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, 2008
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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)
671-0300
(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, 2008,
the last business day of the registrant’s most recently completed second fiscal
quarter, was approximately $204,847,378 (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 27, 2009
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Common
Stock, $0.01 par value per share
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17,139,730
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 21, 2009, are incorporated by
reference in Part III.
-1-
CAPITAL
CITY BANK GROUP, INC.
ANNUAL
REPORT FOR 2008 ON FORM 10-K
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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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15
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Item
1B.
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23
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Item
2.
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23
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Item
3.
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23
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Item
4.
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23
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Item
5.
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23
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Item
6.
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25
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Item
7.
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26
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Item
7A.
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54
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Item
8.
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55
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Item
9.
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93
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Item
9A.
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93
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Item
9B.
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93
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Item
10.
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95
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Item
11.
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95
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Item
12.
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95
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Item
13.
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96
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Item
14.
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96
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Item
15.
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97
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99
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-2-
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
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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changes
in the securities and real estate
markets;
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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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inflation,
interest rate, market and monetary
fluctuations;
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·
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legislative
or regulatory changes;
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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
need and our ability to incur additional debt or equity
financing;
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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
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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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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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.
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Business
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About
Us
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 68 full-service banking locations in Florida,
Georgia, and Alabama. CCB operates these banking
locations.
At
December 31, 2008, we had total consolidated assets of approximately $2.5
billion, total deposits of approximately $2 billion and shareowners’ equity was
approximately $279 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, 2008, and
approximately 100% of consolidated net income for the year ended December 31,
2008. 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
1,042 (full-time equivalent) associates at February 27, 2009. Page 25
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. We also provide
treasury management services, and, through a marketing alliance with
Elavon, Inc., merchant credit card transaction processing
services.
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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. Credit
products are available to facilitate the purchase of land and/or build
structures for business use and for investors who are developing
residential or commercial property.
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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 (ARM) residential mortgage loans. As of
December 31, 2008, approximately 14.1% of the Bank’s loan portfolio
consisted of residential ARM loans. A portion of our loans
originated are sold into the secondary market. We do not
originate subprime residential real estate
loans.
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The Bank
offers these products through its existing network of offices in addition to a
mortgage lending office in Gainesville, Florida
(Alachua County).
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·
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Retail Credit – The
Bank provides a full range of loan products to meet the needs of
consumers, including personal loans, automobile loans, boat/RV loans, home
equity loans, and credit card
programs.
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·
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Institutional Banking –
The Bank provides banking services to meet the needs of state and local
governments, public schools and colleges, charities, membership and
not-for-profit associations including customized checking and savings
accounts, cash management systems, tax-exempt loans, lines of credit, and
term loans.
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·
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Retail Banking - The
Bank provides a full range of consumer banking services, including
checking accounts, savings programs, automated teller machines (ATMs),
debit/credit cards, night deposit services, safe deposit facilities, and
PC/Internet banking. Clients can use the Capital City Bank
Direct which offers both a “live” call center between the hours of 8 a.m.
to 6 p.m. five days a week, and an automated phone system offering 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 27, 2009, the Services Company is providing data processing services to
seven 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. Additionally, 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 $664.0 million as of December 31, 2008, with total assets
under administration exceeding $677.0 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 12 new banking offices to improve service and product delivery
within our markets, two of which were opened during 2008 (Macon, Georgia and
Brooksville, Florida). We currently have in construction, three
replacement banking offices (Macon, Georgia, Palatka, Florida and Gainesville,
Florida scheduled for opening in the first half of 2010.
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 has resulted in a more tactical focus
on certain higher growth metro markets, including Macon, Tallahassee,
Gainesville, and Hernando/Pasco counties. 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 $783 million, or 39.3%, of
our consolidated deposits at December 31, 2008.
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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2008
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2007
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2006
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||||||||||
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Florida
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Alachua County
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4.6
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%
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4.7
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%
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5.6
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%
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||||||
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Bradford County
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50.1
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%
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47.6
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%
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44.6
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%
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Citrus County
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3.1
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%
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3.0
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%
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3.3
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%
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Clay County
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1.9
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%
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2.0
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%
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2.0
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%
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||||||
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Dixie County
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23.4
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%
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22.9
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%
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20.8
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%
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||||||
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Gadsden County
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55.7
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%
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61.0
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%
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64.9
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%
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||||||
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Gilchrist County
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37.8
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%
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33.6
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%
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47.1
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%
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||||||
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Gulf County
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9.1
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%
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11.7
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%
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14.3
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%
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||||||
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Hernando County
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1.2
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%
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1.2
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%
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1.5
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%
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||||||
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Jefferson County
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21.9
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%
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22.8
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%
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24.6
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%
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||||||
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Leon County
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17.6
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%
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16.2
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%
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18.0
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%
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||||||
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Levy County
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31.7
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%
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33.0
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%
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34.4
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%
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||||||
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Madison County
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12.1
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%
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13.1
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%
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14.9
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%
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||||||
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Pasco County
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0.2
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%
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0.2
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%
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0.2
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%
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||||||
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Putnam County
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19.7
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%
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11.1
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%
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12.3
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%
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||||||
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St. Johns County
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1.1
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%
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1.2
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%
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1.5
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%
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||||||
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Suwannee County
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7.2
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%
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7.7
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%
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11.8
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%
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||||||
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Taylor County
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31.1
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%
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30.1
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%
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28.6
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%
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||||||
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Wakulla County
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5.5
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%
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2.6
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%
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2.9
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%
|
||||||
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Washington County
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17.0
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%
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13.8
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%
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17.4
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%
|
||||||
|
Georgia
|
||||||||||||
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Bibb County
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2.1
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%
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2.5
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%
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2.9
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%
|
||||||
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Burke County
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7.4
|
%
|
7.8
|
%
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9.2
|
%
|
||||||
|
Grady County
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16.7
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%
|
18.7
|
%
|
20.0
|
%
|
||||||
|
Laurens County
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16.2
|
%
|
19.2
|
%
|
23.8
|
%
|
||||||
|
Troup County
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5.6
|
%
|
6.2
|
%
|
8.2
|
%
|
||||||
|
Alabama
|
||||||||||||
|
Chambers County
|
7.3
|
%
|
6.5
|
%
|
4.7
|
%
|
||||||
|
(1)
|
Obtained
from the June 30, 2008 FDIC/OTS Summary of Deposits
Report.
