The Operations Center

Is Timing Right for a Strategy Change: A Feasibility Study

By: Jep Larkin

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Table of Contents Executive Summary ....................................................................................................................................... 2

Introduction/Background ............................................................................................................................. 3

History ....................................................................................................................................................... 3

Competition & Markets ............................................................................................................................ 4

Financial Condition ................................................................................................................................... 6

Business Model & Strategic Focus ............................................................................................................ 7

Strategy/Implementation ............................................................................................................................. 9

Industry Changes....................................................................................................................................... 9

Fit to Strategy ............................................................................................................................................ 9

Approach to Feasibility Study ................................................................................................................. 10

Space Utilization at Operations/Data Center...................................................................................... 10

Space Utilization within Banking Office Network ............................................................................... 12

Potential Use/Value of Operations Center ......................................................................................... 14

Change and Effect ................................................................................................................................... 14

Future Benefits ........................................................................................................................................ 16

Financial Impact .......................................................................................................................................... 18

Current Cost to Operate the Center ................................................................................................... 18

Highest and Best Use of Property ....................................................................................................... 19

Range of Sales Values.......................................................................................................................... 21

Cost to Operate in Alternative Space .................................................................................................. 22

Full View of Financial Impact .............................................................................................................. 24

Financial Risks ..................................................................................................................................... 25

Conclusions Reached .......................................................................................................................... 25

Non-Financial Impact .................................................................................................................................. 26

Organizational Hurdles ....................................................................................................................... 26

Impact on Associates/Clients .............................................................................................................. 27

Tactical Strategies to Measure Performance ...................................................................................... 28

Conclusion ................................................................................................................................................... 28

APPENDIX A: FEASIBILITY ASSESSMENT APPROACH ................................................................................... 30

APPENDIX B: PROJECT PLAN ....................................................................................................................... 31

BIBLIOGRAPHY/SOURCES ............................................................................................................................ 32

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Executive Summary

The focus of this paper is to outline and evaluate feasibility considerations in making the

decision to sell the Capital City Services Company Operations Center, including an impact

assessment and risk factors. This effort was aided by several internal Bank associates and

external subject matter experts, whom provided valuable insight into the right approach to the

analysis, potential impacts, and strategies to mitigate both decision and execution risk.

Our industry is changing and as such the strategy of running and owning a large, fixed

cost operations/data center has changed driven by many challenges, including the need for

profit and efficiency improvement, technological change, and the role of third party

partnerships and outsourcing options.

The timing is right for this assessment to take place as market conditions are in our

favor, both commercial real estate and macro-economic conditions. This feasibility revealed

there is significant value in the real estate that currently houses our banking operations and

data processing function “Operations Center”. The third party subject matter experts

interviewed for this project indicated there was a large pool of potential buyers. Most would

agree we are near the top of the real estate market and we should be aware that delay in

moving forward with a sale could delay our ability to monetize the value in this site.

The financial assessment of this feasibility study indicated that a sale and re-location of

associates would result in an annual expense reduction of $300,000, allowing the Bank to rid

itself of the hidden cost of unused capacity in the Operations Center -- currently only 64% of

the space is utilized. The review of non-financial factors revealed that while important, they

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could be mitigated with a good project plan, including executive level sponsorship and good

communications program. Other future benefits were identified, including the opportunity to

move to a space management model that has greater flexibility to respond to change, the

creation of a new modern day working environment, greater collaboration and more effective

cross-functional coordination, and lastly, the opportunity to offset some of the cost of co-

location strategy for networking and computer operations. In summary, there were many more

favorable than unfavorable outcomes and opportunities noted in the feasibility study which

supports a decision to move forward quickly.

Introduction/Background History

Capital City Bank was founded in 1895 and is a subsidiary of Capital City Bank Group, Inc.

(“CCBG”). CCBG is headquartered in Tallahassee, Florida and operates 59 full service offices

across three contiguous states – Florida, Georgia and Alabama – 75 percent to 80 percent of

the franchise resides in north Florida1.

CCBG is characterized as a super-community bank, offering a full array of risk

appropriate community bank based products, which include traditional deposit and credit

services, asset management, trust, mortgage banking, merchant services, bankcards and

securities brokerage services; allowing it to attract and build consumer, business and

institutional relationships throughout its market areas.

The overarching strategy of CCBG is to establish itself as a market leader in less

competitive markets. These are generally small to mid-size markets, many times on the

1 CCBG Strategic Plan

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outskirts of larger metropolitan areas. CCBG’s size and market position enable it to out-product

local community banks and to out-service the larger regional banks.

CCBG management is keenly aware that the banking industry, particularly, the

community bank sector is going through a transformation. The longevity of the company is due

in large part by its ability to recognize changing client behaviors and external conditions and

responding accordingly. This culture has carried the course of time and reflects the company’s

culture of continuous improvement enabling it to retain strategies which continue to operate

effectively and adjust, as appropriate, strategies necessary to adapt to a changing operating

environment.

Competition & Markets CCBG has sought to build its franchise in small-to-mid size markets and believes this is a

rational alternative to the larger, faster growing metropolitan markets. Many of its markets are

on the outskirts of these larger markets and may be in close proximity to major interstate

thoroughfares. The major employers in most markets are state/local governments, healthcare

and education, which provide stability and can help to buffer these communities from severe

economic swings.

