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CAPITAL CITY BANK GROUP INC - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

[x]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2017

 

OR

 

[  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number: 0-13358 

 

CCB Group logo 

(Exact name of registrant as specified in its charter)

 

Florida

 

59-2273542

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

217 North Monroe Street, Tallahassee, Florida

 

32301

(Address of principal executive office)

 

(Zip Code)

 

(850) 402-7821

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

Accelerated filer [X]

Non-accelerated filer [  ]

Smaller reporting company [  ]

 

 

(Do not check if smaller reporting company)

Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of The Exchange Act.  [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

At October 31, 2017, 16,966,047 shares of the Registrant's Common Stock, $.01 par value, were outstanding.

 


 

CAPITAL CITY BANK GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

 

PART I – Financial Information

 

Page

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

Consolidated Statements of Financial Condition – September 30, 2017 and December 31, 2016

4

 

Consolidated Statements of Changes in Shareowners’ Equity – Nine Months Ended September 30, 2017 and 2016

7

 

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016

8

 

Notes to Consolidated Financial Statements

9

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

46

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

PART II – Other Information

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosure

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           

2


 

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control.  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

 

All forward-looking statements, by their nature, are subject to risks and uncertainties.  Our actual future results may differ materially from those set forth in our forward-looking statements.

 

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and the following sections of our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business” (b) “Risk Factors” in Part I, Item 1A, as updated in our subsequent quarterly reports filed on Form 10-Q; and (c) “Introduction” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7, as well as:

·         our ability to successfully manage interest rate risk, liquidity risk, and other risks inherent to our industry;

·         legislative or regulatory changes, including the Dodd-Frank Act, Basel III, and the ability to repay and qualified mortgage standards;

·         the effects of security breaches and computer viruses that may affect our computer systems or fraud related to debit card products;

·         the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan loss provision, deferred tax asset valuation and pension plan;

·         the frequency and magnitude of foreclosure of our loans;

·         the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;

·         the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

·         our ability to declare and pay dividends, the payment of which is now subject to our compliance with heightened capital requirements;

·         changes in the securities and real estate markets;

·         changes in monetary and fiscal policies of the U.S. Government;

·         inflation, interest rate, market and monetary fluctuations;

·         the effects of harsh weather conditions, including hurricanes, and man-made disasters;

·         our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;

·         the willingness of clients to accept third-party products and services rather than our products and services and vice versa;

·         increased competition and its effect on pricing;

·         technological changes;

·         negative publicity and the impact on our reputation;

·         changes in consumer spending and saving habits;

·         growth and profitability of our noninterest income;

·         changes in accounting principles, policies, practices or guidelines;

·         the limited trading activity of our common stock;

·         the concentration of ownership of our common stock;

·         anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;

·         other risks described from time to time in our filings with the Securities and Exchange Commission; and

·         our ability to manage the risks involved in the foregoing.

 

However, other factors besides those listed in Item 1A Risk Factors or discussed in this Form 10-Q also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.  Any forward-looking statements made by us or on our behalf speak only as of the date they are made.  We do not undertake to update any forward-looking statement, except as required by applicable law.

3


 

PART I.      FINANCIAL INFORMATION

Item 1.

 

 

 

 

 

 

 

 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

September 30,

 

December 31,

(Dollars in Thousands)

2017

 

2016

ASSETS

 

 

 

 

 

Cash and Due From Banks

$

50,420

 

$

48,268

Federal Funds Sold and Interest Bearing Deposits

 

140,694

 

 

247,779

 

 

Total Cash and Cash Equivalents

 

191,114

 

 

296,047

 

 

 

 

 

 

 

 

Investment Securities, Available for Sale, at fair value

 

510,846

 

 

522,734

Investment Securities, Held to Maturity, at amortized cost (fair value of $183,523 and $176,746)

 

184,262

 

 

177,365

 

 

Total Investment Securities

 

695,108

 

 

700,099

 

 

 

 

 

 

 

 

Loans Held For Sale

 