|
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
|
14
|
66
|
||||||
|
Bradford
|
3
|
3
|
||||||
|
Citrus
|
14
|
49
|
||||||
|
Clay
|
14
|
31
|
||||||
|
Dixie
|
3
|
4
|
||||||
|
Gadsden
|
4
|
6
|
||||||
|
Gilchrist
|
3
|
6
|
||||||
|
Gulf
|
6
|
9
|
||||||
|
Hernando
|
13
|
43
|
||||||
|
Jefferson
|
2
|
2
|
||||||
|
Leon
|
19
|
96
|
||||||
|
Levy
|
3
|
13
|
||||||
|
Madison
|
6
|
6
|
||||||
|
Pasco
|
26
|
120
|
||||||
|
Putnam
|
6
|
16
|
||||||
|
St. Johns
|
23
|
66
|
||||||
|
Suwannee
|
5
|
8
|
||||||
|
Taylor
|
3
|
4
|
||||||
|
Wakulla
|
4
|
7
|
||||||
|
Washington
|
5
|
5
|
||||||
|
Georgia
|
|
|||||||
|
Bibb
|
12
|
57
|
||||||
|
Burke
|
5
|
10
|
||||||
|
Grady
|
5
|
8
|
||||||
|
Laurens
|
10
|
20
|
||||||
|
Troup
|
12
|
27
|
||||||
|
Alabama
|
|
|||||||
|
Chambers
|
5
|
10
|
||||||
Data
obtained from the June 30, 2008 FDIC/OTS Summary of Deposits
Report.
Seasonality
We
believe our commercial banking operations are not generally seasonal in
nature. However, 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
(“DIF”).
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 the Florida Financial Institutions 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. See Management Discussion and Analysis (Liquidity and Capital
Resources - Dividends) and Note 15 in the Notes to Consolidated Financial
Statements for additional information on the impact of this regulatory
requirement on us.
Insurance of Accounts and Other
Assessments. The FDIC merged the Bank Insurance Fund and the
Savings Association Insurance Fund to form the DIF on March 31,
2006. The Bank pays its deposit insurance assessments to the DIF,
which insures the Bank’s deposit accounts.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted,
which temporarily raises the basic limit on federal deposit insurance coverage
from $100,000 to $250,000 per depositor. The legislation provides
that the basic deposit insurance limit will return to $100,000 after December
31, 2009. This increase in coverage does not in itself increase our DIF
assessment.
In
addition, on November 26, 2008 the FDIC issued a final rule under its
Transaction Account Guarantee Program (“TAGP”), pursuant to which the deposit
insurance coverage limits for all non-interest bearing transaction deposit
accounts, including all personal and business checking deposit accounts that do
not earn interest, lawyer trust accounts where interest does not accrue to the
account owner (IOLTA), and NOW accounts with interest rates no higher than
0.50%. Thus, all money in these accounts is fully insured by the FDIC
regardless of dollar amount. This second increase to coverage is in
effect through December 31, 2009. The cost to us for participating in this
expanded deposit insurance coverage program is a 10-basis point surcharge to our
current insurance assessment rate with respect to the portions of the TAGP
covered deposit accounts not otherwise covered by the existing deposit insurance
limit of $250,000. We have elected to participate in the
TAGP.
On
February 27, 2009, the FDIC announced an amendment to its restoration plan for
the DIF by imposing an emergency special assessment on all insured financial
institutions. This special assessment of 20 basis points will occur
on June 30, 2009, and will be payable by us on September 30,
2009. The FDIC may impose an additional special assessment of up to
10 basis points if necessary to maintain public confidence in federal deposit
insurance. Subsequently, the FDIC has announced its willingness to
lower the special assessment to 10 basis points, but as of March 9, 2009, no
final determination has been made. Based on our deposits as of
December 31, 2008, we anticipate our special assessment, based on the current
guidance from the FDIC of a 20 basis point special assessment, to be
approximately $3.9 million.
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 current 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
0.12% of deposits for an institution in the highest sub-category of the highest
category to 0.50% of deposits for an institution in the lowest
category. Beginning with the second quarter of 2009, the FDIC has
announced it will make changes to the deposit insurance assessment system to
require riskier institutions to pay a larger share of the DIF
assessment. The FDIC has announced that the new assessment rates will
range from 0.08% to 0.775%. Any changes to our DIF assessment rate
will impact our earnings.
In
addition, all FDIC insured institutions are required to pay assessments to the
FDIC at an annual rate of approximately one basis point (the rate is adjusted
quarterly) 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 those executive officers, directors, or
10% Shareholders or which is controlled by those 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 those 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 of those 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 of the extensions of credit outstanding to all of these 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 shareholders’ 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.
Basel II Capital
Standards. We may decide to adopt certain new capital and
other regulatory requirements proposed by the Basel Committee on Banking
Supervision. The federal banking regulators have implemented new risk-based
capital requirements in the United States. These new requirements, which are
often referred to as the Basel II Accord, modify the capital charge
applicable to credit risk and incorporate a capital charge for operational risk.
The Basel II Accord also places greater reliance on market discipline than
previous standards. The Basel II standards will be mandatory only with
respect to banking organizations with total banking assets of $250 billion
or more or total on-balance-sheet foreign exposure of $10 billion or
more. We will continue to closely monitor developments on these
matters and assess their impact on us.
Interstate Banking and
Branching. The Bank Holding Company Act was amended by the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
“Interstate Banking Act”). The Interstate Banking Act provides that
adequately capitalized and managed financial and bank holding companies are
permitted to acquire banks in any state.
State
laws prohibiting interstate banking or discriminating against out-of-state banks
are preempted. States are not permitted to enact laws opting out of
this provision; however, states are allowed to adopt a minimum age restriction
requiring that target banks located within the state be in existence for a
period of years, up to a maximum of five years, before a bank may be subject to
the Interstate Banking Act. The Interstate Banking Act establishes
deposit caps which prohibit acquisitions that result in the acquiring company
controlling 30% or more of the deposits of insured banks and thrift institutions
held in the state in which the target maintains a branch or 10% or more of the
deposits nationwide. States have the authority to waive the 30% deposit
cap. State-level deposit caps are not preempted as long as they do
not discriminate against out-of-state companies, and the federal deposit caps
apply only to initial entry acquisitions.