While the markets in CCBG’s footprint do not necessarily grow at the same rate as the

state of Florida (which historically has been 2x the national average), these markets have good

growth dynamics and have historically grown at 1.5x the national average. CCBG’s Florida

markets are projected to grow 4.1% between 2018 and 2023 and the median income, which is

$46,306, is projected to grow by 7.3% over the same time period. These same growth rates for

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Florida are 6.7% and 10.5% and for the U. S. as a whole are 3.5% and 8.9%, respectively. A

snapshot of CCBG’s deposit market share is provided below.

While CCBG’s markets are competitive, the size and nature of its markets (many are

rural) make them less competitive. While the larger regional and mega banks have a presence

in a number of our markets they are generally there by default, not design, as many of CCBG’s

smaller town offices were acquired through the acquisition of a larger institution which just

happened to have offices in these smaller communities. Therefore, on a relative basis, its

banking offices are exponentially more valuable to CCBG than the local offices are to the large

regional and mega banks, thus its commitment of resources to offices and communities is much

greater. These smaller communities are integral to CCBG’s overall strategy. Other small

community banks pose competition; however CCBG’s advantage over these banks is its

management expertise and a much broader array of product offerings.

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Financial Condition Set forth below are selected financial metrics for the last five years along with peer

group comparisons. Additionally, strategic goals are provided where appropriate.

During the great recession of 2007-2009, Florida was at the epicenter of the real estate

downturn. A history of not following the herd, CCBG made a strategic decision to be the only

Florida based publicly traded bank to not accept TARP or raise capital to resolve its problem

assets. Its credit underwriting and risk management practices would survive the day and its

shareowners would not be diluted. As a result, resources were allocated to this strategy and

the recovery in earnings was longer than others in the industry, many of whom capitalized on

financial engineering opportunities associated with problem bank acquisitions. Since then, the

return to historical earnings performance has been steady and well planned – the operating

philosophy of not sacrificing long term shareowner value for short-term reactive strategies is

evident today in CCBG’s Vision 2020 strategic plan discussed further below.

Strategic Southeast Florida

Metric Goal Peers1 Peers231-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18

ROAA% >=1.00% 1.06% 1.26% 0.36% 0.34% 0.43% 0.39% 0.92%

ROAE% >=10.00% 10.20% 11.94% 3.27% 3.31% 4.22% 3.83% 8.89%

Efficiency Ratio <=65.00% 62.27% 66.39% 89.68% 87.94% 85.34% 80.50% 77.05%

Net Interest Margin >=5.00% 3.55% 3.73% 3.36% 3.31% 3.25% 3.37% 3.64%

NPA to Loans + OREO <=1.00% 1.12% 1.17% 3.55% 1.94% 1.21% 0.67% 0.51%

NCO Ratio <=0.35% 0.02% 0.00% 0.53% 0.35% 0.09% 0.14% 0.12%

Classified Assets NA NA NA 83,137$ 53,551$ 41,507$ 31,002$ 25,117$

Risk Based Capital >=10.50% 14.90% 14.48% 17.76% 17.25% 16.28% 17.10% 17.13%

Tier 1 Capital >=8.50% 12.48% 13.38% 16.67% 16.42% 15.51% 16.33% 16.36%

CET1 Capital >=7.00% 12.00% 13.22% NA 12.84% 12.61% 13.42% 13.58%

Leverage Ratio >=5.00% 10.58% 9.08% 10.99% 10.65% 10.23% 10.47% 10.89%

Tangible Capital Ratio >=6.00% 9.41% 8.46% 7.38% 6.99% 6.90% 7.09% 7.58%

Loan/Deposit Ratio <=100.00% 88.93% 84.90% 67.17% 65.31% 65.17% 67.14% 70.35%

2 Regional Peers reflect all Public Holding Companies $1-$5 Bill ion in Assets3 Florida Peers reflect all Public & Non-Public Commercial Bank $1-$5 Bill ion in Assets

CCBG

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Business Model & Strategic Focus CCBG’s business model is built on client relationships and getting paid for the value

added, not pursuing transactions or deals. Essentially, CCBG strives to take pricing out of the

equation when serving its clients and recognizes it can only be successful when the “value-

added” is tangible to our clients.

While most consumers have a bank, few have a banker. This is one element of CCBG’s

strategy where it strives to distinguish itself from its competitors and it is memorialized its

branding moniker “More Than Your Bank, Your Banker”. Ultimately, CCBG would like for every

client to have and know his/her banker.

CCBG has long understood that the core deposit base is the predominant driver in

overall franchise value and has spent years building strategy around this very simple concept

which suggest that a high level of core deposits will drive an extremely low cost of funds. The

recent economic cycle has further emphasized the stability of CCBG’s core deposit base, which

produces a stable funding source over long periods of time.

In 2015, CCBG developed a long-term strategic plan to return its earnings performance

to its historical norm and shareowner expectations. A long-term strategic plan, coined

internally “Vision 2020”, was developed to include specifically identified areas of focus and

strategies to meet targeted financial goals. Most of the focus of this plan was on driving

revenue growth, but part of the equation was managing expenses so as to improve the bank’s

efficiency ratio and contribute to operating leverage/earnings growth. CCBG formed a Delivery

Group who would be accountable for reviewing bank operations and identifying opportunities

to reduce expenses and create efficiencies across the organization. Part of this focus was to

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take a fresh assessment of CCBG’s legacy real estate holdings and right size them to its current

and planned operational needs.