7,800

 

 

10,886

 

 

 

 

 

 

 

 

Loans, Net of Unearned Income

 

1,630,338

 

 

1,561,289

 

Allowance for Loan Losses

 

(13,339)

 

 

(13,431)

 

 

Loans, Net

 

1,616,999

 

 

1,547,858

 

 

 

 

 

 

 

 

Premises and Equipment, net

 

92,345

 

 

95,476

Goodwill

 

84,811

 

 

84,811

Other Real Estate Owned

 

5,987

 

 

10,638

Other Assets

 

96,678

 

 

99,382

 

 

Total Assets

$

2,790,842

 

$

2,845,197

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest Bearing Deposits

$

870,644

 

$

791,182

 

Interest Bearing Deposits

 

1,476,973

 

 

1,621,104

 

 

Total Deposits

 

2,347,617

 

 

2,412,286

 

 

 

 

 

 

 

 

Short-Term Borrowings

 

6,777

 

 

12,749

Subordinated Notes Payable

 

52,887

 

 

52,887

Other Long-Term Borrowings

 

15,047

 

 

14,881

Other Liabilities

 

83,313

 

 

77,226

 

 

Total Liabilities

 

2,505,641

 

 

2,570,029

 

 

 

 

 

 

 

 

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; 16,966,047 and 16,844,698 shares

 

 

 

 

issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

170

 

 

168

Additional Paid-In Capital

 

35,892

 

 

34,188

Retained Earnings

 

275,013

 

 

267,037

Accumulated Other Comprehensive Loss, net of tax

 

(25,874)

 

 

(26,225)

Total Shareowners’ Equity

 

285,201

 

 

275,168

Total Liabilities and Shareowners' Equity

$

2,790,842

 

$

2,845,197

 

 

 

 

 

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

4


 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands, Except Per Share Data)

2017

 

2016

 

2017

 

2016

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Loans, including Fees

$

19,479

 

$

18,046

 

$

56,204

 

$

54,196

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

2,150

 

 

1,633

 

 

5,832

 

 

4,591

 

Tax Exempt

 

266

 

 

213

 

 

795

 

 

643

Federal Funds Sold and Interest Bearing Deposits

 

446

 

 

212

 

 

1,472

 

 

892

Total Interest Income

 

22,341

 

 

20,104

 

 

64,303

 

 

60,322

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

530

 

 

223

 

 

1,199

 

 

655

Short-Term Borrowings

 

15

 

 

43

 

 

77

 

 

91

Subordinated Notes Payable

 

420

 

 

341

 

 

1,203

 

 

1,071

Other Long-Term Borrowings

 

115

 

 

177

 

 

331

 

 

599

Total Interest Expense

 

1,080

 

 

784

 

 

2,810

 

 

2,416

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

21,261

 

 

19,320

 

 

61,493

 

 

57,906

Provision for Loan Losses

 

490

 

 

-

 

 

1,389

 

 

355

Net Interest Income After Provision For Loan Losses

 

20,771

 

 

19,320

 

 

60,104

 

 

57,551

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Deposit Fees

 

5,153

 

 

5,373

 

 

15,295

 

 

16,094

Bank Card Fees

 

2,688

 

 

2,759

 

 

8,361

 

 

8,467

Wealth Management Fees

 

2,197

 

 

1,774

 

 

6,112

 

 

5,256

Mortgage Banking Fees

 

1,480

 

 

1,503

 

 

4,344

 

 

3,800

Other

 

1,478

 

 

1,602

 

 

4,737

 

 

7,286

Total Noninterest Income

 

12,996

 

 

13,011

 

 

38,849

 

 

40,903

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

16,349

 

 

15,993

 

 

49,137

 

 

48,285

Occupancy, net

 

4,501

 

 

4,734

 

 

13,437

 

 

13,777

Other Real Estate Owned, net

 

(118)

 

 

821

 

 

780

 

 

3,306

Other

 

5,975

 

 

6,474

 

 

19,196

 

 