The
Interstate Banking Act also provides that adequately capitalized and managed
banks are able to engage in interstate branching by merging with banks in
different states. Unlike the interstate banking provision discussed
above, states were permitted to opt out of the application of the interstate
merger provision by enacting specific legislation.
Florida
responded to the enactment of the Interstate Banking Act by enacting the Florida
Interstate Branching Act (the “Florida Branching Act”). The purpose
of the Florida Branching Act was to permit interstate branching through merger
transactions under the Interstate Banking Act. Under the Florida
Branching Act, with the prior approval of the Florida Office of Financial
Regulation, a Florida bank may establish, maintain and operate one or more
branches in a state other than the State of Florida pursuant to a merger
transaction in which the Florida bank is the resulting bank. In
addition, the Florida Branching Act provides that one or more Florida banks may
enter into a merger transaction with one or more out-of-state banks, and an
out-of-state bank resulting from this transaction may maintain and operate the
branches of the Florida bank that participated in this merger. An
out-of-state bank, however, is not permitted to acquire a Florida bank in a
merger transaction unless the Florida bank has been in existence and
continuously operated for more than three years.
BankSecrecy Act/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 file reports and
maintain records, 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.
In 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 or, in the alternative, the Bank fails to correct a
deficiency which has been previously cited by the federal banking agency with
respect to the Bank’s 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. In 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. Regulation R went into effect for us on January 1,
2009.
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.
In 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 required the Bank to have identity theft policies and programs in
place by no later than November 1, 2008. The Red Flag Regulations
require the Bank 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. This 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. See page 28 for further discussion of
recent legislation.
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.
Since
December 2008, the Federal Reserve has adopted a zero interest rate policy to
help combat the severe economic downturn in the United States and growing
deflationary pressure. For banks, one of the most significant
downsides with a zero interest rate policy is that it causes the yield curve to
flatten (i.e. there is little difference between short and long term interest
rates). Because banks make money by lending long term and borrowing
short term funds, the narrowing of this gap narrows profit
margins.
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 2007 and will do the
same for 2008.
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
Difficult
market conditions and economic trends have adversely affected our industry and
our business.
Dramatic
declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, have negatively impacted the credit performance
of mortgage and construction loans and resulted in significant write-downs of
assets by many financial institutions. General downward economic trends, reduced
availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and consumer credit, resulting in
additional write-downs. Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by financial institutions to
their customers and to each other. This market turmoil and tightening of credit
has led to increased commercial and consumer deficiencies, lack of customer
confidence, increased market volatility and widespread reduction in general
business activity. Financial institutions have experienced decreased access to
deposits and borrowings.
The
resulting economic pressure on consumers and businesses and the lack of
confidence in the financial markets may adversely affect our business, financial
condition, results of operations and stock price.
Our
ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure is made more complex by these difficult market
and economic conditions. We also expect to face increased regulation and
government oversight as a result of these downward trends. This increased
government action may increase our costs and limit our ability to pursue certain
business opportunities. We also may be required to pay even higher FDIC premiums
than the recently increased level, because financial institution failures
resulting from the depressed market conditions have depleted and may continue to
deplete the deposit insurance fund and reduce its ratio of reserves to insured
deposits.
We do not
believe these difficult conditions are likely to improve in the near future. A
worsening of these conditions would likely exacerbate the adverse effects of
these difficult economic conditions on us, our clients and the other financial
institutions in our market. As a result, we may experience increases in
foreclosures, delinquencies, and client bankruptcies, as well as more restricted
access to funds.
Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.
The
recently enacted Emergency Economic Stabilization Act of 2008 (the “EESA”)
authorizes the United States Treasury to purchase from financial institutions
and their holding companies up to $700 billion in mortgage loans,
mortgage-related securities and certain other financial instruments, including
debt and equity securities issued by financial institutions and their holding
companies, under a troubled asset relief program, or “TARP.” The purpose of TARP
is to restore confidence and stability to the U.S. banking system and to
encourage financial institutions to increase their lending to customers and to
each other.
The EESA
followed, and has been followed by, numerous actions by the Board of Governors
of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC
and others to address the current liquidity and credit crisis that has followed
the sub-prime meltdown that commenced in 2007. These measures include homeowner
relief that encourage loan restructuring and modification; the establishment of
significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program for money market
funds; the establishment of a commercial paper funding facility to provide
back-stop liquidity to commercial paper issuers; and coordinated international
efforts to address illiquidity and other weaknesses in the banking
sector.
In 2009,
with the change in presidential administrations, additional changes have been
announced, such as the creation of a Public-Private Investment Fund to purchase
“toxic assets”, which are primarily mortgage-backed securities and nonperforming
mortgage loans, from financial institutions. Further, a new capital
injection plan has been unveiled accompanied with significantly more
restrictions on the payment of executive compensation and dividends, and a
prohibition on acquisitions.
The
purpose of all of these legislative and regulatory actions is to stabilize the
U.S. banking system. The EESA and the other regulatory initiatives described
above may not have their desired effects. If the volatility in the markets
continues and economic conditions fail to improve or worsen, our business,
financial condition and results of operations could be materially and adversely
affected.
Current
levels of market volatility are unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers without regard to
those issuers’ underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on our ability to
access capital and on our business, financial condition, and results of
operations.
An
impairment in the carrying value of our goodwill could negatively impact our
earnings and capital.
Goodwill
is initially recorded at fair value and is not amortized, but is reviewed for
impairment at least annually or more frequently if events or changes in
circumstances indicate that the carrying value may not be
recoverable. Given the current economic environment and conditions in
the financial markets, we could be required to evaluate the recoverability of
goodwill prior to our normal annual assessment if we experience disruption in
our business, unexpected significant declines in our operating results, or
sustained market capitalization declines. These types of events and
the resulting analyses could result in goodwill impairment charges in the
future. These non-cash impairment charges could adversely affect our
results of operations in future periods, and could also significantly impact
certain financial ratios and limit our ability to obtain financing or raise
capital in the future. A goodwill impairment charge does not
adversely affect the calculation of our risk based and tangible capital
ratios. As of December 31, 2008, we had $84.8 million in goodwill,
which represented approximately 3.41% of our total assets.
State
law may limit our ability to declare and pay dividends.