As a background, prior to 2017, CCBG was in the data processing business, and at its

peak, this business line was very profitable, processing for 30 user banks in the North

Florida/South Georgia area. To support this business, a large operations/data processing center

was built in the headquarters city of Tallahassee in 1994. Over time, an industry trend of banks

migrating to larger data processors, namely FIS, FISERV, and Jack Henry, resulted in the loss of

user banks and the discontinuance of this line of business. As a result of the changes in this

business and other improved efficiencies in CCBG’s bank operations over the years, there is a

significant amount of unused space at this operations center. In addition, CCBG’s legacy

banking office network in the Tallahassee market maintains unused space reflective of the

impact of technology advancements, namely digital banking, over the years that have reduced

space needs in banking offices, in general. Lastly, hurricane threats over the past few years

have raised concerns about the inherent risk a catastrophic disaster presents to our operations

center and recovery capabilities. As such, a co-location strategy has been discussed that would

necessitate the movement of data processing and network operations to a third party site

creating additional unused space at the operations center. Given the aforementioned focus on

the company’s real estate holdings and the change in CCSC’s space needs, management desires

to study the feasibility of selling the operations center and moving operational functions to

other space in the Tallahassee area. This feasibility study is the topic of this project paper.

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Strategy/Implementation

Industry Changes The large banking operations/data center that we all know is in a 10-year transition

cycle that began in 2014. “Things are changing in the corporate operations/data center,

especially in financial services,” says Dr. Howard Rubin, a Gartner senior advisor. “With the

change in the financial services arena and the decline in revenue, the equation for owning and

running your own operations/data center has changed. Tony Bishop, Chief Strategy Officer for

the 451 Group adds “The entire operations/data center concept needs to be resized. If you go

across every financial services firm, there is a need to fine-tune the operations/data center2.”

CCBG has realized significant change in its operations over the past 10 years consistent

with the industry theme noted above by experts on the topic. Since 2007, CCBG total

headcount has declined by 248, with 25% of the headcount reduction being realized in its

Operations Center. The significant reduction in headcount is driven by various factors, most

notably, the discontinuance of CCBG’s data processing line of business, outsourcing of various

functions, including item processing and programming, as well as overall improved efficiency in

other operational areas, namely deposit and loan operations.

Fit to Strategy Premises (real estate) cost is a large item on a bank’s income statement and must be

managed strategically to respond to change and ensure these resources are being managed

efficiently. Consistent with the focus on improving CCBG’s efficiency ratio, management

desires to take a deeper dive to better understand options and potential outcomes related to

2 Wall Street and Technology (2014, January 13). Rethinking the Financial Services Data Center.

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its Operations Center as part of its overall review and optimization of the Bank’s real estate

holdings. This initiative will involve stakeholders and subject matter experts from inside and

outside the organization to ensure that all considerations and potential impacts are studied and

evaluated to ensure that the analysis and conclusions reached are sound and that potential

unintended consequences are identified and mitigated.

Approach to Feasibility Study To begin the feasibility study, the following were reviewed and evaluated as an initial

screen: current space utilization within the operations/data center, space utilization within

CCBG’s banking office network, and the potential use and value of the Operations Center real

estate. Internal and external specialists were consulted for each of the aforementioned areas

and a description of the evaluation process for each is provided below. My role in this

feasibility study was to develop an approach to the evaluation, coordinate the review and input

of the various stakeholders needed to ensure the conclusions reached are consistent and well-

studied, aid in identifying the change and effect of the options identified, and ultimately

develop a roadmap for executive management to determine the right strategy or combination

of strategies that work best for CCBG given all considerations. A high-level overview of the key

elements of the feasibility approach is provided in Appendix A.

Space Utilization at Operations/Data Center

To begin the process of evaluating space utilization at the Operations Center, the

Business Support Services/IT Manager was interviewed to capture a big picture view of space

usage change over time, current usage, synergies desired, and future needs. The General

Services Manager was also consulted to perform a walk-through of the Operations Center and

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properly measure the current usage. Currently, in the main building, 55,000 square feet of the

75,000 square feet available, or approximately 64%, is being utilized by various operations and

technology departments. The results of the space usage study, including current usage (pre-

sale of building) and future space needs (post-sale of building) are provided in the tables below.

CAPITAL CITY SERVICES COMPANY (existing space usage - pre Sale)

Department SF Associates NOTES

General Services (including Mail Room) 1,906 6

Loan Servicing (including Loan Vault) 3,950 16

Central Document Imaging 639 4

Project Management (including 1 office) 2,830 6

Digital Lending 136 1

Electronic Services/Online Banking 1,740 10

Digital Channels 1,056 10

Networking (including storage area) 2,375 13

Deposit Services 3,498 11

Transaction Risk/Fraud 1,584 10

Audit 2,100 4 includes D&T (3). Also need space for examiners

Technology Services & Support 3,510 15

Administration 2,142 7 includes: IT, Deposit & Delivery Admin

Auditorium 1,250 0

Training Room 1st Floor 1,350 0

Star U (including teller training room) 3,423 7

Retail Support Group 692 3

Computer Room 5,252 2 2 Computer Operators

Corporate Security (2 offices & switchboard) 810 4

Bank Direct (including 5 offices) 3,113 32

Express Banking Center 800 7 Old Money Center building

Warehouse 11,250 0

Total Current Utilization (Pre-Sale) 55,406 168 Pre Co-Lo

Total Main Building 74,910

Total Warehouse 11,250

Total Space Available 86,160

Total Current Capacity Utilized 64.3%

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As can be seen by this study, many departments can operate effectively utilizing smaller

space which reflects operational and technological efficiencies gained over time as well as

taking advantage of the opportunity to develop multi-purpose use space in a new location.

Total right-sized capacity needed is approximately 30,000 square feet which is approximately

56,000 square feet over current space available in the Operations Center building. For

informational purposes, if a co-location strategy is chosen by management for off-site location

of computer and network operations, it will reduce the square footage needs by another 5,000

square feet.