20,286

Total Noninterest Expense

 

26,707

 

 

28,022

 

 

82,550

 

 

85,654

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

7,060

 

 

4,309

 

 

16,403

 

 

12,800

Income Tax Expense

 

2,505

 

 

1,436

 

 

5,543

 

 

4,350

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

$

4,555

 

$

2,873

 

$

10,860

 

$

8,450

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC NET INCOME PER SHARE

$

0.27

 

$

0.18

 

$

0.64

 

$

0.50

DILUTED NET INCOME PER SHARE

$

0.27

 

$

0.17

 

$

0.64

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Basic Shares Outstanding

 

16,965

 

 

16,804

 

 

16,946

 

 

17,049

Average Common Diluted Shares Outstanding

 

17,044

 

 

16,871

 

 

17,009

 

 

17,100

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

5


 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in Thousands)

2017

 

2016

 

2017

 

2016

NET INCOME

$

4,555

 

$

2,873

 

$

10,860

 

$

8,450

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain/loss on securities available for sale

 

(99)

 

 

(1,158)

 

 

516

 

 

1,535

Amortization of unrealized losses on securities transferred from

 

 

 

 

 

 

 

 

 

 

 

available for sale to held to maturity

 

19

 

 

21

 

 

57

 

 

60

Total Investment Securities

 

(80)

 

 

(1,137)

 

 

573

 

 

1,595

Other comprehensive (loss) income, before tax

 

(80)

 

 

(1,137)

 

 

573

 

 

1,595

Deferred tax (benefit) expense related to other comprehensive income

 

(31)

 

 

(439)

 

 

222

 

 

615

Other comprehensive (loss) income, net of tax

 

(49)

 

 

(698)

 

 

351

 

 

980

TOTAL COMPREHENSIVE INCOME

$

4,506

 

$

2,175

 

$

11,211

 

9,430

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

6


 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Other 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive

 

 

 

 

Shares

 

Common

 

Additional

 

Retained

 

Loss, Net of

 

 

 

(Dollars In Thousands, Except Share Data)

Outstanding

 

Stock

 

Paid-In Capital

 

Earnings

 

Taxes

 

Total

Balance, January 1, 2016

17,156,919

 

$

172

 

$

38,256

 

$

258,181

 

$

(22,257)

 

$

274,352

Net Income

-

 

 

-

 

 

-

 

 

8,450

 

 

-

 

 

8,450

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

980

 

 

980

Cash Dividends ($0.1200 per share)

-

 

 

-

 

 

-

 

 

(2,050)

 

 

-

 

 

(2,050)

Repurchase of Common Stock

(435,461)

 

 

(4)

 

 

(6,308)

 

 

-

 

 

-

 

 

(6,312)

Stock Based Compensation

-

 

 

-

 

 

743

 

 

-

 

 

-

 

 

743

Impact of Transactions Under Compensation Plans, net

85,620

 

 

-

 

 

461

 

 

-

 

 

-

 

 

461

Balance, September 30, 2016

16,807,078

 

$

168

 

$

33,152

 

$

264,581

 

$

(21,277)

 

$

276,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

16,844,698

 

$

168

 

$

34,188

 

$

267,037

 

$

(26,225)

 

$

275,168

Net Income

-

 

 

-

 

 

-

 

 

10,860

 

 

-

 

 

10,860

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

351

 

 

351

Cash Dividends ($0.1700 per share)

-

 

 

-

 

 

-

 

 

(2,884)

 

 

-

 

 

(2,884)

Stock Based Compensation

-

 

 

-

 

 

1,196

 

 

-

 

 

-

 

 

1,196

Impact of Transactions Under Compensation Plans, net

121,349

 

 

2

 

 

508

 

 

-

 

 

-

 

 

510

Balance, September 30, 2017

16,966,047

 

$

170

 

$

35,892

 

$

275,013

 

$

(25,874)

 

$

285,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

7


 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited) 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(Dollars in Thousands)

2017

 

2016

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net Income

$

10,860

 

