UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
____________________
FORM
10-K
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ý
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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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§
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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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§
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technological
changes;
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§
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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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§
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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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§
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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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§
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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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§
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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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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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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
|
2006
|
2005
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||||||||
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Florida
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||||||||||
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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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||||
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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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Clay
County
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2.0
|
%
|
2.0
|
%
|
2.2
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%
|
||||
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Dixie
County
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22.9
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%
|
20.8
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%
|
17.3
|
%
|
||||
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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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%
|
68.0
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%
|
||||
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Gilchrist
County
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33.6
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%
|
47.1
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%
|
49.5
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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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%
|
19.8
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%
|
||||
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Hernando
County
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1.2
|
%
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1.5
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%
|
1.4
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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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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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Levy
County
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33.0
|
%
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34.4
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%
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33.8
|
%
|
||||
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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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15.1
|
%
|
||||
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Pasco
County
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0.2
|
%
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0.2
|
%
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0.3
|
%
|
||||
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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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%
|
12.3
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%
|
||||
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St.
Johns County(2)
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1.2
|
%
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1.5
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%
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2.0
|
%
|
||||
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Suwannee
County
|
7.7
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%
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11.8
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%
|
7.5
|
%
|
||||
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Taylor
County
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30.1
|
%
|
28.6
|
%
|
27.9
|
%
|
||||
|
Wakulla
County(3)
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2.6
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%
|
2.9
|
%
|
--
|
|||||
|
Washington
County
|
13.8
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%
|
17.4
|
%
|
20.3
|
%
|
||||
|
Georgia(4)
|
||||||||||
|
Bibb
County
|
2.5
|
%
|
2.9
|
%
|
2.8
|
%
|
||||
|
Burke
County
|
7.8
|
%
|
9.2
|
%
|
9.3
|
%
|
||||
|
Grady
County
|
18.7
|
%
|
20.0
|
%
|
19.7
|
%
|
||||
|
Laurens
County
|
19.2
|
%
|
23.8
|
%
|
33.1
|
%
|
||||
|
Troup
County
|
6.2
|
%
|
8.2
|
%
|
7.5
|
%
|
||||
|
Alabama
|
||||||||||
|
Chambers
County
|
6.5
|
%
|
4.7
|
%
|
3.9
|
%
|
||||
|
(1)
|
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.
|
County
|
Number
of
Commercial
Banks
|
Number
of Commercial
Bank
Offices
|
|
Florida
|
||
|
Alachua
|
13
|
65
|
|
Bradford
|
3
|
3
|
|
Citrus
|
16
|
49
|
|
Clay
|
12
|
29
|
|
Dixie
|
3
|
4
|
|
Gadsden
|
4
|
6
|
|
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
|
|
Grady
|
5
|
8
|
|
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
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geographic
and industry loan concentrations.
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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 | |||||||