Space Utilization within Banking Office Network

As part of this feasibility study, an assessment of current space usage and availability

within CCBG’s existing banking office network was needed to identify opportunities for housing

CAPITAL CITY SERVICES COMPANY (required space usage - post Sale)

Department SF Associates Space Needs NOTES

General Services (including Mail Room) 1,906 6 1,500

Loan Servicing (including Loan Vault) 3,950 16 2,000

Central Document Imaging 639 4 600

Project Management (including 1 office) 2,830 6 1,000

Digital Lending 136 1 200

Electronic Services/Online Banking 1,740 10 1,500

Digital Channels 1,056 3 600

Networking (including storage area) 2,375 14 1,600

Deposit Services 3,498 11 1,300

Transaction Risk/Fraud 1,584 10 1,500

Audit 2,100 4 1,700 Move to Metro Office space

Technology Services & Support 3,510 15 2,000

Administration 2,142 7 1,500

Auditorium 1,250 0 1,250

Training Room 1st Floor 1,350 0 -

Star U (including teller training room) 3,423 7 3,000

Retail Support Group 692 3 600

Computer Room 5,252 0 - To Co-Lo

Corporate Security (2 offices & switchboard) 810 4 600

Bank Direct (including 5 offices) 3,113 32 1,500 Move to Apalachee Parkway East Office space

Express Banking Center 800 7 800

Warehouse 11,250 0 5,000

Total Current Utilization (Pre-Sale/Post Co-Lo) 55,406 160

Total Right-Sized Capacity Needed (Office) 24,750

Total Right-Sized Capacity Needed (Warehouse) 5,000

Excess Over Total Current Available 56,410

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the various operational/technology departments if a sale of the Operations Center building is

consummated. Additionally, this study will support the larger project of right sizing CCBG’s real

estate holdings, namely, better utilizing the space within CCBG’s large legacy offices. The

results of the space usage study are provided in the table below. This study included an

assessment of offices within the Tallahassee market as well as larger offices outside of

Tallahassee where excess capacity has been identified.

As can be seen from the table above, there is 4,000 square feet available in the

Tallahassee market, not including 2,400 square feet of construction in-progress at the Main

Office which has been ear-marked/reserved for a department that is not currently in the

Operations Center building. There are an additional 28,000 square feet of space available in

four individual markets adjacent to Tallahassee that could be considered and 5,000 square feet

of available space in the Macon market in Georgia, approximately 180 miles from Tallahassee.

CAPITAL CITY BANK (space availability assessment)

Banking Office/Building SF SF Available Associates Parking Bathrooms Conference Supply Other NOTES

Main Office 26,552 2,400 16 Yes Yes Yes Yes N/A includes construction in process

West Tennessee Office 16,137 0 N/A Yes 2 2 2 Kitchen 2nd Floor. Possible sale in 2019

Apalachee Parkway-Main 14,696 0 N/A N/A N/A N/A N/A N/A To be re-developed by land lease owner

Centerville 6,897 0 N/A N/A N/A N/A N/A N/A To be Sold in 2019

Metropolitan 26,501 1,500 8 Yes 1 1 1 Break Nice Welcome Area

Apalachee Parkway-East 2,500 2,500 15 Yes 1 1 1 Break Office is closed/SATM only

Total - Tallahassee Offices 93,283 6,400 39

Perry 27,477 9,159 22 Yes 1 1 1 N/A 3rd floor available

Cairo 18,312 9,156 22 Yes 1 1 1 N/A 2nd floor available

Macon Main 16,000 5,333 18 Yes 1 1 1 N/A 3rd floor available

Quincy 18,727 9,364 22 Yes 1 1 1 N/A 2nd floor available

Total - Offices Near Tallahassee 80,516 33,012 84

Total - Offices Under Evaluation 173,799 39,412 123

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Consideration of space outside of the Tallahassee market is discussed further below under

Future Benefits.

Potential Use/Value of Operations Center

The potential use and target buyer for the Operations Center site and the range of

possible sales values are two key considerations that needed to be evaluated early on in the

feasibility analysis. The Bank’s Co-Chief Operating Officer “Co-COO” Revenue was consulted to

gain an initial understanding of the process needed to evaluate these two key considerations

and ensure that to ensure a reliable outcome in the financial impact part of this study. The Co-

COO Revenue recommended the use of an engineer to study the potential uses of the property

and possible target buyers and a commercial real estate broker to provide a range of sales

values. Meetings were held with both experts to gain preliminary feedback on these matters

and both meetings yielded a bias that there was significant value in the site given its location,

developed and vested zoning status, and the various amenities already in place that are

valuable to target buyers. The results of the two subject matter reports and approach to

quantifying the range of sales values are provided below under “Financial Impact”.

Change and Effect Change management will be a significant component of the transition to an alternative

site if it is determined that the best course is to sell the Operations Center site. The center

houses all of the Capital City Services Company associates whom have long called this location

home. A service culture and comradery has been developed over several years with this group

and it is critical that that culture and working relationships be maintained. Various in-house

experts were interviewed and consulted to identify the key components to maintaining the

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culture, including a clear and cohesive communications plan and a well-designed project plan to

execute the transition. The goal of this change management process will be to not loose

existing operational synergies and to maintain working relationships that differentiate CCBG.

Opportunities to enhancement existing processes and the working environment are also

discussed further below under “Future Benefits”.