$

8,450

Adjustments to Reconcile Net Income to

 

 

 

 

 

   Cash Provided by Operating Activities:

 

 

 

 

 

      Provision for Loan Losses

 

1,389

 

 

355

      Depreciation

 

4,966

 

 

5,198

      Amortization of Premiums, Discounts, and Fees, net

 

4,928

 

 

4,642

      Gain on Partial Retirement of Trust Preferred Securities

 

-

 

 

(2,487)

      Net Decrease in Loans Held-for-Sale

 

3,086

 

 

1,122

      Stock Compensation

 

1,196

 

 

743

      Net Tax Benefit From Stock-Based Compensation

 

(223)

 

 

-

      Deferred Income Taxes

 

247

 

 

3,087

      Net Loss on Sales and Write-Downs of Other Real Estate Owned

 

456

 

 

2,523

      Loss on Disposal of Premises and Equipment

 

276

 

 

131

      Net Decrease (Increase) in Other Assets

 

2,559

 

 

(6,610)

      Net Increase in Other Liabilities

 

6,487

 

 

6,733

Net Cash Provided By Operating Activities

 

36,227

 

 

23,887

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Securities Held to Maturity:

 

 

 

 

 

      Purchases

 

(60,703)

 

 

(40,320)

      Payments, Maturities, and Calls

 

53,031

 

 

37,495

Securities Available for Sale:

 

 

 

 

 

      Purchases

 

(122,949)

 

 

(125,975)

      Payments, Maturities, and Calls

 

130,997

 

 

74,450

Purchases of Loans Held for Investment

 

(44,083)

 

 

-

Net Increase in Loans

 

(27,327)

 

 

(68,775)

Proceeds From Sales of Other Real Estate Owned

 

5,952

 

 

7,338

Purchases of Premises and Equipment

 

(3,052)

 

 

(3,696)

Net Cash Used In Investing Activities

 

(68,134)

 

 

(119,483)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net (Decrease) Increase in Deposits

 

(64,669)

 

 

12,258

Net Decrease in Short-Term Borrowings

 

(3,020)

 

 

(50,023)

Redemption of Subordinated Notes

 

-

 

 

(7,500)

Repayment of Other Long-Term Borrowings

 

(2,786)

 

 

(5,819)

Dividends Paid

 

(2,884)

 

 

(2,050)

Payments to Repurchase Common Stock

 

-

 

 

(6,312)

Issuance of Common Stock Under Compensation Plans

 

333

 

 

321

Net Cash Used In Financing Activities

 

(73,026)

 

 

(59,125)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(104,933)

 

 

(154,721)

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

296,047

 

 

378,905

Cash and Cash Equivalents at End of Period

$

191,114

 

$

224,184

 

 

 

 

 

 

Supplemental Cash Flow Disclosures:

 

 

 

 

 

   Interest Paid

$

2,825

 

$

2,422

   Income Taxes Paid (Refunded)

$

4,044

 

$

(355)

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

   Loans and Premises Transferred to Other Real Estate Owned

$

2,024

 

$

3,309

 

 

 

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

8


 

CAPITAL CITY BANK GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 -  SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations.  Capital City Bank Group, Inc. (“CCBG” or the “Company”) provides a full range of banking and banking-related services to individual and corporate clients through its subsidiary, Capital City Bank, with banking offices located in Florida, Georgia, and Alabama.  The Company is subject to competition from other financial institutions, is subject to regulation by certain government agencies and undergoes periodic examinations by those regulatory authorities.