Under
applicable statutes and regulations, the Bank’s board of directors, 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 declare dividends 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. If the Bank does not earn an amount approximately equal to
CCBG’s anticipated 2009 dividend, CCBG may be unable to declare and pay a
dividend to its shareowners. See section entitled “Liquidity and
Capital Resources – Dividends” in Management’s Discussion and Analysis for
further discussion.
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, 2008, approximately 33.6% and 35.9% of our
$1.958 billion loan portfolio was secured by commercial real estate and
residential real estate, respectively. As of this same date,
approximately 7.3% was secured by property under construction.
The
current downturn in the real estate market, the deterioration in the value of
collateral, and the local and national economic recessions, have adversely
affected our clients’ ability to repay their loans. If these
conditions persist, or get worse, our clients’ ability to repay their loans will
be further eroded. 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.
If
our nonperforming loans continue to increase, our earnings will
suffer.
At
December 31, 2008, our non-performing loans (which consist of non-accrual and
restructured loans) totaled $98.6 million, or 5.04% of the total loan portfolio,
which is an increase of $73.5 million, or 293% over non-performing loans at
December 31, 2007. At December 31, 2008, our nonperforming assets
(which include foreclosed real estate) were $107.8 million, or 4.33% of total
assets. In addition, the Bank had approximately $0.1 million in
accruing loans that were over 90 days delinquent and still accruing as of
December 31, 2008. 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. We must reserve for probable
losses, which is established through a current period charge to the provision
for loan losses as well as from time to time, as appropriate, write down the
value of properties in our other real estate owned portfolio to reflect changing
market values. Additionally, there are legal fees associated the
resolution of problem assets as well as carrying costs such as taxes, insurance
and maintenance related to our other real estate owned. Further, the
resolution of nonperforming assets requires the active involvement of
management, which can distract them from more profitable
activity. Finally, 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.
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, as is likely in the current zero interest
rate policy environment, 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.
Our
loan portfolio is heavily concentrated in mortgage loans secured by properties
in Florida and Georgia.
Our
interest-earning assets are heavily concentrated in mortgage loans secured by
real estate, particularly real estate located in Florida and
Georgia. As of December 31, 2008, approximately 75.9% of our loans
had real estate as a primary, secondary, or tertiary component of
collateral. The real estate collateral in each case provides an
alternate source of repayment in the event of default by the borrower; however,
the value of the collateral may decline during the time the credit is
extended. If we are required to liquidate the collateral securing a
loan during a period of reduced real estate values, such as in today’s market,
to satisfy the debt, our earnings and capital could be adversely
affected.
Additionally,
as of December 31, 2008, substantially all of our loans secured by real estate
are secured by commercial and residential properties located in Northern Florida
and Middle Georgia. The concentration of our loans in this area
subjects us to risk that a downturn in the economy or recession in those areas,
such as the one the areas are currently experiencing, 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 and Georgia, 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. We may suffer further losses due to the decline in
the value of the properties underlying our mortgage loans, which 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:
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general
or local economic conditions;
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environmental
cleanup liability;
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neighborhood
values;
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interest
rates;
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real
estate tax rates;
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operating
expenses of the mortgaged
properties;
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supply
of and demand for rental units or
properties;
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ability
to obtain and maintain adequate occupancy of the
properties;
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zoning
laws;
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governmental
rules, regulations and fiscal policies;
and
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acts
of God.
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Certain
expenditures associated with the ownership of real estate, principally real
estate taxes, insurance 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.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
Liquidity
is essential to our business. An inability to raise funds through
deposits, borrowings, and other sources, could have a substantial negative
effect on our liquidity. Our access to funding sources in amounts
adequate to finance our activities on terms that are acceptable to us could be
impaired by factors that affect us specifically or the financial services
industry or economy in general. Factors that could negatively impact
our access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the markets in which our loans are
concentrated, adverse regulatory action against us, or our inability to attract
and retain deposits. Our ability to borrow could be impaired by
factors that are not specific to us, such a disruption in the financial markets
or negative views and expectations about the prospects for the financial
services industry in light of recent turmoil faced by banking organizations and
the unstable credit markets.
We
may need additional capital resources in the future and these capital resources
may not be available when needed or at all. If we do raise additional
capital, your ownership could be diluted.
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.
Further,
our Articles of Incorporation do not provide shareowners with preemptive rights
and such shares may be offered to investors other than shareowners at the
discretion of the Board. If we do sell additional shares of common
stock to raise capital, the sale could dilute your ownership interest and such
dilution could be substantial.
Concerns
of clients over deposit insurance may cause a decrease in our
deposits.
With
increased concerns about bank failures, clients are increasingly concerned about
the extent to which their deposits are insured by the FDIC. Clients
may withdraw deposits from CCB in an effort to ensure that the amount that they
have on deposit at CCB is fully insured. Decreases in deposits may
adversely affect our funding costs and net income. See Regulatory
Considerations – Capital City Bank – Insurance Accounts and Other Assessments
for further discussion.
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.
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 offices will depend on successfully identifying,
acquiring and integrating those institutions or offices. We may be
unable to identify attractive acquisition candidates, make acquisitions on
favorable terms or successfully integrate any acquired institutions or
offices. 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.
Potential
acquisitions may dilute shareowner value.
We
regularly evaluate opportunities to acquire other financial
institutions. As a result, merger and acquisition discussions and, in
some cases, negotiations may take place and future mergers or acquisitions
involving cash, debt, or equity securities may occur at any
time. Acquisitions typically involve the payment of a premium over
book and market values, and, therefore, some dilution of our tangible book value
and net income per common share may occur in connection with any future
acquisitions.
Future
economic growth in our Florida market area is likely to be slower compared to
previous years.
The State
of Florida’s population growth has historically exceeded national averages.
Consequently, the state has experienced substantial growth in population, new
business formation and public works spending. Due to the moderation of economic
growth and migration into our market area and the downturn in the real estate
market, management believes that growth in our market area will be restrained in
the near term. We have experienced an overall slow down in the
origination of residential mortgage loans recently due to the slowing in
residential real estate sales activity in our markets. A decrease in
existing and new home sales decreases lending opportunities and negatively
affects our income. Continued deterioration in the housing market and property
values could lead to additional valuation adjustments in our loan
portfolios.
The
market value of our investments could decline.
Our
investment securities portfolio as of December 31, 2008 has been designated as
available-for-sale pursuant to Statement of Financial Accounting Standards No.
