Capital City Bank Group Inc.
Annual Report 2004

Plain-text annual report

lead execute communicate think learn welcome table of contents Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Letter from the Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Senior Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Lead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Execute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Communicate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Think . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Learn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Capital City Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Community Presidents and Office Managers . . . . . . . . . . . . . . . . . . . . . 24 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Report of Independent Registered Public Accounting Firm . . . . . . . . . . 51 Officers, Directors and Community Boards . . . . . . . . . . . . . . . . . . . . . . 72 Shareowner Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Capital City Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 CORPORATE PROFILE Capital City Bank Group, Inc. (Capital City Bank Group) is a $2.4 billion financial services company headquartered in Tallahassee, Florida, providing traditional deposit and credit services, asset management, trust, mortgage banking, bankcards, data processing, and securities brokerage services. Founded in 1895, Capital City Bank has 60 banking offices, five mortgage lending offices, 74 ATMs, and 11 Bank 'N Shop locations in Florida, Georgia and Alabama. For more information about Capital City Bank Group, Inc. visit us on the Web at http://www.ccbg.com. Capital City Bank Group stock can be found on NASDAQ under the ticker CCBG. Capital City Bank Group financial highlights (Dollars in Thousands, Except Per Share Data) 2004 2003 Percent Change For the Year: Net Income Cash Dividends Declared Average Loans, Net of Unearned Interest Average Earning Assets Average Assets Average Deposits Average Equity $ 16,86$ 29,371 $ 25,193 16.6% 6,3769,857 1,538,744 1,534,5481,789,843 1,704,1672,006,745 1,1,599,201 168,65220,731 8,646 1,318,080 1,624,680 1,804,895 1,431,808 196,588 13,222,487 13,251,189 14.0 16.7 10.2 11.2 11.7 12.3 14.1 14.7 11.3 18.7 Basic Average Common Shares Outstanding 13,443,753 Diluted Average Common Shares Outstanding 10,633,94813,447,937 Per Share: Basic Net Income Diluted Net Income Cash Dividends Declared Diluted Book Value Ratios: Return on Average Assets Return on Average Equity Equity to Assets, Year-End Dividend Payout Net Interest Margin(1) (1) Taxable-Equivalent Net Interest Income Divided by Average Earning Assets. $ 1.$ 2.18 $ 1.91 1.592.18 .595.730 16.0818.13 1.46% 13.31 10.86 33.42 4.88 1.90 .656 15.27 1.40% 12.82 10.98 34.51 5.01 2 Capital City Bank Group financial data Net Income (dollars in thousands) Return on Equity $28,000 21,000 14,000 7,000 $2.0 1.5 1.0 0.5 1.500% 1.125 0.750 0.375 29,371 15.00% 11.25 7.50 3.75 99 00 01 02 03 04 99 00 01 02 03 04 Diluted Earnings per Share Average Assets (dollars in millions) 2.18 $2,000 1,500 1,000 500 99 00 01 02 03 04 99 00 01 02 03 04 Return on Assets Average Deposits (dollars in millions) 1.46 $1,500 1,125 750 375 13.31 2,007 1,599 99 00 01 02 03 04 99 00 01 02 03 04 Capital City Bank Group 3 Capital City Associates think, learn, communicate, execute, lead and welcome. These are the core competencies that drive our success as we strive every day to be a super-community bank in the relationship banking business. William G. Smith, Jr. Chairman, President and Chief Executive Officer 4 Capital City Bank Group I Letter from the Chairman n last year’s annual report I wrote about an exciting undertaking at The Project 2010 road map for Capital City Bank Group, Project expansion includes five areas which are expansion may be a part of the Capital 2010. The plan, with a single goal of targeted by Capital City for acquisition City future, these five identified $50 million in annual earnings by and expansion over the next seven markets are critical to the 2010 goal. 2010, was unveiled to all directors and years: Hernando/Pasco, Ocala, 2004 saw an economy that associates in February 2004. We are Gainesville, west Florida, and middle responded well to a slight rise in well on the way after one year. Earnings Georgia. Capital City expanded its interest rates. Residential lending, a of $29.4 million, or $2.18 per share, presence in middle Georgia to almost Capital City strength, saw production were up 16.6% over 2004 and put $500 million with the purchase of the of $262 million. Capital City Trust Capital City Bank Group ahead of pace Farmers & Merchants Bank in Dublin, Company finished the year with $653 toward its ambitious, yet achievable Georgia in October 2004. With Macon million in assets under management 2010 goal. The excitement, focused as an anchor city in the franchise, this following the successful integration of attention, and desire to achieve can be strategic acquisition significantly trust assets in conjunction with the seen in our associates every day. The strengthened the presence of Capital Quincy State Bank purchase. Loans, simplicity of the goal and ability to drive City in Georgia. I am pleased McGrath excluding acquisitions, grew $166 it to every department, office, and Keen, a fourth generation Dublin million during the year as we saw nice associate is a formula for success. banker, with a wealth of banking gains in both commercial and Project 2010 includes the continued knowledge, joined the Capital City commercial real estate lending. Credit building of the Capital City franchise Bank Group board and made an quality was pristine with charge-offs of which includes acquisitions and immediate impact. .22% and nonperforming loans of .29%. construction of new offices. Offices in In February 2005, Capital City I am humbled to have the Palatka and Keystone Heights, Florida announced an agreement to purchase opportunity to lead the talented group will be relocated to new facilities that the First National Bank of Alachua. of associates that define Capital City are under construction, and Capital This $230 million bank, with eight Bank Group. Their strength, energy City is entering a new market offices in and around Gainesville, and passion are contagious. We have in Wakulla County, Florida with Florida will increase our foothold in the the team that will drive us relentlessly the construction of an office in central Florida market and is a until we reach our Project 2010 goal of Crawfordville. significant step in the CCBG expansion $50 million in annual earnings. We plans. While other geographical enter 2005 with great enthusiasm and momentum. As always, I welcome your comments. Capital City Bank Group 5 Senior Management William G. Smith, Jr. Chairman, President and Chief Executive Officer Thomas A. Barron President Capital City Bank J. Kimbrough Davis Executive Vice President and Chief Financial Officer E xperienced mountain climbers will tell you that the first steps you AA BBOOLLDD SSTTRROOKKEE take on an important climb are just as important as the last. It just The year began with a bold financial stroke as Capital City Bank Group doesn’t seem it at the time. acquired Quincy State Bank for $28.1 million dollars. As a result of the Maybe it’s the low altitude or the excitement of the event or that at the acquisition, Capital City acquired $218 million in trust assets – not a bad start of the climb, the climber tends to be so fresh and full of ambition he way to begin the year. or she looks past those initial steps. The acquisition more than doubled the Company’s banking assets in the After the February 2004 breakthrough event where Capital City Bank Gadsden market and increased by over 50% the total assets under Group, Inc. Chairman, President and CEO Bill Smith established the management in Capital City Trust Company. “We will strengthen our Company’s lofty 2010 goal – a Mount Everest-like goal of doubling the presence in the Gadsden County Market,” said Capital City Trust Company Company’s annual earnings from $25 million in 2003 to $50 million by President Randy Pople. While Pople noted the name would change, the 2010 – he inspired a lot of pick work. faces and the interpersonal relationships would not. So, as Capital City Bank roars into 2005, well on its way to the pinnacle “Our clients will continue to work closely with the Quincy Associates that Smith pointed to, it may someday look back at 2004 – a record year – they have come to know and trust,” he said. as the launching pad for an unforgettable financial climb. 6 Capital City Bank Group Senior Management Flecia Braswell Executive Vice President Director of Marketing Randolph K. Briley Executive Vice President Retail Credit Edward G. Canup Executive Vice President Commercial Lending AANNOOTTHHEERR BBIIGG MMOOVVEE Laurens County, serving generation after generation of local families. By The next big announcement to Capital City Bank Associates was the teaming up with Capital City, the future of banking in Laurens County acquisition of Farmers and Merchants Bank in Dublin, Ga., a sure sign has never looked brighter." that the Star was continuing to head north as well as south and west – But 2004 wasn’t all about acquiring other banks. Inside the something that Smith had promised. workings of Capital City, some senior managers were working overtime, In May, the announcement came that Capital City Bank Group trying to find better and smarter ways to do business. was buying Farmers and Merchants Bank in Dublin, a $66.7 million dollar acquisition. AA CCRREEDDIITTAABBLLEE DDEECCIISSIIOONN Farmers and Merchants Bank, one of Georgia’s oldest and largest Randy Briley, Capital City Bank Executive Vice President of community banks, founded in 1910, had assets totaling $395 million and Retail Credit, recommended changes to the Capital City credit card 70 associates. product line. Farmers and Merchants Bank Chairman Wallace Miller proudly Capital City’s credit card offering was relatively basic and didn’t offer announced, “Our clients can look forward to the same friendly, personal many of the bells and whistles Briley knew our clients preferred. He also service they have always enjoyed. We have built a loyal client base in knew that for every dollar in credit card loans, about 4-5 cents would go Capital City Bank Group 7 Senior Management William D. Colledge Executive Vice President Institutional Banking Noel A. Ellis Executive Vice President Credit Administration Mitchell R. Englert Executive Vice President Community Banking Russell S. Grosvenor Executive Vice President President Capital City Services Company toward bad debt or money that would never be collected. Capital City continued to focus on earnings and process improvement. Capital City Bank entered into an agreement with Élan Financial Once again, Capital City stepped up the promotion of the annual Spring Services to sell our portfolio of credit cards. “This agreement enables the campaign called “FreedomLine Home Equity” – loan opportunities for Bank to offer a bankcard with the features our clients desire,” Briley said. clients and prospects. The conversion, which officially took place in November, was a bold and It worked. Capital City’s “FreedomLine” promotion ended up exceeding decisive strike for the future. its 2004 stated goal of $42 million by $13 million – quite an achievement. The after-tax gain on the sale of the portfolio, which included The popular Spring promotion will be continued in 2005 in approximately 22,000 accounts and $22.7 million in receivables, was all 60 offices. $4.2 million. Selling the portfolio enhanced profitability and improved the overall risk profile of the Capital City Bank loan portfolio, each of which LLOOOOKKIINNGG BBAACCKK,, LLOOOOKKIINNGG AAHHEEAADD is moving Capital City closer to its 2010 goal. Having announced two So, with a wonderful, experienced, energetic team of senior strategic acquisitions and its intention to sell the credit card portfolio, managers, arguably the finest crew in our history, Capital City was 8 Capital City Bank Group Senior Management Karen H. Love Executive Vice President Residential Lending Randolph M. Pople President Capital City Trust Company Dale A. Thompson Executive Vice President Business Banking Edwin N. West, Jr. Executive Vice President Community Banking able to make 2004 a year to remember. “Simply put,” Smith said, “we will need to grow earnings over the next “2004 was Capital City’s greatest year ever,” said Bill Smith. “We’re off seven years by an amount equal to what it took Capital City 109 years to to a great start toward Project 2010. But each year must be a record year produce. Ambitious, but achievable.” for us to achieve our goal.” Sounds like a perfect description of mountain climbing. Capital City must produce a 10 percent plus compounded annual Pick a peak and go for it! growth rate to achieve Capital City’s goal for 2010 of $50 million in annual earnings. “We made $25 million in 2003,” Smith said, “and we believe a little more than half of the next $25 million we’ll need by 2010 will come from our existing offices and a little less than half will come from acquisitions.” Then Smith offered a challenge to Capital City’s Team 2010, one that will echo in their minds for a while to come. Capital City Bank Group 9 lead He’s never held a scalpel,taken a pulse or scrubbed up for surgery. 10 Capital City Bank Group H e will talk cholesterol, exercise and blood pressure, if you prod him. But Capital City Bank Executive Vice President Bill Colledge knows about heart. Knows about hearts. Singular and Plural. As National Chairman of the Board for the American Heart Association, an honor that capped a 12-year stint working as a volunteer for the association, Colledge is uniquely qualified to speak about these things. So when he got a good look at President George W. Bush’s 2005 budget and wasn’t as happy with it as he might have been, he spoke up. For all of us. It was in newspapers all over the country. “We applaud the President for all his work to safeguard Americans,” Colledge said, “but we believe part of providing safety and security is to fight the diseases that kill the most Americans. The proposed budget invests too little in the search for cures and the prevention of our Number 1 killer, heart disease, and stroke, the third-leading chaired the Florida Affiliate board in 1999 and has been on more cause of death.” committees than you can count. Speaking as a guy who may – in those 12 inexhaustible years – have “It is a lot of time,” Colledge said, “but technology has really helped a done as much good for American hearts as Shirley Temple, those words lot in that regard. With teleconferences and emails, it’s a lot more carry weight. But that’s what leaders do. They speak out. Say their piece. convenient to communicate. And since the organization is so spread out They lead. and I’m on the East Coast, some of these things get done in the evenings.” Colledge is somebody who does that as a matter of course. “Bankers, Not surprisingly, Colledge’s role with Capital City has been a success, I think, as a rule, are people who like to give back to the community,” too. Hired seven years ago to lead Capital City’s business with he said. governments, school districts, water districts and other non-profit areas, He has. Whether with the Chamber of Commerce (he’s a former Colledge has grown the institutional side of Capital City Bank. Chairman) or the United Way, Colledge is tireless about that sort of thing. In 2004, Colledge’s group had a total production of $37 million, adding And the American Heart Association? That’s a topic that’s really dear to 11 new clients. his heart. Leaders know the value of ideas and hard work. Bill Colledge has “My family was really touched by heart disease,” he said. “My father, known for years now that he’s been giving something away that’s worth both my grandparents and my uncle all died before the age of 60. There more than anything he’ll find in a vault down the hall. His time. With that, were a lot of questions I never got answered. I would have liked for my he doesn’t think like a banker. Then again, maybe he does. dad to be around to see my children as adults, to get to really know them Time does pay. and see them become the fine people they are.” But, instead of cursing his genetic fate, Colledge decided to do something about it – a sure trait of a leader. He volunteered for the American Heart Association, became a member of the board, Capital City Bank Group 11 execute E It’s all in the details – and the execution. ven if they didn’t exactly know what was about to happen or why, the relentless rush of excitement was unmistakable. Fifty-three buses perfectly timed, arriving in an undisclosed location within 15 minutes of each other. Enough candles to illuminate a baseball stadium at midnight. Enough genuine joy to tinder even the cold, cold heart of Ebenezer Scrooge. In all, more than 1,000 Capital City Associates and Directors arrived at the 2004 kick-off event for Project 2010 with bounces in their steps and lifts in their hearts. Bankers from far and wide were ready to get rowdy, but in a really fun way. Rowdy? Bankers? Yes, it can happen. When you have a plan – a grand plan – then execute it with a precision that rivals that of Allied Commander Dwight D. Eisenhower at Normandy, people are going to make the assumption that you know what you are doing and where you are going. 12 Capital City Bank Group Not only that. They will also follow – if you show them that you will lead With successful acquisitions of Quincy State Bank in Quincy, Florida them. That goes a little deeper. That isn’t something that happens in one and Farmers and Merchants Bank in Dublin, Georgia, the Capital City night or 20 days. That only happens over time, over days and weeks and Bank Group network grew a little wider. There was some intricate work months of consistent, well-thought out, sharply executed ideas. inside, too, selling the credit card portfolio, implementing new profit So, in the final moments of the event, when Capital City Bank Group initiatives and strengthening Capital City’s already distinct place in the Chairman, President and CEO Bill Smith took the stage to an ovation region, as Smith puts it, “Being a super-community bank in the worthy of The Beatles on Ed Sullivan, it was enough to make you pause relationship banking business.” – in quiet – and reflect. For 2005, there will be more to come. Three new offices will open and Why were bankers getting rowdy over a CEO in folksy jeans, sitting the acquisition of the First Alachua Banking Corporation and idly chatting on the back of a pickup truck, talking about his plans is anticipated, giving Capital City Bank an even stronger foothold in for the Bank’s future? north central Florida. Do these people know something, perhaps sense something that those Heading down the road toward the goal of $50 million in annual outside the magical circle of Capital City Bank don’t? It’s all in the details earnings for 2010 will take continued commitment, dedication – and the execution. and enthusiasm. “The details leading up to that event were incredible,” said Capital City Like country music icon Billy Dean, from Quincy, Florida, sang in his Bank Executive Vice President of Marketing Flecia Braswell. well-chosen song from that magical event: “Life is not tried, it is merely “The T-shirts, the video, Billy Dean showing up…it was a better survived if you are standing outside the fire.” than perfect day.” At Capital City Bank, associates aren’t standing outside the fire. They Not only that, it was evidently motivational. Sparked by that eventful are dancing on the coals and turning up the heat. day, Capital City roared through the rest of 2004, finishing ahead of schedule with earnings of $29 million and assets of $2.4 billion dollars. Capital City Bank Group 13 communicate I“ tell you one thing I learned. We have a great brand.” just got back from six weeks with the United Way as a loaned executive,” explained Darrell (pronounced Darr-ELL) Fowler, Capital City Bank Vice President for Business Banking, “and I’ll It’s a Capital City Bank specialty. He may be the new guy in town – he’s only been in Tallahassee about a year – but he knows quality when he sees it. Because of the distinctive way Capital City Bank does business, because of the Bank’s tireless efforts in the community, because of all sorts of intangible things, Fowler doesn’t think it’s at all difficult for Tallahasseans to distinguish Capital City from its competitors. “When people see the name, there’s something there, something intangible yet very real,” he said. As a former college basketball coach, someone who was always fearful that Tuesday’s newspaper interview would wind up as inspirational fodder for the other team in Wednesday’s sports section, Fowler was 14 Capital City Bank Group reluctant to talk about the opposition - at first. Then he remembered he people, get involved in the community, interact with people, and bring had a new life, a new career. them to us.” “I guess I don’t have to worry about bulletin board material any more,” “That’s what my role is, to communicate with businesses, clients,” laughed Fowler. “I don’t care what the big boys say, we are ‘The Bank’ in he said. “I probably talk to 25-30 of them a day.” our communities.” “You see,” he continued, “the whole point of getting out there and How did that happen? Why did that happen? There are many facets to talking to people is that’s really the only way we can let them know what the answer, of course. we do and why we do it better than anybody else. We operate in very But a major factor – and one that generally distinguishes all quality competitive markets. It’s like I say, in Tallahassee, there’s a bank and a organizations from those of lesser ilk – is communication. For a group of church on every corner. people to share ideals, goals, problems and solutions, they need to be able “But I think the difference with us is, we can do all the things the big to talk to each other. That’s a Capital City Bank specialty. banks can do – but we never lose that small-town feel…” At Capital City Bank, feel is important. When you’re a super- “That’s something I think we do exceptionally well,” Fowler said, who community bank in the relationship banking business, it always will be. spent a number of years in different finance-related positions, so he knows the difference. In the long-term, Capital City Associates are able to apply those communication skills to their interaction with their clients. “It’s all about establishing relationships,” Fowler said. “That’s what my job is all about, working in the business end of things. A few years ago, banks would sit back and wait for the business to walk in. Not here. We have a strong sales culture. Let’s go out and find the business, meet Capital City Bank Group 15 think Mark Twain, admittedly, would have been lousy at banking commercial real estate clients. 16 Capital City Bank Group I“ was never able to recognize an opportunity,” Twain once lamented, “until after it ceased to be one.” Native Tallahassean Ed Canup, Capital City Bank Executive Vice President for Commercial Real Estate, is cut from a different bolt of cloth. To Canup, opportunity is always knocking. You just have to be listening. And thinking about what to do if you hear something. A few months ago, Canup set up a meeting with Pat Roberts, president of the Florida Broadcasters Association. Canup, who did his homework, knew Roberts, a prominent long-time Tallahassean, did his banking elsewhere. When Canup’s fellow associate, Emory Mayfield’s hard work turned up news of Roberts’ impending purchase of a large parcel of land by a scenic lake in Tallahassee, Canup’s mind was brimming with possibilities. “That parcel of land hadn’t changed hands in almost 100 years,” Canup said excitedly. “It was just gorgeous.” “It’s really relationship-banking,” Canup said. “It’s not just about the Roberts had plans to develop it with a number of lakefront lots. With deal or the numbers. Because you’re not just thinking about this his Tallahassee background, Canup knew instantly how valuable the land opportunity, but about another opportunity two years from now, 10 years could be. What Ed and Emory had to do was find the best way to present from now.” to Roberts exactly what Capital City could bring to the project. How could In this case, Canup and Mayfield were able to do that brilliantly. Capital City add value, and create a relationship rather than just a deal? Despite prior loyalties, Roberts knew the value added when he saw it. Canup had to think on his feet and when he and Mayfield accompanied Once Mayfield secured Roberts’ financial statements, he got him what Roberts to the site. Roberts immediately started sharing his plans for every client wants: a quick answer. developing the land. Canup had some concerns right away. When Canup and Mayfield presented the commitment letter to “I knew Pat was an experienced real estate developer,” Canup said, “but Roberts, explaining that Capital City Bank wanted to help him, Roberts I also knew that lake preservation development is different. was ready to move. “Fortunately, our team has had some experience with this kind of Quick responses. Right answers. The whole process, not just the start project,” Canup said. “Consequently, we were uniquely qualified to help of it. Capital City Bank had it all, when necessary. him. We were able to help him understand the obstacles and what he Why? Because, like Ed Canup and Emory Mayfield, these folks know needed to do to develop the land. And I do believe he genuinely how to think things through. appreciated the opportunity to work with someone who understood his plans and what it would take to realize them.” To Canup, that’s one of the real strengths Capital City offers its clients. Not only thinking about them but also with them, particularly in deals where it helps to have some grasp of the geography and history of the area. It’s the ability of Capital City to add value beyond the numbers. Capital City Bank Group 17 learn Work made fun gets done. 18 Capital City Bank Group T he note, gracefully penned in Bill Smith’s distinctive handwriting, carried an air of excitement. He was thrilled. He’d just sat in on the opening class of a revolutionary new program and knew instantly his 20-year search was over. It was that many years earlier Smith had read, and held on to, an article written on the importance and rarity of excellent client service. Now, after learning about the FISH! program, he could send the article to an associate and have them see what he did so long ago. “I have saved this article since 1984,” Smith wrote. “I read it again after our FISH! class. Hope these stories will continue to inspire us to even higher levels.” That long-ago article, written by Thomas Peters, whose book “In Search Of Excellence” became a phenomenal best-seller in 1983, made perfect sense. Then and now. “Good associate relations is good client service…” it read. “It’s hard work, it’s an agonizing game of inches, of millimeters. It is a thousand things done a little better…” Which is precisely the idea behind the famous name, asked something personal about them like, “Where are the kids FISH! program, a radical approach to work inspired by Seattle’s Pike Place today?” “How is your husband doing?” “Do you have plans for Fish Market. the weekend?” The Market, now one of Seattle’s great tourist stops, draws enormous In another office, an innovative plan to reduce absenteeism and crowds every day, beginning at 6:30 a.m. as visitors are invited to join the tardiness has been a masterstroke. Every Monday morning, there’s a fish peddlers in their daily routines, tossing stone crabs or mackerel back drawing to see which associate will be selected for “Make Their Week.” and forth. The idea is to involve the customers in the process in a most That week’s winner is the recipient of extra help on the job, perhaps their unique way. favorite lunch, all sorts of perks. Since then, the Market’s four guiding principles: Play, Make Their Day, “Not only did it help attendance and early arrivals,” a bank associate Be There, Choose Your Attitude have become concepts applicable to noted, “everyone’s work improved. They couldn’t wait to get to work industries all over the world. Even banking. on Monday.” “‘Work made fun gets done,’” explained Denise Wilson, Capital City Yes, it’s all about a thousand things, done a little better. A company that Bank Associate Director of Development. “And really, we’ve seen it work. realizes where it is, where it can be and what it will take to get there. The FISH! program is definitely a big part of our future.” There’s nothing too small, no mountain too big. Choose your attitude and How does throwing fish around an open-air market translate into be there to play and make their day. You won’t want to miss it. banking excellence? By striving for the same kind of “Make Their Day” distinction with each and every client. “I received a partial distribution from a legal case, a horrible endeavor to endure that took four years,” writes a Capital City client. “…I went to the bank and the tellers were helpful, cheerful and acting happy to see each and every person that walked in the doors. They called people by Capital City Bank Group 19 welcome I“ Sometimes, Sue Wise admits, she takes the long way home. t’s a couple of miles out of the way,” she says a little sheepishly, “but I kind of like seeing how things are coming along.” There’s something unusual here. Wise, the Community President for the Perry Office, is celebrating her 40th year of banking and ninth in that office. As she awaited daily updates about the impending birth of another grandchild, she found herself taking a new route home two or three days a week, past a new building at 1149 West Hampton Springs Road. She was checking on another new arrival. Perry’s newest church, the Mount Olive Baptist Church, is a project that Wise helped get started. “We wondered if Sue could help us get the funding for a new church,” explained Thomas Demps, a Pastor at Mount Olive Baptist Church. “I knew Capital City Bank was a fairly big bank but Sue, she’s a people person.” 20 Capital City Bank Group Building a new church had been a dream of the Mount Olive found out what we were hoping to do, she came out and saw the whole congregation for several years. A small church in a tough area, they’d seen congregation in our old church.’’ the congregation grow to the point where they had to do something. On a Saturday in February – both parties distinctly remember it “They say that when a congregation gets to 70 percent of capacity, was a Saturday, not your typical workday – Sue went to a meeting to it doesn’t go forward, it goes back,” Demps said. “There’s got to be hear more. room to grow.” “Sue came in, talked with us and said, ‘You’re going to have questions Church leaders started saving money and Demps made personal on this. Here’s my number at the Bank, here’s my number at home. Call appeals to the Campers On Mission volunteers, visiting them at a number me any time.’’’ Demps recalled, “That was impressive.” of sites where this nationally known group of retirees helped communities Is there a better way to make a client feel important? To make them build churches. Then came Sue. feel welcome in sharing their dream? To let them know you and your “When they came to see me,” Wise said, “they had already saved bank want to be a part of it? $200,000. Though they checked at some other banks, and were told ‘No,’ So the church is going up. Campers On Mission is in Perry helping. I was confident we would be able to help them. I knew them and what The congregation of the Mount Olive Baptist Church has shown them this meant. community commitment. “It’s so easy to do the right thing for the right reasons,” Wise said. “I’m That congregation could also tell them about an enthusiastic in an economically depressed area. It’s not a white-collar area. Whenever banker, now beginning her 40th year in the business with a dream of you can do something that’s going to benefit our town, it’s an easy call. her own. And a knack for making neighbors and their dreams – That’s one of the great things about working for a community bank. You always feel welcome. really feel like you can make a difference.” Demps knew at Capital City Bank their nurtured dream would be welcome. “Sue is a down-home kind of person,” Demps said. “When Sue Capital City Bank Group 21 Atlanta Lanett West Point Macon Auburn Valley Phenix City Columbus Montgomery Waynesboro Dublin Tifton Cairo Thomasville Monticello Madison Tallahassee Jacksonville Branford Perry Starke Steinhatchee Fanning Springs Bell Trenton Keystone Heights Gainesville Palatka Daytona Beach Cross City Chiefland Bronson Cedar Key Inglis Williston Citrus Springs Inverness Crystal River Floral City Orlando Lakeland Spring Hill Port Richey Tampa Whigham Havana Quincy Panacea Chipley Chattahoochee Panama City Port St. Joe 22 Capital City Bank Group Capital City locations ALABAMA GULF COUNTY WAKULLA COUNTY CHAMBERS COUNTY Port St. Joe Panacea Lanett Valley HERNANDO COUNTY WASHINGTON COUNTY Spring Hill Chipley GEORGIA BIBB COUNTY Macon BURKE COUNTY Waynesboro GRADY COUNTY Cairo Whigham LAURENS COUNTY Dublin THOMAS COUNTY Thomasville TROUP COUNTY West Point FLORIDA ALACHUA COUNTY Gainesville BRADFORD COUNTY Starke CITRUS COUNTY Crystal River Citrus Springs Inverness CLAY COUNTY Keystone Heights Floral City DIXIE COUNTY Cross City GADSDEN COUNTY Quincy Havana Chattahoochee JEFFERSON COUNTY Monticello LEON COUNTY Tallahassee LEVY COUNTY Chiefland Bronson Williston Cedar Key Inglis MADISON COUNTY Madison PASCO COUNTY Port Richey POLK COUNTY Lakeland PUTNAM COUNTY Palatka SUWANNEE COUNTY GILCHRIST COUNTY Branford Bell Trenton Fanning Springs TAYLOR COUNTY Perry Steinhatchee Capital City Bank Group 23 Community Presidents LEFT TO RIGHT: Jeff Oody, Bradford and Clay Counties; Johanna White, Gulf County; Clif Bradley, Dixie, Gilchrist, Levy and Suwannee Counties; Dave Alberson, Hernando and Pasco Counties; Jimmy Suber, Gadsden County; Roy Carter, Washington County; Terry McRae, Grady County; Drew Ferguson, III, Chambers and Troup Counties; Steve Martin, Citrus County and Inglis Market; Beverly Black, Burke County; Steve Jukes, Bibb County; Sue Wise, Taylor County; Larry Fredrick, Putnam County; Bill Gunnels, Jefferson and Madison Counties. Office Managers ALABAMA Chambers County Shawmut Office – Susan Terry Fob James Office – Sandra Fuller FLORIDA Bradford/Clay Counties Keystone Heights Office – Sam Midgett Starke Office – Vorease Jones Citrus County/Inglis Crystal River Office – Robin Falkenburg Citrus Springs Office – Patricia Striglio Floral City Office – James Segovia Inglis Office – Vickie Keech Inverness Office – Deborah Wade Dixie/Gilchrist/Levy/Suwannee Counties Bell Office – Shelly Irvin Branford Office – Teresa Kelley Bronson Office – Annie Sims Cedar Key Office – Inez Worthington Chiefland Office – Jackie Hawkins Cross City Office – Connie Odom Fanning Springs Office – Becky Magwood Trenton Office – Elwanda Gore Williston Office – Andy Lott Gadsden County Chattahoochee Office – Jane Thompson Havana Office – Almeta Leverett Quincy Office – Sue Chester 24 Capital City Bank Group Gulf County Port St. Joe Office – Kim Knight Taylor County Perry Office – Angela Wilson Hernando/Pasco Counties Mariner Boulevard Office – Anita Hearl Port Richey Office – Tiffany Marholz Suncoast Spring Hill Office – Donna Lipidarov Jefferson/Madison Counties Madison Office – Evelyn Pridgeon Monticello Office – Sharon Bradley Leon County Apalachee Parkway East Office – Sue McCoy Apalachee Parkway Office – Liz Beaty Bradfordville Office – Lisa Elam Capital Circle NW Office – Pat Ramsden Centerville Office – Beverly Duinkerken Governors Square Office – Beverly Duinkerken Lake Jackson Office – Tresann Walsh Mahan Office – Chris Maxwell Main Office – Liz Beaty Metropolitan Office – Pelita Sheffield North Monroe Office – Karol Schneider South Monroe Office – Barbara Gregg Tharpe St. Office – Tammy Ciaccio Thomasville Rd. Office – Jackye Beasley-Moore West Tennessee Office – Judy Sharman Westwood Office – Brenda Sunday Putnam County Palatka Main Office – Linda Baggs Palatka Mall Office – Carol Snow Washington County Chipley Office – Sheila Sanders GEORGIA Bibb County Macon Main Office – Darlene Stewart Macon Main Office – Heather Turnbull Macon Mall Office – Michelle Rodriguez Macon Northside Office – Teresa Knipfer Burke County Waynesboro Office – Ruth McClellan Grady County Cairo Office – Becky Miller Whigham Office – Jessica Kines Laurens County Dublin Main Office – Frances Purvis Dublin Main Office – Annelle Lowery East Dublin Office – Gloria Ikner Westgate Office – Janie Stewart Troup County West Point Office – Diane McCollough 2004 financials Capital City Bank Group 25 selected financial data (Dollars in Thousands,Except Per Share Data) (1) 2004 2003 2002 2001 2000 For the Years Ended December 31, Interest Income Net Interest Income Provision for Loan Losses Net Income Per Common Share: Basic Net Income Diluted Net Income Cash Dividends Declared Book Value Key Performance Ratios: Return on Average Assets Return on Average Equity Net Interest Margin (FTE) Dividend Pay-Out Ratio Equity to Assets Ratio Asset Quality: $ 101,525 86,084 2,141 29,371 $ 2.18 2.18 .730 18.13 $ 94,830 79,991 3,436 25,193 $ 1.91 1.90 .656 15.27 $ 104,165 81,662 3,297 23,082 $ 1.75 1.74 .502 14.08 $ 117,156 68,907 3,983 16,866 $ 1.27 1.27 .476 12.86 $ 107,720 61,486 3,120 18,153 $ 1.43 1.43 .436 11.61 1.46% 13.31 4.88 33.42 10.86 1.40% 12.82 5.01 34.51 10.98 1.34% 12.85 5.35 28.87 10.22 0.99% 10.00 4.61 37.48 9.43 1.24% 12.99 4.80 30.49 9.66 Allowance for Loan Losses Allowance for Loan Losses to Loans Nonperforming Assets Nonperforming Assets to Loans + ORE Allowance to Nonperforming Loans Net Charge-Offs to Average Loans $ 16,037 $ 12,429 $ 12,495 $ 12,096 $ 10,564 0.88% 5,271 0.29 345.18 0.22 0.93% 7,301 0.54 529.80 0.27 0.97% 3,843 0.30 497.72 0.23 0.98% 3,940 0.32 496.96 0.31 1.00% 3,909 0.37 359.57 0.25 Averages for the Year: Loans, Net Earning Assets Total Assets Deposits Subordinated Note Long-Term Borrowings Shareowners’ Equity Year-End Balances: Loans, Net Earning Assets Total Assets Deposits Subordinated Note Long-Term Borrowings Shareowners’ Equity Other Data: Basic Average Shares Outstanding Diluted Average Shares Outstanding Shareowners of Record (2) Banking Locations (2) Full-Time Equivalent Associates (2) $1,538,744 1,789,843 2,006,745 1,599,201 5,155 59,462 220,731 $1,828,825 2,113,571 2,364,013 1,894,886 30,928 68,453 256,800 13,443,753 13,447,937 1,598 60 926 $1,318,080 1,624,680 1,804,895 1,431,808 - 55,594 196,588 $1,341,632 1,648,818 1,846,502 1,474,205 - 46,475 202,809 13,222,487 13,251,189 1,512 57 795 $1,256,107 1,556,500 1,727,180 1,424,999 - 30,423 179,652 $1,285,221 1,636,472 1,824,771 1,434,200 - 71,745 186,531 13,225,285 13,274,355 1,457 54 781 $1,184,290 1,534,548 1,704,167 1,442,916 - 15,308 168,652 $1,243,351 1,626,841 1,821,423 1,550,101 - 13,570 171,783 13,241,957 13,292,435 1,473 56 787 $1,002,122 1,315,024 1,463,612 1,207,103 - 13,070 139,738 $1,051,832 1,369,294 1,527,460 1,268,367 - 11,707 147,607 12,732,749 12,768,553 1,599 56 791 (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13,2003. (2) As of the record date. The record date is on or about March 1st of the following year. 26 Capital City Bank Group MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s discussion and analysis (“MD&A”) provides supple- mental information, which sets forth the major factors that have affected the Company’s financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. 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.” Information therein should facilitate a better understanding of the major factors and trends that affect the Company’s earnings performance and financial condition, and how the Company’s performance during 2004 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and its subsidiary, collectively, are referred to as “CCBG” or the “Company.” Capital City Bank is referred to as “CCB” or the “Bank.” The period-to-date averages used in this report are based on daily balances for each respective period. In certain circumstances, comparing average balances for the fourth quarters of consecutive years may be more meaningful than simply analyzing year-to-date averages. Therefore, where appropriate, quarterly averages have been presented for analysis and have been noted as such. See Table 2 for annual averages and Table 15 for financial information presented on a quarterly basis. This Report including the MD&A section, and other Company written and oral communications and statements may contain “forward- looking statements.” These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expecta- tions, 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. The Company’s actual future results may differ materially from those set forth in its forward-looking statements. Factors that might cause the future financial performance to vary from that described in its forward-looking statements include the credit, market, operational, liquidity, interest rate and other risks discussed in the MD&A section of this report and in other periodic reports filed with the SEC. In addition, the following discussion sets forth certain risks and uncertainties that the Company believes could cause its actual future results to differ materially from expected results. However, other factors besides those listed below or discussed in the Company’s reports to the SEC also could adversely affect the Company’s results, and the reader should not consider any such list of factors to be a complete set of all potential risks or uncertainties. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. The following factors, among others, could cause our financial performance financial review to differ materially from what is contemplated in those forward-looking statements. • Our ability to integrate the business and operations of companies and banks that we have acquired and that we may acquire in the future. For example, the Company may fail to realize the growth opportunities and cost savings anticipated to be derived from our acquisitions. In addition, it is possible that during the integration process of our acquisitions, the Company could lose key employ- ees or the ability to maintain relationships with customers. • The strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio and allowance for loan losses; • Worldwide political and social unrest, including acts of war and terrorism; • The effects of harsh weather conditions, including hurricanes; • The effects of, and changes in, trade, monetary and fiscal poli- cies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; • Inflation, interest rate, market and monetary fluctuations; • Adverse conditions in the stock market and other capital markets and the impact of those conditions on our capital markets and capital management activities, including our invest- ment and wealth management advisory businesses and brokerage activities; • Changes in U.S. foreign or military policy; • The timely development of competitive new products and services by us and the acceptance of those products and services by new and existing customers; • The willingness of customers to accept third-party products mar- keted by us; • The willingness of customers to substitute competitors’ products and services for our products and services and vice versa; • The impact of changes in financial services laws and regula- tions (including laws concerning taxes, banking, securities and insurance); • Technological changes; • Changes in consumer spending and saving habits; • The growth and profitability of our noninterest or fee income being less than expected; • Unanticipated regulatory or judicial proceedings; • The impact of changes in accounting policies by the Securities and Exchange Commission; Capital City Bank Group 27 financial review • Adverse changes in the financial performance and/or condition of our borrowers, which could impact the repayment of those borrowers’ outstanding loans; and • Our success at managing the risks involved in the foregoing. We caution that the foregoing list of important factors is not exhaustive. Any forward-looking statements made by or on behalf of the Company speak only as of the date they are made. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf. The Company may make further disclosures of a forward-looking nature in its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its current report on Form 8-K. BUSINESS OVERVIEW The Company is a financial holding company headquartered in Tallahassee, Florida and is the parent of its wholly-owned subsidiary, Capital City Bank. The Bank offers a broad array of products and ser- vices through a total of 60 full-service offices located in 17 Florida counties, five Georgia counties, and one Alabama county. The Bank also has mortgage lending offices in four additional Florida communi- ties, and one Georgia community. The Bank offers commercial and retail banking services, as well as trust and asset management, broker- age, and data processing services. From an industry and national perspective, the Company’s prof- itability, 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 inter- est 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, non-interest income such as service charges on deposit accounts, trust service fees, mortgage banking revenues, and data processing revenues. Economic conditions, competition and the monetary and fiscal policies of the Federal government, in general, significantly affect financial insti- tutions, including the Company. During 2004, the Federal government’s monetary and fiscal policy was marked by a steady increase in short- term interest rates to curb the potential for inflationary pressures. Lending activities are also significantly influenced by regional and local economic factors. Some specific factors may include the demand for and supply of housing, competition among lenders, interest rate condi- tions and prevailing market rates on competing investments, customer preferences and levels of personal income and savings in the Company’s primary market area. The Company philosophy is to grow and prosper, building long- term relationships based on quality service, high ethical standards, and safe and sound banking practices. The Company is a super-community bank in the relationship banking business with a locally oriented, com- munity-based focus, which is augmented by experienced, centralized support in select specialized areas. The Company’s local market orien- 28 Capital City Bank Group tation is reflected in its network of banking office locations, experienced community executives, and community advisory boards which support the Company’s focus of responding to local banking needs. The Company strives to offer a broad array of sophisticated products and to provide quality service by empowering associates to make decisions in their local markets. Pursuant to the Company’s “Project 2010”, the Company plans to continue its expansion, emphasizing a combination of growth in existing markets and acquisitions. 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. The Company 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, insurance, and mortgage banking. Management anticipates that roughly half of the Company’s future earn- ings growth will be generated through growth in existing markets and half through acquisitions. Pending Acquisition. On February 3, 2005, the Company announced the signing of a definitive agreement to acquire First Alachua Banking Corporation (“FABC”), headquartered in Alachua, Florida. FABC’s wholly-owned subsidiary, First National Bank of Alachua (“FNBA”) has $229 million in assets, seven offices located in Alachua County -- Gainesville (three), Alachua, High Springs, Jonesville, Newberry -- and an eighth office in Hastings, Florida, which is located in St. Johns County. FABC also has a mortgage lending office in Gainesville and a financial services division. Subject to certain potential adjustments, FABC shareowners will receive $2,847.04 in cash and 71.176 shares of CCBG common stock for each of the 10,186 shares of FABC common stock outstanding. Based on Capital City’s closing market price on Nasdaq on February 3, 2005, this cash and stock combination equaled aggregate consideration of $58.0 million. Closing is anticipated for mid- year 2005. Previous Acquisitions. On March 19, 2004, the Company’s subsidiary, Capital City Bank, completed its merger with Quincy State Bank, a former subsidiary of Synovus Financial Corp. Quincy State Bank had $116.6 million in assets with one office in Quincy, Florida and one office in Havana, Florida. Both markets adjoin Leon County, home to the Company’s Tallahassee headquarters. The purchase price was $26.1 million in cash. On October 15, 2004, the Company completed its acquisition of Farmers and Merchants Bank in Dublin, Georgia, a $395 million asset institution with three offices in Laurens County. The Company issued 17.08 shares and $666.50 in cash for each of the 50,000 shares of Farmers and Merchants Bank, resulting in the issuance of 854,000 shares of Company common stock and the payment of $33.3 million in cash for a total purchase price of approximately $66.7 million. FINANCIAL OVERVIEW The Company’s net income for 2004 totaled $29.4 million, or $2.18 per diluted share. This compares to $25.2 million, or $1.90 per diluted share in 2003. Key factors impacting the Company’s financial condition and results of operations for 2004 are summarized below. • • • • Total assets of the Company increased to $2.4 billion at the end of 2004, or 28.0%, from $1.8 billion at the end of 2003. This strong growth is primarily reflective of increases in earning assets obtained through the two acquisitions during 2004 and strong loan production in existing markets. Shareowners’ equity for the same periods improved from $202.8 million at the end of 2003 to $256.8 million at the end of 2004. The Company continues to be well capitalized with a Tier 1 capital ratio of 11.4%. Net interest income in 2004 grew $6.1 million, or 7.6% over 2003 due to higher interest income reflective of earning asset growth through acquisitions and strong organic loan growth, and an improved deposit mix, partially offset by declining asset yields primarily attributable to earning asset re-pricing. The full year net interest margin of 4.88% declined 13 basis points from the comparable period in 2003 reflective of an 18 basis point decline in earning asset yield partially offset by a 5 basis point decline in the cost of funds. Noninterest income increased $8.6 million, or 20.5%, over 2003 due primarily to the $6.9 million one-time gain on the sale of the bank’s credit card portfolio recognized in the third quarter. Gains were also realized in deposit service fees, data processing Table 1 Condensed Summary of Earnings (Dollars in Thousands,Except Per Share Data) Interest Income ............................................................................................... Taxable Equivalent Adjustments.......................................................................... Total Interest Income (FTE) ................................................................................ Interest Expense .............................................................................................. Net Interest Income (FTE).................................................................................. Provision for Loan Losses ................................................................................. Taxable Equivalent Adjustments.......................................................................... Net Interest Income After Provision for Loan Losses .............................................. Noninterest Income.......................................................................................... Gain on Sale of Credit Card Portfolio................................................................... Noninterest Expense ........................................................................................ Income Before Income Taxes............................................................................. Income Taxes.................................................................................................. Net Income..................................................................................................... Basic Net Income Per Share.............................................................................. Diluted Net Income Per Share............................................................................ financial review • • • fees, asset management fees, and merchant fees that were par- tially offset by a decline in mortgage banking revenues. Noninterest expense grew by $9.5 million, or 11.9% over 2003. Higher expense for compensation, occupancy, profes- sional fees, advertising, and intangibles were the primary reasons for the increase. The integration of two acquisitions during the year, expansion of banking office locations, and the implementation of Sarbanes-Oxley Section 404 compli- ance and testing were the primary contributing factors driving the increase. Provision for loan losses for the year totaled $2.1 million com- pared to $3.4 million in 2003. The lower provision is reflective of continued strong credit quality and lower inher- ent risk in the loan portfolio due to the sale of the credit card portfolio. Net charge-offs totaled $3.4 million, or .22% of average loans for the year compared to $3.5 million, or .27% for 2003. At year-end the allowance for loan losses was .88% of outstanding loans and provided coverage of 345% of non- performing loans. Nonperforming assets totaled $5.3 million, or .29% of total loans and other real estate at year-end. This compares to .36% for the third quarter of 2004, and .54% for the year ended 2003. Asset quality continues to be strong and a key driver in bank performance and growth. The year 2004 set the stage for the start of the Company’s “Project 2010”, a strategic initiative aimed at achieving $50.0 million in annual earnings by 2010. Key parts of the initiative include the continued For the Years Ended December 31, 2004 $101,525 1,207 102,732 15,441 87,291 2,141 1,207 83,943 43,372 7,181 89,226 45,270 15,899 $ 29,371 ==================== $ 2.18 ==================== $ 2.18 ==================== 2003 $94,830 1,414 96,244 14,839 81,405 3,436 1,414 76,555 41,939 - 79,721 38,773 13,580 $25,193 ================= $ 1.91 ================= $ 1.90 ================= 2002 $104,165 1,682 105,847 22,503 83,344 3,297 1,682 78,365 36,103 - 78,695 35,773 12,691 $ 23,082 ==================== $ 1.75 ==================== $ 1.74 ==================== Capital City Bank Group 29 financial review building of the Company’s franchise through acquisitions and/or con- struction of offices in five targeted geographic areas (Hernando/Pasco, Ocala, Gainesville, west Florida, and middle Georgia), and organic growth in existing markets through the continued emphasis on relation- ship banking, quality service, and offering a broad array of sophisticated banking services. RESULTS OF OPERATIONS Net income for 2004 totaled $29.4 million, or $2.18 per diluted share. This compares to $25.2 million, or $1.90 per diluted share in 2003, and $23.1 million, or $1.74 per diluted share in 2002. Net income in 2004 included a one-time, after-tax gain of $4.2 million, or $.32 per diluted share, from the sale of the Bank’s credit card portfolio. The increase in 2004 net income was primarily attributable to Table 2 Average Balances and Interest Rates (Taxable Equivalent Basis-Dollars in Thousands) Assets: 2004 2003 2002 Average Balance Average Interest Rate Average Balance Average Interest Rate Average Balance Average Interest Rate Loans, Net of Unearned Interest (1)(2) ............ Taxable Investment Securities .................... Tax-Exempt Investment Securities (2) ............ Funds Sold .............................................. Total Earning Assets .............................. $1,538,744 131,842 51,979 67,278 1,789,843 $ 95,796 3,138 2,965 833 102,732 6.23% $1,318,080 $87,608 3,725 124,541 2.38 5.70 3,650 61,387 120,672 1,261 1.24 96,244 1,624,680 5.74 6.65% 2.98 5.95 1.03 5.92 $1,256,107 135,865 68,915 95,613 1,556,500 $ 93,293 6,941 4,133 1,481 105,848 7.43% 5.11 6.00 1.53 6.80 Cash & Due From Banks .......................... Allowance For Loan Losses........................ Other Assets ............................................ TOTAL ASSETS .................................... Liabilities: NOW Accounts ........................................ Money Market Accounts ............................ Savings Accounts .................................... Time Deposits.......................................... Total Interest Bearing Deposits ................ Short-Term Borrowings ............................ Long-Term Borrowings.............................. Subordinate Debentures ............................ Total Interest Bearing Liabilities................ Noninterest Bearing Deposits...................... Other Liabilities ........................................ TOTAL LIABILITIES................................ Shareowners’ Equity: Common Stock........................................ Additional Paid-In Capital .......................... Retained Earnings .................................... TOTAL SHAREOWNERS’ EQUITY ............ TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY ............ Interest Rate Spread ...................................... Net Interest Income........................................ Net Interest Margin (3) .................................... 93,070 (13,846) 137,678 $2,006,745 ============ $ 292,492 227,808 130,282 459,464 1,110,046 100,582 59,462 5,155 1,275,245 489,155 21,614 1,786,014 135 24,586 196,010 220,731 $2,006,745 ============ 79,625 (12,544) 113,134 $1,804,895 ============ $ 733 1,190 164 9,228 11,315 1,270 2,562 294 15,441 0.25% $ 264,159 $ 676 1,312 215,597 0.52 0.13 189 109,837 433,176 9,390 2.01 11,567 1,022,769 1.02 1,270 101,274 1.26 2,002 55,594 4.31 - 5.71 - 1,179,637 14,839 1.21 409,039 19,631 1,608,307 0.26% 0.61 0.17 2.17 1.13 1.25 3.60 - 1.26 132 15,272 181,184 196,588 $1,804,895 ============ $ 1,272 2,904 500 15,875 20,551 767 1,185 - 22,503 0.53% 1.30 0.48 3.21 1.93 1.06 3.90 - 1.93 72,960 (12,409) 110,129 $1,727,180 ============ $ 241,873 224,275 104,967 493,956 1,065,071 72,594 30,423 - 1,168,088 359,928 19,512 1,547,528 132 15,386 164,184 179,652 $1,727,180 ============ $ 87,291 ========== 4.53% ========= 4.88% ========= $81,405 ========= 4.66% ======== 5.01% ======== $ 83,345 ========== 4.87% ======== 5.35% ======== (1) Average balances include nonaccrual loans.Interest income includes fees on loans of approximately $1.7 million,$1.8 million and $2.7 million in 2004,2003 and 2002,respectively. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest on tax-exempt loans and securities to a taxable equivalent basis. (3) Taxable equivalent net interest income divided by average earning assets. 30 Capital City Bank Group financial review growth in operating revenues (defined as the total of net interest income and noninterest income) of 12.1%, driven by a 7.6% increase in net interest income and a 20.5% increase in noninterest income. A lower loan loss provision also enhanced net income. The increase in net inter- est income primarily reflects growth in earning assets and an improved deposit mix. The increase in noninterest income reflects higher deposit service fees, asset management fees, and a one-time gain on the sale of the credit card portfolio. The lower loan loss provision is reflective of a reduction in the overall risk of the loan portfolio due to the sale of the credit card portfolio. A condensed earnings summary for the last three years is presented in Table 1. Net Interest Income Net interest income represents the Company’s single largest source of earnings and is equal to interest income and fees generated by earning assets, less interest expense paid on interest bearing liabilities. An analysis of the Company’s net interest income, including average yields and rates, is presented in Tables 2 and 3. This information is pre- sented 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 2004, taxable equivalent net interest income increased $5.9 million, or 7.2%. This follows a decrease of $1.9 million, or 2.3%, in 2003, and an increase of $10.8 million, or 14.9%, in 2002. The favor- able impact resulted from an improved earning asset mix, lower funding costs, and two acquisitions; and was partially offset by declining asset yields attributable to the continued low interest rate environment. For the year 2004, taxable equivalent interest income increased $6.5 million, or 6.7%, over 2003, and decreased $9.6 million, or 9.1%, in 2003 over 2002. Growth resulting from strong loan demand and two acquisitions was partially offset by lower yields on earning assets and a decline in short-term funds and investment securities. New loan pro- duction and repricing of existing earning assets produced a 18 basis point reduction in the yield on earning assets, which declined from 5.92% for 2003 to 5.74% for 2004. This compares to an 88 basis point reduction in 2003 over 2002. As shown in Table 3, the loan portfolio was a significant contributor to the net increase in interest income. Interest expense increased $.6 million, or 4.0%, over 2003, and decreased $7.7 million, or 34.1%, in 2003 over 2002. The increase in 2004 was primarily a result of higher interest bearing liabilities attribut- able to the acquisitions and offset partially by the lower costs of funds. The lower cost of funds resulted from a favorable shift in mix, as certifi- Table 3 Rate/Volume Analysis (1) 2004 Changes from 2003 2003 Changes from 2002 Due To Average Due To Average (Taxable Equivalent Basis - Dollars in Thousands) Total Calendar(3) Volume Rate Total Volume Rate Earning Assets: Loans, Net of Unearned Interest (2) ...................... $8,188 Investment Securities: Taxable (2) .................................................... Tax-Exempt.................................................. Funds Sold ...................................................... (587) (685) (428) $240 $13,939 $ (5,991) $(5,685) $3,189 $ (8,874) 3 - 3 68 (558) (558) (658) (127) 127 (3,217) (482) (220) (2,448) (450) 389 (769) (32) (609) Total ...................................................................... 6,488 246 12,891 (6,649) (9,604) 680 $(10,284) Interest Bearing Liabilities: NOW Accounts ................................................ Money Market Accounts .................................... Savings Accounts.............................................. Time Deposits .................................................. Short-Term Borrowings ...................................... Subordinated Note Payable ................................ Long-Term Borrowings ...................................... 55 (121) (25) (161) - 294 560 Total ...................................................................... 