 

Basis of Presentation.  The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of CCBG and its wholly-owned subsidiary, Capital City Bank (“CCB” or the “Bank”).  All material inter-company transactions and accounts have been eliminated.  Certain previously reported amounts have been reclassified to conform to the current year’s presentation.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 

 

The consolidated statement of financial condition at December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

 

NOTE 2 – INVESTMENT SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Portfolio Composition. The amortized cost and related market value of investment securities available-for-sale and

held-to-maturity were as follows:

 

September 30, 2017

 

 

December 31, 2016

 

Amortized

Unrealized

Unrealized

Market

Amortized

Unrealized

Unrealized

Market

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gain

 

Losses

 

Value

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

257,635

 

$

32

 

$

869

 

$

256,798

 

$

286,867

 

$

262

 

$

851

 

$

286,278

U.S. Government Agency

 

147,550

 

 

729

 

 

290

 

 

147,989

 

 

131,489

 

 

495

 

 

344

 

 

131,640

States and Political Subdivisions

 

95,869

 

 

175

 

 

54

 

 

95,990

 

 

95,197

 

 

23

 

 

381

 

 

94,839

Mortgage-Backed Securities

 

1,218

 

 

114

 

 

-

 

 

1,332

 

 

1,312

 

 

118

 

 

-

 

 

1,430

Equity Securities(1)

 

8,737

 

 

-

 

 

-

 

 

8,737

 

 

8,547

 

 

-

 

 

-

 

 

8,547

Total

$

511,009

 

$

1,050

 

$

1,213

 

$

510,846

 

$

523,412

 

$

898

 

$

1,576

 

$

522,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

93,309

 

$

2

 

$

183

 

$

93,128

 

$

119,131

 

$

107

 

$

81

 

$

119,157

States and Political Subdivisions

 

7,051

 

 

31

 

 

2

 

 

7,080

 

 

8,175

 

 

1

 

 

38

 

 

8,138

Mortgage-Backed Securities

 

83,902

 

 

55

 

 

642

 

 

83,315

 

 

50,059

 

 

29

 

 

637

 

 

49,451

Total

$

184,262

 

$

88

 

$

827

 

$

183,523

 

$

177,365

 

$

137

 

$

756

 

$

176,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Securities

$

695,271

 

$

1,138

 

$

2,040

 

$

694,369

 

$

700,777

 

$

1,035

 

$

2,332

 

$

699,480

 

(1)     Includes Federal Home Loan Bank, Federal Reserve Bank, and FNBB, Inc. stock recorded at cost of $3.2 million, $4.8 million, and $0.8 million, respectively, at September 30, 2017 and $3.3 million, $4.8 million, and $0.5 million, respectively, at December 31, 2016.

 

Securities with an amortized cost of $214.3 million and $332.7 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes.

 

9


 

The Bank, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), is required to own capital stock in the FHLB based generally upon the balances of residential and commercial real estate loans, and FHLB advances.  FHLB stock which is included in equity securities is pledged to secure FHLB advances.  No ready market exists for this stock, and it has no quoted market value; however, redemption of this stock has historically been at par value.

 

As a member of the Federal Reserve Bank of Atlanta, the Bank is required to maintain stock in the Federal Reserve Bank of Atlanta based on a specified ratio relative to the Bank’s capital.  Federal Reserve Bank stock is carried at cost.

 

Maturity Distribution.  At September 30, 2017, the Company's investment securities had the following maturity distribution based on contractual maturity.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.  Mortgage-backed securities and certain amortizing U.S. government agency securities are shown separately because they are not due at a certain maturity date.

 

 

Available for Sale

 

Held to Maturity

(Dollars in Thousands)

Amortized Cost

 

Market Value

 

Amortized Cost

 

Market Value

Due in one year or less

$

138,454

 

$

138,421

 

$

63,439

 

$

63,370

Due after one through five years

 

253,590

 

 

252,720

 

 

36,922

 

 

36,838

Mortgage-Backed Securities

 

1,217

 

 

1,332

 

 

83,901

 

 

83,315

U.S. Government Agency

 

109,011

 

 

109,636

 

 

-

 

 

-

Equity Securities

 

8,737

 

 

8,737

 

 

-

 

 

-

Total

$

511,009

 

$

510,846

 

$

184,262

 

$

183,523

10


 

Unrealized Losses on Investment Securities.   The following table summarizes the investment securities with unrealized losses aggregated by major security type and length of time in a continuous unrealized loss position:

 

 

Less Than

 

Greater Than

 

 

 

 

 

 

 

12 Months

 

12 Months

 

Total

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

(Dollars in Thousands)

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

191,720

 

$

759

 

$

9,981

 

$

110

 

$

201,701

 

$

869

U.S. Government Agency

 

34,775

 

 

126

 

 

17,853

 

 

164

 

 

52,628

 

 

290

States and Political Subdivisions

 

23,031

 

 

22

 

 

5,129

 

 

32

 

 

28,160

 

 

54

Total

 

249,526

 

 

907

 

 

32,963

 

 

306

 

 

282,489

 

 

1,213

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

 

83,173

 

 

183

 

  

-

 

 

-

 

  

83,173

 

 

183

States and Political Subdivisions

 

504

 

 

2

 

 

-

 

 

-

 

 

504

 

 

2

Mortgage-Backed Securities

 

47,159

 

 

579

 

 

4,373

 

 

63

 

 

51,532

 

 

642

Total

$

130,836

 

$

764

 

$

4,373

 

$

63

 

$

135,209

 

$

827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

116,704

 

$

851

 

$

-

 

$

-

 

$

116,704

 

$

851

U.S. Government Agency

 

48,520

 

 

310

 

 

6,699

 

 

34

 

 

55,219

 

 

344

States and Political Subdivisions

 

81,521

 

 

380

 

 

294

 

 

1

 

 

81,815

 

 

381

Mortgage-Backed Securities

 

3

 

 

-

 

 

-

 

 

-

 

 

3

 

 

-

Total

 

246,748

 

 

1,541

 

 

6,993

 

 

35

 

 

253,741

 

 

1,576

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

 

35,210

 

 

81

 

 

-

 

 

-

 

 

35,210

 

 

81

States and Political Subdivisions

 

7,491

 

 

38

 

 

-

 

 

-

 

 

7,491

 

 

38

Mortgage-Backed Securities

 

36,710

 

 

599

 

 

4,010

 

 

38

 

 

40,720

 

 

637

Total

$

79,411

 

$

718

 

$

4,010

 

$

38

 

$

83,421

 

$

756

 

Management evaluates securities for other than temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation.  Declines in the fair value of  available-for-sale (“AFS”) and held-to-maturity (“HTM”)securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, the Company considers, (i) whether it has decided to sell the security, (ii) whether it is more likely than not that the Company will have to sell the security before its market value recovers, and (iii) whether the present value of expected cash flows is sufficient to recover the entire amortized cost basis.  When assessing a security’s expected cash flows, the Company considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost and (ii) the financial condition and near-term prospects of the issuer.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by rating agencies have occurred, regulatory issues, and analysts’ reports. 

 

At September 30, 2017, there were 266 positions (combined AFS and HTM) with unrealized losses totaling $2.0 million. 58 of these positions were U.S. government treasury securities guaranteed by the U.S. government. 103 of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities.  Because the declines in the market value of these securities are attributable to changes in interest rates and not credit quality and because the Company has the present ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2017.

11


 

NOTE 3 – LOANS, NET

 

Loan Portfolio Composition.  The composition of the loan portfolio was as follows:

 

(Dollars in Thousands)

September 30, 2017

 

December 31, 2016

Commercial, Financial and Agricultural

$

215,963

 

$

216,404

Real Estate – Construction

 

67,813

 

 

58,443

Real Estate – Commercial Mortgage

 

527,331

 

 

503,978

Real Estate – Residential(1)

 

315,583

 

 

281,509

Real Estate – Home Equity

 

228,499

 

 

236,512

Consumer

 

275,149

 

 

264,443

 

Loans, Net of Unearned Income

$

1,630,338

 

$

1,561,289

             

 

(1)     Includes loans in process with outstanding balances of $10.9 million and $9.6 million at September 30, 2017 and December 31, 2016, respectively.  

 

Net deferred costs included in loans were $0.7 million at September 30, 2017 and $0.5 million at December 31, 2016.