115 (“SFAS 115") relating to accounting for investments. SFAS 115
requires that unrealized gains and losses in the estimated value of the
available-for-sale portfolio be “marked to market” and reflected as a separate
item in shareholders’ equity (net of tax) as accumulated other comprehensive
income. At December 31, 2008, we maintained all of our investment
securities in the available-for-sale classification.
Shareowners’
equity will continue to reflect the unrealized gains and losses (net of tax) of
these investments. The market value of our investment portfolio may
decline, causing a corresponding decline in shareowners’ equity.
Management
believes that several factors will affect the market values of our investment
portfolio. These include, but are not limited to, changes in interest
rates or expectations of changes, the degree of volatility in the securities
markets, inflation rates or expectations of inflation and the slope of the
interest rate yield curve (the yield curve refers to the differences between
shorter-term and longer-term interest rates; a positively sloped yield curve
means shorter-term rates are lower than longer-term rates). These and
other factors may impact specific categories of the portfolio differently, and
we cannot predict the effect these factors may have on any specific
category.
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, 2008 was approximately 39,293 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 45.67% of the outstanding shares of
our stock as of February 27, 2009. 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.
|
Our
shares of common stock are not an insured deposit.
The
shares of our common stock are not a bank deposit and will not be insured or
guaranteed by the FDIC or any other government agency. Your
investment will be subject to investment risk, and you must be capable of
affording the loss of your entire investment.
|
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.
As of
February 27, 2009, the Bank had 68 banking locations. Of the 68
locations, the Bank leases the land, buildings, or both at 12 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.
|
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 1,756 shareowners of
record as of February 27, 2009.
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
|||||||||||||||||||||||||
|
Common
stock price:
|
||||||||||||||||||||||||||||||||
|
High
|
$
|
33.32
|
$
|
34.50
|
$
|
30.19
|
$
|
29.99
|
$
|
34.00
|
$
|
36.40
|
$
|
33.69
|
$
|
35.91
|
||||||||||||||||
|
Low
|
21.06
|
19.20
|
21.76
|
24.76
|
24.60
|
27.69
|
29.12
|
29.79
|
||||||||||||||||||||||||
|
Close
|
27.24
|
31.35
|
21.76
|
29.00
|
28.22
|
31.20
|
31.34
|
33.30
|
||||||||||||||||||||||||
|
Cash
dividends declared per share
|
.1900
|
.1850
|
.1850
|
.1850
|
.1850
|
.1750
|
.1750
|
.1750
|
||||||||||||||||||||||||
Future
payment of dividends will be subject to determination and declaration by our
Board of Directors. Florida law limits the amount of dividends that
CCB can pay annually to the holding company. These restrictions may
limit our ability to pay dividends to our shareowners. During 2009,
in accordance with these restrictions, CCB may declare and pay a dividend in an
amount which approximates its current year-to-date earnings and it has further
received authority from its state regulator to declare and pay a dividend up to
$60 million in 2009 to the holding company. See subsection entitled
"Capital; Dividends; Sources of Strength" in the Business section on page 9, and
the section entitled “Liquidity and Capital Resources – Dividends” -- in
Management's Discussion and Analysis of Financial Condition and Operating
Results on page 50 and Note 15 in the Notes to Consolidated Financial
Statements.
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,
2003 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
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||||||||||||||||||
|
Capital
City Bank Group, Inc.
|
$
|
100.00
|
$
|
92.50
|
$
|
96.53
|
$
|
101.36
|
$
|
82.95
|
$
|
82.41
|
||||||||||||
|
NASDAQ
Composite
|
100.00
|
108.59
|
110.08
|
120.56
|
132.39
|
78.72
|
||||||||||||||||||
|
SNL
$1B-$5B Bank Index
|
100.00
|
123.42
|
121.31
|
140.38
|
102.26
|
84.81
|
||||||||||||||||||
|
Selected
Financial Data
|
|
|
For
the Years Ended December 31,
|
||||||||||||||||||||
|
(Dollars in Thousands, Except
Per Share Data)(1)
(3)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Interest
Income
|
$
|
142,866
|
$
|
165,323
|
$
|
165,893
|
$
|
140,053
|
$
|
101,525
|
||||||||||
|
Net
Interest Income
|
108,866
|
112,241
|
119,136
|
109,990
|
86,084
|
|||||||||||||||
|
Provision
for Loan Losses
|
32,496
|
6,163
|
1,959
|
2,507
|
2,141
|
|||||||||||||||
|
Net
Income
|
15,225
|
29,683
|
33,265
|
30,281
|
29,371
|
|||||||||||||||
|
Per
Common Share:
|
||||||||||||||||||||
|
Basic
Net Income
|
$
|
0.89
|
$
|
1.66
|
$
|
1.79
|
$
|
1.66
|
$
|
1.74
|
||||||||||
|
Diluted
Net Income
|
0.89
|
1.66
|
1.79
|
1.66
|
1.74
|
|||||||||||||||
|
Cash
Dividends Declared
|
.745
|
.710
|
.663
|
.619
|
.584
|
|||||||||||||||
|
Book
Value
|
16.27
|
17.03
|
17.01
|
16.39
|
14.51
|
|||||||||||||||
|
Key
Performance Ratios:
|
||||||||||||||||||||
|
Return
on Average Assets
|
0.59
|
%
|
1.18
|
%
|
1.29
|
%
|
1.22
|
%
|
1.46
|
%
|
||||||||||
|
Return
on Average Equity
|
5.06
|
9.68
|
10.48
|
10.56
|
13.31
|
|||||||||||||||
|
Net
Interest Margin (FTE)
|
4.96
|
5.25
|
5.35
|
5.09
|
4.88
|
|||||||||||||||
|
Dividend
Pay-Out Ratio
|
83.71
|
42.77
|
37.01
|
37.35
|
33.62
|
|||||||||||||||
|
Equity
to Assets Ratio
|
11.20
|
11.19
|
12.15
|
11.65
|
10.86
|
|||||||||||||||
|
Asset
Quality:
|
||||||||||||||||||||
|
Allowance
for Loan Losses
|
$
|
37,004
|
$
|
18,066
|
$
|
17,217
|
$
|
17,410
|
$
|
16,037
|
||||||||||
|
Allowance
for Loan Losses to Loans
|
1.89
|
%
|
0.95
|
%
|
0.86
|
%
|
0.84
|
%
|
0.88
|
%
|
||||||||||
|
