5.00
|
%
|
||||||||||
*Not applicable to bank holding
companies.
Note
15
DIVIDEND
RESTRICTIONS
Substantially
all the Company’s retained earnings are undistributed earnings of its banking
subsidiary which are restricted by various regulations administered by federal
and state bank regulatory authorities.
The
approval of the appropriate regulatory authority is required if the total of all
dividends declared by a subsidiary bank in any calendar year exceeds the bank’s
net profits (as defined under Florida law) for that year combined with its
retained net profits for the preceding two calendar years. In 2008,
the bank subsidiary may declare dividends without regulatory approval of an
amount equal to the net profits of the Company’s subsidiary bank for 2008 up to
the date of any such dividend declaration.
Note
16
RELATED
PARTY INFORMATION
Related Party
Loans. At December 31, 2007 and 2006, certain officers and
directors were indebted to the Company’s bank subsidiary in the aggregate amount
of $9.1 million and $12.6 million, respectively. During 2007, $6.2
million in new loans were made and repayments totaled $9.7
million. In the opinion of management, these loans were made on
similar terms as loans to other individuals of comparable creditworthiness and
were all current at year-end.
Note
17
SUPPLEMENTARY
INFORMATION
Components
of other noninterest income and noninterest expense in excess of 1% of the sum
of total interest income and noninterest income, which are not disclosed
separately elsewhere, are presented below for each of the respective
years.
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Noninterest
Income:
|
||||||||||
|
Merchant
Fee Income
|
$
|
7,257
|
$
|
6,978
|
$
|
6,174
|
||||
|
Interchange
Commission Fees
|
3,757
|
3,105
|
2,239
|
|||||||
|
ATM/Debit
Card Fees
|
2,692
|
2,519
|
2,206
|
(1)
|
||||||
|
Noninterest
Expense:
|
||||||||||
|
Professional
Fees
|
3,855
|
3,402
|
3,825
|
|||||||
|
Interchange
Service Fees
|
6,118
|
6,010
|
5,402
|
|||||||
|
Telephone
|
2,373
|
2,323
|
2,493
|
|||||||
|
Advertising
|
3,742
|
4,285
|
4,275
|
|||||||
|
Printing
& Supplies
|
2,124
|
(1)
|
2,472
|
2,372
|
||||||
|
(1)
|
<1% of appropriate
threshold.
|
Note
18
COMMITMENTS
AND CONTINGENCIES
Lending
Commitments. The Company is a party to financial instruments
with off-balance sheet risks in the normal course of business to meet the
financing needs of its clients. These financial instruments consist
of commitments to extend credit and standby letters of credit.
The
Company’s maximum exposure to credit loss under standby letters of credit and
commitments to extend credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in
establishing commitments and issuing letters of credit as it does for on-balance
sheet instruments. As of December 31, 2007, the amounts associated
with the Company’s off-balance sheet obligations were as follows:
|
(Dollars
in Thousands)
|
Amount
|
||
|
Commitments
to Extend Credit(1)
|
$
|
437,806
|
|
|
Standby
Letters of Credit
|
$
|
17,385
|
|
|
(1)
|
Commitments include unfunded
loans, revolving lines of credit, and other unused
commitments.
|
Commitments
to extend credit are agreements to lend to a client so long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a client to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities. In general, management does not anticipate any
material losses as a result of participating in these types of
transactions. However, any potential losses arising from such
transactions are reserved for in the same manner as management reserves for its
other credit facilities.
For both
on- and off-balance sheet financial instruments, the Company requires collateral
to support such instruments when it is deemed necessary. The Company
evaluates each client’s creditworthiness on a case-by-case basis. The
amount of collateral obtained upon extension of credit is based on management’s
credit evaluation of the counterparty. Collateral held varies, but
may include deposits held in financial institutions; U.S. Treasury securities;
other marketable securities; real estate; accounts receivable; property, plant
and equipment; and inventory.
Other
Commitments. In the normal course of business, the Company
enters into lease commitments which are classified as operating
leases. Rent expense incurred under these leases was approximately
$1.5 million in 2007, $1.5 million in 2006, and $1.3 million in
2005. Minimum lease payments under these leases due in each of the
five years subsequent to December 31, 2007, are as follows (in millions): 2008,
$1.4; 2009, $1.3; 2010, $1.1; 2011, $1.0; 2012, $.4; thereafter,
$5.7.