 

The Company has pledged a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity loans to support available borrowing capacity at the FHLB of Atlanta and has pledged a blanket floating lien on all consumer loans, commercial loans, and construction loans to support available borrowing capacity at the Federal Reserve Bank of Atlanta.

 

Nonaccrual Loans.  Loans are generally placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful.  Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured.

 

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans.

 

 

September 30, 2017

 

December 31, 2016

(Dollars in Thousands)

Nonaccrual

 

90 + Days

 

Nonaccrual

 

90 + Days

Commercial, Financial and Agricultural

$

41

 

$

-

 

$

468

 

$

-

Real Estate – Construction

 

362

 

 

-

 

 

311

 

 

-

Real Estate – Commercial Mortgage

 

2,425

 

 

-

 

 

3,410

 

 

-

Real Estate – Residential

 

2,350

 

 

-

 

 

2,330

 

 

-

Real Estate – Home Equity

 

1,108

 

 

-

 

 

1,774

 

 

-

Consumer

 

272

 

 

-

 

 

240

 

 

-

Total Nonaccrual Loans

$

6,558

 

$

-

 

$

8,533

 

$

-

 

12


 

Loan Portfolio Aging.  A loan is defined as a past due loan when one full payment is past due or a contractual maturity is over 30 days past due (“DPD”).

 

The following table presents the aging of the recorded investment in accruing past due loans by class of loans.

  

 

30-59

 

60-89

 

90 +

 

Total

 

Total

 

Total

(Dollars in Thousands)

DPD

 

DPD

 

DPD

 

Past Due

 

Current

 

Loans(1)

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

249

 

$

584

 

$

-

 

$

833

 

$

215,089

 

$

215,963

Real Estate – Construction

 

-

 

 

5

 

 

-

 

 

5

 

 

67,446

 

 

67,813

Real Estate – Commercial Mortgage

 

1,277

 

 

168

 

 

-

 

 

1,445

 

 

523,461

 

 

527,331

Real Estate – Residential

 

374

 

 

754

 

 

-

 

 

1,128

 

 

312,105

 

 

315,583

Real Estate – Home Equity

 

455

 

 

1

 

 

-

 

 

456

 

 

226,935

 

 

228,499

Consumer

 

1,266

 

 

554

 

 

-

 

 

1,820

 

 

273,057

 

 

275,149

Total Past Due Loans

$

3,621

 

$

2,066

 

$

-

 

$

5,687

 

$

1,618,093

 

$

1,630,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

209

 

$

48

 

$

-

 

$

257

 

$

215,679

 

$

216,404

Real Estate – Construction

 

949

 

 

282

 

 

-

 

 

1,231

 

 

56,901

 

 

58,443

Real Estate – Commercial Mortgage

 

835

 

 

1

 

 

-

 

 

836

 

 

499,732

 

 

503,978

Real Estate – Residential

 

1,199

 

 

490

 

 

-

 

 

1,689

 

 

277,490

 

 

281,509

Real Estate – Home Equity

 

577

 

 

51

 

 

-

 

 

628

 

 

234,110

 

 

236,512

Consumer

 

1,516

 

 

281

 

 

-

 

 

1,797

 

 

262,406

 

 

264,443

Total Past Due Loans

$

5,285

 

$

1,153

 

$

-

 

$

6,438

 

$

1,546,318

 

$

1,561,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Total Loans include nonaccrual loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan LossesThe allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of incurred losses within the existing portfolio of loans.  Loans are charged-off to the allowance when losses are deemed to be probable and reasonably quantifiable. 