Nonperforming
Assets
|
107,842
|
28,163
|
8,731
|
5,550
|
5,271
|
|||||||||||||||
|
Nonperforming
Assets to Loans + ORE
|
5.48
|
1.47
|
0.44
|
0.27
|
0.29
|
|||||||||||||||
|
Allowance
to Nonperforming Loans
|
37.52
|
71.92
|
214.09
|
331.11
|
345.18
|
|||||||||||||||
|
Net
Charge-Offs to Average Loans
|
0.71
|
0.27
|
0.11
|
0.13
|
0.22
|
|||||||||||||||
|
Averages
for the Year:
|
||||||||||||||||||||
|
Loans,
Net
|
$
|
1,918,417
|
$
|
1,934,850
|
$
|
2,029,397
|
$
|
1,968,289
|
$
|
1,538,744
|
||||||||||
|
Earning
Assets
|
2,240,649
|
2,183,528
|
2,258,277
|
2,187,672
|
1,789,843
|
|||||||||||||||
|
Total
Assets
|
2,567,905
|
2,507,217
|
2,581,078
|
2,486,733
|
2,006,745
|
|||||||||||||||
|
Deposits
|
2,066,065
|
1,990,446
|
2,034,931
|
1,954,888
|
1,599,201
|
|||||||||||||||
|
Subordinated
Notes
|
62,887
|
62,887
|
62,887
|
50,717
|
5,155
|
|||||||||||||||
|
Long-Term
Borrowings
|
39,735
|
37,936
|
57,260
|
70,216
|
59,462
|
|||||||||||||||
|
Shareowners'
Equity
|
300,890
|
306,617
|
317,336
|
286,712
|
220,731
|
|||||||||||||||
|
Year-End
Balances:
|
||||||||||||||||||||
|
Loans,
Net
|
$
|
1,957,797
|
$
|
1,915,850
|
$
|
1,999,721
|
$
|
2,067,494
|
$
|
1,828,825
|
||||||||||
|
Earning
Assets
|
2,156,172
|
2,272,829
|
2,270,410
|
2,299,677
|
2,113,571
|
|||||||||||||||
|
Total
Assets
|
2,488,699
|
2,616,327
|
2,597,910
|
2,625,462
|
2,364,013
|
|||||||||||||||
|
Deposits
|
1,992,174
|
2,142,344
|
2,081,654
|
2,079,346
|
1,894,886
|
|||||||||||||||
|
Subordinated
Notes
|
62,887
|
62,887
|
62,887
|
62,887
|
30,928
|
|||||||||||||||
|
Long-Term
Borrowings
|
51,470
|
26,731
|
43,083
|
69,630
|
68,453
|
|||||||||||||||
|
Shareowners'
Equity
|
278,830
|
292,675
|
315,770
|
305,776
|
256,800
|
|||||||||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Basic
Average Shares Outstanding
|
17,141,454
|
17,909,396
|
18,584,519
|
18,263,855
|
16,805,696
|
|||||||||||||||
|
Diluted
Average Shares Outstanding
|
17,146,914
|
17,911,587
|
18,609,839
|
18,281,243
|
16,810,926
|
|||||||||||||||
|
Shareowners
of Record(2)
|
1,756
|
1,750
|
1,805
|
1,716
|
1,598
|
|||||||||||||||
|
Banking
Locations(2)
|
68
|
70
|
69
|
69
|
60
|
|||||||||||||||
|
Full-Time
Equivalent Associates(2)
|
1,042
|
1,097
|
1,056
|
1,013
|
926
|
|||||||||||||||
|
(1)
|
All share and per share data have
been adjusted to reflect the 5-for-4 stock split effective July 1,
2005.
|
|
(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 2008
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Efficiency
ratio
|
68.09
|
%
|
70.13
|
%
|
68.87
|
%
|
||||||
|
Effect
of intangible amortization and merger expenses
|
(3.19
|
)%
|
(3.36
|
)%
|
(3.45
|
)%
|
||||||
|
Operating
efficiency ratio
|
64.91
|
%
|
66.77
|
%
|
65.42
|
%
|
||||||
Reconciliation
of operating net noninterest expense ratio:
|
For
the Years Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
noninterest expense as a percent of average assets
|
2.12
|
%
|
2.50
|
%
|
2.56
|
%
|
||||||
|
Effect
of intangible amortization and merger expenses
|
(0.22
|
)%
|
(0.23
|
)%
|
(0.24
|
)%
|
||||||
|
Operating
net noninterest expense as a percent of average assets
|
1.90
|
%
|
2.27
|
%
|
2.32
|
%
|
||||||
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 68 full-service offices located in Florida, Georgia, and
Alabama. The Bank offers commercial and retail banking services, as
well as trust and asset management, 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, bank card
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, and
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. Other expansion
opportunities that will be evaluated include asset management and mortgage
banking.
Recent
Market Developments
The
global and U.S. economies are experiencing significantly reduced business
activity as a result of, among other factors, disruptions in the financial
system in the past year. In fact, the National Bureau of Economic
Research announced that the U.S. had entered into a recession in December
2007. Dramatic declines in the housing market during the past year,
with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities but spreading
to credit default swaps and other derivative securities, as well as other areas
of the credit market, including investment grade and non-investment grade
corporate debt, convertible securities, emerging market debt and equity, and
leveraged loans, have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in some cases, to
fail.
The
magnitude of these declines led to a crisis of confidence in the financial
sector as a result of concerns about the capital base and viability of certain
financial institutions. During this period, interbank lending and commercial
paper borrowing fell sharply, precipitating a credit freeze for both
institutional and individual borrowers. This market turmoil and
tightening of credit have led to an increased level of consumer and commercial
delinquencies, lack of consumer confidence, increased market volatility and
widespread reduction of business activity generally. The resulting
economic pressure on consumers and lack of confidence in the financial markets
has, in some cases, adversely affected the financial services
industry.
Over the
course of the past year, the landscape of the U.S. financial services industry
changed dramatically, especially during the fourth quarter of
2008. Lehman Brothers Holdings Inc. declared bankruptcy and many
major U.S. financial institutions consolidated were forced to merge or were put
into conservatorship by the U.S. Federal Government, including The Bear Stearns
Companies, Inc., Wachovia Corporation, Washington Mutual, Inc., Federal Home
Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage
Association (“Fannie Mae”). In addition, the U.S. Federal Government provided a
sizable loan to American International Group Inc. (“AIG”) in exchange for an
equity interest in AIG.