A high-level implementation plan is provided as Appendix B to this document. This

project plan was developed in consultation with the General Services and Project Management

Departments who manage projects of this nature for the Bank. The process for identifying

operational synergy needs and maintaining working relationships via the proper location of

associates/departments within a new leased building is the first and most important step in the

project plan. The key individuals involved in leading this project and collaborating on these key

decisions include: Co-COO Delivery, SVP – Business Services/IT, SVP – Operations, SVP – Omni

Channel Delivery and other affected Operational Department Managers.

As previously noted, many associates have worked in the center for several years, many

in the same office/cubicle. This will be a big change for some, probably a majority of those

involved therefore, the importance of the communications plan cannot be underestimated.

The EVP – Marketing and SVP – Business Services/IT were consulted on the key components of

such a plan and include:

Transparent communications to all Associates as to the specific purpose and goals of the

building sale and re-location of associates. These communications should be to all CCBG

associates, but more importantly, group meetings with associates located in the

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Operations Center. Talking points for Managers will also be important to ensure a

consistent message.

Timely communications, including an initial informational message as well as ongoing

periodic updates on the project via the Bank’s weekly “Stand-Up” company-wide calls.

This will ensure the energy and focus on the project is top of mind for associates

Future Benefits There are future opportunities available related to the sale of the Operations Center and

transition of associates to a new location. The most significant is timing as both local and

national commercial real estate market conditions are still good and any delay in capturing the

value of the center’s site can be mitigated by a future downturn in real estate conditions and/or

the economy in general. A downturn will occur at some point so capitalizing on the opportunity

to monetize the value of this asset at this time is an important consideration in this analysis. As

noted by Collier International U.S. Chief Economist Andrew Nelson, “Although transaction

volumes were modestly higher in 2018, the trend since 2015 has been a gradual decline in

transaction volumes, and I see that trend continuing into next year, Nelson said. “We’re close

to the actual top of the market. It’s always tough to call the top of the market with any

precision, but I think we are very close to it3.” It can be further argued that we are only getting

closer to the end of the 8.8 year economic expansion we’ve enjoyed and a slowdown in macro-

economic conditions alone would further limit the pool of potential buyers for the Operations

Center site.

3 BISNOW (2018, October 11). We’re Close to the Top of the Market.

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Development of a modern day working environment that meets the needs and desires

of our current workforce is also a potential opportunity. The transition to new space also

allows for the creation of more efficient work space that will aid in improving workflows and

working relationships among associates and their managers as well as cross-functional

department communications. The opportunity to re-development meeting space, break-room

space, and leisure space that reflects today’s social and cultural influences is also a potential

benefit for consideration. This change could aid in both associate retention and recruiting. In

addition, the energy and excitement created from such change could further enhance associate

moral, working relationships, and attitudes.

Movement of associates to a new location allows for operational flexibility, namely the

ability to right size the Bank’s operations as the industry and technology change. As previously

noted, industry and technology change as well as outsourcing to third party operators has put

us in this position of having excess capacity in the Operations Center that is idle and costly.

Leasing space versus owning space allows for the Bank to increase/decrease space needs as

change occurs. This is an especially important given the future expectation of many that third

party/off-site Fintech vendors will play a significant role in the future delivery of bank products

and services and operational strategies.

Lastly, the flexibility allowed by selling the Operations Center and re-locating to leased

space frees management to consider other strategies, including a parallel transition to a co-

location strategy for information technology resources (data processing and networking) which

will greatly reduce the Bank’s operational risk (disaster/business recovery).

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Financial Impact

An important component of this feasibility analysis is the accurate quantification of the

financial impact. There are various parts of this analysis, including the current cost to operate

the Operations Center, assessing the highest/best use of the property, determining possible

ranges of sales values, researching cost to lease alternative space. All of these parts required

research and consultation with third party and Bank subject matter experts. The process for

this study was previously discussed in general terms above under “Approach to Feasibility

Study”, but this section will outline the sources of the research and the consultations held, the

logic behind the financial calculations, the assumptions that were utilized, and additional

thought and support for the conclusions reached.

Current Cost to Operate the Center

The first step in assessing the financial impact was to fully understand and accurately

identify the annual cost to run and support the Center. This information was obtained from

financial reports published by the Finance Department of the Bank and is provided below.

There are hidden costs related to the unused capacity in the Operations Center -- only 64% of

the space is currently being utilized. The table below shows the savings that can be achieved

from re-locating to alternative space that is right-sized for the Bank’s current needs.

Actual Direct Costs -(Deprec/Maint/Utilities) - 2018564,106$

Real Estate Taxes - 2018 85,428$

Insurance (building/contents) - 2018 41,223$

Total Cost to Run & Support 690,757$

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Due to the low cost basis the Bank maintains in the Operations Center site, one could argue

that the current fixed cost model of operating the Operations Center can be leveraged as the

Bank’s operations grow versus a variable cost approach with a leasing model. However, the

following factors outweigh that “business as usual” thought process:

In all likelihood, capacity needs will stay the same or decline as the Bank and industry

focus on strategies to manage costs. How long would we have to wait to achieve the

benefits of the fixed cost model, if ever?

The Bank and industry continue to focus on partnering with third party resources and

outsourcing to scale and gain operating efficiencies.

A variable cost model to managing facilities is gaining traction in the industry in order to

maintain flexibility as business conditions change and to respond quicker to change than

in the past.