Contingencies. The
Company is a party to lawsuits and claims arising out of the normal course of
business. In management's opinion, there are no known pending claims
or litigation, the outcome of which would, individually or in the aggregate,
have a material effect on the consolidated results of operations, financial
position, or cash flows of the Company.
Indemnification
Obligation. The Company recorded a charge in its fourth
quarter financial statements of approximately $1.9 million, or $0.07 per diluted
common share to recognize a contingent liability related to the costs of the
judgments and settlements from certain Visa Inc. (“Visa”) related litigation
(“Covered Litigation”). Visa U.S.A. believes that its member banks
are required to indemnify Visa U.S.A. for potential losses arising from certain
Covered Litigation. The Company has been a Visa U.S.A. member for a
number of years.
Visa has
stated in its filings with the SEC that Visa’s escrow account established with a
portion of its IPO proceeds will be used to pay the costs of the judgments and
settlements from the Covered Litigation. Thus, provided that the
escrow account has sufficient funds, the liability recorded on the Company’s
books would no longer be required and would be reversed.
Note
19
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Many of
the Company’s assets and liabilities are short-term financial instruments whose
carrying values approximate fair value. These items include Cash and Due From
Banks, Interest Bearing Deposits with Other Banks, Federal Funds Sold, Federal
Funds Purchased, Securities Sold Under Repurchase Agreements, and Short-Term
Borrowings. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. The resulting fair values may be significantly affected
by the assumptions used, including the discount rates and estimates of future
cash flows.
The
methods and assumptions used to estimate the fair value of the Company’s other
financial instruments are as follows:
Investment
Securities - Fair values for investment securities are based on quoted market
prices. If a quoted market price is not available, fair value is estimated using
market prices for similar securities.
Loans -
The loan portfolio is segregated into categories and the fair value of each loan
category is calculated using present value techniques based upon projected cash
flows and estimated discount rates. The calculated present values are then
reduced by an allocation of the allowance for loan losses against each
respective loan category.
Deposits
- The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market
Accounts and Savings Accounts are the amounts payable on demand at the reporting
date. The fair value of fixed maturity certificates of deposit is estimated
using present value techniques and rates currently offered for deposits of
similar remaining maturities.
Subordinated
Notes Payable - The fair value of each note is calculated using present value
techniques, based upon projected cash flows and estimated discount rates as well
as rates being offered for similar obligations.
Long-Term
Borrowings - The fair value of each note is calculated using present value
techniques, based upon projected cash flows and estimated discount rates as well
as rates being offered for similar debt.
Commitments
to Extend Credit and Standby Letters of Credit - The fair value of commitments
to extend credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the present creditworthiness of the
counterparties. The fair value of these fees is not material.
The
Company’s financial instruments that have estimated fair values are presented
below:
|
At
December 31,
|
|||||||||||||||
|
2007
|
2006
|
||||||||||||||
|
(Dollars
in Thousands)
|
Carrying
Value
|
Estimated
Fair
Value
|
Carrying
Value
|
Estimated
Fair
Value
|
|||||||||||
|
Financial
Assets:
|
|||||||||||||||
|
Cash
|
$ | 93,437 | $ | 93,437 | $ | 98,769 | $ | 98,769 | |||||||