Much of
our lending operations are in the State of Florida, which has been particularly
hard hit in the current U.S. recession. Evidence of the economic
downturn in Florida is reflected in current unemployment
statistics. The Florida unemployment rate at the end of 2008
increased to 8.1% from 4.7% at the end of 2007, reaching the highest level since
September 1992. A worsening of the economic condition in Florida
would likely exacerbate the adverse effects of these difficult market conditions
on our customers, which may have a negative impact on our financial
results.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act
of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S.
Treasury was given the authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.
On
October 14, 2008, the Secretary of the Department of the Treasury announced
that the Department of the Treasury will purchase equity stakes in a wide
variety of banks and thrifts. Under the program, known as the Troubled Asset
Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”),
from the $700 billion authorized by the EESA, the Treasury made
$250 billion of capital available to U.S. financial institutions in the
form of preferred stock. In conjunction with the purchase of preferred
stock, the Treasury received, from participating financial institutions,
warrants to purchase common stock with an aggregate market price equal to 15% of
the preferred investment. Participating financial institutions were
required to adopt the Treasury’s standards for executive compensation and
corporate governance for the period during which the Treasury holds equity
issued under the TARP Capital Purchase Program. On November 13, 2008, we
announced that we would not apply for funds available through the TARP Capital
Purchase Program.
On
November 21, 2008, the Board of Directors of the FDIC adopted a final
rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”).
The TLG Program was announced by the FDIC on October 14, 2008 as
an initiative to counter the system-wide crisis in the nation’s financial
sector. Under the TLG Program the FDIC will (i) guarantee,
through the earlier of maturity or June 30, 2012, certain newly issued
senior unsecured debt issued by participating institutions on or after
October 14, 2008, and before June 30, 2009 and (ii) provide full
FDIC deposit insurance coverage for non-interest bearing transaction deposit
accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5%
interest per annum and Interest on Lawyers Trust Accounts (“IOLTA”) accounts
held at participating FDIC insured institutions through December 31, 2009.
Coverage under the TLG Program was available for the first
30 days without charge. The fee assessment for coverage of senior
unsecured debt ranges from 50 basis points to 100 basis points per
annum, depending on the initial maturity of the debt. The fee assessment
for deposit insurance coverage is 10 basis points per quarter on amounts in
covered accounts exceeding $250,000. On December 12, 2008, we
announced that we would participate in both guarantee programs.
FINANCIAL
OVERVIEW
A summary
overview of our financial performance for 2008 versus 2007 is provided
below.
2008
Financial Performance Highlights –
|
·
|
In
2008, we earned $15.2 million, or $0.89 per diluted share, compared to
$29.7 million, or $1.66 per diluted share in 2007, decreases of 48.7% and
46.4%, respectively. For the year, turbulent economic and
market conditions and an associated increase in the provision for loan
losses and the level of nonperforming assets significantly impacted our
earnings performance.
|
|
·
|
Tax
equivalent net interest income fell $3.3 million, or 2.9%, over 2007 due
primarily to a higher level of foregone interest associated with an
increased level of nonperforming assets which drove compression in our net
interest margin of 29 basis
points.
|
|
·
|
Noninterest
income increased $7.7 million, or 13.0%, from 2007 due primarily to a
$6.25 million gain from the sale of a portion of our merchant services
portfolio ($0.22 per share) and a $2.4 million gain from the redemption of
Visa shares ($0.09) related to their initial public
offering. Lower asset management revenues (trust fees and
retail brokerage fees) and mortgage banking revenues, all related to weak
economic conditions and turbulent market conditions during 2008 partially
offset the aforementioned
gains.
|
|
·
|
Noninterest
expense declined $0.5 million, or 0.43%, reflecting the impact of the $1.9
million Visa litigation charge in the fourth quarter of 2007 and the
reversal of $1.1 million in Visa litigation reserves in the first quarter
of 2008. Higher operating expenses primarily for salaries,
legal fees and other real estate owned, partially offset the
aforementioned favorable variance related to our Visa litigation
reserve. The higher level of legal fees and other real estate
owned expense was driven by legal support needed for loan
workout/resolution and holding costs related to foreclosed
properties.
|
|
·
|
Loan
loss provision increased $26.3 million ($0.95 per share) in 2008 driven
primarily by a higher level of required reserves for our consumer and our
residential real estate loan portfolios, generally reflective of weak
economic conditions and stress in our residential real estate
markets. Net loan charge-offs for 2008 were 71 basis points of
average loans compared to 27 basis points in 2007. At year-end
2008, the allowance for loan losses was 1.89% of outstanding loans (net of
overdrafts) and provided coverage of 38% of nonperforming
loans.
|
|
·
|
Share
repurchase activity continued in 2008 with 90,041 shares being purchased
during the year compared to 1,404,364 shares being repurchased during
2007. We remain well-capitalized with a risk based capital
ratio of 14.69% and a tangible capital ratio of
7.76%.
|
RESULTS
OF OPERATIONS
Net
income for 2008 totaled $15.2 million ($0.89 per diluted share) compared to
$29.7 million ($1.66 per diluted share) in 2007 and $33.3 million ($1.79 per
diluted share) in 2006. Earnings per share reflect the repurchase of
90,041 common shares during 2008, 1,404,364 common shares during 2007, and
164,596 common shares during 2006.
The
reduction in earnings in 2008 of $14.5 million, or $0.77 per diluted share, is
primarily due to lower net interest income of $3.4 million, a higher loan loss
provision of $26.3 million, partially offset by a $6.25 million gain from the
sale of a portion of the bank’s merchant services portfolio and a $2.4 million
gain from the redemption of Visa Inc. shares related to its initial public
offering. Our 2007 earnings include a $1.9 million charge to reserve
for Visa litigation and our 2008 earnings include the reversal of $1.1 million
of our Visa litigation reserve.
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.