Highest and Best Use of Property

To aid in the highest and best use analysis for the property, information was obtained from

two primary external subject matter sources, including an engineering firm and a commercial

Cost of Re-Location Leased Space3 465,000$

FF&E Furnishings4

50,000$

Leasehold Improvements5

60,000$

Insurance (contents) 22,260$

Building Cleaning Costs 30,000$

Total Annual Impact 627,260$ 3 Annual lease cost of $20/sf for 20,750 sf (office-full service lease) + $10/sf for 5,000 sf warehouse4 Most all FFE can be moved - $250k/5 Yr Am for any needed upgrades5 Leasehold improvements/ ($600k) 10 Yr Am

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real estate broker. The report4 obtained from the engineering firm focused on the potential

range of options by a target buyer for the property and in summary indicated the following:

Desirable commercial property zoned for a range of potential uses

Access points and signalized driveway is a unique and valuable asset

Property contains a maximized amount of impervious area and will not require any

future construction costs prior to re-development

Significant opportunity to increase yields per acre due to existing infrastructure

improvements

Property has vested traffic concurrency status

Property enjoys advantages over other similarly situated undeveloped tracts given its

current developed status

A commercial real estate broker was engaged to provide recent sales data5 for similarly

situated facilities. The broker confirmed the engineer’s conclusion that there was value in

the developed status of the property and that there was a scarcity of similar sites in the

highly desirable northeast quadrant of the city. He further noted that the range of potential

uses (office, retail, residential, or a combination thereof) significantly enhanced the value of

the property. Because of these unique factors, he noted a bias toward the higher range of

value.

4 Moore Bass Consulting. January 8, 2019 Report to Capital City on Engineering/Zoning Evaluation of Bank Operations Site. 5 TLG Real Estate Services. January 16, 2019 Report to Capital City Bank on Estimated Sales Value for Bank Operations Site.

21

Range of Sales Values

The Co-COO of Revenue for the Bank was consulted to finalize a range of sales value for

the Operations Center based on three sales scenarios, each yielding a different range based on

the highest and best use of the property to potential buyers. These ranges of value are

provided in the table below.

In consultation from the two primary external subject matters experts utilized in the

sales valuation process as well as the Bank Co-COO of Revenue, the consensus was that the

largest pool of buyers was developers focused on utilizing the valuable infrastructure already in

place to re-develop the property in order to maximize the acreage yield. The existing zoning

allowing for a number of uses also supports a bias toward this pool of buyers. These experts

SCENARIO 1 - SOLD TO A "DEVELOPER"Assumes Re-Development of Site by Developer

Best Most Likely Worst

Value of Land (8.8 acres) 6,550,000$ 5,550,000$ 4,550,000$

Value of Holding Pond 250,000$ 250,000$ 250,000$

Value of Red Light 250,000$ 250,000$ 250,000$

Total Value 7,050,000$ 6,050,000$ 5,050,000$

SCENARIO 2 - SOLD TO AN "OWNER USER"

Assumes Single User Usage of Existing Site "As Is"

Best Most Likely Worst

Office Space (75,000 sf @ $100/$90/$80 sf) 7,500,000$ 6,750,000$ 6,000,000$

Warehouse (11,250 sf @ $70/$60/$50 sf) 787,500$ 675,000$ 550,000$

Excess Land Pad 700,000$ 600,000$ 500,000$

Total Value 8,987,500$ 8,025,000$ 7,050,000$

SCENARIO 3 - SOLD TO AN "INVESTOR"

Sold With Long-Term Lease in Place for Investor

Best Most Likely Worst

Cap Rate of 7.0% / Terminal Rate of 6.5% 13,892,490$

Cap Rate of 7.5% / Terminal Rate of 7.0% 13,580,549$

Cap Rate of 8.0% / Terminal Rate of 7.5% 13,268,608$

22

also identified a smaller pool of end-user acquirers who would utilize the existing structure to

re-locate or start a business. This pool of buyers would consist of large businesses or

governmental/quasi-governmental entities, for example, a state agency or a health care

organization/hospital. The third potential buyer was an investor who would acquire the

property as an investment with a long-term lease in place. While the sales valuation in this

scenario was the highest, the longer period of time to find a long-term tenant for such a large

space and an investor, the probability of executing this scenario within a reasonable timeframe

was deemed to be the lowest. In summary, the final sales valuation range estimate of $7

million to $9 million reflected the two largest two pools of potential buyers (developer and end-

user) with a bias toward to the higher end of the developer range and the mid-range for an

end-user sale to a governmental agency or hospital.

Cost to Operate in Alternative Space

To determine the cost to lease alternative office space at another commercial location,

various sources were consulted, primarily two local commercial real estate brokers to ensure

corroboration of the information received. This market survey6 reflects a range of “asking” cost

per square foot from $12 to $32 depending on the location desired with a minimum term of 5

years. For purposes of this analysis, we utilized an average cost per square foot of $20 for a full

service “all-in” lease arrangement for office space. Additionally, the cost of warehouse space

would approximate $10 per square foot.

To further understand the costs associated with operating leased office space, the

Bank’s General Services Manager was consulted. The following ancillary costs related to

6 Coldwell Banker Commercial. Report on Commercial Real Estate Office Space Costs for Tallahassee Market

23

operating in a leased space arrangement include: FF&E furnishings, any necessary leasehold

improvements, insurance coverage for contents, and office cleaning costs. The cost of these

ancillary investments and services was confirmed with other in-house subject matter experts.

The total annual accounting costs related to the re-location to leased space are included

in the table below.