|
Short-Term
Investments
|
166,260 | 166,260 | 78,795 | 78,795 | |||||||||||
|
Investment
Securities
|
190,719 | 190,719 | 191,894 | 191,894 | |||||||||||
|
Loans,
Net of Allowance for Loan Losses
|
1,897,784 | 1,982,661 | 1,982,504 | 1,992,025 | |||||||||||
|
Total
Financial Assets
|
$ | 2,348,200 | $ | 2,433,077 | $ | 2,351,962 | $ | 2,361,483 | |||||||
|
Financial
Liabilities:
|
|||||||||||||||
|
Deposits
|
$ | 2,142,344 | $ | 2,089,550 | $ | 2,081,654 | $ | 2,007,308 | |||||||
|
Short-Term
Borrowings
|
53,131 | 53,022 | 65,023 | 64,970 | |||||||||||
|
Subordinated
Notes Payable
|
62,887 | 63,371 | 62,887 | 63,013 | |||||||||||
|
Long-Term
Borrowings
|
26,731 | 28,284 | 43,083 | 42,256 | |||||||||||
|
Total
Financial Liabilities
|
$ | 2,285,093 | $ | 2,234,227 | $ | 2,252,647 | $ | 2,177,547 | |||||||
All
non-financial instruments are excluded from the above table. The
disclosures also do not include certain intangible assets such as client
relationships, deposit base intangibles and goodwill. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
Note
20
PARENT
COMPANY FINANCIAL INFORMATION
The
operating results of the parent company for the three years ended December 31,
are shown below:
Parent
Company Statements of Income
|
(Dollars
in Thousands)
|
2007
|
2006
|
2005
|
||||||||
|
OPERATING
INCOME
|
|||||||||||
|
Income
Received from Subsidiary Bank:
|
|||||||||||
|
Dividends
|
$ | 49,207 | $ | 20,166 | $ | 10,597 | |||||
|
Overhead
Fees
|
3,532 | 3,524 | 2,716 | ||||||||
|
Other
Income
|
164 | 112 | 87 | ||||||||
|
Total
Operating Income
|
52,903 | 23,802 | 13,400 | ||||||||
|
OPERATING
EXPENSE
|
|||||||||||
|
Salaries
and Associate Benefits
|
1,812 | 2,360 | 2,191 | ||||||||
|
Interest
on Subordinated Notes Payable
|
3,730 | 3,725 | 2,981 | ||||||||
|
Professional
Fees
|
787 | 741 | 1,399 | ||||||||
|
Advertising
|
260 | 403 | 467 | ||||||||
|
Legal
Fees
|
375 | 604 | 701 | ||||||||
|
Other
|
621 | 649 | 471 | ||||||||
|
Total
Operating Expense
|
7,585 | 8,482 | 8,210 | ||||||||
|
Income
Before Income Taxes and Equity in Undistributed Earnings of Subsidiary
Bank
|
45,318 | 15,320 | 5,190 | ||||||||
|
Income
Tax Benefit
|
(1,429 | ) | (1,835 | ) | (2,060 | ) | |||||
|
Income
Before Equity in Undistributed Earnings of Subsidiary
Bank
|
46,747 | 17,155 | 7,250 | ||||||||
|
Equity
in Undistributed Earnings of Subsidiary Bank
|
(17,064 | ) | 16,110 | 23,031 | |||||||
|
Net
Income
|
$ | 29,683 | $ | 33,265 | $ | 30,281 | |||||
The
following are condensed statements of financial condition of the parent company
at December 31:
Parent
Company Statements of Financial Condition
|
(Dollars in Thousands, Except
Per Share Data)(1)
|
2007
|
2006
|
|||||
|
ASSETS
|
|||||||
|
Cash
and Due From Subsidiary Bank
|
$ | 958 | $ | 8,921 | |||
|
Investment
in Subsidiary Bank
|
357,093 | 373,278 | |||||
|
Other
Assets
|
2,826 | 1,550 | |||||
|
Total
Assets
|
$ | 360,877 | $ | 383,749 | |||
|
LIABILITIES
|
|||||||
|
Subordinated
Notes Payable
|
$ | 62,887 | $ | 62,887 | |||
|
Other
Liabilities
|
5,315 | 5,092 | |||||
|
Total
Liabilities
|
$ | 68,202 | $ | 67,979 | |||
|
SHAREOWNERS'
EQUITY
|
|||||||
|
Preferred
Stock, $.01 par value, 3,000,000 shares authorized; no shares issued and
outstanding
|
- | - | |||||
|
Common
Stock, $.01 par value; 90,000,000 shares authorized; 17,182,553 and
18,518,398 shares issued and outstanding at December 31, 2007 and
December 31, 2006, respectively
|
172 | 185 | |||||
|
Additional
Paid-In Capital
|
38,243 | 80,654 | |||||
|
Retained
Earnings
|
260,325 | 243,242 | |||||
|
Accumulated
Other Comprehensive Loss, Net of Tax
|
(6,065 | ) | (8,311 | ) | |||
|
Total
Shareowners' Equity
|
292,675 | 315,770 | |||||
|
Total
Liabilities and Shareowners' Equity
|
$ | 360,877 | $ | 383,749 | |||
|
(1)
|
All share and per share data have
been adjusted to reflect the 5-for-4 stock split effective July 1,
2005.