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)
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
Income
|
$ | 142,866 | $ | 165,323 | $ | 165,893 | ||||||
|
Taxable
Equivalent Adjustments
|
2,482 | 2,420 | 1,812 | |||||||||
|
Total
Interest Income (FTE)
|
145,348 | 167,743 | 167,705 | |||||||||
|
Interest
Expense
|
34,000 | 53,082 | 46,757 | |||||||||
|
Net
Interest Income (FTE)
|
111,348 | 114,661 | 120,948 | |||||||||
|
Provision
for Loan Losses
|
32,496 | 6,163 | 1,959 | |||||||||
|
Taxable
Equivalent Adjustments
|
2,482 | 2,420 | 1,812 | |||||||||
|
Net
Interest Income After Provision for Loan Losses
|
76,370 | 106,078 | 117,177 | |||||||||
|
Noninterest
Income
|
67,040 | 59,300 | 55,577 | |||||||||
|
Noninterest
Expense
|
121,472 | 121,992 | 121,568 | |||||||||
|
Income
Before Income Taxes
|
21,938 | 43,386 | 51,186 | |||||||||
|
Income
Taxes
|
6,713 | 13,703 | 17,921 | |||||||||
|
Net
Income
|
$ | 15,225 | $ | 29,683 | $ | 33,265 | ||||||
|
Basic
Net Income Per Share
|
$ | 0.89 | $ | 1.66 | $ | 1.79 | ||||||
|
Diluted
Net Income Per Share
|
$ | 0.89 | $ | 1.66 | $ | 1.79 | ||||||
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 2008,
our taxable equivalent net interest income decreased $3.4 million, or
2.9%. This follows a decrease of $6.3 million, or 5.2%, in 2007, and
an increase of $9.7 million, or 8.8%, in 2006. The decrease in our
taxable equivalent net interest income in 2008 resulted from a higher level of
foregone interest associated with the increased level of nonperforming assets
and a decline in loan fees, partially offset by the lower costs of funds for
deposits.
For the
year 2008, taxable equivalent interest income declined $22.5 million, or 13.4%
from 2007 and was constant for the periods in 2007 and 2006. Taxable
equivalent interest income was unfavorably impacted by the lower rate
environment in 2008 as compared to 2007, the higher level of foregone interest
on non-performing loans and a decline in loan fees, all of which resulted in
lower yields on our earning assets during 2008. These factors
produced a 120 basis point decline in the yield on earning assets, which
decreased from 7.68% in 2007 to 6.48% for 2008. This compares to a 26
basis point improvement in 2007 over 2006. Interest income is
expected to decline further during 2009, reflecting the lower interest rate
environment stemming from reductions in the Federal Reserve’s target rate
throughout the year and the continued impact of foregone interest income
associated with the current level of nonperforming assets.
Interest
expense decreased $19.1 million, or 36.0%, from 2007, and $6.3 million, or
13.5%, in 2007 over 2006. The decrease was experienced in interest on
deposits and short-term borrowings, primarily as a result of lower average
interest rates in 2008 and a favorable shift in the deposit
mix. Management responded aggressively to the reductions in the
Federal Reserve’s target rate, which began in September 2007, and believe we
have successfully neutralized the overall impact of the rate reductions by
aggressively lowering our deposit rates.
The
average rate paid on interest bearing liabilities in 2008 decreased 123 basis
points compared to 2007, reflecting the factors mentioned
above. Interest expense is expected to trend downward in 2009 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) increased 2
basis points in 2008 compared to 2007 and decreased 13 basis points in 2007
compared to 2006. The increase in 2008 was primarily attributable to
the rapid repricing of our deposit base, which more than offset the adverse
impact of lower rates and higher foregone interest.
Our net
interest margin (defined as taxable equivalent interest income less interest
expense divided by average earning assets) was 4.96% in 2008, compared to 5.25%
in 2007 and 5.35% in 2006. In 2008, the decline was a result of a 120
basis point decrease in the yield on earning assets, partially offset by a 91
basis point decrease in the cost of funds. Year over year, the
increase in foregone interest coupled with maintaining a higher level of
municipal deposits, which produce relatively thin spreads, led to the
compression in our net interest margin of 29 basis points.
During
2008, the Federal Reserve reduced the federal funds rate by 400 basis
points. Capital City Bank benefited from the influx of NOW deposits,
primarily during the first half of 2008, attributable to transfers from the
Florida State Board of Administration’s Local Government Investment
Pool. These new deposits were in the form of negotiated public
deposits and resulted in a significant increase in the bank’s NOW
accounts. These public funds declined throughout the second half of
2008. 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 on these accounts are thin, and
therefore, due to the volume of these new deposits, we have experienced an
adverse impact on our net interest margin percentage.
Table
2
AVERAGE
BALANCES AND INTEREST RATES
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||
|
(Taxable
Equivalent Basis - Dollars in Thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||
|
Loans,
Net of Unearned Interest(1)(2)
|
$
|
1,918,417
|
$
|
133,457
|
6.96
|
%
|
$
|
1,934,850
|
$
|
155,434
|
8.03
|
%
|
$
|
2,029,397
|
$
|
157,227
|
7.75
|
%
|
||||||||||
|
Taxable
Investment Securities
|
93,149
|
3,889
|
5.04
|
103,840
|
4,949
|
4.76
|
112,392
|
4,851
|
4.31
|
|||||||||||||||||||
|
Tax-Exempt
Investment Securities(2)
|
97,010
|
4,893
|
4.16
|
84,849
|
4,447
|
5.24
|
74,634
|
3,588
|
4.81
|
|||||||||||||||||||
|
Funds
Sold
|
132,073
|
3,109
|
2.32
|
59,989
|
2,913
|
4.79
|
41,854
|
2,039
|
4.81
|
|||||||||||||||||||
|
Total
Earning Assets
|
2,240,649
|
145,348
|
6.48
|
%
|
2,183,528
|
167,743
|
7.68
|
%
|
2,258,277
|
167,705
|
7.42
|
%
|
||||||||||||||||
|
Cash
& Due From Banks
|
82,410
|
86,692
|
100,237
|
|||||||||||||||||||||||||
|
Allowance
for Loan Losses
|
(23,015
|
)
|
(17,535
|
)
|
(17,486
|
)
|
||||||||||||||||||||||
|
Other
Assets
|
267,861
|
254,532
|
240,050
|
|||||||||||||||||||||||||
|
TOTAL
ASSETS
|
$
|
2,567,905
|
$
|
2,507,217
|
$
|
2,581,078
|
||||||||||||||||||||||