602 2 4 - 26 3 - 5 40 73 74 35 568 (197) 294 139 (20) (199) (60) (755) 194 - 416 (596) (1,592) (311) (6,485) 503 - 817 117 (111) 23 (1,953) 578 - 981 (713) (1,481) (334) (4,532) (75) -- (164) 986 (424) (7,664) (365) (7,299) Changes in Net Interest Income.................................... $5,886 ========== $206 ======== $11,905 ============= $ (6,225) ============ $(1,940) ========== $1,045 =========== $ (2,985) ============== (1) This table shows the change in taxable equivalent net interest income for comparative periods based on either changes in average volume or changes in average rates for earning assets and interest bearing liabilities. Changes which are not solely due to volume changes or solely due to rate changes have been attributed to rate changes. (2) Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest on tax-exempt loans and securities to a taxable equivalent basis. (3) Reflects difference in 366 day year (2004) versus 365 day year (2003). Capital City Bank Group 31 financial review cates of deposit (generally a higher cost deposit product) declined relative to total deposits. Certificates of deposit, as a percent of total average deposits, declined from 30.2% in 2003 to 28.7% in 2004. The average rate paid on interest bearing liabilities in 2004 declined 5 basis points compared to 2003, primarily attributable to the favorable shift in mix. The Company’s interest rate spread (defined as the taxable equiva- lent yield on average earning assets less the average rate paid on interest bearing liabilities) decreased 13 basis points in 2004 and decreased 21 basis points in 2003. The decrease in 2004 was primarily attributable to the decline in the earning asset yield. The Company’s net interest margin (defined as taxable equivalent inter- est income less interest expense divided by average earning assets) was 4.88% in 2004, compared to 5.01% in 2003 and 5.35% in 2002. In 2004, the lower yields on earning assets (partially offset by lower rates paid on interest bearing liabilities) resulted in the 13 basis point decline in the margin. Loan growth is anticipated to have a favorable impact on net inter- est income during the upcoming year along with any favorable changes in the Federal Reserve’s target rate on overnight funds. However, depending on the magnitude of the loan growth, the improvement attrib- utable to growth may be partially or completely offset by unfavorable repricing variances associated with deposits. A further discussion of the Company’s earning assets and funding sources can be found in the section entitled “Financial Condition.” Provision for Loan Losses The provision for loan losses was $2.1 million in 2004, compared to $3.4 million in 2003 and $3.3 million in 2002. The decrease in the 2004 provision reflects continued strong credit quality and lower inherent risk in the loan portfolio due to the sale of the credit card portfolio, which pre- viously accounted for approximately one-third of net charge-offs. Net charge-offs for 2004 were comparable to 2003, and remain at historically low levels relative to the size of the portfolio. Net charge-offs for 2004 totaled $3.4 million, or .22% of average loans. This compares to $3.5 million, or .27% for 2003. Excluding credit card charge-offs, net charge-offs increased $500,000 due to a higher level of commercial loan and consumer indirect auto loan charge-offs. At December 31, 2004, the allowance for loan losses totaled $16.0 million compared to $12.4 million in 2003. At year-end 2004, the allowance represented 0.88% of total loans and provided coverage of 345% of nonperforming loans. Management considers the allowance to be adequate based on the current level of nonperforming loans and the estimate of losses inherent in the portfolio at year-end. See the section entitled “Financial Condition” and Tables 7 and 8 for further information regarding the allowance for loan losses. Noninterest Income In 2004, noninterest income increased $8.6 million, or 20.5%, compared to an increase of $5.8 million, or 16.2% in 2003. The increase in the level of noninterest income is attributable primarily to a one-time $7.2 million gain recognized from the sale of the credit card portfolio. 32 Capital City Bank Group Higher deposit service fees, asset management fees, data processing fees, and merchant service fees also contributed to the increase, but were partially offset by a decrease in mortgage banking revenues. Excluding the one-time gain on the sale of the credit card portfolio, non- interest income represented 33.5% of operating revenue in 2004 compared to 34.4% in 2003. The increase in noninterest income in 2003 was attributable to growth in deposit service charge fees, merchant service fee income, and mortgage banking revenues. Factors affecting noninterest income are discussed below. Service charge fees on deposit accounts increased $1.3 million, or 7.7%, in 2004, compared to an increase of $3.6 million, or 28.0%, in 2003. Deposit service charge revenues in any one year are dependent on the number of accounts, primarily transaction accounts, the level of activity subject to service charges, and the collection rate. The increase in service charge revenues in 2004 was primarily attributable to growth in NSF/overdraft fees associated with a revised fee structure implement- ed in mid-2004 and implementation of improved processing efficiencies in late 2004. The increase in deposit service charge fees in 2003 was primarily attributable to growth in NSF/overdraft fees associated with a new overdraft protection program implemented in late 2002. Data processing revenues increased $225,000, or 9.4%, in 2004 versus an increase of $397,000, or 19.8%, in 2003. The data processing center provides computer services to both financial and non-financial clients in North Florida and South Georgia. The increase in 2004 was driven by an increase in revenues from financial clients. The Company currently provides data processing services for six financial clients and contract processing services for six non-financial clients. In 2004, pro- cessing revenues for financial clients increased 16.6% and represented 66.3% of total processing revenues. Processing revenues for non-finan- cial clients decreased 8.7% in 2004 due to slightly lower processing volume for one government client. In 2003, processing revenues for financial clients represented 60.7% of total processing revenues. The increase in processing revenues for 2003 was due to higher revenues from both financial clients and government contract processing. In 2004, asset management fees increased $1.4 million, or 51.2%, versus an increase of $129,000, or 5.1%, in 2003. At year-end 2004, assets under management totaled $653.0 million, reflecting growth of $249.0 million, or 61.6% over 2003. This growth is due to the purchase of $208 million in trust and investment management accounts from Synovus Trust Company in connection with the Quincy State Bank acquisition, growth in new business, and increased fee revenues from managed accounts due to improved asset returns. At year-end 2003, assets under management totaled $404 million, reflecting growth of $61.0 million, or 17.8% over 2002. The Company continues to be among the leaders in the production of residential mortgage loans in many of its markets. In 2004, mortgage banking revenues decreased $2.9 million, or 47.3%, compared to an increase of $588,000, or 10.7% in 2003. The decrease in 2004 was due to a decline in fixed rate mortgage production that was affected by a general slow-down in residential lending markets. The Company gener- ally sells all fixed rate residential loan production into the secondary market. Management expects 2005 mortgage banking revenues to remain near the levels experienced in 2004. The increase in revenue in 2003 was due to a high level of fixed rate mortgage production driven by a historically low interest rate environment. The level of interest rates, origination volume and percent of fixed rate production have significant impacts on the Company’s mortgage banking revenues. Other noninterest income increased $1.5 million, or 10.2%, in 2004 versus an increase of $1.2 million, or 8.7% in 2003. The increase in 2004 was attributable primarily to an increase in merchant service fee income, retail brokerage fees, and miscellaneous income. Merchant service fee income increased $572,000, or 12.5%, due to increased transaction volume and was partially offset with higher interchange service fees, which is reflected in noninterest expense. Retail brokerage fees increased $189,000, or 15.6% due to increased commission fees driven by higher trade volume and the number of accounts. Miscellaneous income increased $592,000 due primarily to one-time gains realized from the sale of two parcels of other real estate. The 2003 increase in noninterest income was attributable primarily to higher mer- chant service fees and miscellaneous recoveries. Noninterest income as a percent of average assets increased to 2.52% in 2004, compared to 2.32% in 2003, and 2.09% in 2002, driven primarily by the one-time gain on sale of the credit card portfolio, higher deposit service charge fees, and asset management fees. Noninterest Expense Noninterest expense for 2004 was $89.2 million, an increase of $9.5 million, or 11.9%, over 2003, compared with an increase of $1.0 million, or 1.3%, in 2003. Factors impacting the Company’s noninterest expense during 2004 and 2003 are discussed below. The Company’s aggregate compensation expense in 2004 totaled $44.3 million, an increase of $3.9 million, or 9.6%, over 2003. The increase is primarily attributable to higher associate salary expense, higher performance-based compensation, increased pension costs, and higher healthcare insurance premiums. The increase in associate salary expense reflects normal merit and market based increases, the integration of two acquired banks, and higher performance-based com- pensation, which is primarily reflective of higher incentive payments to loan production associates. The higher pension cost is a result of an increase in the number of plan participants, slightly lower than expected return on plan assets, and use of a slightly lower discount rate. Pension costs in 2005 are expected to be higher due to the increase in the number of plan participants associated with the two acquisitions during the year. Healthcare premiums are expected to continue to increase due to additional participants and rising costs from healthcare providers. In 2003, aggregate compensation increased $250,000, or .62%, over 2002. The increase was primarily attributable to higher pension costs, health- care insurance premiums, and stock based compensation, partially offset by higher deferred loan costs, which is accounted for as a reduc- tion to associate salary expense. financial review Occupancy expense (including furniture, fixtures and equipment) increased by $1.7 million, or 12.0%, in 2004, compared to $416,000, or 3.1% in 2003. The increase in 2004 was primarily due to higher expense for utilities, property taxes, depreciation, and premises rental attribut- able to the increase in banking offices. The increase in 2003 was primarily due to higher furniture/fixture, utility, and building deprecia- tion expenses associated with the addition of four new banking offices. Other noninterest expense increased $4.0 million, or 15.6%, in 2004, compared to $360,000, or 1.4%, in 2003. The increase in 2004 was attributable primarily to: (1) higher professional fees of $940,000; (2) higher director fees of $101,000; (3) higher advertising expense of $742,000; (4) increased interchange service fees of $560,000; (5) higher contribution expense of $132,000; (6) higher telephone expense of $176,000; (7) higher intangible amortization expense of $583,000; and (8) higher merger expenses of $550,000. The increase in professional fees is primarily reflective of the cost of Sarbanes-Oxley Section 404 compliance and testing work. The increase in director fees is reflective of an increase in the number of directors, higher fee structure, and number of committees and meetings. Higher advertising expense is due to an increased level of marketing initiatives aimed at supporting two new acquisitions during the year and an increased level of product and market support activities. The increase in interchange service fees is reflective of increased merchant card processing volume, and was offset by higher merchant service fees reflected in other income. The increase in contribution expense is due primarily to an increase in contributions made to local non-profit scholarship funding organizations. The increase in telephone, intangible amortization, and merger expenses were due to the integration of two acquisitions during the year. The increase in 2003 was attributable to: (1) higher legal costs of $106,000 primarily resulting from corporate governance compliance work associated with the Sarbanes-Oxley Act; (2) increased processing expenses of $272,000 associated with implementation of new database systems in human resources, and custom programming work performed by the bank’s core processing system vendor to facilitate the implemen- tation of new applications (platform automation and home banking); and (3) increased interchange service fees of $717,000 associated with higher merchant card processing volume. These increases were partial- ly offset with approximately $617,000 lower expense for legal reserves, and lower seminar/education expense of $123,000. The net noninterest expense ratio (defined as noninterest income minus noninterest expense, net of intangible amortization and conver- sion/merger-related expenses, as a percent of average assets) was 1.71% in 2004 compared to 1.91% in 2003, and 2.27% in 2002. The Company’s efficiency ratio (expressed as noninterest expense, net of intangible amortization and conversion/merger-related expenses, as a percent of taxable equivalent net interest income plus noninterest income) was 61.6%, 62.0%, and 63.0% in 2004, 2003 and 2002, respec- tively. Excluding the affect of the one-time gain realized from the sale of the credit card portfolio, the above mentioned metrics adjust to and 2.07% and 64.9%, respectively, for 2004. Capital City Bank Group 33 financial review Income Taxes The consolidated provision for federal and state income taxes was $15.9 million in 2004, compared to $13.6 million in 2003, and $12.7 million in 2002. The increase in each of the three respective years was due to higher taxable income and lower tax exempt income. The effective tax rate was 35.1% in 2004, 35.0% in 2003, and 35.5% in 2002. These rates differ from the combined federal and state statutory tax rates due primarily to tax-exempt income. The decrease in the effective tax rate in 2003 was due to an adjustment in federal income tax expense in the amount of $500,000 made during the fourth quarter of 2003. Following an IRS examination in 2003, the Company performed an evaluation of all its tax accounts. Upon completion of the analysis, the Company adjusted certain tax accounts to more appropri- ately reflect its current and deferred assets and liabilities. FINANCIAL CONDITION The Company’s 2004 balance sheet reflects growth from within its existing markets plus the integration of two acquisitions during the year. Average assets totaled $2.0 billion, an increase of $201.9 million, or 11.2%, in 2004 versus the comparable period in 2003. Average earning assets for 2004 were $1.8 billion, representing an increase of $165.2 million, or 10.2%, over 2003. Loan growth, in existing markets and from acquisitions, fueled the earning asset increase in 2004 as average loans increased $220.7 million, or 16.7%. Partially offsetting the increase was a decrease in average funds sold of $53.4 million, or 44.2% and a slight decline in investment securities of $2.1 million, or 1.1%. Funding of 2004 earning asset growth is discussed in more detail under the section entitled “Liquidity”. Table 2 provides information on average balances and rates, Table 3 provides an analysis of rate and volume variances, while Table 4 highlights the changing mix of the Company’s earning assets over the last three years. Loans Average loans increased $220.7 million, or 16.7%, over the compa- rable period in 2003. Loans as a percent of average earning assets increased to 86.0% for the year, compared to 81.1% for 2003. Loan growth occurred in all loan categories during the year as noted in Table 4 below. Approximately $103.2 million, or 46.8% of the growth in average loans was from loan production in existing markets, and approximately $117.5 million, or 53.2% was from acquisitions. Although management is continually evaluating alternative sources of revenue, lending is a major component of the Company’s business and is key to profitability. While management strives to identify oppor- tunities to increase loans outstanding and enhance the portfolio’s overall contribution to earnings, it can do so only by adhering to sound lending principles applied in a prudent and consistent manner. Thus, manage- ment will not relax its underwriting standards in order to achieve designated growth goals. The Company’s average loan-to-deposit ratio increased to 96.2% in 2004 from 92.1% in 2003. This compares to an average loan-to-deposit ratio in 2002 of 88.1%. The higher average loan-to-deposit ratio in 2004 primarily reflects higher loan growth as discussed above. Real estate loans, combined, represented 76.1% of total loans at December 31, 2004, versus 70.7% in 2003. This increase is reflective of increases in all real estate loan categories as noted above. See the section entitled “Risk Element Assets” for a discussion concerning loan concentrations. The composition of the Company’s loan portfolio at December 31, for each of the past five years is shown in Table 5. Table 6 arrays the Company’s total loan portfolio as of December 31, 2004, based upon maturities. As a percent of the total portfolio, loans with fixed interest rates represent 36.6% as of December 31, 2004, versus 32.5% at Table 4 Sources of Earning Asset Growth (Average Balances - Dollars in Thousands) Loans: Commercial, Financial and Agricultural........................................ Real Estate - Construction ........................................................ Real Estate - Commercial Mortgage........................................... Real Estate - Residential........................................................... Consumer.............................................................................. Total Loans........................................................................ Securities: Taxable.................................................................................. Tax-Exempt............................................................................ Total Securities................................................................... 2003 to 2004 Change Percentage of Total Change Components of Total Earning Assets 2004 2003 2002 $ 35,032 19,291 109,503 48,529 8,309 220,664 7,301 (9,408) (2,107) 21.2% 11.7 66.3 29.4 5.0 133.6 4.4 (5.7) (1.3) (32.3) 10.3% 6.2 27.3 29.1 13.1 86.0 7.4 2.9 10.3 3.7 9.2% 5.5 23.4 29.1 13.9 81.1 7.7 3.8 11.5 7.4 8.6% 5.3 20.7 32.6 13.5 80.7 8.8 4.4 13.2 6.1 Funds Sold ..................................................................................... (53,394) Total Earning Assets................................................................. $165,163 =============== 100.0% ========== 100.0% ========== 100.0% ========== 100.0% =========== 34 Capital City Bank Group financial review December 31, 2003. The increase from 2003 is reflective of the integra- tion of loans acquired from Farmers and Merchants Bank of Dublin, which maintained a high number of fixed rate loans with one to three year stated maturities. Allowance for Loan Losses Management maintains the allowance for loan losses at a level suf- ficient to provide for the estimated credit losses inherent in the loan portfolio as of the balance sheet date. Credit losses arise from the bor- rowers’ inability and unwillingness to repay, and from other risks inherent in the lending process including collateral risk, operations risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the loan loss reserve. The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance for loan losses is based on management’s judgment of overall loan quality. This is a significant estimate based on a detailed analysis of the loan portfolio. The balance can and will change based on changes in the assessment of the portfolio’s overall credit quality. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. Loans that have been identified as impaired are reviewed for adequacy of collateral, with a specific reserve assigned to those loans when necessary. Impaired loans are defined as those in which the full collection of principal and interest in accordance with the contrac- tual terms is improbable. Impaired loans generally include those that are past due for 90 days or more and those classified as doubtful in accor- dance with the Company’s risk rating system. Loans classified as doubtful have a high possibility of loss, but because of certain factors that may work to strengthen the loan, its classification as a loss is deferred until a more exact status may be determined. Not all loans are considered in the review for impairment; only loans that are for business purposes exceeding $25,000 are considered. The evaluation is based on current financial condition of the borrower or current payment status of the loan. The method used to assign a specific reserve depends on whether repayment of the loan is dependent on liquidation of collateral. If repay- ment is dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the fair value of the collateral after estimated sales expenses. If repayment is not dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the estimated cash flows discounted using the loan’s effec- tive interest rate. The discounted value of the cash flows is based on the anticipated timing of the receipt of cash payments from the borrower. The reserve allocations assigned to impaired loans are sensitive to Table 5 Loans by Category As of December 31, (Dollars in Thousands) 2004 2003 2002 2001 2000 Commercial, Financial and Agricultural ......................................... Real Estate - Construction.......................................................... Real Estate - Commercial Mortgage ............................................ Real Estate – Residential............................................................ Consumer................................................................................ Total Loans, Net of Unearned Interest ....................................... $ 206,474 140,190 655,426 600,375 226,360 $1,828,825 =================== $ 160,048 89,149 391,250 467,790 233,395 $1,341,632 =================== $ 141,459 91,110 356,807 474,069 221,776 $1,285,221 =================== $ 128,480 72,778 302,239 530,546 209,308 $1,243,351 ===================== $ 108,340 84,133 231,099 444,489 183,771 $1,051,832 ================= Table 6 Loan Maturities (Dollars in Thousands) Maturity Periods One Year or Less Over One Through Five Years Commercial, Financial and Agricultural ........................................................... Real Estate ................................................................................................ Consumer (1) .............................................................................................. Total ..................................................................................................... Loans with Fixed Rates................................................................................ Loans with Floating or Adjustable Rates.......................................................... Total ..................................................................................................... (1) Demand loans and overdrafts are reported in the category of one year or less. $ 92,626 338,244 37,436 $468,306 =============== $336,290 132,046 $468,306 =============== $ 89,045 287,113 183,657 $559,816 =============== $311,011 248,805 $559,816 =============== Over Five Years $ 24,802 770,634 5,267 $800,703 =============== $ 21,637 779,066 $800,703 =============== Total $ 206,474 1,395,991 226,360 $1,828,825 =================== $ 668,938 1,159,887 $1,828,825 =================== Capital City Bank Group 35 financial review Table 7 Analysis of Allowance for Loan Losses For the Years Ended December 31, (Dollars in Thousands) 2004 2003 2002 2001 2000 Balance at Beginning of Year................................................................. Acquired Reserves .............................................................................. Reserve Reversal (1) ............................................................................. Charge-Offs: Commercial, Financial and Agricultural .................................................... Real Estate - Construction .................................................................... Real Estate - Mortgage ........................................................................ Real Estate - Residential....................................................................... Consumer .......................................................................................... Total Charge-Offs ............................................................................ Recoveries: Commercial, Financial and Agricultural .................................................... Real Estate - Construction .................................................................... Real Estate - Mortgage ........................................................................ Real Estate - Residential....................................................................... Consumer .......................................................................................... Total Recoveries.............................................................................. Net Charge-Offs.................................................................................. Provision for Loan Losses..................................................................... Balance at End of Year ......................................................................... Ratio of Net Charge-Offs to Average Loans Outstanding ............................ Allowance for Loan Losses as a Percent of Loans at End of Year ................ Allowance for Loan Losses as a Multiple of Net Charge-Offs ...................... (1) Reflects recapture of reserves allocated to the credit card portfolio,which was sold in August 2004. $12,429 5,713 (800) 873 - 48 191 3,946 5,058 81 - 14 188 1,329 1,612 3,446 2,141 $16,037 =============== .22% =============== .88% =============== 4.65x =============== $12,495 - - 426 - 91 228 3,794 4,539 142 - - 18 877 1,037 3,502 3,436 $12,429 =============== .27% =============== .93% =============== 3.55x =============== $12,096 - - 818 - - 175 3,279 4,272 136 - 20 37 1,181 1,374 2,898 3,297 $12,495 ============== .23% ============== .97% ============== 4.31x ============== $10,564 1,206 - 483 - 32 159 3,976 4,650 44 - 65 116 768 993 3,657 3,983 $12,096 ================ .31% ================ .97% ================ 3.31x ================ $ 9,929 - - 626 7 - 168 2,387 3,188 52 11 73 54 513 703 2,485 3,120 $10,564 ================= .25% ================= 1.00% ================= 4.25x ================= Table 8 Allocation of Allowance for Loan Losses 2004 2003 2002 2001 2000 Percent of Loans in Each Allow- Category To Total ance Loans Amount Percent of Loans in Each Allow- Category To Total ance Loans Amount Percent of Loans in Each Allow- Category To Total ance Amount Loans Percent of Loans in Each Allow- Category To Total ance Loans Amount Percent of Loans in Each Allow- Category To Total ance Loans Amount $ 4,341 11.3% $ 2,824 11.9% $ 2,740 11.0% $ 3,257 10.3% $ 1,423 10.3% 578 6,296 705 2,966 1,151 7.7 35.8 32.8 12.4 - 313 2,831 853 4,169 1,439 6.6 29.2 34.9 17.4 - 348 2,559 1,021 4,210 1,617 7.1 27.8 36.9 17.2 - 600 3,098 947 4,194 - 5.9 24.3 42.7 16.8 - 424 3,157 922 3,423 1,215 8.0 22.0 42.3 17.4 - (Dollars in Thousands) Commercial, Financial and Agricultural ... Real Estate: Construction ............................. Commercial Mortgage ................ Residential................................ Consumer ......................................... Not Allocated ..................................... Total ........................................ $16,037 ============ 100.0% ========== $12,429 ============ 100.0% ========= $12,495 ============ 100.0% ========= $12,096 ============ 100.0% $10,564 ============ ========= 100.0% ========= 36 Capital City Bank Group the extent market conditions or the actual timing of cash receipts change. Once specific reserves have been assigned to impaired loans, general reserves are assigned to the remaining portfolio. General reserves are assigned to commercial purpose loans exceeding $100,000 that are not impaired. Finally, general reserves are assigned to large groups of smaller-balance homogenous loans, including commercial purpose loans less than $100,000 which are not deemed to be impaired, consumer loans, and residential mortgage loans. Large commercial purpose loans exhibiting specific weaknesses are detailed in a monthly Problem Loan Report. These loans are divided into seven different pools based on various risk characteristics and the underlying value of collateral taken to secure specific loans within the pools. These classified loans are monitored for changes in risk ratings that are assigned based on the Bank’s Asset Classification Policy, and for the ultimate disposition of the loan. The ultimate disposition may include upgrades in risk ratings, payoff of the loan, or charge-off of the loan. This migration analysis results in a charge-off ratio by loan pool of classified loans that is applied to the balance of the pool to determine general reserves for specifically identified pools of problem loans. This charge-off ratio is adjusted for various environmental factors including past due and nonperforming trends in the loan portfolio, the micro-and macro-economic outlook, and credit administration practices as deter- mined by independent parties. General reserves are assigned to large commercial purpose loans exceeding $100,000 that do not exhibit weaknesses and pools of smaller-balance homogenous loans based on calculated overall charge- off ratios over the past three years. The charge-off ratios applied are adjusted as detailed above, with further consideration given to the highest charge-off experience of the Bank dating back to the recession of the late 1980s. The allowance for loan losses is compared against the sum of the specific reserves assigned to problem loans plus the general reserves assigned to pools of loans that are not specific problem loans. Table 9 Risk Element Assets financial review Adjustments are made when appropriate. A most likely reserve value is determined within the computed range of required calculated reserve, with the actual allowance for loan losses compared to the most likely reserve value. The unallocated reserve is monitored on a regular basis and adjusted based on qualitative factors. Table 7 analyzes the activity in the allowance over the past five years. The allowance for loan losses at December 31, 2004 of $16.0 million compares to $12.4 million at year-end 2003. The allowance as a percent of total loans was 0.88% in 2004 and 0.93% in 2003. The allowance for loan losses as a percentage of loans reflects management’s current estimation of the credit quality of the Company’s loan portfolio. While there can be no assurance that the Company will not sustain loan losses in a particular period that are substantial in relation to the size of the allowance, management’s assessment of the loan portfolio does not indicate a likelihood of this occurrence. It is management’s opinion that the allowance at December 31, 2004 is adequate to absorb losses inher- ent in the loan portfolio at year-end. Table 8 provides an allocation of the allowance for loan losses to specific loan types for each of the past five years. The reserve alloca- tions, as calculated using the above methodology, are assigned to specific loan categories corresponding to the type represented within the components discussed. The greatest losses experienced by the Company have historically occurred in the consumer loan portfolio, including credit cards. As such, the greatest amount of the allowance has been allocated to consumer loans despite its relatively small balance. The credit card portfolio was sold in 2004, thus the allowance amount allocated to consumer loans declined noticeably as of December 31, 2004. Compared to December 31, 2003, the increase in reserve allo- cated to commercial real estate mortgage loans is reflective of the large increase in this category due to loans acquired from Farmers and Merchants Bank of Dublin. Management has implemented credit risk management procedures to closely monitor all segments of its loan port- folio, including the ongoing review of the delivery, underwriting and As of December 31, (Dollars in Thousands) 2004 2003 2002 2001 2000 Nonaccruing Loans.......................................................................................................... Restructured................................................................................................................... Total Nonperforming Loans ........................................................................................... Other Real Estate ............................................................................................................ Total Nonperforming Assets........................................................................................... Past Due 90 Days or More ............................................................................................... Nonperforming Loans/Loans............................................................................................. Nonperforming Assets/Loans Plus Other Real Estate............................................................. Nonperforming Assets/Capital (1) ........................................................................................ Allowance/Nonperforming Loans ....................................................................................... $ 4,646 - 4,646 625 $ 5,271 =============== $ 605 =============== .25% =============== .29% =============== 1.93% =============== 345.18% =============== $ 2,346 - 2,346 4,955 $ 7,301 =============== $ 328 =============== .17% =============== .54% =============== 3.39% =============== 529.80% =============== $ 2,510 - 2,510 1,333 $ 3,843 =============== $ 2,453 =============== .20% =============== .30% =============== 1.93% =============== 497.72% =============== $ 2,414 20 2,434 1,506 $ 3,940 ============= $ 1,065 ============= .20% ============= .32% ============= 2.14% ============= 496.96% ============= $ 2,919 19 2,938 971 $ 3,909 ============= $ 1,102 ============= .28% ============= .37% ============= 2.47% ============= 359.57% ============= (1) For computation of this percentage,“capital”refers to shareowners’ equity plus the allowance for loan losses. Capital City Bank Group 37 financial review collection practices to reduce loan losses. Risk Element Assets Risk element assets consist of nonaccrual loans, renegotiated loans, other real estate, loans past due 90 days or more, potential problem loans and loan concentrations. Table 9 depicts certain cate- gories of the Company’s risk element assets as of December 31 for each of the last five years. Potential problem loans and loan concentrations are discussed within the narrative portion of this section. The Company’s nonperforming loans increased $2.3 million, or 98.1% from a level of $2.3 million at December 31, 2003, to $4.6 million at December 31, 2004. The increase from 2003 is primarily reflective of one large commercial real estate loan added to nonaccrual status in the amount of $2.1 million. During 2004 loans totaling approximately $7.8 million were added, while loans totaling $5.5 million were removed from nonaccruing status. Of the $5.5 million removed, $2.4 million consisted of principal reductions and loan payoffs, $811,000 represented loans transferred to other real estate, $2.0 million consisted of loans brought current and returned to an accrual status, and $284,000 was charged off. Where appropriate, management has allocated specific reserves to absorb anticipated losses. The majority (76%) of the Company’s net charge-offs in 2004 were in the consumer portfolio where loans are charged off based on past due status and are not recorded as nonaccru- ing loans. All nonaccrual loans exceeding $25,000 not secured by 1-4 family residential properties are reviewed quarterly for impairment. A loan is considered impaired when the full collection of principal and interest in accordance with the contractual terms is in doubt. When a loan is con- sidered impaired, it is reviewed for exposure to credit loss. If credit loss is probable, a specific reserve is allocated to absorb the anticipated loss. The Company had $3.7 million in loans considered impaired at December 31, 2004. The anticipated loss in those impaired loans is $313,000. Interest on nonaccrual loans is generally recognized only when received. Cash collected on nonaccrual loans is applied against the principal balance or recognized as interest income based upon manage- ment’s expectations as to the ultimate collectibility of principal and interest in full. If interest on nonaccruing loans had been recognized on a fully accruing basis, interest income recorded would have been $189,000 higher for the year ended December 31, 2004. Other real estate totaled $625,000 at December 31, 2004, versus $5.0 million at December 31, 2003. This category includes property owned by Capital City Bank that was acquired either through foreclosure procedures or by receiving a deed in lieu of foreclosure. During 2004, the Company added properties totaling $1.4 million, and partially or com- pletely liquidated properties totaling $5.7 million, resulting in a net decrease in other real estate of approximately $4.3 million. The majority of the decrease is due to the resolution of a large commercial real estate loan in the amount of $3.9 million during the first quarter of 2004. Potential problem loans are defined as those loans which are now current but where management has doubt as to the borrower’s ability to comply with present loan repayment terms. Potential problem loans 38 Capital City Bank Group totaled $7.1 million at December 31, 2004. Loans past due 90 days or more totaled $605,000 at year-end, up from $328,000 at the previous year-end. This is primarily the result of the addition of several smaller consumer loans. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which cause them to be similarly impacted by economic or other conditions and such amount exceeds 10% of total loans. Due to the lack of diversified industry within the markets served by the Bank and the relatively close proximity of the markets, the Company has both geographic concentrations as well as concentrations in the types of loans funded. Specifically, due to the nature of the Company’s markets, a significant portion of the portfolio has historically been secured with real estate. While the Company has a majority of its loans (76.3%) secured by real estate, the primary types of real estate collateral are commercial prop- erties and 1-4 family residential properties. At December 31, 2004, commercial real estate mortgage loans and residential real estate mortgage loans accounted for 35.8% and 32.8% of the loan portfolio, respectively. The real estate portfolio, while subject to cyclical pressures, is not typically speculative in nature and is originated at amounts that are within or below regulatory guidelines for collateral values. Management anticipates no significant reduction in the percentage of real estate loans to total loans outstanding. Management is continually analyzing its loan portfolio in an effort to identify and resolve its problem assets as quickly and efficiently as possible. As of December 31, 2004, management believes it has identi- fied and adequately reserved for such problem assets. However, management recognizes that many factors can adversely impact various segments of its markets, creating financial difficulties for certain bor- rowers. As such, management continues to focus its attention on promptly identifying and providing for potential losses as they arise. Investment Securities In 2004, the Company’s average investment portfolio decreased $2.1 million, or 1.1%, from 2003 and $18.9 million, or 9.2%, from 2003 to 2002. As a percentage of average earning assets, the investment port- folio represented 10.3% in 2004, compared to 11.4% in 2003. In 2004, the decline was due to maturities in the portfolio partially offset by the addition of $75.6 million in investment securities obtained in the two acquisitions. In 2003, the decline in the portfolio was attributable to the maturities of investment securities in most categories, which in anticipa- tion of future loan growth, were only partially replaced during the period. Throughout 2005, the Company will closely monitor liquidity levels to determine if the Company should purchase additional investments. In 2004, average taxable investments increased $7.3 million, or 5.9%, primarily as a result of the acquisitions, while tax-exempt invest- ments decreased $9.4 million, or 15.3%. Although the Tax Reform Act of 1986 significantly reduced the tax benefits associated with tax- exempt securities, management will continue to purchase “bank Table 10 Maturity Distribution of Investment Securities As of December 31, 2004 2003 2002 Weighted(1) Weighted(1) Weighted(1) financial review (Dollars in Thousands) U.S. GOVERNMENTS Amortized Market Average Value Yield Cost Amortized Market Average Amortized Market Average Cost Value Yield Cost Value Yield Due in 1 year or less ................................ Due over 1 year through 5 years ................ Due over 5 years through 10 years ............ Due over 10 years.................................... TOTAL ................................................ $ 48,553 $ 48,327 66,204 7,589 - 122,120 66,863 7,684 - 123,100 2.08% 2.38 3.75 - 2.35 $ 82,654 $ 82,749 22,848 - - 105,360 105,597 22,706 - - 1.26% 2.04 - - 1.43 $ 27,037 34,476 - - 61,513 $ 27,651 34,751 - - 62,402 4.57% 3.09 - - 3.74 STATE & POLITICAL SUBDIVISIONS Due in 1 year or less ................................ Due over 1 year through 5 years ................ Due over 5 years through 10 years ............ Due over 10 years.................................... TOTAL ................................................ MORTGAGE-BACKED SECURITIES (2) Due in 1 year or less ................................ Due over 1 year through 5 years ................ Due over 5 years through 10 years ............ Due over 10 years.................................... TOTAL .................................................... OTHER SECURITIES 27,916 21,076 897 - 49,889 489 22,719 3,085 - 26,293 28,090 21,200 916 - 50,206 493 22,839 3,068 - 26,400 Due in 1 year or less ................................ Due over 1 year through 5 years ................ Due over 5 years through 10 years ............ Due over 10 years (3) ................................ TOTAL ................................................ - - - - - - 11,514 11,514 11,514 11,514 5.94 4.56 5.36 - 5.35 5.13 3.96 4.83 - 4.09 - - - 4.31 4.31 19,018 36,046 577 - 55,641 356 11,167 95 - 11,618 1,003 - 2 5,922 6,927 19,205 37,337 610 - 57,152 361 11,586 98 - 12,045 1,016 - 2 5,922 6,940 4.18 4.47 4.36 - 4.37 5.12 5.29 3.26 - 5.27 6.18 - - 3.89 4.22 5,193 56,724 928 - 62,845 10,593 24,048 109 - 34,750 5,251 59,264 960 - 65,475 10,707 25,112 111 - 35,930 8,515 1,016 127 6,623 16,281 8,693 1,065 127 6,623 16,508 5.48 5.96 6.41 - 5.93 4.66 5.61 4.27 - 5.31 5.42 6.18 4.45 5.12 5.34 TOTAL INVESTMENT SECURITIES.................... $210,796 $210,240 ============== ============== 3.38% ====== $179,546 $181,734 ============== ============== 2.69% ======= $175,389 ============== $180,315 ============== 4.98% ======= (1) Weighted average yields are calculated on the basis of the amortized cost of the security.The weighted average yields on tax-exempt obligations are computed on a taxable equivalent basis using a 35% tax rate. (2) Based on weighted average life. (3) Federal Home Loan Bank Stock and Federal Reserve Bank Stock are included in this category for weighted average yield,but do not have stated maturities. AVERAGE MATURITY (In Years) As of December 31, 2003 2002 2004 U.S. Governments ...................................................... State and Political Subdivisions..................................... Mortgage-Backed Securities........................................ Other Securities ......................................................... TOTAL................................................................. 1.54 1.32 2.67 - 1.63 ====== .73 1.23 1.56 .30 .90 ====== .75 1.99 1.60 .75 1.32 ====== Capital City Bank Group 39 MUNICIPAL PORTFOLIO QUALITY (Dollars in Thousands) Moody’s Rating Amortized Cost Percentage AAA .............................................. AA-1 ............................................ AA-2 ............................................ AA-3 ............................................ A-1 .............................................. A-2 .............................................. Not Rated (1) .................................. Total ........................................ $37,624 1,850 1,111 1,305 374 227 7,398 $49,889 ============= 75.42% 3.71 2.23 2.62 0.74 0.45 14.83 100.00% ========== (1) All of the securities not rated by Moody’s are rated “A-”or higher by S&P. qualified” municipal issues when it considers the yield to be attractive and the Company can do so without adversely impacting its tax position. As of December 31, 2004, the Company may purchase additional tax- exempt securities without adverse tax consequences. The investment portfolio is a significant component of the Company’s operations and, as such, it functions as a key element of liq- uidity and asset/liability management. As of December 31, 2004, all securities are classified as available-for-sale. Classifying securities as available-for-sale offers management full flexibility in managing its liq- uidity and interest rate sensitivity without adversely impacting its regulatory capital levels. Securities in the available-for-sale portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded, net of tax, in the accumulated other compre- hensive (loss) income component of shareowners’ equity. At December Table 11 Sources of Deposit Growth 31, 2004, shareowners’ equity included a net unrealized loss of $0.4 million, compared to a gain of $1.4 million at December 31, 2003. It is neither management’s intent nor practice to participate in the trading of investment securities for the purpose of recognizing gains and therefore the Company does not maintain a trading portfolio. The average maturity of the total portfolio at December 31, 2004 and 2003, was 1.63 and 0.90 years, respectively. See Table 10 for a breakdown of maturities by portfolio. The weighted average taxable equivalent yield of the investment port- folio at December 31, 2004 was 3.38%, versus 2.69% in 2003. The increase in yield was due to acquisitions and purchases of securities made throughout the year in a higher interest rate environment. The quality of the municipal portfolio at year-end is depicted above. There were no investments in obligations, other than U.S. Governments, of any one state, municipality, political subdivision or any other issuer that exceeded 10% of the Company’s shareowners’ equity at December 31, 2004. Table 10 and Note 3 in the Notes to Consolidated Financial Statements present a detailed analysis of the Company’s investment securities as to type, maturity and yield. Deposits and Funds Purchased Average total deposits of $1.6 billion in 2004 increased $167.4 million, or 11.7% from the prior year. Deposit growth for the year was driven primarily by the integration of deposits from two bank acquisi- tions. All deposit categories grew, with a majority of the growth being realized in noninterest bearing deposits, thus creating a favorable shift (Average Balances - Dollars in Thousands) Noninterest Bearing Deposits ............................................. NOW Accounts ................................................................ Money Market Accounts.................................................... Savings .......................................................................... Time Deposits ................................................................. Total Deposits .............................................................. 2003 to 2004 Change Percentage of Total Change $ 80,116 28,333 12,211 20,445 26,288 $167,393 ================ 47.9% 16.9 7.3 12.2 15.7 100.0% ========= Components of Total Deposits 2004 30.6% 18.3 14.3 8.1 28.7 100.0% ========= 2003 28.6% 18.4 15.1 7.7 30.2 100.0% ========= 2002 25.3% 17.0 15.7 7.4 34.7 100.0% ========== Table 12 Maturity Distribution of Certificates of Deposit $100,000 or Over (Dollars in Thousands) Three months or less ............................................................................................................... Over three through six months ................................................................................................... Over six through twelve months.................................................................................................. Over twelve months ................................................................................................................. Total ................................................................................................................................. December 31, 2004 Time Certificates of Deposit Percent $ 57,337 35,816 44,719 28,889 $166,761 =========== 34.38% 21.48 26.82 17.32 100.00% ======== 40 Capital City Bank Group in deposit mix and positive impact on the Bank’s cost of funds. Average noninterest bearing deposits as a percent of average total deposits improved from 28.6% in 2003 to 30.6% in 2004. This was primarily a result of the high level of core deposits retained from the two acquisi- tions during 2004, and the relatively low level of interest rates. Table 2 provides an analysis of the Company’s average deposits, by category, and average rates paid thereon for each of the last three years. Table 11 reflects the shift in the Company’s deposit mix over the last three years and Table 12 provides a maturity distribution of time deposits in denominations of $100,000 and over. Average short-term borrowings, which include federal funds pur- chased, securities sold under agreements to repurchase, Federal Home Loan Bank advances, and other borrowings, increased $692,000, or .68%. The slight increase is attributable to a $7.5 million increase in federal funds purchased and $4.8 million increase in repurchase agree- ment balances offset by a $13.0 million decrease in Federal Home Loan Bank advances. See Note 9 in the Notes to Consolidated Financial Statements for further information on short-term borrowings. LIQUIDITY AND CAPITAL RESOURCES Liquidity Liquidity for a banking institution is the availability of funds to meet increased loan demand and/or excessive deposit withdrawals. Management monitors the Company’s financial position in an effort to ensure the Company has ready access to sufficient liquid funds to meet normal transaction requirements, can take advantage of investment opportunities and cover unforeseen liquidity demands. In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities (e.g., collection of interest and fees), federal funds sold, loan and investment maturities, bank lines of credit for the Company, approved lines for the purchase of federal funds by CCB and Federal Home Loan Bank advances. The Company ended 2004 with approximately $75 million in liq- uidity, a decline of approximately $50.0 million from the previous year-end. The decline was primarily the result of loan growth and funding of acquisitions. Management expects liquidity to continue to decline throughout 2005 as the Company funds future loan growth. The Company intends to borrow approximately $31.0 million to financial review fund the cash portion of the consideration paid for the acquisition of First National Bank of Alachua. Management expects to use a mixture of debt and stock to fund future acquisition opportunities. The Company has the ability to draw on a Revolving Credit Note, due on October 15, 2007. Interest is payable quarterly at LIBOR plus an applicable margin on advances. The revolving credit is unsecured. The existing loan agreement contains certain financial covenants that must be maintained by the Company. At December 31, 2004, the Company was in compliance with all of the terms of the agreement and had $36.0 million available under a $36.0 million line of credit facility. Effective January 1, 2005, in accordance with the terms of the agree- ment which was executed on October 15, 2004, the amount available under the facility will be reduced from $36.0 million to $25.0 million. At December 31, 2004, the Company had $68.5 million in long-term borrowings outstanding to the Federal Home Loan Bank of Atlanta. The debt consists of 36 loans. The interest rates are fixed and the weighted average rate at December 31, 2004 was 4.29%. Required annual principal reductions approximate $2.3 million, with the remaining balances due at maturity ranging from 2006 to 2024. During 2004, the Company reclassi- fied $16.0 million, consisting of an advance from the Federal Home Loan Bank of Atlanta (“FHLB”), from long-term to short-term borrowings. The Company also obtained a $20.0 million advance from the FHLB with a fixed rate of 2.93% and a maturity of September 2006. Additions to long- term borrowings also consists of $9.7 million primarily used to match-fund longer-term, fixed rate loan products, which management elected not to fund internally due to asset/liability management consider- ations. The remaining increase was attributable to FHLB debt assumed from the bank acquisitions in 2004. The debt is secured by 1-4 family residential mortgage loans and selected investment securities from the portfolio. See Note 10 in the Notes to Consolidated Financial Statements for additional information on these borrowings. The Company issued a $30.9 million junior subordinated deferrable interest note in November 2004 to a wholly owned Delaware statutory trust, Capital City Bank Group Capital Trust I (“CCBG Capital Trust I”). See Note 10 in the Notes to Consolidated Financial Statements for additional information on this borrowing. Interest payments are due quarterly at a fixed rate of 5.71% for five years, then adjustable annually to LIBOR plus a margin of 1.90%. The note matures on December 31, Table 13 Contractual Cash Obligations Table 13 sets forth certain information about contractual cash obligations at December 31, 2004. Payments Due By Period 1 Year or Less 1-3 Years 4-5 Years After 5 Years Total Federal Home Loan Bank Advances......................................... Subordinated Note Payable..................................................... Operating Lease Obligations ................................................... Total Contractual Cash Obligations ........................................... $18,306 - 1,319 $19,625 ============= $32,599 - 3,372 $36,042 ============== $5,325 - 2,110 $7,435 =========== $28 216 30,928 6,127 $65,271 ============= $ 84,446 30,928 12,928 $128,302 =============== Capital City Bank Group 41 financial review 2034. The proceeds of the borrowing were used to partially fund the Farmers and Merchants Bank of Dublin acquisition. It is anticipated that capital expenditures will approximate $10 million over the next twelve months. These capital expenditures are expected to consist primarily of several new offices in existing markets, office equipment and furniture, and technology purchases. Management believes these capital expenditures can be funded internally without impairing the Company’s ability to meet its on-going obligations. Capital The Company continues to maintain a strong capital position. The ratio of shareowners’ equity to total assets at year-end was 10.86%, 10.98%, and 10.22%, in 2004, 2003, and 2002, respectively. The Company is subject to risk-based capital guidelines that measure capital relative to risk weighted assets and off-balance sheet financial instruments. Capital guidelines issued by the Federal Reserve Board require bank holding companies to have a minimum total risk- based capital ratio of 8.00%, with at least half of the total capital in the form of Tier 1 capital. As of December 31, 2004, the Company exceeded these capital guidelines with a total risk-based capital ratio of 12.33% and a Tier 1 ratio of 11.44%, compared to 13.79% and 12.88%, respec- tively, in 2003. As allowed by Federal Reserve Board capital guidelines the trust preferred securities issued by CCBG Capital Trust I are includ- ed as Tier 1 capital in the Company’s capital calculations previously noted. See Note 10 in the Notes to Consolidated Financial Statements for additional information on the trust preferred security offering. See Note 14 in the Notes to Consolidated Financial Statements for additional information as to the Company’s capital adequacy. A tangible leverage ratio is also used in connection with the risk- based capital standards and is defined as Tier 1 capital divided by average assets. The minimum leverage ratio under this standard is 3% for the highest-rated bank holding companies which are not undertaking significant expansion programs. An additional 1% to 2% may be required for other companies, depending upon their regulatory ratings and expansion plans. On December 31, 2004, the Company had a lever- age ratio of 8.79% compared to 9.51% in 2003. Shareowners’ equity as of December 31, for each of the last three years is presented below: Shareowners’ Equity (Dollars in Thousands) 2004 2003 2002 Common Stock Additional Paid-in Capital Retained Earnings Subtotal Accumulated Other Comprehensive Income, Net of Tax Total Shareowners’ Equity $ 142 52,363 204,648 257,153 $ 132 16,157 185,134 201,423 (353) $256,800 ========== 1,386 $202,809 ========== $ 132 14,691 168,587 183,410 3,121 $186,531 ========== At December 31, 2004, the Company’s common stock had a book value of 42 Capital City Bank Group $18.13 per diluted share compared to $15.27 in 2003. Beginning in 1994, book value has been impacted by the net unrealized gains and losses on invest- ment securities available-for-sale. At December 31, 2004, the net unrealized loss was $353,000 compared to a net unrealized gain in 2003 of $1.4 million. The decrease in unrealized gain is a result of changes in the portfolio due to securities which have matured or been called and an increase in interest rates. On March 30, 2000, the Company’s Board of Directors authorized the repurchase of up to 625,000 shares of its outstanding common stock. The purchases are made in the open market or in privately negotiated transac- tions. The Company acquired 155,775 shares during 2002 and 267,500 shares during 2001. On January 24, 2002, the Company’s Board of Directors authorized the repurchase of an additional 312,500 shares of its outstanding common stock. From March 30, 2000 through February 28, 2005, the Company repurchased a total of 572,707 shares at an average purchase price of $19.18 per share. The Company offers an Associate Incentive Plan under which certain associates are eligible to earn shares of CCBG stock based upon achieving established performance goals. In 2004, the Company issued 37,381 shares, valued at approximately $1.6 million under this plan. The Company also offers stock purchase plans, whereby employees and directors may purchase shares at a 10% discount. In 2004, 27,425 shares, valued at approximately $991,000, were issued under these plans. Dividends Adequate capital and financial strength is paramount to the stability of the Company and its subsidiary bank. Cash dividends declared and paid should not place unnecessary strain on the Company’s capital levels. When determining the level of dividends the following factors are considered: • Compliance with state and federal laws and regulations; • The Company’s capital position and its ability to meet its financial obligations; • Projected earnings and asset levels; and • The ability of the Bank and CCBG to fund dividends. Although a consistent dividend payment is believed to be favorably viewed by the financial markets and shareowners, the Board of Directors will declare dividends only if the Company is considered to have adequate capital. Future capital requirements and corporate plans are considered when the Board considers a dividend payment. Dividends declared and paid totaled $.730 per share in 2004. For the first through third quarters of 2004 the Company declared a dividend of $.180 per share. The dividend was raised 6.0% in the fourth quarter of 2004 from $.180 per share to $.190 per share. The Company declared dividends of $.656 per share in 2003 and $.502 per share in 2002. The dividend payout ratio was 33.42%, 34.51%, and 28.87% for 2004, 2003 and 2002, respective- ly. Total cash dividends declared per share in 2004 represented an 11.3% increase over 2003. All share and per share data has been adjusted to reflect the five-for-four stock dividend paid on June 13, 2003. OFF-BALANCE SHEET ARRANGEMENTS The Company does not currently engage in the use of derivative instru- ments to hedge interest rate risks. However, the Company is a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of its customers. At December 31, 2004, the Company had $407.3 million in commit- ments to extend credit and $17.8 million in standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Company to guar- antee the performance of a customer to a third party. The Company uses the same credit policies in establishing commitments and issuing letters of credit as it does for on-balance sheet instruments. If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact its ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, man- agement believes current liquidity, available lines of credit from the Federal Home Loan Bank, investment security maturities and the Company’s revolving credit facility provide a sufficient source of funds to meet these commitments. ACCOUNTING POLICIES Critical Accounting Policies The consolidated financial statements and accompanying Notes to Consolidated Financial Statements are prepared in accordance with account- ing principles generally accepted in the United States of America, which require the Company to make various estimates and assumptions (see Note 1 in the Notes to Consolidated Financial Statements). The Company believes that, of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Allowance for Loan Losses: The allowance for loan losses is estab- lished through a charge to the provision for loan losses. Provisions are made to reserve for estimated losses in loan balances. The allowance for loan losses is a significant estimate and is evaluated quarterly by the Company for ade- quacy. The use of different estimates or assumptions could produce a different required allowance, and thereby a larger or smaller provision recog- nized as expense in any given reporting period. A further discussion of the allowance for loan losses can be found in the section entitled “Allowance for Loan Losses” and Note 1 in the Notes to Consolidated Financial Statements. Intangible Assets: Intangible assets consist primarily of goodwill, core deposit assets, and other identifiable intangibles that were recognized in con- nection with various acquisitions. Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets. The Company performs an impairment review on an annual basis to determine financial review if there has been impairment of its goodwill. The Company has determined that no impairment existed at December 31, 2004. Impairment testing requires management to make significant judgments and estimates relating to the fair value of its identified reporting units. Significant changes to these estimates may have a material impact on the Company’s reported results. Core deposit assets represent the premium the Company paid for core deposits. Core deposit intangibles are amortized on the straight-line method over various periods ranging from 7-10 years. Generally, core deposits refer to nonpublic, nonmaturing deposits including noninterest-bearing deposits, NOW, money market and savings. The Company makes certain estimates relating to the useful life of these assets, and rate of run-off based on the nature of the specific assets and the customer bases acquired. If there is a reason to believe there has been a permanent loss in value, management will assess these assets for impairment. Any changes in the original estimates may materially affect reported earnings. Pension Assumptions: The Company has a trusteed defined benefit pension plan for the benefit of substantially all associates of the Company. The Company’s funding policy with respect to the pension plan is to con- tribute amounts to the plan sufficient to meet minimum funding requirements as set by law. Pension expense, reflected in the Consolidated Statements of Income in noninterest expense as “Salaries and Associate Benefits”, is determined by an external actuarial valuation based on assump- tions that are evaluated annually as of December 31, the measurement date for the pension obligation. The Consolidated Statements of Financial Condition reflect an accrued pension benefit cost due to funding levels and unrecognized actuarial amounts. The most significant assumptions used in calculating the pension obligation are the weighted-average discount rate used to determine the present value of the pension obligation, the weighted- average expected long-term rate of return on plan assets, and the assumed rate of annual compensation increases. These assumptions are re-evaluated annually with the external actuaries, taking into consideration both current market conditions and anticipated long-term market conditions. The weighted-average discount rate is determined by matching antici- pated Retirement Plan cash flows for a 30-year period to long-term corporate Aa-rated bonds and solving for the underlying rate of return, which investing in such securities would generate. This methodology is applied consistently from year-to-year. The discount rate utilized in 2004 was 6.25%. The estimat- ed impact to 2004 pension expense of a 25 basis point increase or decrease in the discount rate would have been a decrease of approximately $208,000 and an increase of approximately $217,000, respectively. The discount rate to be used in 2005 will be 6.00%. The weighted-average expected long-term rate of return on plan assets is determined based on the current and anticipated future mix of assets in the plan. The assets currently consist of equity securities, U.S. Government and Government agency debt securities, and other securities (typically tempo- rary liquid funds awaiting investment). The weighted-average expected long-term rate of return on plan assets utilized in 2004 was 8.00%. The esti- mated impact to pension expense of a 25 basis point increase or decrease in the rate of return would have been an approximate $83,000 decrease or Capital City Bank Group 43 financial review increase, respectively. The rate of return on plan assets for 2005 will be 8.0%. The assumed rate of annual compensation increases (5.50% in 2004) is based on expected trends in salaries and the employee base. This assumption is not expected to change materially in 2005. Detailed information on the pension plan, the actuarially determined disclosures, and the assumptions used are provided in Note 12 of the Notes to Consolidated Financial Statements. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (Revised). SFAS 123R estab- lishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock- based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. The Company adopted the accounting stan- dards set forth in SFAS No. 123 in 2003 and has accordingly expensed stock–based compensation for 2003 and 2004. See Note 1 — Accounting Policies. In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than- Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides guidance for determining when an investment is consid- ered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment; and (b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began presenting the new disclosure requirement in its consolidated financial statements for the year ended December 31, 2003. The recognition and impairment provisions were initially effective for other- than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provi- sions was delayed until the finalization of the FASB Staff Position (FSP) to provide additional implementation guidance. The Company is continuing to evaluate the impact of EITF 03-1. The amount of other-than- temporary impairment the Company will recognize, if any, will be dependent on market conditions and management’s intent and ability at the time of the evaluation to hold investments with unrealized losses until a forecasted recov- ery in the fair value up to and beyond the adjusted cost. In December 2003, the FASB issued Interpretation No. 46 (“FIN46”) 44 Capital City Bank Group (revised December 2003 (“FIN46R”)), “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN46R replaces FIN46, which was issued in January 2003. FIN46R applies immediately to a variable interest entity created after January 31, 2003 and as of the first interim period ending after March 15, 2004 to those variable interest entities created before February 1, 2003 and not already consolidated under FIN46 in previously issued financial statements. The Company has adopted FIN 46R in connection with its consolidated financial statements for the year ended December 31, 2004. The implementation of FIN 46R requires the Company to not consolidate its investment in CCBG Capital Trust I because the Company is not the primary beneficiary. In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to loans and debt securities acquired individually, in pools or as part of a business combination and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess of contractual cash flows over cash flows expected to be collected to be recog- nized as an adjustment of yield, loss accrual or valuation allowance, such as the allowance for loan losses. SOP 03-3 requires that increases in expected cash flows subsequent to the initial investment be recognized prospectively through adjustment of the yield on the loan or debt security over its remain- ing life. Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired in a business combination where the loans show signs of credit deterioration, SOP 03-3 represents a significant change from current purchase accounting practice whereby the acquiree’s allowance for loan losses is typically added to the acquirer’s allowance for loan losses. SOP 03-3 is effective for loans and debt securities acquired by the Company beginning January 1, 2005. Loans acquired in future acquisi- tions will be impacted by the adoption of this pronouncement. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Overview Market risk management arises from changes in interest rates, exchange rates, commodity prices, and equity prices. The Company has risk management policies to monitor and limit exposure to market risk and does not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices. In asset and liability management activities, policies are in place that are designed to minimize structural interest rate risk. Interest Rate Risk Management The normal course of business activity exposes CCBG to interest rate risk. Fluctuations in interest rates may result in changes in the fair market value of the Company’s financial instruments, cash flows and net interest income. The Company seeks to avoid fluctuations in its net interest margin and to maximize net interest income within acceptable levels of risk through periods of changing interest rates. Accordingly, the Company’s interest rate sensitivity and liquidity are monitored on an ongoing basis by its Asset and Liability Committee (“ALCO”), which oversees market risk management and establishes risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effects on net interest income and capital. A variety of measures are used to provide for a comprehensive view of the magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships. ALCO continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. ALCO’s objective is to manage the impact of fluctuating market rates on net interest income within acceptable levels. In order to meet this objective, management may adjust the rates charged/paid on loans/deposits or may shorten/lengthen the duration of assets or liabili- ties within the parameters set by ALCO. The financial assets and liabilities of the Company are classified as other-than-trading. An analysis of the other-than-trading financial compo- nents, including the fair values, are presented in Table 14. This table presents the Company’s consolidated interest rate sensitivity position as of year-end 2004 based upon certain assumptions as set forth in the Notes to the Table. The objective of interest rate sensitivity analysis is to measure the impact on the Company’s net interest income due to fluctuations in interest rates. The asset and liability values presented in Table 14 may not necessari- ly be indicative of the Company’s interest rate sensitivity over an extended period of time. The Company expects rising rates to have a favorable impact on the net interest margin, subject to the magnitude and timeframe over which the rate changes occur. However, as general interest rates rise or fall, other factors such as current market conditions and competition may impact how the Company responds to changing rates and thus impact the magnitude of change in net interest income. Nonmaturity deposits offer management greater discretion as to the direction, timing, and magnitude of interest rate changes and can have a material impact on the Company’s interest rate sen- sitivity. In addition, the relative level of interest rates as compared to the current yields/rates of existing assets/liabilities can impact both the direction and magnitude of the change in net interest margin as rates rise and fall from one period to the next. Inflation The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment. Assets and liabilities of financial institutions are virtually all monetary in nature, and therefore are primarily impacted by interest rates rather than financial review changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Net interest income and the interest rate spread are good measures of the Company’s ability to react to changing interest rates and are discussed in further detail in the section enti- tled “Results of Operations.” Capital City Bank Group 45 financial review Table 14 Financial Assets and Liabilities Market Risk Analysis (1) Other Than Trading Portfolio (Dollars in Thousands) Loans: Year 1 Year 2 Year 3 Year 4 Year 5 Beyond Total Fair Value Maturing or Repricing in: Fixed Rate .................................................. $ 336,290 5.90% 888,396 5.02% Average Interest Rate................................ Floating Rate (2) ............................................ Average Interest Rate................................ $153,445 7.09% 165,277 6.21% $ 81,088 7.01% 84,206 6.17% $48,491 6.83% 7,625 7.08% Investment Securities: (3) Fixed Rate .................................................. Average Interest Rate................................ Floating Rate................................................ Average Interest Rate................................ 83,436 2.98% 2,610 4.37% 76,818 2.57% - - 25,132 3.75% - - 9,528 3.23% - - Other Earning Assets: Floating Rate................................................ Average Interest Rate................................ 74,506 2.01% Total Financial Assets............................ $1,385,238 4.95% Average Interest Rate ...................... Deposits: (4) Fixed Rate .................................................. $ 452,241 1.87% 755,218 0.63% Average Interest Rate................................ Floating Rate................................................ Average Interest Rate................................ Other Interest Bearing Liabilities: Fixed Rate Debt............................................ Average Interest Rate................................ Floating Rate Debt ........................................ Average Interest Rate................................ 4,476 4.26% 93,811 1.40% Total Financial Liabilities ........................ $1,305,746 1.13% Average Interest Rate ...................... - - $395,540 5.84% - - $190,426 6.21% - - $65,644 6.33% $ 64,554 2.64% - - 24,630 3.18% - - $ 89,184 2.79% $ 37,962 3.38% - - 3,574 4.68% 346 4.91% $ 41,882 3.50% $12,563 3.35% - - 3,318 4.80% 832 3.05% $16,713 3.62% $27,987 6.65% 6,245 7.07% 4,342 3.54% - - - - $38,574 6.37% $ 5,349 3.19% - - 2,747 4.97% 1,025 4.00% $ 9,121 3.82% $21,637 6.34% 8,138 7.36% $ 668,938 6.42% 1,159,887 5.32% $ 670,404 1,162,303 8,374 3.25% - - 207,630 2.96% 2,610 4.37% 207,630 2,610 - - $38,149 5.88% 74,506 2.01% $2,113,571 5.32% 74,506 $2,117,453 $ 8 2.50% - - $ 572,677 2.10% 755,218 0.63% $ 535,085 755,218 29,708 5.04% 30,928 5.71% $60,644 5.38% 68,453 4.29% 126,942 1.46% $1,523,290 1.41% 68,582 127,093 $1,485,978 (1) Based upon expected cash flows unless otherwise indicated. (2) Based upon a combination of expected maturities and repricing opportunities. (3) Based upon contractual maturity,except for callable and floating rate securities,which are based on expected maturity and weighted average life,respectively. (4) Savings,NOW and money market accounts can be repriced at any time,therefore,all such balances are included as floating rate deposits.Time deposit balances are classified according to maturity. 46 Capital City Bank Group Table 15 Quarterly Financial Data (Unaudited) (Dollars in Thousands,Except Per Share Data) (1) Fourth Third Second First Fourth Third Second First 2004 2003 financial review Summary of Operations: Interest Income ................................... Interest Expense.................................. Net Interest Income.............................. Provision for Loan Losses..................... Net Interest Income After Provision for Loan Losses............... Gain on Sale of Credit Card Portfolio....... Noninterest Income.............................. Conversion/Merger Expense ................. Noninterest Expense ............................ Income Before Provision for Income Taxes.. Provision for Income Taxes.................... Net Income ........................................ Net Interest Income (FTE) ..................... Per Common Share: Net Income Basic ................................ Net Income Diluted .............................. Dividends Declared.............................. Diluted Book Value .............................. Market Price: High............................................ Low ............................................ Close........................................... Selected Average Balances: Loans ................................................ Earning Assets .................................... Assets ............................................... Deposits............................................. Shareowners’ Equity............................. Common Equivalent Average Shares: $ 29,930 5,634 24,296 300 23,996 324 11,596 436 24,481 10,999 3,737 $ 7,262 =========== $ 24,619 $ .51 .51 .190 18.13 $ 24,660 $ 24,265 $ 22,670 3,408 3,221 3,178 19,492 300 580 961 21,044 21,252 20,464 - 11,031 4 20,952 6,857 10,864 68 18,531 - 9,881 42 21,565 21,597 21,033 7,337 6,221 3,451 2,490 $ 10,819 $ 6,443 $ 4,847 =========== =========== =========== $ 21,528 $ 21,333 $ 19,811 17,040 9,894 $ .82 $ .48 $ .37 .37 .180 15.54 .48 .180 15.80 .82 .180 16.48 $ 23,022 3,339 19,683 850 $ 23,484 3,506 19,978 921 $ 23,997 $ 24,327 3,894 4,100 20,227 886 779 20,103 18,833 - 10,614 - 20,593 8,854 2,758 $ 6,096 =========== $ 20,020 19,217 - 10,428 - 19,448 19,057 - - 9,945 10,952 - - 19,516 19,428 20,184 9,965 9,825 3,689 3,604 3,529 $ 6,296 $ 6,440 $ 6,361 =========== =========== =========== $ 20,456 $ 20,597 $ 20,332 10,129 $ .47 .46 .180 15.27 $ .47 .47 .170 15.00 $ .49 $ .48 .48 .136 14.42 .49 .170 14.73 45.98 37.71 41.80 41.20 33.33 38.71 43.15 35.50 39.59 45.55 39.05 41.25 46.83 36.62 45.99 40.93 35.00 38.16 36.43 29.74 36.08 32.32 26.81 31.29 $1,779,736 2,066,111 2,322,870 1,853,588 248,773 $1,524,401 $1,491,142 $1,357,206 1,634,468 1,721,655 1,734,708 1,830,496 1,929,485 1,941,372 1,457,160 1,538,630 1,545,224 206,395 210,211 217,273 $1,329,673 1,636,269 1,819,552 1,451,095 201,939 $1,336,139 1,634,689 1,816,005 1,451,879 199,060 $1,316,705 $1,289,161 1,615,287 1,612,133 1,796,657 1,786,991 1,407,763 1,415,798 190,416 194,781 Basic........................................... Diluted......................................... 13,955 13,961 13,283 13,287 13,274 13,277 13,262 13,286 13,223 13,265 13,221 13,260 13,209 13,255 13,207 13,253 Ratios: ROA .................................................. ROE .................................................. Net Interest Margin (FTE) ...................... Efficiency Ratio.................................... 1.24% 11.61% 4.75% 63.85% 2.22% 19.81% 4.94% 52.60%(2) 1.34% 12.33% 4.99% 63.87% 1.06% 9.45% 4.88% 68.06% 1.33% 11.98% 4.85% 64.58% 1.38% 12.55% 4.94% 61.93% 1.45% 13.26% 5.09% 60.57% 1.44% 13.55% 5.17% 60.96% (1) All share and per-share data have been adjusted to reflect the 5-for-4 stock split effective June 13,2003. (2) Includes $4.2 million (after-tax) one-time gain on sale of credit card portfolio. Capital City Bank Group 47 This page intentionally left blank. 48 Capital City Bank Group consolidated financial statements Report of Independent Registered Public Accounting Firm _______________51 Consolidated Statements of Income _____________________________ 52 Consolidated Statements of Financial Condition______________________ 53 Consolidated Statements of Changes in Shareowners’ Equity ____________ 54 Consolidated Statements of Cash Flows __________________________ 55 Notes to Consolidated Financial Statements ________________________ 56 Capital City Bank Group 49 This page intentionally left blank. This page intentionally left blank. 50 Capital City Bank Group report of independent registered public accounting firm The Board of Directors Capital City Bank Group, Inc.: We have audited the accompanying consolidated statements of financial condition of Capital City Bank Group, Inc. and subsidiary (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareowners’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presenta- tion. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital City Bank Group, Inc. and subsidiary as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of computing stock-based compensation in 2003, and as discussed in Note 6 to the consolidated financial statements, changed its method of accounting for goodwill and other intangible assets in 2002. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2005 expressed an unqual- ified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. KPMG LLP Orlando, Florida March 16, 2005 Capital City Bank Group 51 consolidated statements of income (Dollars In Thousands,Except Per Share Data) (1) INTEREST INCOME Interest and Fees on Loans ..................................................................................................... Investment Securities: U.S. Treasury....................................................................................................................... U.S. Government Agencies/Corporations ................................................................................. States and Political Subdivisions............................................................................................. Other Securities................................................................................................................... Funds Sold........................................................................................................................... Total Interest Income....................................................................................................... INTEREST EXPENSE Deposits ............................................................................................................................ Short-Term Borrowings .......................................................................................................... Subordinated Note Payable ..................................................................................................... Other Long-Term Borrowings .................................................................................................. Total Interest Expense ..................................................................................................... Net Interest Income................................................................................................................ Provision for Loan Losses....................................................................................................... Net Interest Income After Provision for Loan Losses.................................................................... NONINTEREST INCOME Service Charges on Deposit Accounts ...................................................................................... Data Processing .................................................................................................................... Asset Management Fees ........................................................................................................ Securities Transactions ........................................................................................................... Mortgage Banking Revenues................................................................................................... Gain on Sale of Credit Cards ................................................................................................... Other................................................................................................................................... Total Noninterest Income ................................................................................................. NONINTEREST EXPENSE Salaries and Associate Benefits................................................................................................ Occupancy, Net..................................................................................................................... Furniture and Equipment......................................................................................................... Intangible Amortization............................................................................................................ Merger Expense.................................................................................................................... Other................................................................................................................................... Total Noninterest Expense ................................................................................................ Income Before Income Taxes .................................................................................................. Income Taxes........................................................................................................................ NET INCOME ........................................................................................................................ BASIC NET INCOME PER SHARE ............................................................................................ DILUTED NET INCOME PER SHARE......................................................................................... Average Basic Common Shares Outstanding ............................................................................. Average Diluted Common Shares Outstanding ........................................................................... (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13,2003. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. For the Years Ended December 31, 2004 2003 2002 $ 95,607 $ 87,435 $ 92,991 759 2,111 1,944 271 833 101,525 11,315 1,270 294 2,562 15,441 86,084 2,141 83,943 17,574 2,628 4,007 14 3,208 7,181 15,941 50,553 44,345 7,074 8,393 3,824 550 25,040 89,226 45,270 15,899 $ 29,371 ============ $ 2.18 ============ $ 2.18 ============ 13,444 ============ 13,448 ============ 664 2,486 2,409 575 1,261 94,830 11,567 1,270 - 2,002 14,839 79,991 3,436 76,555 16,319 2,403 2,650 1 6,090 - 14,476 41,939 40,462 5,972 7,840 3,241 - 22,206 79,721 38,773 13,580 $ 25,193 ============ $ 1.91 ============ $ 1.90 ============ 13,222 ============ 13,251 ============ 2 5,366 2,752 1,573 1,481 104,165 20,551 767 - 1,185 22,503 81,662 3,297 78,365 12,749 2,006 2,521 10 5,502 - 13,315 36,103 40,212 5,719 7,677 3,242 212 21,633 78,695 35,773 12,691 $ 23,082 =========== $ 1.75 =========== $ 1.74 =========== 13,225 =========== 13,274 =========== 52 Capital City Bank Group consolidated statements of financial condition (Dollars in Thousands,Except Per Share Data) (1) ASSETS Cash and Due From Banks ........................................................................................................................ Funds Sold and Interest Bearing Deposits .................................................................................................... Total Cash and Cash Equivalents ............................................................................................................ Investment Securities, Available-for-Sale........................................................................................................ Loans, Net of Unearned Interest .................................................................................................................. Allowance for Loan Losses .................................................................................................................... Loans, Net ...................................................................................................................................... Premises and Equipment, Net .................................................................................................................... Goodwill ................................................................................................................................................ Other Intangible Assets .............................................................................................................................. Other Assets ............................................................................................................................................ Total Assets .................................................................................................................................... LIABILITIES Deposits: Noninterest Bearing Deposits.................................................................................................................. Interest Bearing Deposits ...................................................................................................................... Total Deposits.................................................................................................................................. Short-Term Borrowings .............................................................................................................................. Subordinated Note Payable ........................................................................................................................ Other Long-Term Borrowings ...................................................................................................................... Other Liabilities ........................................................................................................................................ Total Liabilities ................................................................................................................................ SHAREOWNERS’ EQUITY Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding ...................... Common Stock, $.01 par value; 90,000,000 shares authorized; 14,155,312 and 13,236,462 shares issued and outstanding at December 31, 2004 and December 31, 2003, respectively .................................... Additional Paid-In Capital ............................................................................................................................ Retained Earnings .................................................................................................................................... Accumulated Other Comprehensive (Loss) Income, Net of Tax ............................................................................................................................................ Total Shareowners’ Equity.................................................................................................................. Commitments and Contingencies (See Note 18) Total Liabilities and Shareowners’ Equity .......................................................................................... (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13,2003. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. As of December 31, 2004 2003 $ 87,039 74,506 161,545 210,240 1,828,825 (16,037) 1,812,788 58,963 54,341 25,964 40,172 $2,364,013 ========================== $ 566,991 1,327,895 1,894,886 96,014 30,928 68,453 16,932 2,107,213 - 142 52,363 204,648 (353) 256,800 $2,364,013 ========================== $ 93,140 125,452 218,592 181,734 1,341,632 (12,429) 1,329,203 54,011 6,680 19,112 37,170 $1,846,502 ========================== $ 455,550 1,018,655 1,474,205 108,184 - 46,475 14,829 1,643,693 - 132 16,157 185,134 1,386 202,809 $1,846,502 ========================== Capital City Bank Group 53 consolidated statements of changes in shareowners’ equity (Dollars in Thousands,Except Per Share Data) (1) Balance, December 31, 2001 ............................... Comprehensive Income: Net Income................................................ Net Change in Unrealized Gain (Loss) On Available-for-Sale Securities................ Total Comprehensive Income................................. Cash Dividends ($.502 per share).......................... Issuance of Common Stock................................... Repurchase and Retirement of Common Stock ........ Balance, December 31, 2002 .............................. Comprehensive Income: Net Income................................................ Net Change in Unrealized (Loss) Gain On Available-for-Sale Securities................ Total Comprehensive Income................................. Cash Dividends ($.656 per share).......................... Executive Stock Performance Plan Compensation..... Issuance of Common Stock................................... Repurchase and Retirement of Common Stock ........ Balance, December 31, 2003 ............................... Comprehensive Income: Net Income................................................ Net Change in Unrealized (Loss) Gain On Available-for-Sale Securities................ Total Comprehensive Income................................. Cash Dividends ($.730 per share).......................... Executive Stock Performance Plan Compensation..... Issuance of Common Stock................................... Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Retained Income (Loss), Earnings Net of Taxes Total $132 $17,152 $152,149 $2,350 $171,783 - - - - - - - - - 934 (3,395) 23,082 - - (6,644) - __ ___- 771 - - - __ __- 23,853 (6,644) 934 (3,395) 132 14,691 168,587 3,121 186,531 - - - - - - __ _- - 25,193 - - - 62 1,421 (17) - - (8,646) - - _ _____- (1,735) - - - - ___ __- 23,458 (8,646) 62 1,421 (17) 132 16,157 185,134 1,386 202,809 - - - - - 10 - 29,371 - - - 193 36,013 - - (9,857) - - (1,739) - - - - 27,632 (9,857) 193 36,023 Balance, December 31, 2004 ............................... $142 ======= $52,363 =========== $204,648 == =========== $ (353) ========== $256,800 ============= (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13,2003. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 54 Capital City Bank Group consolidated statements of cash flows (Dollars in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income.......................................................................................................................................... Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses ...................................................................................................................... Depreciation ........................................................................................................................................ Loss on Disposal of Fixed Assets ............................................................................................................ Net Securities Amortization .................................................................................................................... Amortization of Intangible Assets ............................................................................................................ Gain on Sale of Investment Securities ...................................................................................................... Non-Cash Compensation ...................................................................................................................... Deferred Income Taxes.......................................................................................................................... Net (Increase) Decrease in Other Assets .................................................................................................. Net Increase (Decrease) in Other Liabilities .............................................................................................. Net Cash Provided by Operating Activities ................................................................................................ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Payments/Maturities/Sales of Investment Securities Available-for-Sale...................................... Purchase of Investment Securities Available-for-Sale .................................................................................. Net Increase in Loans............................................................................................................................ Net Cash Used in Acquisitions ................................................................................................................ Purchase of Premises & Equipment ........................................................................................................ Proceeds From Sales of Premises & Equipment ........................................................................................ Net Cash Used in Investing Activities ........................................................................................................ CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits ........................................................................................................ Net (Decrease) Increase in Short-Term Borrowings .................................................................................... Proceeds from Subordinated Note Payable .............................................................................................. Increase in Other Long-Term Borrowings.................................................................................................. Repayment of Other Long-Term Borrowings ............................................................................................ Dividends Paid .................................................................................................................................... Repurchase of Common Stock .............................................................................................................. Issuance of Common Stock .................................................................................................................. Net Cash Provided By (Used in) Financing Activities .................................................................................. Net (Decrease) Increase in Cash and Cash Equivalents .............................................................................. Cash and Cash Equivalents at Beginning of Year........................................................................................ Cash and Cash Equivalents at End of Year ................................................................................................ SUPPLEMENTAL DISCLOSURES: Interest Paid on Deposits ...................................................................................................................... Interest Paid on Debt ............................................................................................................................ Taxes Paid .......................................................................................................................................... Loans Transferred to Other Real Estate .................................................................................................... Issuance of Common Stock as Non-Cash Compensation............................................................................ Transfer of Current Portion of Long-Term Borrowings to Short-Term Borrowings ............................................ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. For the Years Ended December 31, 2004 2003 2002 $ 29,371 $ 25,193 $ 23,082 2,141 5,288 - 2,117 3,824 (14) 1,707 765 (4,210) 3,182 44,171 132,083 (88,028) (139,507) (31,743) (5,576) 1,155 (131,616) 23,776 (33,559) 30,928 59,741 (41,815) (9,857) - 1,184 30,398 (57,047) 218,592 $161,545 ============= $ 10,661 ============= $ 4,066 ============= $ 12,606 ============= $ 1,351 ============= $ 1,707 ============= $ 16,002 ============= 3,436 4,857 92 2,180 3,241 (1) 508 755 1,385 (3,791) 37,855 3,297 4,897 32 889 3,242 (10) 892 (1,479) 4,183 (953) 38,062 101,359 (107,695) (65,180) - (11,152) 1,090 (81,578) 82,466 (43,370) (46,006) - (6,868) 89 (13,689) 40,005 (45,913) - 16,564 (1,412) (8,646) (17) 975 1,556 (42,167) 260,759 $218,592 ============= $ 11,999 ============= $ 3,238 ============= $ 16,303 ============= $ 5,267 ============= $ 508 ============= $ 40,423 ============= (115,901) 46,633 - 62,058 (3,883) (6,644) (3,395) 688 (20,444) 3,929 256,830 $260,759 ============= $ 23,694 ============= $ 1,825 ============= $ 13,175 ============= $ 1,238 ============= $ 246 ============= $ - ============= Capital City Bank Group 55 notes to consolidated financial statements Note 1 SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Capital City Bank Group, Inc. (“CCBG”), and its wholly-owned subsidiary, Capital City Bank (“CCB” or the “Bank” and together with CCBG, the “Company”). All material inter-company transactions and accounts have been eliminated. The Company, which operates in a single reportable business segment comprised of commercial banking within the states of Florida, Georgia, and Alabama, follows accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry. The principles which materially affect the financial position, results of operations and cash flows are summarized below. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting inter- est entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling finan- cial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial inter- est, known as the primary beneficiary, consolidates the VIE. CCBG’s wholly-owned subsidiary, CCBG Capital Trust I (established November 1, 2004) is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Company’s consolidated financial statements. Certain items in prior financial statements have been reclassified to conform to the current presentation. All acquisitions during the reported periods were accounted for using the purchase method. Accordingly, the operating results of the acquired companies are included with the Company’s results of operations since their respective dates of acquisition (see Note 2 — Acquisitions). Use of Estimates The preparation of financial statements in conformity with account- ing principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, inter- est-bearing deposits in other banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods and all other cash equivalents have a maturity of 90 days or less. Investment Securities Investment securities available-for-sale are carried at fair value and represent securities that are available to meet liquidity and/or other needs of the Company. Gains and losses are recognized and reported separately in the Consolidated Statements of Income upon realization or when impairment of values is deemed to be other than temporary. Gains or losses are recognized using the specific identification method. Unrealized holding gains and losses for securities available-for-sale are excluded from the Consolidated Statements of Income and reported net of taxes in the accumulated other comprehensive (loss) income component of shareown- ers’ equity until realized. Accretion and amortization are recognized on the effective yield method over the life of the securities. Loans Loans are stated at the principal amount outstanding, net of unearned income. Interest income is generally accrued on the effective yield method based on outstanding balances. Fees charged to originate loans and direct loan origination costs are deferred and amortized over the life of the loan as a yield adjustment. Loans held for sale are valued at lower of cost or market value based on information obtained from third party investors. Allowance for Loan Losses The allowance for loan losses is that amount considered adequate to absorb losses inherent in the portfolio based on management’s evaluation of the current risk characteristics of the loan portfolio as of the reporting date. The allowance is a significant estimate recorded by management and is based on the credit quality of the portfolio. The evaluation of credit quality begins with the review for impair- ment of commercial purpose loans with balances exceeding $25,000. Impaired loans are defined as those in which the full collection of principal and interest in accordance with the contractual terms is improbable. Impaired loans typically include those that are in nonaccrual status or classified as doubtful as defined by the Company’s internal risk rating system. Generally, loans are placed on nonaccrual status when interest becomes past due 90 days or more, or management deems the ultimate collection of principal and interest is in doubt. A specific allowance for loss is made for impaired loans based on a comparison of the recorded investment in the loan to either the present value of the loan’s expected cash flow, the loan’s estimated market price or the estimated fair value of the underlying collateral less costs to sell the collateral. Commercial purpose loans exceeding $100,000 that are not impaired, but have weaknesses requiring closer management attention, are analyzed to determine if an allowance is required. This analysis is based primarily on the underlying value of the collateral. If the value of the collateral is considered insufficient, an allowance is made for the defi- 56 Capital City Bank Group notes to consolidated financial statements ciency. The value of the collateral is dependent on current economic con- ditions in the communities served and is subject to change. In addition, the analysis includes changes in risk ratings that are assigned based on the Bank’s Asset Classification Policy, and for the ultimate disposition of the loan. The ultimate disposition may include upgrades in risk ratings, payoff of the loan, or charge-off of the loan. This migration analysis results in a charge-off ratio by loan pool of classified loans that is applied to the balance of the pool to determine general reserves for specifically identified problem loans. This charge-off ratio is adjusted for various envi- ronmental factors including past due and nonperforming trends in the loan portfolio, the micro and macro-economic outlook, and credit adminis- tration practices as determined by independent parties. Larger commercial purpose loans that show no signs of weakness are assigned an allowance based on the historical loss ratios in pools of loans with similar characteristics. The historical loss ratios are deter- mined by analyzing losses over the prior twelve quarters, with more emphasis being placed on the recent four quarters. The historical loss ratios are then adjusted for certain external factors, including micro- and macro-economic outlook, past due and nonperforming trends within the portfolio, loan growth, and credit administration practices. Large groups of smaller balance homogeneous loans that are not impaired are collectively evaluated to determine the allowance required for loan losses. These small balance homogenous loans include commercial purpose loans less than $100,000, consumer installment loans, and resi- dential mortgage loans. Historical loss ratios are determined for these smaller balance loan pools and applied to the balance of the related pool of loans to determine the allowance needed. The historical loss ratios are adjusted for external factors as described above. Goodwill As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The adoption of SFAS 142 required the Company to discontinue goodwill amortization and identify reporting units to which the goodwill related for purposes of assessing potential impairment of goodwill on an annual basis, or more frequently, if events or changes in circum- stances indicate that the carrying value of the asset may not be recoverable. In accordance with the guidelines in SFAS 142, the Company determined it has one reporting unit with goodwill. As of December 31, 2004, the Company performed its annual impairment review and concluded that no impairment adjustment was necessary. Income Taxes The Company files consolidated federal and state income tax returns. In general, the parent company and its subsidiary compute their tax provisions as separate entities prior to recognition of any tax expense or benefits which may accrue from filing a consolidated return. The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities on the Company’s consolidated statement of financial position and their respec- tive tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Long-Lived Assets Stock Based Compensation Premises and equipment are stated at cost less accumulated depre- As of December 31, 2004, the Company had three stock-based com- ciation, computed on the straight-line method over the estimated useful lives for each type of asset with premises being depreciated over a range of 10 to 40 years, and equipment being depreciated over a range of 3 to 10 years. Major additions are capitalized and depreciated in the same manner. Repairs and maintenance are charged to noninterest expense as incurred. Intangible assets, other than goodwill, consist of core deposit assets, and a customer relationship and non-compete asset that were recognized in connection with various acquisitions. Core deposit intangible assets are amortized on the straight-line method over various periods, with the majority being amortized over an average of 7 to 10 years. Other identifi- able intangibles are amortized on the straight-line methods over their estimated useful lives. Long-lived assets are evaluated for impairment if circumstances suggest that their carrying value may not be recoverable, by comparing the carrying value to estimated undiscounted cash flows. If the asset is deemed impaired, an impairment charge is recorded equal to the carrying value less the fair value. pensation plans, consisting of the Associate Incentive Plan (“AIP”), the Associate Stock Purchase Plan and the Director Stock Purchase Plan. Under the AIP, performance shares are awarded to participants based on performance goals being achieved. In addition, pursuant to the AIP, the Company executed incentive stock option arrangements for 2004 and 2003 for a key executive officer (William G. Smith, Jr.). As a result of SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” the Company adopted the fair value recognition provi- sions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” prospectively to all awards granted, modified, or settled on or after January 1, 2003. Awards under the Company’s plans vest over periods ranging from six months to four years. Therefore, the cost related to stock-based associate compensation included in the determination of net income for 2003 is different than that which would have been recog- nized if the fair value based method had been applied to all awards since the original effective date of SFAS 123, as a result of the difference between compensation measurement dates under SFAS 123 and Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) the differences in what instruments are consid- ered non-compensatory, and the fact that awards granted prior to January 1, 2003 were accounted for under APB 25. The cost related to all stock- Capital City Bank Group 57 notes to consolidated financial statements based associate compensation included in net income is accounted for under the fair value based method during 2004 as all awards have grant dates after January 1, 2003. The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation. Transactions under the ASPP were as follows: Number of Shares Purchase Price per Share(1) Available at December 31, 2001 Purchased Available at December 31, 2002 (Dollars in Thousands,Except Per Share Data) 2004 2003 2002 Purchased Net income, as reported Add: Stock based compensation included $29,371 $25,193 $23,082 in reported net income, net of tax 400 634 553 Deduct: Stock based compensation Available at December 31, 2003 Purchased Available at December 31, 2004 determined under fair value based method for all awards, net of tax 317,629 (31,588) 286,041 (25,234) 260,807 (20,056) 240,751 ============= $18.90 $30.46 $35.63 Pro forma net income Net Income per share: Basic-as reported Basic-pro forma Diluted-as reported Diluted-pro forma (400) (388) (348) $29,371 $25,479 $23,247 ========= ========= ========= $ 2.18 $ 1.91 $ 1.75 ========= ========= ========= $ 2.18 $ 1.93 $ 1.76 ========= ========= ========= $ 1.74 $ 1.90 $ 2.18 ========= ========= ========= $ 2.18 $ 1.92 $ 1.75 ========= ========= ========= Director Stock Purchase Plan (“DSPP”). The Company’s DSPP allows the directors to purchase the Company’s common stock at a price equal to 90% of the closing price on the date of purchase. The DSPP has 187,500 shares reserved for issuance. In 2004, 2003, and 2002, CCBG issued 7,369, 4,861, and 4,438 shares, respectively, under this plan. A total of 54,388 shares have been issued to directors since the inception of this plan. Prior to 2003, the DSPP plan was accounted for under the pro- visions of APB 25 and no compensation expense was recognized. In accordance with the Company’s adoption of SFAS 123, compensation expense has been recognized for the Company’s purchase plan activity in 2004 and 2003. Associate Stock Purchase Plan (“ASPP”). Under the Company’s ASPP, substantially all associates may purchase the Company’s common stock through payroll deductions at a price equal to 90% of the lower of the fair market value at the beginning or end of each six-month offering period. Stock purchases under the ASPP are limited to 10% of an asso- ciate’s eligible compensation, up to a maximum of $25,000 (fair market value on each enrollment date) in any plan year. The ASPP has 562,500 shares of common stock reserved for issuance. CCBG issued 20,056, 25,234, and 31,588 shares under the plan in 2004, 2003, and 2002, respectively. A total of 321,749 shares have been issued since inception of this plan. Prior to 2003, the ASPP was accounted for under the provi- sions of APB 25 and no compensation expense was recognized. In accordance with the Company’s adoption of SFAS 123, compensation expense has been recognized for the Company’s purchase plan activity in 2004 and 2003. 58 Capital City Bank Group (1) Weighted Average Price for two annual offering periods Based on the Black-Scholes option pricing model, the weighted average estimated fair value of the purchase rights granted under the ASPP was $7.37 for 2004, $6.65 for 2003, and $3.96 for 2002. In calcu- lating pro forma compensation at December 31, the fair value of each stock purchase right is estimated on the date of grant using the follow- ing weighted average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life (in years) 2004 2003 2002 2.4% 1.8% 1.7% 30.0% 34.5% 33.0% 1.7% 1.1% 1.1% 0.5 0.5 0.5 Associate Incentive Plan (“AIP”). Under the Company’s AIP, shares are granted to participants based upon the achievement of per- formance goals established by the Board of Directors at the beginning of each award period. A total of 937,500 shares of common stock have been reserved for issuance under this Plan. Award periods have histori- cally been one year for the short-term plan and three years for the long-term plan. In 2004, award periods were one year for both plans. Both plans were accounted for under SFAS 123 for 2004 and compensa- tion expense was measured under the fair value method as of the grant date and recognized over the service period. Shares earned are issued during the first calendar quarter of the following year. CCBG issued 37,381, 10,596, and 12,618 shares under the plan in 2004, 2003, and 2002, respectively. A total of 279,438 shares have been issued since inception of this plan. Executive Stock Option Agreement. In 2003 and 2004, the Company’s Board of Directors approved stock option agreements for a key executive officer (William G. Smith, Jr. - Chairman, President and CEO, CCBG) under the provisions of the AIP. These agreements grant a non-qualified stock option award upon achieving certain annual earn- ings per share conditions set by the Board, subject to certain vesting requirements. The options granted under the agreements have a term of ten years and vest at a rate of one-third on each of the first, second, and third anniversaries of the date of grant. Under the 2003 agreement, notes to consolidated financial statements 18,510 option shares were issued, none of which have been exercised. The exercise price for the 2003 shares is $41.20. Under the 2004 agree- ment, the earnings per share conditions were analyzed resulting in economic value earned by the executive of approximately $500,000, for which the Company will issue option shares equal to that value. During 2004 and 2003, the Company recognized expense of $193,000 and $61,658, respectively, related to these agreements in accordance with the provisions of SFAS 123. Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.123R, “Share-Based Payment” (Revised). SFAS 123R establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. The Company adopted the accounting standards set forth in SFAS No. 123 in 2003 and has accordingly expensed stock–based compensation for 2003 and 2004. See Note 1 — Accounting Policies. In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than- Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than- temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the cost of the investment; and (b) evidence indi- cating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is deter- mined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company began presenting the new disclosure require- ment in its consolidated financial statements for the year ended December 31, 2003. The recognition and impairment provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the final- ization of the FASB Staff Position to provide additional implementation guidance. The Company is continuing to evaluate the impact of EITF 03-1. The amount of other-than-temporary impairment the Company will recognize, if any, will be dependent on market conditions and man- agement’s intent and ability at the time of the evaluation to hold invest- ments with unrealized losses until a forecasted recovery in the fair value up to and beyond the adjusted cost. In December 2003, the FASB issued Interpretation No. 46 (“FIN46”) (revised December 2003 (“FIN46R”)), “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN46R replaces FIN46, which was issued in January 2003. FIN46R applies immediately to a variable interest entity created after January 31, 2003 and as of the first interim period ending after March 15, 2004 to those variable interest entities created before February 1, 2003 and not already consolidated under FIN46 in previously issued financial statements. The Company has adopted FIN46R in connection with its consolidated financial statements for the year ended December 31, 2004. The implementation of FIN46R requires the Company to not consolidate its investment in CCBG Capital Trust I because the Company is not the primary beneficiary. In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP 03-3 addresses accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to loans and debt securities acquired individually, in pools or as part of a business combination and does not apply to originated loans. The application of SOP 03-3 limits the interest income, including accretion of purchase price discounts, that may be recognized for certain loans and debt securities. Additionally, SOP 03-3 does not allow the excess of contractual cash flows over cash flows expected to be collected to be recog- nized as an adjustment of yield, loss accrual or valuation allowance, such as the allowance for loan losses. SOP 03-3 requires that increases in expected cash flows subsequent to the initial investment be recognized prospectively through adjustment of the yield on the loan or debt security over its remain- ing life. Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired in a business combination where the loans show signs of credit deterioration, SOP 03-3 represents a significant change from current purchase accounting practice whereby the acquiree’s allowance for loan losses is typically added to the acquirer’s allowance for loan losses. SOP 03-3 is effective for loans and debt securities acquired by the Company beginning January 1, 2005. Loans acquired in future acquisi- tions will be impacted by the adoption of this pronouncement. Capital City Bank Group 59 notes to consolidated financial statements Note 2 ACQUISITIONS On February 3, 2005, the Company announced the signing of a definitive agreement to acquire First Alachua Banking Corporation (“FABC”), headquartered in Alachua, Florida. FABC’s wholly-owned sub- sidiary, First National Bank of Alachua (“FNBA”) has $229 million in assets, seven offices located in Alachua County -- Gainesville (three), Alachua, High Springs, Jonesville, Newberry -- and an eighth office in Hastings, Florida, which is located in St. Johns County. FABC also has a mortgage lending office in Gainesville and a financial services division. Subject to certain potential adjustments, FABC shareowners will receive $2,847.04 in cash and 71.176 shares of CCBG common stock for each of the 10,186 shares of FABC common stock outstanding. Based on Capital City’s closing market price on Nasdaq on February 3, 2005, this cash and stock combination equaled aggregate consideration of $58.0 million. Closing is anticipated for mid-year 2005. On March 19, 2004, the Company’s subsidiary, Capital City Bank, completed its merger with Quincy State Bank, a subsidiary of Synovus Financial Corp. Results of Quincy State Bank’s operations have been included in the Company’s consolidated financial statements since March 20, 2004. Quincy State Bank had $116.6 million in assets with one office in Quincy, Florida and one office in Havana, Florida. The transaction was accounted for as a purchase and resulted in approxi- mately $15.4 million of intangible assets, including approximately $13.0 million in goodwill and a core deposit intangible of $2.4 million. The core deposit intangible is being amortized over a 7-year period. On March 19, 2004, the Company completed its purchase of fidu- ciary assets from Synovus Trust Company for $2.0 million. This purchase was subject to a $800,000 earn-out agreement of which $634,000 was paid in October 2004. Subsequently, the intangible asset associated with this transaction was increased to $1.8 million. This intangible is being amortized over a 10-year period. On October 15, 2004, the Company completed its acquisition of Farmers and Merchants Bank in Dublin, Georgia, a $395 million asset institution with three offices in Laurens County. The Company issued 17.08 shares and $666.50 in cash for each of the 50,000 shares of Farmers and Merchants Bank, resulting in the issuance of 854,000 shares of Company common stock and the payment of $33.3 million in cash for a total purchase price of approximately $66.7 million. The transaction resulted in approximately $41.1 million of intangible assets, including approximately $34.7 million in goodwill, a core deposit intan- gible of $5.9 million, and a non-compete intangible of $483,000. The core deposit intangible is being amortized over a 7-year period and the non-compete intangible is being amortized over a 2-year period. The following table summarizes the assets acquired and liabilities assumed as of the date of each acquisition (excluding trust assets), along with the consideration paid: (Dollars in Thousands) Quincy State Bank Farmers & Merchants Bank of Dublin Cash and Due From Banks Funds Sold $ 2,295 6,949 Total Cash and Cash Equivalents $ 9,244 Investment Securities, Available-for-Sale Loans, Net Intangible Asset Other Assets Total Assets Acquired 16,150 88,727 14,915 2,498 $131,534 Total Deposits Short-Term Borrowings Long-Term Borrowings Other Liabilities Total Liabilities Assumed Consideration Paid to Shareowners 102,434 - 3,000 - 105,434 $ 26,100 ========= $ 8,521 12,641 $ 21,162 61,359 257,685 41,103 4,035 $385,344 293,938 5,388 17,063 2.305 318,694 $ 66,650 ========= The following unaudited pro forma financial information for 2004 and 2003 presents the consolidated operations of the Company as if the acquisitions had been made on January 1, 2003. The unaudited pro forma financial information is provided for informational purposes only, should not be construed to be indicative of the Company’s consolidated results of operations had the acquisitions been consummated on this earlier date, and does not project the Company’s results of operations for any future period: For the 12 Months Ended December 31, (Dollars in Thousands, Except Per Share Data) 2004 Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Interest Income After Provision for Loan Losses Noninterest Income Noninterest Expense Income Before Income Taxes Income Taxes Net Income Basic Net Income Per Share Diluted Net Income Per Share $120,416 20,480 99,936 2,696 97,240 52,321 96,443 53,118 18,882 $ 34,236 ========= $ 2.36 ========= $ 2.36 ========= 2003 $121,757 22,637 99,120 3,976 95,144 46,158 89,432 51,870 18,655 $ 33,215 ========= $ 2.26 ========= $ 2.25 ========= 60 Capital City Bank Group notes to consolidated