|
The cash
flows for the parent company for the three years ended December 31, were as
follows:
Parent
Company Statements of Cash Flows
|
2007
|
2006
|
2005
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||
|
Net
Income
|
$ | 29,683 | $ | 33,265 | $ | 30,281 | |||||
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
|||||||||||
|
Equity
in Undistributed Earnings of Subsidiary Bank
|
17,064 | (16,110 | ) | (23,031 | ) | ||||||
|
Non-Cash
Compensation
|
238 | 1,673 | 110 | ||||||||
|
Increase
in Other Assets
|
(152 | ) | (670 | ) | 131 | ||||||
|
Increase
in Other Liabilities
|
222 | 1,976 | 381 | ||||||||
|
Net
Cash Provided by Operating Activities
|
47,055 | 20,134 | 7,872 | ||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||
|
Cash
Paid for Investment in:
|
|||||||||||
|
Purchase
of held-to-maturity and available-for-sale
securities
|
(1,000 | ) | - | - | |||||||
|
CCBG
Capital Trust I and CCBG Capital Trust II
|
- | - | (959 | ) | |||||||
|
Cash
Paid for Acquisitions
|
- | - | (29,953 | ) | |||||||
|
Increase
in Investment in Bank Subsidiary
|
1,466 | - | - | ||||||||
|
Net
Cash Used in Investing Activities
|
466 | - | (30,912 | ) | |||||||
|
CASH
FROM FINANCING ACTIVITIES:
|
|||||||||||
|
Proceeds
from Subordinated Notes
|
- | - | 31,959 | ||||||||
|
Payment
of Dividends
|
(12,823 | ) | (12,322 | ) | (11,397 | ) | |||||
|
Repurchase
of Common Stock
|
(43.233 | ) | (5,360 | ) | - | ||||||
|
Issuance
of Common Stock
|
572 | 1,035 | 1,019 | ||||||||
|
Net
Cash (Used in) Provided by Financing Activities
|
(55,484 | ) | (16,647 | ) | 21,581 | ||||||
|
Net
Increase (Decrease) in Cash
|
(7,963 | ) | 3,487 | (1,459 | ) | ||||||
|
Cash
at Beginning of Period
|
8,921 | 5,434 | 6,893 | ||||||||
|
Cash
at End of Period
|
$ | 958 | $ | 8,921 | $ | 5,434 | |||||
Note
21
COMPREHENSIVE
INCOME
SFAS No.
130, "Reporting Comprehensive Income," requires that certain transactions and
other economic events that bypass the income statement be displayed as other
comprehensive income (loss). Total comprehensive income is reported in the
accompanying statements of changes in shareowners’
equity. Information related to net comprehensive income (loss) is as
follows:
|
(Dollars in
Thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Other
Comprehensive Income (Loss):
|
||||||||||||
|
Securities available for sale:
|
||||||||||||
|
Change
in net unrealized gain (loss), net of tax expense (benefit) of $616, $202,
and $(502)
|
$ | 1,080 | $ | 412 | $ | (893 | ) | |||||
|
Retirement plans:
|
||||||||||||
|
Change
in funded status of defined benefit pension plan and SERP plan, net of tax
expense of $830
|
1,166 | - | - | |||||||||
|
Net
Other Comprehensive Gain (Loss)
|
$ | 2,246 | $ | 412 | $ | (893 | ) | |||||
|
The
components of accumulated other comprehensive income, net of tax, as of
year-end were as follows:
|
||||||||||||
|
Net unrealized gain (loss) on securities available for
sale
|
$ | 246 | $ | (834 | ) | $ | (1,246 | ) | ||||
|
Net unfunded liability for defined benefit pension plan and SERP
plan
|
(6,311 | ) | (7,477 | ) | - | |||||||
| $ | (6,065 | ) | $ | (8,311 | ) | $ | (1,246 | ) | ||||
|
Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure
|
None.
|
Controls and
Procedures
|
Evaluation of Disclosure Controls
and Procedures. As of December 31, 2007, the end of the period covered by
this Annual Report on Form 10-K, our management, including our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer each concluded that as of December
31, 2007, the end of the period covered by this Annual Report on Form 10-K, we
maintained effective disclosure controls and procedures.