Ancillary Costs of Re-Location to Leased Space -

Cost of Re-Location Leased Space1 465,000$

FF&E Furnishings2 50,000$

Leasehold Improvements3 60,000$

Insurance (contents) 22,260$

Building Cleaning Costs 30,000$

Total Annual Impact 627,260$

Annual lease cost of $20/sf for 20,750 sf (office-full service lease) + $10/sf for 5,000 sf warehouse

Most all FFE can be moved - $250k/5 Yr Am for any needed upgrades

Leasehold improvements/ ($600k) 10 Yr Am

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Full View of Financial Impact

In consideration of all the various key components of the financial feasibility analysis

that were previously enumerated, the table below provides the possible range of outcomes.

FINANCIAL IMPACTSale of Capital City Services Co. Building & Re-Location

Best Worst Most Likely

Sales Price (Gross) 9,000,000$ 7,000,000$ 8,000,000$

Sales Price (Net) 8,550,000$ 6,650,000$ 7,600,000$

Net Book Value of Bldg/Land 1,231,905$ 1,231,905$ 1,231,905$

Net Gain on Sale 7,318,095$ 5,418,095$ 6,368,095$

Accounting Impact of Building Sale -

Re-Investment Rate1 3.0% 3.0% 3.0%

Re-Investment Earnings on Gain 219,543$ 162,543$ 191,043$

Op Center Building Cost Reduction2 690,757$ 690,757$ 690,757$

Total Annual Impact - Favorable 910,299$ 853,299$ 881,799$

Accounting Impact of Re-Location -

Cost of Re-Location Leased Space3 465,000$ 465,000$ 465,000$

FF&E Furnishings4 50,000$ 50,000$ 50,000$

Leasehold Improvements5 60,000$ 60,000$ 60,000$

Insurance (contents) 22,260$ 22,260$ 22,260$

Building Cleaning Costs 30,000$ 30,000$ 30,000$

Total Annual Impact - Unfavorable 627,260$ 627,260$ 627,260$

Net Annual P&L Impact (Unfav)/Fav 283,039$ 226,039$ 254,539$

Co-Location Strategy Costs6 600,000$ 600,000$ 600,000$

NOTE: One-time cost of $75k to re-locate CCSC contents/workstations to leased site is not included

1 Overnight Funds Rate2 Actual Direct Costs -(Deprec/Maint/Utilities) - 2018 564,106$ 564,106$ 564,106$

Real Estate Taxes - 2018 85,428$ 85,428$ 85,428$

Insurance (building/contents) - 2018 41,223$ 41,223$ 41,223$ 3 Annual lease cost of $20/sf for 20,750 sf (office-full service lease) + $10/sf for 5,000 sf warehouse4 Most all FFE can be moved - $250k/5 Yr Am for any needed upgrades5 Leasehold improvements/ ($600k) 10 Yr Am 6 Informational: Estimated run rate for Co-Lo accounting costs

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Financial Risks

Financial risks related to the feasibility analysis include the following:

Inaccurate assessment of space needs – space needs were evaluated based on

discussions with Bank subject matter experts, however, these needs could

change based on the department manager and executive management input.

Care was taken during this feasibility to work with manager’s close the resource

needs of the Bank, synergies needed, and space requirements, therefore, the

residual risk associated with this factor is deemed to be low.

Lease costs rise – costs could rise, but they could also decline based on market

conditions, so this factor is difficult to quantify and incorporate into the analysis.

Rising lease cost is a risk that will always be present, but is mitigated somewhat

by the flexibility that leasing has over owning a property, a strategy that

management currently has a bias toward.

Incremental costs for expansion/growth – as the Bank grows and expands its

activities, headcount and resources could grow thus requiring more space and

higher lease cost. Expansion quite possibly could require additional space, but

this is an unknown and the flexibility allowed by leasing to alternatively down-

size/right-size operations to offset expansion cost partially mitigates this risk.

Conclusions Reached

It is clear that third party experts consulted indicate the Operations Center is a valuable

property that has many potential uses and a large pool of potential buyers. Based on the

strength of the support from the third party subject matter experts there is a bias toward the

26

best and most likely case outcomes. Furthermore, in consideration of the favorable current

real estate market conditions, now is a perfect time to unlock the value and monetize this

asset. Lastly, this strategy aligns with the Bank’s desire to better utilize capacity in its current

banking office network. The financial outcome alone and the low execution risk associated

with this strategy, provide sufficient support to move forward with selling the Operations

Center and re-locating existing associates to a new leased location.

Non-Financial Impact

There are non-financial impacts that do require analysis and consideration in this

feasibility assessment. Detailed below are factors that pose risk or could reduce the

effectiveness of the proposed strategy, including strategies to mitigate and/or reduce these

risks.

Some of these risks are tangible, others are intangible, but could impact the organizational

response and buy-in as well as the achievement of the future benefits previously noted.

Organizational Hurdles

The primary organizational obstacles identified associated with this strategy include: 1)

competition for Bank resources and prioritization of projects, and 2) changing economic and

business conditions

Competition for Bank Resources – the Bank has many initiatives planned and in-

progress, so the project to sell the Operations Center and re-locate associates will compete.

However, the time required to list and market the Operations Center will allow this project to

get in line within the next strategic planning and budget cycle. In addition, market conditions

are not expected to turn significantly in the one to two year period, so the risk of losing the

27

window of opportunity to monetize this asset is not significantly exposed. The project also

aligns well with the existing strategy of the better utilizing existing real estate assets.

Changing Economic and Business Conditions – conditions could change and divert

attention and focus to other matters thus delaying and possibly losing the opportunities that

exist today with such a strategy. Timely decision making with regard to this strategy is

important and should not be overlooked.