financial statements Note 3 INVESTMENT SECURITIES As of December 31, 2004, the Company’s investment securities had the following maturity distribution based on contractual maturities: The amortized cost and related market value of investment securi- (Dollars in Thousands) Amortized Cost Market Value $ 78,498 $ 105 $ 1 $ 78,602 (Dollars in Thousands) Value Losses Market Unrealized Market Unrealized Market Unrealized Value Losses Losses Value ties available-for-sale at December 31, were as follows: 2004 (Dollars in Thousands) U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Mortgage-Backed Securities Other Securities (1) Total Investment Securities (Dollars in Thousands) U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Mortgage-Backed Securities Other Securities (1) Total Investment Securities Amortized Unrealized Unrealized Market Value Losses Gains Cost $ 31,027 $ 92,073 49,889 26,293 11,514 - 5 409 187 - $ 244 $ 30,783 741 91,337 92 80 - 50,206 26,400 11,514 $210,796 =========== $ 601 $210,240 ======== ========= =========== $1,157 2003 Amortized Unrealized Unrealized Market Value Losses Gains Cost 26,862 133 55,641 11,618 6,927 1,511 427 13 - - - - 26,995 57,152 12,045 6,940 $179,546 =========== $2,189 ========= $ 1 $181,734 ======= =========== (1) FHLB and FRB stock recorded at cost. The total proceeds from the sale of investment securities and the gross realized gains and losses from the sale of such securities for each of the last three years are as follows: (Dollars in Thousands) Year 2004 2003 2002 Total Proceeds Gross Realized Gains Gross Realized Losses $114,184 $ 48,922 $ 44,576 $17 $24 $10 $ 3 $23 $ - Total proceeds do not include principal reductions in mortgage- backed securities and proceeds from securities which were called of $17.9 million, $52.4 million, and $37.9 million in 2004, 2003 and 2002, respectively. Due in one year or less Due after one through five years Due after five through ten years Over ten years Total Investment Securities $ 76,958 110,658 11,666 11,514 $210,796 ======== $ 76,910 110,243 11,573 11,514 $210,240 ======== Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities with an amortized cost of $142.8 million and $73.9 million at December 31, 2004 and 2003, respectively, were pledged to secure public deposits and for other purposes. Securities with unrealized losses at year-end 2004 not recognized in income by period of time unrealized losses have existed are as follows: Less Than 12 months Greater Than 12 months Total U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Mortgage-Backed $ 30,783 $ 244 $ - $ 88,331 13,217 741 92 - - - - - $ 30,783 $ 244 88,331 741 13,217 92 Securities 18,173 80 - - 18,173 80 Total Investment Securities $150,504 ========== $1,157 ======== $ - ====== $ - ====== $150,504 ========== $1,157 ======== Note 4 LOANS At December 31, the composition of the Company’s loan portfolio was as follows: (Dollars in Thousands) 2004 2003 Commercial, Financial and Agricultural Real Estate - Construction Real Estate - Commercial Mortgage Real Estate - Residential Real Estate - Home Equity Real Estate - Loans Held-for-Sale Consumer Total Loans, Net of Unearned Interest $ 206,474 140,190 655,426 438,484 150,061 11,830 226,360 $1,828,825 ======================== $ 160,048 89,149 391,250 346,170 116,810 4,810 233,395 $1,341,632 ======================= Capital City Bank Group 61 notes to consolidated financial statements Nonaccruing loans amounted to $4.6 million and $2.3 million, at December 31, 2004 and 2003, respectively. There were no restructured loans at December 31, 2004 or 2003. Interest on nonaccrual loans is generally recognized only when received. Cash collected on nonaccrual loans is applied against the principal balance or recognized as interest income based upon management’s expectations as to the ultimate col- lectibility of principal and interest in full. If interest on nonaccruing loans had been recognized on a fully accruing basis, interest income recorded would have been $189,000, $166,000, and $116,000 higher for the years ended December 31, 2004, 2003, and 2002, respectively. Note 5 ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the years ended December 31, is as follows: (Dollars in Thousands) 2004 2003 2002 Balance, Beginning of Year Acquired Reserves Reserve Reversal (1) Provision for Loan Losses Recoveries on Loans Previously Charged-Off Loans Charged-Off Balance, End of Year $12,429 5,713 (800) 2,141 1,612 (5,058) $16,037 ======== $12,495 - - 3,436 1,037 (4,539) $12,429 ======== $12,096 - - 3,297 1,374 (4,272) $12,495 ======== (1) Reflects recapture of reserves allocated to the credit card portfolio,which was sold in August 2004. Selected information pertaining to impaired loans, at December 31, is as follows: (Dollars in Thousands) 2004 2003 Valuation Balance Allowance Valuation Balance Allowance With Related Credit Allowance $ 578 Without Related Credit Allowance $3,150 $313 - $810 $477 $178 - (Dollars in Thousands) 2004 2003 2002 Average Recorded Investment in Impaired Loans Interest Income on Impaired Loans Recognized Collected in Cash $5,382 $6,737 $2,544 140 $ 120 194 $ 194 169 $ 169 Note 6 INTANGIBLE ASSETS The Company had intangible assets of $80.3 million and $25.8 million at December 31, 2004 and December 31, 2003, respectively. Intangible assets at December 31, were as follows: (Dollars in Thousands) 2004 2003 Accumulated Gross Amount Amortization Accumulated Gross Amount Amortization Core Deposits Intangibles Goodwill Customer Relationship Intangible Non-Compete Agreement Total Intangible Assets $ 42,078 58,127 1,867 483 $102,555 =============== $18,300 3,786 114 50 $22,250 ============= $33,752 $14,640 3,786 10,466 - - - - $44,218 $18,426 ============= ============= Net Core Deposit Intangibles. As of December 31, 2004 and December 31, 2003, the Company had net core deposit intangibles of $23.8 million and $19.1 million, respectively. Amortization expense for the twelve months of 2004, 2003 and 2002 was $3.7 million, $3.2 million and $3.2 million, respectively. The estimated annual amortiza- tion expense for the next five years is expected to be approximately $4.4 million per year. Goodwill. As of December 31, 2004 and December 31, 2003, the Company had goodwill, net of accumulated amortization, of $54.3 million and $6.7 million, respectively. The increase in goodwill is due to the acquisition of Quincy State Bank and Farmers and Merchants Bank of Dublin during 2004. Goodwill is the Company’s only intangible asset that is no longer subject to amortization under the provisions of SFAS 142. On December 31, 2004, the Company performed its annual impairment review and concluded that no impairment adjustment was necessary. Other. As of December 31, 2004, the Company had a customer relationship intangible, net of accumulated amortization, of $1.8 million. This intangible was booked as a result of the March 2004 acquisition of trust customer relationships from Synovus Trust Company. Amortization expense for the twelve months of 2004 was $114,000. Estimated annual amortization expense is $187,000 based on use of a 10-year useful life. The Company also had a non-compete intangible, net of accumulated amortization, of $433,000. This intangible was booked as a result of the October 2004 acquisition of Farmers and Merchants Bank of Dublin. Amortization expense for the twelve months of 2004 was $50,000. Estimated annual amortization expense is $242,000 based on a 2-year useful life. 62 Capital City Bank Group notes to consolidated financial statements Note 7 PREMISES AND EQUIPMENT The composition of the Company’s premises and equipment at 2004 2003 59,311 $ 13,251 $ 12,152 51,577 43,623 40,878 113,440 107,352 (54,477) (53,341) $ 58,963 $ 54,011 ========== ========= December 31, was as follows: (Dollars in Thousands) Land Buildings Fixtures and Equipment Total Accumulated Depreciation Premises and Equipment, Net Note 8 DEPOSITS Interest expense on deposits for the three years ended December 31, was as follows: (Dollars in Thousands) NOW Accounts Money Market Accounts Savings Accounts Time Deposits < $100,000 Time Deposits > $100,000 Total 2004 2003 $ 733 1,189 164 6,683 2,546 $11,315 =========== $ 678 1,310 189 7,007 2,383 $11,567 =========== 2002 $ 1,272 2,904 500 12,060 3,815 $20,551 =========== Note 9 SHORT-TERM BORROWINGS Short-term borrowings included the following: Interest bearing deposits, by category, as of December 31, were as follows: (Dollars in Thousands) NOW Accounts Money Market Accounts Savings Accounts Time Deposits Total 2004 2003 $ 338,932 270,095 147,348 571,520 $1,327,895 ============== $ 276,934 207,934 110,834 422,953 $1,018,655 ============== At December 31, 2004 and 2003, $4.1 million and $7.2 million, respectively, in overdrawn deposit accounts were reclassified as loans. Deposits from certain directors, executive officers, and their related interests totaled $23.1 million and $11.1 million at December 31, 2004 and 2003, respectively. Time deposits in denominations of $100,000 or more totaled $166.8 million and $107.2 million at December 31, 2004 and 2003, respectively. The balances maintained on deposit with the Federal Reserve Bank to meet reserve requirements as of December 31, 2004 and 2003, were $59.0 million and $57.1 million, respectively. At December 31, 2004, the scheduled maturities of time deposits were as follows: (Dollars in Thousands) 2005 2006 2007 2008 2009 and thereafter Total $448,880 64,553 38,309 13,395 6,383 $571,520 ============ (Dollars in Thousands) 2004 Balance at December 31, Maximum indebtedness at any month end Daily average indebtedness outstanding Average rate paid for the year Average rate paid on period-end borrowings (Dollars in Thousands) 2003 Balance at December 31, Maximum indebtedness at any month end Daily average indebtedness outstanding Average rate paid for the year Average rate paid on period-end borrowings (Dollars in Thousands) 2002 Balance at December 31, Maximum indebtedness at any month end Daily average indebtedness outstanding Average rate paid for the year Average rate paid on period-end borrowings Securities Sold Under Repurchase Short-Term Purchased Agreements Borrowings Federal Funds Other $19,800 27,875 22,291 1.27% 1.97% $58,431 77,087 54,607 0.71% 1.12% $17,783 41,941 23,683 2.52% 3.19% Securities Sold Under Repurchase Short-Term Purchased Agreements Borrowings Federal Funds Other $12,624 23,930 14,768 0.94% 0.68% $53,223 90,209 49,785 0.59% 0.31% $42,337 44,226 36,721 2.28% 2.50% Securities Sold Under Repurchase Short-Term Purchased Agreements Borrowings Federal Funds Other $14,120 17,395 9,079 1.46% 0.55% $77,318 77,318 55,679 0.87% 0.83% $22,237 22,237 7,836 1.89% 2.32% Capital City Bank Group 63 notes to consolidated financial statements Note 10 LONG-TERM DEBT Federal Home Loan Bank Notes. At December 31, Federal Home Loan Bank advances included: (Dollars in Thousands) 2004 2003 Due on September 12, 2005, fixed rate of 3.06% Due on December 19, 2005, fixed rate of 6.04% Due on February 15, 2006, fixed rate of 3.00% Due on September 11, 2006, fixed rate of 2.93% Due on February 13, 2007, fixed rate of 3.05% Due on April 24, 2007, fixed rate of 7.30% Due on May 30, 2008, fixed rate of 2.50% Due on June 13, 2008, fixed rate of 5.40% Due on November 10, 2008, fixed rate of 4.12% Due on October 19, 2009, fixed rate of 3.69% Due on November 10, 2010, fixed rate of 4.72% Due on December 31, 2010, fixed rate of 3.85% Due on April 4, 2011, fixed rate of 4.00%(1) Due on December 18, 2012, fixed rate of 4.84% Due on March 18, 2013, fixed rate of 6.37% Due on June 17, 2013, fixed rate of 3.53% Due on June 17, 2013, fixed rate of 3.85% Due on June 17, 2013, fixed rate of 4.11% Due on September 23, 2013, fixed rate of 5.64% Due on January 27, 2014, fixed rate of 5.79% Due on March 10, 2014, fixed rate of 4.21% Due on May 27, 2014, fixed rate of 5.92% Due on July 20, 2016, fixed rate of 6.27% Due on October 3, 2016, fixed rate of 5.41% Due on October 31, 2016, fixed rate of 5.16% Due on June 27, 2017, fixed rate of 5.53% Due on October 31, 2017, fixed rate of 4.79% Due on December 11, 2017, fixed rate of 4.78% Due on December 20, 2017, fixed rate of 5.37% Due on February 26, 2018, fixed rate of 4.36% Due on September 18, 2018, fixed rate of 5.15% Due on November 5, 2018, fixed rate of 5.10% Due on December 3, 2018, fixed rate of 4.87% Due on December 17, 2018, fixed rate of 6.33% Due on December 24, 2018, fixed rate of 6.29% Due on February 16, 2021, fixed rate of 3.00% Due on May 30, 2023, fixed rate of 2.50% Due on May 21, 2024, fixed rate of 5.94% Total outstanding $ - - 49 20,000 3,000 136 134 500 2,346 784 774 1,006 5,000 610 699 977 96 1,828 998 1,297 694 527 1,371 355 789 875 1,070 948 979 2,247 660 3,749 688 1,640 742 884 1,001 9,000 $68,453 ========= $15,000 1,103 86 - - - 168 643 2,419 906 798 1,115 - 631 755 1,060 98 1,877 1,076 1,344 - 569 1,489 - - - 1,160 1,021 1,003 2,418 708 3,866 737 1,710 769 915 1,031 - $46,475 ======== (1) This advance is callable quarterly at the option of the FHLB beginning on April 4,2005. The contractual maturities of FHLB debt for the five years succeed- ing December 31, 2004, are as follows: (Dollars in Thousands) 2005 2006 2007 2008 2009 2010 and thereafter Total $ 2,313 22,509 5,554 4,536 2,386 31,155 $68,453 ========= The Federal Home Loan Bank advances are collateralized with 1-4 family residential mortgage loans and treasury securities. Interest on the Federal Home Loan Bank advances is paid on a monthly basis. Line of Credit. The Company has the ability to draw on a Revolving Credit Note, due on October 15, 2007. Interest is payable quarterly at LIBOR plus an applicable margin on advances. The revolving credit is unsecured. The existing loan agreement contains certain financial covenants that must be maintained by the Company. At December 31, 2004, the Company was in compliance with all of the terms of the agree- ment and had $36.0 million available under a $36.0 million line of credit facility. Effective January 1, 2005, in accordance with the terms of the agreement which was executed on October 15, 2004, the amount available under the facility will be reduced from $36.0 million to $25.0 million. Junior Subordinated Deferrable Interest Note. The Company has issued a $30.9 million junior subordinated deferrable interest note to a wholly owned Delaware statutory trust, Capital City Bank Group Capital Trust I (“CCBG Capital Trust I”). The trust is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, the accounts of the trust are not included in the Company’s consolidated financial statements. See Note 1 – Summary of Significant Accounting Policies for additional information about the Company’s con- solidation policy. Details of the Company’s transaction with the trust are provided below. In November 2004, CCBG Capital Trust I issued $30.0 million of trust preferred securities which represent beneficial interest in the assets of the trust. The interest rate is fixed at 5.71% for a period of five years, then adjustable annually to LIBOR plus a margin of 1.90%. The trust preferred securities will mature on December 31, 2034, and are redeemable upon approval of the Federal Reserve Board in whole or in part at the option of the Company at any time after December 31, 2009 and in whole or upon occurance of certain events affecting their tax or regulatory capital treatment. Distributions on the trust preferred secu- rities are payable quarterly on March 31, June 30, September 30, and December 31 of each year. CCBG Capital Trust I also issued $928,000 of common equity securities to Capital City Bank Group, Inc. The pro- ceeds of the offering of trust preferred securities and common equity securities were used to purchase a $30.9 million junior subordinated deferrable interest note issued by the Company, which has terms sub- stantially similar to the trust preferred securities. 64 Capital City Bank Group notes to consolidated financial statements The Company has the right to defer payments of interest on the note at any time or from time to time for a period of up to twenty consec- utive quarterly interest payment periods. Under the terms of the note, in the event that under certain circumstances there is an event of default under the note or the Company has elected to defer interest on the note, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. The Company is current on the interest payment obligation and has not executed the right to defer interest pay- ments on the note. The Company has entered into an agreement to guarantee the pay- ments of distributions on the trust preferred securities and payments of redemption of the trust preferred securities. Under this agreement, the Company also agrees, on a subordinated basis, to pay expenses and lia- bilities of the trust other than those arising under the trust preferred securities. The obligations of the Company under the junior subordinat- ed note, the trust agreement establishing the trust, the guarantee and agreement as to expenses and liabilities, in aggregate, constitute a full and conditional guarantee by the Company of the trust’s obligations under the trust preferred securities. Despite the fact that the accounts of CCBG Capital Trust I are not included in the Company’s consolidated financial statements, the $30.0 million in trust preferred securities issued by the trust is included in the Tier 1 capital of Capital City Bank Group, Inc. as allowed by Federal Reserve Board guidelines. Note 11 INCOME TAXES The provision for income taxes reflected in the statement of income is comprised of the following components: (Dollars in Thousands) 2004 2003 2002 Current: Federal State Deferred: Federal State Total $13,753 1,381 656 109 $15,899 ======== $10,876 1,949 682 73 $13,580 ========= $12,123 2,047 (1,337) (142) $12,691 ========= The net deferred tax assets and the temporary differences compris- ing that balance at December 31, 2004 and 2003, are as follows: (Dollars in Thousands) 2004 2003 Deferred Tax Assets attributable to: Allowance for Loan Losses Associate Benefits Unrealized Losses on Investment Securities Accrued Pension/SERP Market Value of Loans Interest on Nonperforming Loans Core Deposit Intangible Amortization Intangible Assets Accrued Expense Other Total Deferred Tax Assets Deferred Tax Liabilities attributable to: Depreciation on Premises and Equipment Deferred Loan Costs Unrealized Gains on Investment Securities Core Deposit Intangible Amortization Securities Accretion Other Total Deferred Tax Liabilities Net Deferred Tax Assets $5,681 229 203 1,390 248 45 - 18 573 331 $8,718 $3,433 2,016 - 465 20 321 6,256 $2,463 ============ $4,216 - - 985 - - 1,524 - 461 871 $8,057 $2,852 3,041 802 - 65 150 6,910 $1,147 ============ Income taxes provided were different than the tax expense comput- ed by applying the statutory federal income tax rate of 35% to pre-tax income as a result of the following: (Dollars in Thousands) 2004 2003 2002 Tax Expense at Federal Statutory Rate $15,845 $13,571 $12,521 Increases (Decreases) Resulting From: Tax-Exempt Interest Income State Taxes, Net of Federal Benefit Other Actual Tax Expense (992) 969 77 (348) $15,899 $13,580 ============= ============== (957) (1,084) 1,314 1,238 16 $12,691 ============= Capital City Bank Group 65 notes to consolidated financial statements Note 12 EMPLOYEE BENEFIT PLANS Pension Plan The Company sponsors a noncontributory pension plan covering substantially all of its associates. Benefits under this plan generally are based on the associate’s years of service and compensation during the years immediately preceding retirement. The Company’s general funding policy is to contribute amounts deductible for federal income tax purposes. The following table details the components of pension expense, the funded status of the plan, amounts recognized in the Company’s consol- idated statements of financial condition, and major assumptions used to determine these amounts. (Dollars in Thousands) 2004 2003 2002 Change in Projected Benefit Obligation: $ 46,227 Benefit Obligation at Beginning of Year 3,776 Service Cost Interest Cost 2,893 Actuarial Loss 2,890 (1,092) Benefits Paid (165) Expenses Paid Plan Change (1) - $ 37,941 3,302 2,571 3,196 (1,060) (237) 514 $ 33,642 2,842 2,348 1,671 (2,385) (177) - Projected Benefit Obligation at End of Year Accumulated Benefit Obligation at End of Year $ 54,529 ======== $ 46,227 $ 37,941 ======== ======== $ 38,325 ======== $ 26,441 $ 32,444 ======== ======== Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year Actual Return on Plan Assets Employer Contributions Benefits Paid Expenses Paid Fair Value of Plan Assets $ 34,784 2,710 4,888 (1,092) (165) $ 27,423 4,915 3,744 (1,061) (237) $ 30,113 (3,357) 3,229 (2,385) (177) Reconciliation of Funded Status: Funded Status Unrecognized Net Actuarial Losses Unrecognized Prior Service Cost Unrecognized Net Transition Obligation (Accrued) Prepaid Benefit Cost $(13,404) 11,676 1,517 - $ (211) ======== $(10,518) $(11,443) 10,672 9,993 1,434 1,732 1 1 $ 283 $ 1,589 ======== ======== 66 Capital City Bank Group (Dollars in Thousands) 2004 2003 2002 Components of Net Periodic Benefit Costs: Service Cost Interest Cost Expected Return on Plan Assets Amortization of Prior Service Costs Transition Obligation Recognition Recognized Net Actuarial Loss Net Periodic Benefit Cost $ 3,776 2,893 (2,665) 215 1 1,163 $ 5,383 ======= $ 3,302 2,571 (2,168) 216 1 1,127 $ 5,049 ======= $ 2,842 2,348 (2,404) 284 1 317 $ 3,388 ======= Assumptions: Weighted-average used to determine benefit obligations: Discount Rate Expected Return on Plan Assets Rate of Compensation Increase 6.00% 8.00% 5.50% Weighted-average used to determine net cost: Discount Rate Expected Return on Plan Assets Rate of Compensation Increase 6.25% 8.00% 5.50% (1) Represents a change in mortality assumptions set forth in IRC 417(e). 6.25% 8.25% 5.50% 6.75% 8.25% 5.50% 6.75% 8.25% 5.50% 7.25% 8.25% 5.50% Return on Plan Assets.. The overall expected long-term rate of return on assets is a weighted-average expectation for the return on plan assets. The Company considers historical performance and current benchmarks to arrive at expected long-term rates of return in each asset category. The Company assumed that 65% of its portfolio would be invested in equity securities, with the remainder invested in debt securi- ties. Plan Assets. The Company’s pension plan asset allocation at year- end 2004 and 2003, and the target asset allocation for 2005 are as follows: Percentage of Plan Assets at Year-End Target Allocation 2005 65% 2004 58% Debt Securities 35% 28% Real Estate - - Other - 14% Total 100% 100% 2003 60% 28% - 12% 100% The Company’s pension plan assets are overseen by the CCBG Retirement Committee. Capital City Trust Company acts as plan trustee and investment manager. The investment strategy is to maximize return on investments while minimizing risk. The Company believes the best way to accomplish this goal is to take a conservative approach to its investment strategy by investing in high-grade equity and debt securities. at End of Year $ 41,125 $ 34,784 $ 27,423 Equity Securities notes to consolidated financial statements notes to consolidated financial statements Expected Benefit Payments. As of December 31, 2004, expected (Dollars in Thousands) 2004 2003 2002 benefit payments related to the Company’s defined benefit pension plan were as follows: 2005 2006 2007 2008 2009 2010 through 2014 $ 2,438,891 2,660,318 3,178,166 3,621,447 3,954,736 25,227,483 $41,081,041 =========== Contributions. The following table details the amounts contributed to the pension plan in 2004 and 2003, and the expected amount to be contributed in 2005. 2004 2003 Actual Contributions $4,888,593 $3,743,763 Expected 2005 $4,000,000 to $5,000,000 Supplemental Executive Retirement Plan The Company has a Supplemental Executive Retirement Plan (“SERP”) covering selected executives. Benefits under this plan generally are based on the executive’s years of service and compensation during the years immediately preceding retirement. The Company recognized expense during 2004, 2003 and 2002 of approximately $490,000, $208,000, and $393,000, respectively, and no minimum liability, at December 31, 2004, 2003 and 2002. The following table details the components of the Supplemental Executive Retirement Plan’s periodic benefit cost, the funded status of the plan, amounts recognized in the Company’s consolidated statements of financial condition, and major assumptions used to determine these amounts. (Dollars in Thousands) 2004 2003 2002 Change in Projected Benefit Obligation: Benefit Obligation at Beginning of Year Service Cost Interest Cost Actuarial Loss (Gain) Plan Change (1) Projected Benefit Obligation $ 1,880 147 198 1,376 - $ 2,770 80 111 (1,107) 26 $ 1,458 118 169 1,025 - at End of Year $ 3,601 $ 1,880 $ 2,770 Accumulated Benefit Obligation at End of Year $ 1,894 $ 1,206 $ 1,273 Reconciliation of Funded Status: Funded Status Unrecognized Net Actuarial Loss (Gain) Unrecognized Prior Service Cost Accrued Benefit Cost Components of Net Periodic Benefit Costs: $ (3,601) 874 449 $ (2,278) $ (1,880) (418) 511 $ (1,787) $ (2,770) 645 546 $ (1,579) ========= ========= ========= Service Cost Interest Cost Amortization of Prior Service Cost Recognized Net Actuarial Loss (Gain) Net Periodic Benefit Cost $ 147 198 62 84 $ 491 $ 80 111 61 (44) $ 208 $ 118 169 59 47 $ 393 ========= ========= ========= Assumptions: Weighted-average used to determine the benefit obligations: Discount Rate Expected Return on Plan Assets Rate of Compensation Increase 6.00% 8.00% 5.50% Weighted-average used to determine the net cost: Discount Rate Expected Return on Plan Assets Rate of Compensation Increase 6.25% 8.00% 5.50% (1) Represents a change in mortality assumptions set forth in IRC 417(e) 6.25% 8.25% 5.50% 6.75% 8.25% 5.50% 6.75% 8.25% 5.50% 7.25% 8.25% 5.50% Expected Benefit Payments. As of December 31, 2004, expected benefit payments related to the Company’s SERP were as follows: 2005 2006 2007 2008 2009 2010 through 2014 401(k) Plan $ 17,519 19,411 20,507 103,905 218,825 2,720,069 $3,100,236 ========== The Company has a 401(k) Plan which enables associates to defer a portion of their salary on a pre-tax basis. The plan covers substantially all associates of the Company who meet minimum age requirements. The plan is designed to enable participants to elect to have an amount from 1% to 15% of their compensation withheld in any plan year placed in the 401(k) Plan trust account. Matching contributions from the Company are made up to 6% of the participant’s compensation for some qualifying associates. During 2004 and 2003, the Company made matching contributions of $66,281 and $32,258, respectively. There were no contributions made by the Company for 2002. The participant may choose to invest their contributions into seventeen investment funds available to CCBG participants, including CCBG’s common stock. A total of 50,000 shares of Capital City Bank Group, Inc. stock have Capital City Bank Group 67 notes to consolidated financial statements Required For Capital Adequacy Purposes To Be Well- Capitalized Under Prompt Corrective Action Provisions Actual (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2004: Tier I Capital: CCBG CCB $207,776 11.44% $ 72,617 4.00% 199,565 11.01% * 72,506 4.00% $108,759 6.00% * Total Capital: CCBG CCB Tier I Leverage: CCBG CCB 223,813 12.33% 215,602 11.89% 145,235 8.00% 145,012 8.00% * * 181,265 10.00% 207,776 199,564 8.79% 8.47% 54,463 3.00% 54,379 3.00% * * 90,632 5.00% As of December 31, 2003: Tier I Capital: CCBG CCB $175,631 12.88% $ 54,547 4.00% 167,698 12.32% * 54,438 4.00% $ 81,658 6.00% * Total Capital: CCBG CCB Tier I Leverage: CCBG CCB 188,059 13.79% 180,126 13.24% 109,094 8.00% 108,877 8.00% * * 136,096 10.00% 175,631 167,698 9.51% 9.10% 40,910 3.00% 40,829 3.00% * * 68,048 5.00% *Non-applicable to bank holding companies. Note 15 DIVIDEND RESTRICTIONS Substantially all the Company’s retained earnings are undistributed earnings of its banking subsidiary which are restricted by various regula- tions administered by federal and state bank regulatory authorities. The approval of the appropriate regulatory authority is required if the total of all dividends declared by a subsidiary bank in any calendar year exceeds the bank’s net profits (as defined under Florida law) for that year combined with its retained net profits for the preceding two calendar years. In 2005, the bank subsidiary may declare dividends without regu- latory approval of $35.2 million plus an additional amount equal to the net profits of the Company’s subsidiary bank for 2005 up to the date of any such dividend declaration. been reserved for issuance. Other Plans The Company has a Dividend Reinvestment and Optional Stock Purchase Plan. A total of 250,000 shares have been reserved for issuance. In recent years, shares for the Dividend Reinvestment and Optional Stock Purchase Plan have been acquired in the open market and, thus, CCBG did not issue any shares under this plan in 2004, 2003 and 2002. Note 13 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: (Dollars in Thousands,Except per Share Data) 2004 2003 2002 Numerator: Net Income Denominator: $ 29,371 $ 25,193 $ 23,082 ============ ============= ============= Denominator for Basic Earnings Per Share Weighted-Average Shares 13,443,753 13,222,487 13,225,285 Effects of Dilutive Securities Stock Compensation Plans 4,184 28,702 49,070 Denominator for Diluted Earnings Per Share Adjusted Weighted-Average Shares and Assumed Conversions Basic Earnings Per Share Diluted Earnings per Share 13,447,937 13,251,189 13,274,355 ============ ============= ============= $ 2.18 $ 1.91 $ 1.75 ============ ============= ============= $ 2.18 $ 1.90 $ 1.74 ============ ============= ============= Note 14 CAPITAL The Company is subject to various regulatory capital requirements which involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items. The Company’s capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require that the Company maintain amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 2004, the Company met all capital adequacy requirements to which it is subject. A summary of actual, required, and capital levels necessary to be considered well-capitalized for Capital City Bank Group, Inc. consolidat- ed and its banking subsidiary, Capital City Bank, as of December 31, 2004 and December 31, 2003 are as follows: 68 Capital City Bank Group notes to consolidated financial statements Note 16 RELATED PARTY INFORMATION DuBose Ausley, a Director of the Company, is employed by and is the former Chairman of Ausley & McMullen, the Company’s general counsel. Fees paid by the Company and its subsidiary for legal services, in aggregate, approximated $797,000, $765,000, and $647,000 during 2004, 2003, and 2002, respectively. as it does for on-balance sheet instruments. As of December 31, 2004, the amounts associated with the Company’s off-balance sheet obliga- tions were as follows: (Dollars in Thousands) Commitments to Extend Credit (1) Standby Letters of Credit Amount $407,331 $ 17,844 Under a lease agreement expiring in 2024, the Bank leases land (1) Commitments include unfunded loans,revolving lines of credit (including credit card lines) and other from a partnership in which several directors and officers have an inter- est. The lease agreement with Smith Interests General Partnership L.L.P., provides for annual lease payments of approximately $91,000, to be adjusted for inflation in future years. At December 31, 2004 and 2003, certain officers and directors were indebted to the Company’s bank subsidiary in the aggregate amount of $18.8 million and $17.8 million, respectively. During 2004, $13.6 million in new loans were made and repayments totaled $12.6 million. In the opinion of management, these loans were made on similar terms as loans to other individuals of comparable creditworthi- ness and were all current at year-end. Note 17 SUPPLEMENTARY INFORMATION Components of other noninterest income and noninterest expense in excess of 1% of the sum of total interest income and noninterest income, which are not disclosed separately elsewhere, are (Dollars in Thousands) Merchant Fee Income Interchange Commission Fees Noninterest Expense: Professional Fees Printing & Supplies Telephone Commission/Service Fees 2004 2003 2002 $5,135 2,229 $4,563 2,183 $3,715 2,133 2,858 1,854 2,048 4,741 1,918 1,742 1,872 4,181 1,895 1,772 1,832 3,464 Note 18 COMMITMENTS AND CONTINGENCIES Lending Commitments. The Company is a party to financial instruments with off-balance sheet risks in the normal course of busi- ness to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in establishing commitments and issuing letters of credit unused commitments. Commitments to extend credit are agreements to lend to a cus- tomer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. In general, man- agement does not anticipate any material losses as a result of participating in these types of transactions. However, any potential losses arising from such transactions are reserved for in the same manner as management reserves for its other credit facilities. For both on- and off-balance sheet financial instruments, the Company requires collateral to support such instruments when it is deemed necessary. The Company evaluates each customer’s creditwor- thiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include deposits held in financial institutions; U.S. Treasury securities; other marketable securi- ties; real estate; accounts receivable; property, plant and equipment; and inventory. Other Commitments. In the normal course of business, the Company enters into lease commitments. Minimum lease payments under leases classified as operating leases due in each of the five years subsequent to December 31, 2004, are as follows (in millions): 2005, $1.3; 2006, $1.2; 2007, $1.1; 2008, $1.1; and 2009, $1.1. Contingencies. The Company is a party to lawsuits and claims arising out of the normal course of business. In management’s opinion, there are no known pending claims or litigation, the outcome of which would, individually or in the aggregate, have a material effect on the con- solidated results of operations, financial position, or cash flows of the Company. Capital City Bank Group 69 notes to consolidated financial statements Note 19 FAIR VALUE OF FINANCIAL INSTRUMENTS Many of the Company’s assets and liabilities are short-term finan- cial instruments whose carrying values approximate fair value. These items include Cash and Due From Banks, Interest Bearing Deposits with Other Banks, Federal Funds Sold, Federal Funds Purchased, Securities Sold Under Repurchase Agreements, and Short-Term Borrowings. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The resulting fair values may be significantly affected by the assump- tions used, including the discount rates and estimates of future cash flows. The methods and assumptions used to estimate the fair value of the Company’s other financial instruments are as follows: Investment Securities – Fair values for investment securities are based on quoted market prices. If a quoted market price is not avail- able, fair value is estimated using market prices for similar securities. Loans – The loan portfolio is segregated into categories and the fair value of each loan category is calculated using present value techniques based upon projected cash flows and estimated discount rates. The cal- culated present values are then reduced by an allocation of the allowance for loan losses against each respective loan category. Deposits – The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market Accounts and Savings Accounts are the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using present value techniques and rates currently offered for deposits of similar remaining maturities. Subordinated Note Payable - The fair value of the note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar obliga- tions. Long-Term Borrowings – The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar debt. The Company’s financial instruments that have estimated fair values are presented below: At December 31, 2004 2003 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value $ 87,039 $ 87,039 $ 93,140 $ 93,140 125,452 181,734 74,506 210,240 74,506 210,240 125,452 181,734 (Dollars in Thousands) Financial Assets: Cash Short-Term Investments Investment Securities Loans, Net of Allowance for Loan Losses Total Financial Assets 1,812,788 1,816,670 1,329,203 1,365,541 $2,184,573 $2,188,455 $1,729,529 $1,765,867 =============== =============== =============== =============== Financial Liabilities: Deposits Short-Term Borrowings Subordinated Note Payable Long-Term Borrowings Total Financial Liabilities 96,014 30,928 $1,894,886 $1,791,797 $1,474,205 $1,486,539 108,184 - 68,453 68,582 46,475 47,270 $2,090,281 $1,987,472 $1,628,864 $1,641,993 =============== =============== =============== =============== 108,184 - 96,053 31,040 Certain financial instruments and all nonfinancial instruments are excluded from the above table. The disclosures also do not include certain intangible assets such as customer relationships, deposit base intangibles and goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Note 20 PARENT COMPANY FINANCIAL INFORMATION The operating results of the parent company for the three years ended December 31, are shown below: Commitments to Extend Credit and Standby Letters of Credit – The Parent Company Statements of Income fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the present creditworthiness of the counterparties. Fair value of these fees is not material. (Dollars in Thousands) 2004 2003 2002 OPERATING INCOME Income Received from Subsidiary Bank: Dividends Overhead Fees Other Income Total Operating Income $12,716 3,232 2 15,950 $11,599 2,935 - 14,534 $12,678 3,061 59 15,798 70 Capital City Bank Group notes to consolidated financial statements (Dollars in Thousands) 2004 2003 2002 The cash flows for the parent company for the three years ended OPERATING EXPENSE Salaries and Associate Benefits Interest on Long-Term Borrowings Interest on Subordinated Note Payable Professional Fees Advertising Legal Fees Other Total Operating Expense Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiary Bank Income Tax Benefit Income Before Equity in Undistributed Earnings of Subsidiary Bank Equity in Undistributed Earnings of Subsidiary Bank Net Income $ 2,257 33 294 895 286 468 480 4,713 $ 1,847 - - 1,104 193 374 404 3,922 $ 2,311 7 - 994 138 197 335 3,982 11,237 (581) 10,612 (278) 11,816 (248) 11,818 10,890 12,064 17,553 $29,371 =========== 14,303 $25,193 =========== 11,018 $23,082 =========== The following are condensed statements of financial condition of the parent company at December 31: Parent Company Statements of Financial Condition (Dollars in Thousands,Except Per Share Data) (1) 2004 2003 ASSETS Cash and Due From Subsidiary Bank Investment in Subsidiary Bank Other Assets Total Assets LIABILITIES Subordinated Note Payable Other Liabilities Total Liabilities SHAREOWNERS’ EQUITY Preferred Stock, $.01 par value, 3,000,000 shares authorized; no shares issued and outstanding Common Stock, $.01 par value; 90,000,000 shares authorized; 14,155,312 and 13,236,462 shares issued and outstanding at December 31, 2004 and December 31, 2003, respectively Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income, Net of Tax Total Shareowners’ Equity Total Liabilities and Shareowners’ Equity $ 6,893 $ 7,850 282,034 196,316 1,536 1,310 $290,463 $205,476 ========== ========== $ 30,928 $ - 2,735 2,667 $ 33,663 $ 2,667 142 52,363 204,648 132 16,157 185,134 (353) 1,386 256,800 202,809 $290,463 $205,476 ========== ========== (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective June 13, 2003. December 31, were as follows: Parent Company Statements of Cash Flows (Dollars in Thousands) 2004 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Undistributed Earnings of Subsidiary Bank Non-Cash Compensation Increase in Other Assets Increase (Decrease) in Other Liabilities Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES: Net Cash Paid for Investment in Subsidiary Increase in Investment in Bank Subsidiary CASH FROM FINANCING ACTIVITIES: Proceeds from Subordinated Note Increase in Other Long-Term Borrowings Repayments of Long-Term Borrowings Payment of Dividends Repurchase of Common Stock Issuance of Common Stock, Net Net Cash Provided by (Used in) Financing Activities Net (Decrease) Increase in Cash Cash at Beginning of Period Cash at End of Period $29,371 $25,193 $23,082 (17,553) 1,707 (189) 68 13,404 (14,303) 508 (130) 300 11,568 (11,018) 892 (256) (2,603) 10,097 (928) (35,688) (36,616) - - - - - - 30,928 30,000 (30,000) (9,857) - 1,184 - - - (8,646) (17) 975 - 2,040 (2,040) (6,644) (3,395) 688 22,255 (7,688) (9,351) (957) 7,850 $ 6,893 ======== 3,880 3,970 $ 7,850 ======== 746 3,224 $ 3,970 ======== Note 21 COMPREHENSIVE INCOME - - SFAS No. 130, “Reporting Comprehensive Income,” requires that certain transactions and other economic events that bypass the income statement be displayed as other comprehensive income (loss). The Company’s comprehensive income (loss) consists of net income (loss) and changes in unrealized gains (losses) on securities available-for-sale, net of income taxes. Changes in unrealized gains (losses) (net of taxes) on securities are reported as other comprehensive (loss) income and totaled ($1,739,000), ($1,735,000), and $771,000 for 2004, 2003 and 2002, respectively. Reclassification adjustments consist only of realized gains on sales of investment securities and were not material for the years ended December 31, 2004, 2003 and 2002. Capital City Bank Group 71 officers, directors and community boards Capital City Bank Group, Inc. Tallahassee, Florida J. Kimbrough Davis Executive Vice President and Chief Financial Officer Drew Ferguson, III Community President Troup and Chambers Counties S. Craig McMillan President,Pat Thomas & Associates Insurance,Inc. OFFICERS William G. Smith, Jr. Chairman,President and Chief Executive Officer Thomas A. Barron Treasurer J. Kimbrough Davis Executive Vice President and Chief Financial Officer John M. Hutchison Senior Vice President Ray A. Johnson Senior Vice President DIRECTORS DuBose Ausley Attorney Ausley & McMullen,P.A. Thomas A. Barron President Capital City Bank Frederick Carroll, III Managing Partner Carroll and Company,CPAs Cader B. Cox, III President Riverview Plantation Inc. J. Everitt Drew President St.Joe Land Company John K. Humphress Partner Krause Humphress Pace & Wadsworth,Chartered CPAs Lina S. Knox Community Volunteer Ruth A. Knox Attorney/President Wesleyan College Henry Lewis, III, PharmD, RPH Dean and Professor Florida A&M University College of Pharmacy John R. Lewis, PhD President and Chief Executive Officer Super-Lube,Inc. William G. Smith, Jr. Chairman,President and Chief Executive Officer Capital City Bank Group,Inc. Andy Andrews Executive Vice President Flecia Braswell Executive Vice President Randolph K. Briley Executive Vice President Edward G. Canup Executive Vice President William D. Colledge Executive Vice President Noel A. Ellis Executive Vice President Mitchell R. Englert Executive Vice President Russell S. Grosvenor Executive Vice President Karen H. Love Executive Vice President Roger Miller Executive Vice President Frances Purvis Senior Vice President, Senior Office Manager Cynthia Y. Pyburn Senior Vice President Dale A. Thompson Executive Vice President Edwin N. West, Jr. Executive Vice President Charles J. Davis Senior Vice President Jep Larkin Senior Vice President,Controller Robert K. Mayer Senior Vice President William L. Moor, Jr. Senior Vice President William R. Rodrigues Senior Vice President David Sanda Senior Vice President James Y. Scarboro Senior Vice President William P. Smith, Jr. Senior Vice President Stephen Stabler Senior Vice President Mark W. Strickland Senior Vice President Emory F. Sullivan Senior Vice President Larry R. Fredrick Community President,Putnam County W. W. Gunnels, Jr. Community President Jefferson and Madison Counties Stephen Jukes Community President,Bibb County C. Stephen Martin Community President Citrus County/Inglis Terry McRae Community President,Grady County Wallace Miller Community President Laurens County Jeffrey L. Oody Community President Bradford and Clay Counties James R. Suber Community President, Gadsden County Johanna White Community President,Gulf County Susan E. Wise Community President,Taylor County DIRECTORS Daniel M. Ausley Owner MASK Development Thomas A. Barron President Capital City Bank Gregory V. Beauchamp Attorney Gregory V.Beauchamp,PA Robert J. Beauchamp Certified Public Accountant Beauchamp & Edwards,PA Donald T. Bennink Dairy Farmer/Owner North Florida Holsteins Kenneth R. Hart President Ausley & McMullen,PA E. Cantey Higdon Investor John B. Higdon Investor Higdon Investment Co. Capital City Bank Tallahassee, Florida OFFICERS William G. Smith, Jr. Chairman of the Board Thomas A. Barron President Beverly H. Black Community President,Burke County McGrath Keen, Jr. Private Investor Clifton E. Bradley Community President,Dixie,Gilchrist, Levy and Suwannee Counties Harold M. Knowles Attorney/Shareholder Knowles,Marks & Randolph Roy L. Carter Community President Washington County Blucher B. Lines Attorney Lines,Hinson & Lines 72 Capital City Bank Group John B. Mowell President Mowell Financial Group,Inc. William G. Smith, Jr. Chairman,President and Chief Executive Officer Capital City Bank Group,Inc. Ben H. Wilkinson, Jr. Partner Tallahassee Land Company Fred M. Williams, Jr. President Williams Timber,Inc. P. Graves Williams President Q.L.Enterprises,Inc. SUBSIDIARIES Capital City Securities, Inc. William L. Moor, Jr. President Capital City Services Company Russell S. Grosvenor President Mark Newman Senior Vice President Cynthia Y. Pyburn Senior Vice President Capital City Trust Company Randolph M. Pople President Robert A. Barnett Senior Vice President R. David Maloy, Jr. Senior Vice President Ross P. Obley Senior Vice President COMMUNITY BOARDS Bibb County Community Board Marilyn L. Ashmore Director,Capital Campaign - Museum of Aviation Foundation Leonard Bevill CEO/Co-owner Macon Occupational Medicine Charles K. Buafo, M.D. Chief of Staff,Medical Center of Central Georgia Dudley B. Christie, Jr. Investor Robert J. Cleveland, Jr. President,Vantage Homes,Inc. Guy B. Eberhardt, Sr. President,Eberhardt Industries,Inc. J. Milton Heard, IV President,Hart’s Mortuary T. Baldwin Martin, Jr. Retired Attorney Paul R. Nagle Investor Edmund E. Olson President Sports Towne/Macon Knights James A. Upshaw, M.D. Partner Internal Medicine Associates,P.C. Bradford/Clay Counties Community Board Steve Denmark Owner,Denmark Furniture Store Susan Faulkner-O’Neal Owner,Faulkner Realty William E. Edwards Area Distributor Manager Georgia Power Company William Marchese, DMD Owner,Bradford Family Dentistry John M. Miller Owner,Bradford County Telegraph Douglas E. Reddish Partner,Reddish & White CPAs Burke County Community Board Rickie Blackburn Owner,Delta Termite & Pest Control Gregory Coursey Sheriff of Burke County William Edwards Area Distribution Manager Georgia Power Company William H. Harper, Jr. Owner,Harper Consulting,Inc. C.W. Hopper Retired,Burke County Commission Robert H. McKinney Owner McKinney Wholesale Company,Inc. Bonnie Taylor General Manager,The True Citizen Citrus County Community Board C.L. Calloway District Manager Withlacoochee River Electric Cooperative,Inc. Dolores H. Clark President/Owner R&R Clark Construction,Inc. Alana Crowder Publisher Nature Coast Visitors Guide,Inc. Billy G. Lafferty President/Owner Total Rental Centers,Inc. William M. Lyons Semi-Retired,Real Estate officers, directors and community boards Gadsden County Community Board John N. Bert Owner/Editor,Havana Herald, Twin City News,and Havana Publishing Sidney Pridgen Owner,Center Drugs Ray Prince Owner,Prince Farms Felix R. Joyner Owner,Joyner’s Travel Center George W. Miller Accountant,Miller Accounting,Inc. John Shaw Curry Retired Attorney Michael Dooner President Southern Forestry Consultants George Hackney Owner/President Hackney Nursery,Inc. Harold J. Henderson, Ph.D. President Henderson Care Centers,Inc. E.W. Hinson, Jr. Owner/President Hinson Oil Company Alma Littles, M.D. Professor/Assoc.Dean for Academic Affairs FSU College ofMedicine William W. Mahaffey President/Broker Mahaffey Agency,Inc. Terrance L. Massey President Massey Drugs William M. Maxwell President Maxwell & Suber Co. Fount H. May, Jr. President,May Nursery,Inc. W. Dale Summerford Tax Collector Gadsden County Bruce H. Thomas President Thomas Motor Cars Pat M. Woodward, MD Retired Gilchrist County Community Board Theodore M. Burt Partner,Burt & Feather,PTR Howell E. Lancaster, Jr. President,Lancaster Oil Gary E. Rexroat Physician’s Assistant Chiefland Medical Center Jimmie L. Troke Co-Owner/REALTOR®,Troke Realty,Inc. Grady County Community Board John P. Bell, Jr. President/Owner,Bell Irrigation,Inc. Jo Ann Butler Owner,Joe McNair,Inc. Phillip Drew President,Drew Oil Company Michael L. Gainous Owner,Triple L.Timber Ken LeGette President,Graco Fertilizer,Inc. Earl Stuckey Owner/President,Stuckey Construction,Inc. Thomas B. Scott Owner,Scott Septic Tank Service Richard VanLandingham CEO,Monrovia Nursery Company John B. Wight, Jr. Retired Reverend Sylvester Williams Pastor,Beulah Missionary Baptist Church Gulf County Community Board Mark Costin Owner,St.Joe Ace Hardware B. Phillip Earley Owner/Operator,St.Joe Rental J. Patrick Farrell, Jr. Owner/REALTOR®,St.Joe Realty Shirley Jenkins Tax Collector,Gulf County Tommy Pitts Port Director,Port St.Joe Port Authority Eugene Raffield Vice President,Raffield Fisheries,Inc. Willie Mae Roche Owner,Holland Roche Design Clay Smallwood President,St.Joe Timberland Hernando/Pasco County Community Board George M. Allen, Jr. Vice Moderator Board of Trustees, Hernando Health Care Jerry P. Walton, Jr. Managing Partner Big Bend Timber Services,LLC Laurens County Community Board Nelson Carswell, Jr. Physician,Children’s Clinic Eddie Herrin Owner,Agriculture wholesale distributor Leon County Community Board Ashley P. Beggs Co-Owner/President,Beggs Funeral Homes Lawrence Carter, Ph.D. Associate Dean,Florida A&MUniversity J. Marshall Conrad Attorney,Ausley & McMullen,P.A. Kevin M. Davis REALTOR®,ERA/Blue Chip Realty Erin Ennis Vice President - Finance and Administration St Joe Land Company Fincher W. Smith Restaurant Owner,McFinch Management,Co. Roger C. Smith Chairman,Prime Credit Corporation Glenda L. Thornton Partner,Foley & Lardner Levy County Community Board Thomas D. Barb Executive Director,Hernando Health Care Sharon C. Brannan Sharon C.Brannan,CPA,PA David R. Carter Attorney,Law Offices of David R.Carter,PA Donald M. McCoy, Jr., M.D. Physician,Nature Coast Medical Group Carl A. Feddeler President,CA Feddeler,Inc.,Real Estate Brokerage/Krysher-Delzer,Inc. Michael J. Kierzynski Certified Public Accountant Kierzynski & Associates,CPAs,PA Joseph Mazzuco, Jr. President/Owner Royal Coachman Homes,Inc. G. Frank Parker Certified Public Accountant Stone,Parker & Assimack,CPA,PA Jefferson County Community Board Frank Blow Owner Fantasia Enterprises Teresa Diane Freeman Senior Engineering Representative Progress Energy-Florida Brian T. Hayes Attorney,Brian T.Hayes,P.A. Robert E. Mount, Jr., DDS Dentist Madison County Community Board Henry N. Davis President,Davis Enterprises Frederick M. Norfleet, Sr. Pharmacist/Investor Pam Schoelles President,Schoelles & Associates,Inc. Lucas M. Waring Owner,Lucas Waring Enterprises,Inc. Odiorne Insurance Agency Gary L. Williams Owner,Williams Electric Putnam County Community Board Bruce A. Baldwin CEO,Putnam Community Medical Center U.D. Floyd Owner,Floyd Farms Mildred G. Horton Retired,St.John’s Water Management District Daniel A. Martinez Retired,Georgia Pacific Randall S. Mathews President/CEO Mathews’ Moving and Storage,Inc.,et al. R. L. McLendon, Jr. President,St.Johns River CommunityCollege E. David Risch, MD Orthopedic Surgeon,E.David Risch,MD,PA Q. Irving Roberts President/Owner,Roberts Communications,Inc. Communications Products,Inc./Roberts Land & Timber Company,Inc. Preston Breck Sloan President,Beck Auto Sales,Inc. Suwannee County Community Board Benita Byrd Office Manager,T.W.Byrd’s Sons,Inc. Charles E. Hatch President,Hatch Brothers Farms,Inc. Charles D. Hurst C & D Farms,Inc. Brian L. McAdams, DVM Co-Owner/President,McAdams Dairy Farm,Inc. Robbie Suggs Co-Owner,North Florida Bio-Med Taylor County Community Board James C. Bassett President,Bassett Dairy Products,Inc. Donald R. Everett President,Ware Oil & Supply Co. William R. Grant President,Perry Auto Supply,Inc. Carl Gross President,CG Contractors,Inc. Michael R. Lynn President,Michael Lynn,Inc. Grady C. Moore, Jr. President,Grady C.Moore Real Estate,Inc. Joe R. Roberts, III Chief Financial Officer,Roberts Lumber Co.& RDS Manufacturing Co. Michael S. Smith Attorney,Smith,Smith & Moore,P.A. Troup/Chambers County Community Board Carter Brown Real Estate Broker,Spinks Brown Durand Realtors Jerry Cash Owner,Greene Super Drug Thomas Ray Edwards Owner,Valley Resale A. Drew Ferguson, IV Owner,A.Drew Ferguson,IV,DMD L. Foy Fisher, III Vice President/Human Resources, West Point Stevens Capital City Bank Group 73 officers, directors and community boards Edmund C. Glover Chairman/CEO Batson Cook Company John Hood Owner,Hood’s Pharmacy Scott A. Huguley Chairman,Troup/Chambers County Community Board Casper Y. Wood, Jr. Editor/Publisher,Valley Times News Washington County Community Board James Edwin Davis Owner,ChuckWagon House Restaurant and Davis Angus,Inc. Willis A. Johnson President,Johnson Brown Service Funeral Home,Inc. William L. Nix Attorney,Morrow & Nix W. Mark Garney Family Nurse Practitioner Margaret Gilmore Secretary/Treasurer, Blackburn Properties,Inc. Rebecca J. Harris Branch Manager Associated Land Title Group,Inc. Vivian P. Morris, EdD Educator Robert W. Snare, MD Physician,Robert W.Snare,M.D. Lamar L. Townsend Owner,L.Townsend Mini Storage Emeritus Board Ned P. Brafford R. Spencer Burress C. Bob Butler Donald E. Grant Sumpter James Damon D. King James T. McNeill Payne H. Midyette, Jr. G. Ulmer Miller John L. Miller M. William Miller Harold Mills John T. Mitchell, Sr. William L. Moor Millard J. Noblin James M. Pafford John H. Parker, Jr., M.D. Wesley Ramsey Jack G. Rich Rodney L. Scarboro P. W. Shelfer George A. Stephens Giles C. Toole, Jr. Mary M. Whatley Earlene U. Wheeler Warren Winkler shareowner information How to Communicate With Capital City Bank Group, Inc. Telephone (850) 671-0300 Mailing Address P. O. Box 11248 Tallahassee, Florida 32302 Internet Address www.ccbg.com Capital City Bank Direct Automated Tallahassee Area (850) 671-0400 Outside Tallahassee (888) 671-0400 Capital City Bank Direct Client Service Center Tallahassee Area (850) 671-0400 Outside Tallahassee (888) 671-0400 Trust and Investment Management Services (850) 671-0315 Corporate Headquarters Capital City Bank Group, Inc. William G. Smith, Jr. Chairman, President and Chief Executive Officer 217 North Monroe Street Tallahassee, Florida 32301 (850) 671-0300 Notice of Annual Meeting The Annual Meeting of Shareowners will be held on Tuesday, April 26, 2005, 11:00 a.m., at Wesleyan College in Macon, Georgia. 74 Capital City Bank Group Shareowner Services Shareowners desiring to change the name, address or ownership of stock, to report lost certificates or to consolidate accounts should contact: American Stock Transfer and Trust Company 59 Maiden Lane New York, New York 10007 (212) 936-5100 (800) 937-5449 Independent Public Accountants KPMG, LLP Jacksonville, Florida General Counsel Ausley & McMullen, P.A. Tallahassee, Florida General Information Analysts, investors and others seeking financial information should contact: J. Kimbrough Davis Executive Vice President and Chief Financial Officer or Robert H. Smith Vice President Capital City Bank Group, Inc. P. O. Box 11248 Tallahassee, Florida 32302 (850) 671-0300 Capital City Bank Group, Inc. common stock trades on The Nasdaq Stock Market® under the symbol CCBG. Form 10-K A copy of the Company’s 2003 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, is available at no charge upon written request to the Chief Financial Officer listed under General Information. Banks in the Capital City Bank Group, Inc. are members of the Federal Deposit Insurance Corporation. ALABAMA Chambers County Fob James Office 375 Fob James Drive Valley, Alabama 36854 (334) 756-8550 Shawmut Office 3503 20th Avenue Valley, Alabama 36854 (334) 768-5410 FLORIDA Alachua County Gainesville Mortgage Lending Office 3760 NW 83rd Street, Suite 2 Gainesville, Florida 32606 (352) 395-1330 Bradford County Starke Office 350 North Temple Avenue Starke, Florida 32091 (904) 964-7050 Citrus County Citrus Springs Office 10241 North Florida Avenue Citrus Springs, Florida 34434 (352) 465-0035 Crystal River Office 101 Southeast U.S. Highway 19 Crystal River, Florida 34429 (352) 795-6100 Floral City Office 7697 South Florida Avenue Floral City, Florida 34436 (352) 344-1555 Inverness Office 1500 North U.S. Highway 41 Inverness, Florida 34450 (352) 726-3200 Clay County Keystone Heights Office 405 South Lawrence Boulevard Keystone Heights, Florida 32656 (352) 473-4952 Dixie County Cross City Office Barber and Chewning Avenue Cross City, Florida 32628 (352) 498-5536 Gadsden County Chattahoochee Office 316 West Washington Street Chattahoochee, Florida 32324 (850) 663-4355 Havana Office 102 South Main Street Havana, Florida 32333 (850) 539-5805 Quincy Office 4 E. Washington Street Quincy, Florida 32351 (850) 875-1000 Gilchrist County Bell Office 690 South U.S. Highway 129 Bell, Florida 32619 (352) 463-7660 Fanning Springs Office 7240 U.S. Highway 19 Fanning Springs, Florida 32693 (352) 463-6537 Trenton Office 109 West Wade Street Trenton, Florida 32693 (352) 463-2329 Gulf County Port St. Joe Office 504 Monument Avenue Port St. Joe, Florida 32456 (850) 229-8282 Hernando County Mariner Boulevard Office 7101 Mariner Boulevard Spring Hill, Florida 34609 (352) 597-2707 Suncoast Spring Hill Office 14302 Spring Hill Drive Spring Hill, Florida 34609 (352) 797-6700 Jefferson County Monticello Office 800 South Jefferson Street Monticello, Florida 32344 (850) 671-0589 Leon County Apalachee Parkway Office 1801 Apalachee Parkway Tallahassee, Florida 32301 (850) 671-0579 Apalachee Parkway East Office 3513 Apalachee Parkway Tallahassee, Florida 32311 (850) 942-3100 Bradfordville Office 6691 Thomasville Road Tallahassee, Florida 32312 (850) 906-5760 Capital Circle Northwest Office 1456 Capital Circle, Northwest Tallahassee, Florida 32303 (850) 575-1705 Centerville Road Office 2375 Centerville Road Tallahassee, Florida 32308 (850) 671-0665 Governor’s Square Mall Office Governor’s Square Mall 1500 Apalachee Parkway Tallahassee, Florida 32301 (850) 671-0640 Lake Jackson Office 3815 North Monroe Street Tallahassee, Florida 32303 (850) 671-0643 Mahan Office 3255 Mahan Drive Tallahassee, Florida 32308 (850) 671-0384 Main Office 217 North Monroe Street Tallahassee, Florida 32301 (850) 671-0300 Metropolitan Office 1301 Metropolitan Boulevard Tallahassee, Florida 32308 (850) 671-0583 North Monroe Office 2111 North Monroe Street Tallahassee, Florida 32303 (850) 671-0655 South Monroe Office 3404 South Monroe Street Tallahassee, Florida 32301 (850) 671-0625 Tharpe Street Office 1108 West Tharpe Street Tallahassee, Florida 32303 (850) 671-0428 Washington County Chipley Office 1242 Jackson Avenue Chipley, Florida 32428 (850) 638-0510 GEORGIA Bibb County Macon Main Office 455 Walnut Street Macon, Georgia 31201 (478) 749-6701 Macon Mall Office 3535 Mercer University Center Drive Macon, Georgia 31204 (478) 749-8021 Macon Northside Office 3710 Northside Drive Macon, Georgia 31210 (478) 749-8071 Burke County Waynesboro Office 615 Liberty Street Waynesboro, Georgia 30830 (706) 437-2000 Waynesboro Office (Remote) 243 Sixth Street Waynesboro, Georgia 30830 (706) 437-2017 Grady County Cairo Office 420 North Broad Street Cairo, Georgia 39828 (229) 377-3002 Cairo Office (Remote) 397 38th Boulevard, Northeast Cairo, Georgia 39828 (229) 377-3003 Whigham Office 126 East Broad Avenue Whigham, Georgia 39879 (229) 762-4151 Laurens County Dublin Main 600 Bellevue Avenue Dublin, Georgia 31021 (478) 272-3100 East Dublin Office 220 Central Drive East Dublin, Georgia 31027 (478) 272-3100 Westgate Office 1959 Veterans Boulevard Dublin, Georgia 31021 (478) 272-3100 Thomas County Mortgage Lending Office 2024-D East Pinetree Boulevard Thomasville, Georgia 31792 (229) 226-1935 Troup County West Point Office 410 West 10th Street West Point, Georgia 31833 (706) 645-2944 West Point Office (Remote) 110 3rd Avenue West Point, Georgia 31833 (706) 645-6227 Thomasville Road Office 3528 Thomasville Road Tallahassee, Florida 32308 (850) 671-0650 West Tennessee Street Office 1828 West Tennessee Street Tallahassee, Florida 32304 (850) 671-0430 Westwood Office 2020 West Pensacola Street Tallahassee, Florida 32304 (850) 671-0445 Levy County Bronson Office 140 East Hathaway Bronson, Florida 32621 (352) 486-2103 Cedar Key Office 390 2nd Street Cedar Key, Florida 32625 (352) 543-5174 Chiefland Office 2012 North Young Boulevard Chiefland, Florida 32626 (352) 493-2571 Inglis Office 95 West Highway 40 Inglis, Florida 34449 (352) 447-2231 Williston Office 144 East Noble Avenue Williston, Florida 32696 (352) 528-5389 Madison County Madison Office 603 West Base Street Madison, Florida 32340 (850) 973-4161 Pasco County Port Richey Office 10290 Regency Park Boulevard Port Richey, Florida 34668 (727) 842-8467 Polk County Lakeland Mortgage Lending Office 124 South Florida Avenue, Suite 304 Lakeland, Florida 33801 (863) 682-4735 Putnam County Palatka Office 200 Reid Street Palatka, Florida 32177 (386) 329-1150 Palatka Mall Office 400 North State Road 19, Suite 52 Palatka, Florida 32177 (386) 329-1155 Suwannee County Branford Office 814 Suwannee Avenue Branford, Florida 32008 (386) 935-1112 Taylor County Perry Office 115 West Green Street Perry, Florida 32347 (850) 584-2057 Steinhatchee Mortgage Lending Office 1502 1st Avenue SE, Unit B Steinhatchee, Florida 32359 (352) 498-4136 Wakulla County Wakulla Mortgage Lending Office 91 Coastal Highway Panacea, Florida 32346 (850) 984-3461 locations SUBSIDIARIES Capital City Securities, Inc. 420 North Broad Street Cairo, Georgia 39828 (229) 378-8409 2012 North Young Boulevard Chiefland, Florida 32626 (352) 490-9004 294 NE 210th Avenue Cross City, Florida 32628 (352) 498-5442 1500 North U.S. Highway 41 Inverness, Florida 34450 (352) 726-3673 455 Walnut Street Macon, Georgia 31201 (478) 749-6735 833 E. Winthrope Avenue Millen, GA 30442 (478) 982-2222 200 Reid Street Palatka, Florida 32177 (386) 312-9904 4 E. Washington Street Quincy, Florida 32351 (850) 875-5555, Ext. 274 105 West Jefferson Street Starke, Florida 32091 (904) 964-7056 1801 Apalachee Parkway Tallahassee, Florida 32301 (850) 671-0505 6691 Thomasville Road Tallahassee, Florida 32312 (850) 906-5760 1301 Metropolitan Boulevard Tallahassee, Florida 32308 (850) 671-0505 217 North Monroe Street Tallahassee, Florida 32301 (850) 671-0450 2111 North Monroe Street Tallahassee, Florida 32303 (850) 671-0419 615 Liberty Street Waynesboro, Georgia 30830 (706) 437-2006 410 West 10th Street West Point, Georgia 31833 (706) 645-6262 Capital City Services Company 1860 Capital Circle, Northeast Tallahassee, Florida 32308 (850) 671-0300 Capital City Trust Company 217 North Monroe Street Tallahassee, Florida 32301 (850) 671-0315 455 Walnut Street Macon, Georgia 31201 (478) 749-6701 14302 Spring Hill Drive Spring Hill, Florida 34609 (352) 797-6704 4 E. Washington Street Quincy, Florida 32351 (850) 875-1000 Capital City Bank Group 75 This page intentionally left blank. 76 Capital City Bank Group 

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