Management's Report on Internal
Control Over Financial Reporting. Our management is responsible for
establishing and maintaining effective internal control over financial
reporting. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles.
Under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation
under the framework in Internal Control - Integrated Framework, our management
has concluded we maintained effective internal control over financial reporting,
as such term is defined in Securities Exchange Act of 1934 Rule 13a-15(f), as of
December 31, 2007.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting can also be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management
is also responsible for the preparation and fair presentation of the
consolidated financial statements and other financial information contained in
this report. The accompanying consolidated financial statements were prepared in
conformity with U.S. generally accepted accounting principles and include, as
necessary, best estimates and judgments by management.
Ernst
& Young, LLP, an independent registered public accounting firm, has audited
our consolidated financial statements as of and for the year ended December 31,
2007, and opined as to the effectiveness of internal control over financial
reporting as of December 31, 2007, as stated in its attestation report, which is
included herein on page 90.
Change in Internal Control.
Our management, including the Chief Executive Officer and Chief Financial
Officer, has reviewed our internal control. There have been no significant
changes in our internal control during our most recently completed fiscal
quarter, nor subsequent to the date of their evaluation, that could
significantly affect our internal control over financial reporting.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of Capital City Bank Group, Inc.
We have
audited Capital City Bank Group, Inc.’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Capital City Bank Group, Inc.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in Management’s Report on the
Effectiveness of Internal Control Over Financial Reporting under Item
9A. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Capital City Bank Group, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) the consolidated statement of financial
condition of Capital City Bank Group, Inc. and subsidiary as of December 31,
2007, and the related consolidated statements of income, changes in shareowners’
equity, and cash flows for the year ended December 31, 2007 of Capital City Bank
Group, Inc. and our report dated March 13, 2008 expressed an unqualified opinion
thereon.
/s/ Ernst
& Young LLP
Birmingham,
Alabama
March 13,
2008
|
Other
Information
|
None.
Part
III
|
Directors, Executive Officers,
and Corporate Governance
|
Incorporated
herein by reference to the subsection entitled “Codes of Conduct and Ethics”
under the section entitled “Corporate Governance,” “Nominees for Election as
Directors,” “Continuing Directors and Executive Officers,” “Share Ownership” and
the subsection entitled “Committees of the Board” under the section “Board and
Committee Membership” in the Registrant’s Proxy Statement relating to its Annual
Meeting of Shareowners to be held April 24, 2008.
|
Executive
Compensation
|
Incorporated
herein by reference to the sections entitled “Executive Compensation” and
“Director Compensation” in the Registrant’s Proxy Statement relating to its
Annual Meeting of Shareowners to be held April 24, 2008.
|
Security Ownership of Certain
Beneficial Owners and Management and Related Shareowners
Matters
|
Equity
Compensation Plan Information
Our 2005
Associate Incentive Plan, 2005 Associate Stock Purchase Plan, and 2005 Director
Stock Purchase Plan were approved by our shareowners. The following
table provides certain information regarding our equity compensation plans as of
December 31, 2007.
|
Plan
Category
|
Number
of securities to be issued upon exercise of
outstanding
options, warrants and rights
|
Weighted-average
exercise price
of
outstanding options, warrants and rights
|
Number
of securities remaining available
for
future issuance under equity
compensation
plans (excluding
securities
reflected in column (a))
|
|||
|
(a)
|
(b)
|
(c)
|
||||
|
Equity
Compensation Plans Approved by Securities Holders
|
60,384(1)
|
$32.83
|
1,410,930(2)
|
|||
|
Equity
Compensation Plans Not Approved by Securities
Holders
|
-
|
-
|
-
|
|||
|
Total
|
60,384
|
$
32.83
|
1,410,930
|
|
(1)
|
Includes 60,384 shares that may
be issued upon exercise of outstanding options under the terminated 1996
Associate Incentive Plan.