Impact on Associates/Clients

This strategy could potentially have an impact on both the Bank’s associates and

ultimately its clients, including: 1) cultural impact, and 2) loss of talent.

Cultural Impact - many associates whom work in the Operations Center have worked

there for a very long period of time and the initial response to a move could be negative and

impact both moral, associate relations, and client service. This risk can be mitigated by a strong

communications plan that aligns the project with the Bank’s Vision 2020 plan to improve its

efficiency and profitability as well as the climax of this initiative and 125 year anniversary. The

intangible benefits to be derived will need to be clearly communicated to generate energy and

support behind the concept and its benefits. On the other side of the coin, some associates

may respond very favorably about having a fresh new working environment that aligns with

their generational and social views/attitudes. While this is identified as a hurdle, it can be

managed effectively given a good communications plan and has the potential to further

enhance associate and client relations.

Loss of Talent – while the Bank may see some attrition or loss of key personnel, the

associated risk is low and can be properly addressed through clear and transparent

28

communications and the support of executive management. For the most part, Bank associates

have responded well to change over the past few years and there is no reason to believe the

response to this initiative will not have a similar response of support.

Tactical Strategies to Measure Performance

There are various strategies and tools that can be used to measure the success of this

project, including: 1) utilization of a project management methodology, and 2) use of various

measurement tools.

Project Management Methodology – the Bank’s project management group is a

valuable resource and can engage the required Bank resources to ensure subject matter

experts are involved, project goals are defined, roles/responsibilities are understood, and due

dates/timelines are achieved.

Measurement Tools – key success factors in such a project include: 1) associate

response, 2) efficiencies and synergies gains, and 3) service quality (both internal and external).

Survey tools can be used to assess associate satisfaction and the impact on client service. Close

monitoring of project cost and financial outcome can be achieved through the analysis of

internal financial reports for both pre and post project impact. Efficiency and synergy gains can

be evaluated by both a survey tool as well as financial analysis.

Conclusion

The feasibility analysis contains several factors for consideration all of which either yield

a favorable assessment or strategies that can be used to mitigate the risk inherent in the

decision to sell the Operations Center building and re-locate associates. The primary benefit to

be derived is the favorable financial outcome as the timing is very good to monetize the value

29

of the Operations Center real estate asset. The analysis performed yielded an annual cost

savings of approximately $300,000 using what are relatively conservative ranges of sales value

for the site. Furthermore, the benefits derived from right-sizing our capacity to current needs

and moving to a variable cost model versus a fixed cost model is timely and consistent with

current Bank strategy. There are non-financial impacts that were evaluated and risk mitigation

strategies identified to manage these risks and reduce the potential for unintended

consequences. The overall execution risk was deemed to be low. Based on the results of this

feasibility study, I believe timing is right to move forward with selling the Operations Center

site. First and foremost, it will result in a favorable financial outcome, but it also places the

Bank in a more flexible position to respond to industry and technological change to which we

must now respond to faster than in the past. This strategy also aligns with the ongoing Vision

2020 banking office optimization initiative and allows us to being using some of the excess

space in our existing Tallahassee banking offices, and to the extent deemed viable, the

utilization of space outside of the Tallahassee market.

30

APPENDIX A: FEASIBILITY ASSESSMENT APPROACH

CCSC Building Sale – Feasibility Study Approach

Val

uatio

n of

CC

SC

Bui

ldin

gS

pace

Util

izat

ion –

Offi

ces

Spa

ce U

tiliz

atio

n - C

CS

C

Planning Assessment Review & Analysis Decision & Approval

Meet with CCSC Mgmt

Move Forward with

Assessment ?

Meet with General Services Mgr

Discuss CCSC Space Usage &

Future Plans

Discuss Office Space Available

Meet with Revenue COO

Move Forward with

Assessment ?

Discuss Potential Use and Valuation

Consult External SME’s

Move Forward with Valuation

Process ?

Study Current Space Usage

Develop Future Space Usage

Needs

Identify Synergy, Efficiency, &

Culture Needs

Identify Future Strategic Needs

Identify CCSC Fit

Space Inventory

Study Current Space Usage

Space Inventory

Study Potential Uses & Value Range for

Property

Consult SME Engineer

Consult RE Broker

Finalize Space NeedsConsult with Managers on

Needs/Synergies

Review/Assessment by General Services &

Revenue COO

Finalize Space Re-Allocation Strategy

Review Engineering

Report & Opinion of

Value

Finalize Value Range and Cost to Re-

Locate

Review Cost to Re-

Locate

Finalize Financial Impact Analysis

Finalize Non-Financial Considerations

Executive Management

DecisionYES

YES

YES

Execute Project Plan if Approved

31

APPENDIX B: PROJECT PLAN

32

BIBLIOGRAPHY/SOURCES

1. CCBG Strategic Plan. 2. Wall Street and Technology (2014, January 13). Rethinking the Financial Services Data

Center. http://www.wallstreetandtech.com/infrastructure/rethinking-the-financial-services-data-center/d/d-id/1268672

3. BISNOW (2018, October 11). We’re Close to the Top of the Market. https://www.bisnow.com/national/news/capital-markets/were-close-to-the-top-of-the-

market-6-commercial-real-estate-capital-flows-trends-to-watch-for-93832

4. Moore Bass Consulting January 8, 2019 Report to Capital City Bank on Engineering/Zoning Evaluation of Bank Operations Site

5. TLG Real Estate Services

January 16, 2019 Report to Capital City Bank on Estimated Sales Value for Bank Operations Center Site

6. Colwell Banker Commercial

Report on Commercial Real Estate Office Space Costs for Tallahassee Market