|
|
(2)
|
Consists of 814,108 shares available for issuance
under our 2005 Associate Incentive Plan, 533,938 shares available for issuance
under our 2005 Associate Stock Purchase Plan, and 62,884 shares available for issuance
under our 2005 Director Stock Purchase Plan. Of these plans, the only plan
under which options may be granted in the future is our 2005 Associate
Incentive Plan.
|
For
additional information about our equity compensation plans, see Stock Based
Compensation in Note 11 in the Notes to the Consolidated Financial
Statements.
The other
information required by Item 12 is incorporated herein by reference to the
section entitled “Share Ownership” in the Registrant’s Proxy Statement relating
to its Annual Meeting of Shareowners to be held April 24, 2008.
|
Item
13.
|
Certain Relationships and Related Transactions, and
Director Independence
|
Incorporated
herein by reference to the subsections entitled “Related Person Transaction
Policy” and “Transactions With Related Persons” under the section entitled
“Executive Officers and Transactions with Related Persons” and the subsection
entitled “Independent Directors” under the section entitled “Corporate
Governance” in the Registrant’s Proxy Statement relating to its Annual Meeting
of Shareowners to be held April 24, 2008.
|
Principal Accountant Fees and
Services
|
Incorporated
herein by reference to the section entitled “Audit Fees and Related Matters” in
the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners
to be held April 24, 2008.
|
|
The
following documents are filed as part of this
report
|
1. Financial
Statements
Reports of Independent Registered
Public Accounting Firms
Consolidated Statements of Income for
Fiscal Years 2007, 2006, and 2005
Consolidated Statements of Financial
Condition at the end of Fiscal Years 2007 and 2006
Consolidated Statements of Changes in
Shareowners’ Equity for Fiscal Years 2007, 2006, and 2005
Consolidated Statements of Cash Flows
for Fiscal Years 2007, 2006, and 2005
Notes to Consolidated Financial
Statements
2. Financial
Statement Schedules
Other
schedules and exhibits are omitted because the required information either is
not applicable or is shown in the financial statements or the notes
thereto.
3. Exhibits
Required to be Filed by Item 601 of Regulation S-K
Reg.
S-K
Exhibit
Table
Item
No. Description of
Exhibit
|
|
2.1
|
Agreement
and Plan of Merger, dated as of February 3, 2005, by and among Capital
City Bank Group, Inc., First Alachua Banking Corporation, and First
National Bank of Alachua (the schedules and exhibits have been omitted
pursuant to Item 601(b)(2) of Regulation S-K) - incorporated herein by
reference to the Registrant’s Form 8-K (filed 2/9/05) (No.
0-13358).
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation - incorporated herein by reference
to Exhibit 3 of the Registrant’s 1996 Proxy Statement (filed 4/11/96) (No.
0-13358).
|
|
|
3.2
|
Amended
and Restated Bylaws - incorporated herein by reference to Exhibit 3.2 of
the Registrant’s Form 8-K (filed 11/30/07) (No.
0-13358).
|
|
|
4.1
|
See
Exhibits 3.1, and 3.2 for provisions of Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws, which define the rights of
its shareowners.
|
|
|
4.2
|
Capital
City Bank Group, Inc. 2005 Director Stock Purchase Plan - incorporated
herein by reference to Exhibit 4.3 of the Registrant’s Form S-8
(filed 11/5/04) (No. 333-120242).
|
|
|
4.3
|
Capital
City Bank Group, Inc. 2005 Associate Stock Purchase Plan - incorporated
herein by reference to Exhibit 4.4 of the Registrant’s Form S-8
(filed 11/5/04) (No. 333-120242).
|
|
|
4.4
|
Capital
City Bank Group, Inc. 2005 Associate Incentive Plan - incorporated herein
by reference to Exhibit 4.5 of the Registrant’s Form S-8 (filed
11/5/04) (No. 333-120242).
|
|
|
4.5
|
In
accordance with Regulation S-K, Item 601(b)(4)(iii)(A) certain
instruments defining the rights of holders of long-term debt of Capital
City Bank Group, Inc. not exceeding 10% of the total assets of Capital
City Bank Group, Inc. and its consolidated subsidiaries have been omitted;
the Registrant agrees to furnish a copy of any such instruments to the
Commission upon request.
|
|
|
10.1
|
Capital
City Bank Group, Inc. 1996 Dividend Reinvestment and Optional Stock
Purchase Plan - incorporated herein by reference to Exhibit 10 of the
Registrant’s Form S-3 (filed 01/30/97) (No.
333-20683).
|
|
|
10.2
|
Capital
City Bank Group, Inc. Supplemental Executive Retirement Plan -
incorporated herein by reference to Exhibit 10(d) of the Registrant’s Form
10-K (filed 3/27/03) (No. 0-13358).
|
|
|
10.3
|
Capital
City Bank Group, Inc. 401(k) Profit Sharing Plan – incorporated herein by
reference to Exhibit 4.3 of Registrant’s Form S-8 (filed 09/30/97) (No.
333-36693).
|
|
|
10.4
|
2005
Stock Option Agreement by and between Capital City Bank Group, Inc. and
William G. Smith, Jr., dated March 24, 2005 – incorporated herein by
reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 3/31/05)
(No. 0-13358).
|
|
|
10.5
|
2006
Stock Option Agreement by and between Capital City Bank Group, Inc. and
William G. Smith, Jr., dated March 23, 2006 – incorporated herein by
reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 3/29/06)
(No. 0-13358).
|
|
|
10.6
|
Capital
City Bank Group, Inc. Non-Employee Director Plan, as amended –
incorporated herein by reference to Exhibit 10.2 of the Registrant’s Form
8-K (filed 3/29/06) (No. 0-13358).
|
|
|
10.7
|
Form
of Participant Agreement for the Capital City Bank Group, Inc. Long-Term
Incentive Plan – incorporated herein by reference to Exhibit 10.1 of the
Registrant’s Form 10-Q (filed 8/10/06) (No.
0-13358).
|
|
|
11
|
Statement
re Computation of Per Share
Earnings.*
|
|
|
14
|
Capital
City Bank Group, Inc. Code of Ethics for the Chief Financial Officer and
Senior Financial Officers - incorporated herein by reference to Exhibit 14
of the Registrant’s Form 8-K (filed 3/11/05) (No.
0-13358).
|
|
*
|
Information
required to be presented in Exhibit 11 is provided in Note 13 to the
consolidated financial statements under Part II, Item 8 of this Form 10-K
in accordance with the provisions of FASB Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per
Share.
|
|
**
|
Filed
electronically herewith.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on March 17, 2008,
on its behalf by the undersigned, thereunto duly authorized.
CAPITAL
CITY BANK GROUP, INC.
/s/ William G. Smith,
Jr.
William
G. Smith, Jr.
Chairman,
President and Chief Executive Officer
(Principal
Executive Officer)
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed on March 17, 2008 by the following persons in the capacities
indicated.
/s/ William G. Smith,
Jr.
William
G. Smith, Jr.
Chairman,
President and Chief Executive Officer
(Principal
Executive Officer)
/s/ J. Kimbrough
Davis
J.
Kimbrough Davis
Executive
Vice President and Chief Financial Officer
(Principal
Financial and Accounting Officer)
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on March 17, 2008,
on its behalf by the undersigned, thereunto duly authorized.
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Directors:
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/s/
Dubose Ausley
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/s/
L. McGrath Keen, Jr.
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DuBose
Ausley
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L.
McGrath Keen, Jr.
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/s/
Thomas A. Barron
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/s/
Lina S. Knox
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Thomas
A. Barron
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Lina S.
Knox
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/s/
Frederick Carroll, III
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/s/
Ruth A. Knox
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Frederick
Carroll, III
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Ruth A.
Knox
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/s/
Cader B. Cox, III
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/s/
Henry Lewis III
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Cader
B. Cox, III
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Henry
Lewis III
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/s/
J. Everitt Drew
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/s/
William G. Smith, Jr.
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J.
Everitt Drew
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William
G. Smith, Jr.
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/s/
John K. Humphress
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John
K. Humphress
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