 

13


 

The following table details the activity in the allowance for loan losses by portfolio class.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

  

 

 

Commercial,

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial,

 

Real Estate

 

Commercial

 

Real Estate

 

Real Estate

 

 

 

 

 

 

(Dollars in Thousands)

Agricultural

 

Construction

 

Mortgage

 

Residential

 

Home Equity

Consumer

 

Total

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,095

 

$

114

 

$

3,825

 

$

3,384

 

$

2,524

 

$

2,300

 

$

13,242

 

Provision for Loan Losses

 

208

 

 

(26)

 

 

286

 

 

(32)

 

 

(103)

 

 

157

 

 

490

 

Charge-Offs

 

(276)

 

 

-

 

 

(94)

 

 

(125)

 

 

(50)

 

 

(455)

 

 

(1,000)

 

Recoveries

 

79

 

 

50

 

 

69

 

 

60

 

 

84

 

 

265

 

 

607

 

Net Charge-Offs

 

(197)

 

 

50

 

 

(25)

 

 

(65)

 

 

34

 

 

(190)

 

 

(393)

Ending Balance

$

1,106

 

$

138

 

$

4,086

 

$

3,287

 

$

2,455

 

$

2,267

 

$

13,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,198

 

$

168

 

$

4,315

 

$

3,445

 

$

2,297

 

$

2,008

 

$

13,431

 

Provision for Loan Losses

 

401

 

 

(80)

 

 

264

 

 

(348)

 

 

148

 

 

1,004

 

 

1,389

 

Charge-Offs

 

(693)

 

 

-

 

 

(643)

 

 

(285)

 

 

(142)

 

 

(1,616)

 

 

(3,379)

 

Recoveries

 

200

 

 

50

 

 

150

 

 

475

 

 

152

 

 

871

 

 

1,898

 

Net Charge-Offs

 

(493)

 

 

50

 

 

(493)

 

 

190

 

 

10

 

 

(745)

 

 

(1,481)

Ending Balance

$

1,106

 

$

138

 

$

4,086

 

$

3,287

 

$

2,455

 

$

2,267

 

$

13,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,048

 

$

126

 

$

4,389

 

$

3,835

 

$

2,391

 

$

1,888

 

$

13,677

 

Provision for Loan Losses

 

163

 

 

(3)

 

 

224

 

 

(324)

 

 

(307)

 

 

247

 

 

-

 

Charge-Offs

 

(143)

 

 

-

 

 

(5)

 

 

(96)

 

 

(51)

 

 

(479)

 

 

(774)

 

Recoveries

 

199

 

 

-

 

 

45

 

 

139

 

 

237

 

 

221

 

 

841

 

Net Charge-Offs

 

56

 

 

-

 

 

40

 

 

43

 

 

186

 

 

(258)

 

 

67

Ending Balance

$

1,267

 

$

123

 

$

4,653

 

$

3,554

 

$

2,270

 

$

1,877

 

$

13,744

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

905

 

$

101

 

$

4,498

 

$

4,409

 

$

2,473

 

$

1,567

 

$

13,953

 

Provision for Loan Losses

 

559

 

 

22

 

 

71

 

 

(1,030)

 

 

(168)

 

 

901

 

 

355

 

Charge-Offs

 

(484)

 

 

-

 

 

(279)

 

 

(779)

 

 

(412)

 

 

(1,356)

 

 

(3,310)

 

Recoveries

 

287

 

 

-

 

 

363

 

 

954

 

 

377

 

 

765

 

 

2,746

 

Net Charge-Offs

 

(197)

 

 

-

 

 

84

 

 

175

 

 

(35)

 

 

(591)

 

 

(564)

Ending Balance

$

1,267

 

$

123

 

$

4,653

 

$

3,554

 

$

2,270

 

$

1,877

 

$

13,744

 

14


 

The following table details the amount of the allowance for loan losses by portfolio class disaggregated on the basis of the Company’s impairment methodology.

  

 

Commercial,

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial,

 

Real Estate

 

Commercial

 

Real Estate

 

Real Estate

 

 

 

 

 

 

(Dollars in Thousands

Agricultural

 

Construction

 

Mortgage

 

Residential

 

Home Equity

Consumer

 

Total

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

88

 

$

24

 

$

1,846

 

$

1,196

 

$

454

 

$

3

 

$

3,611

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,018

 

 

114

 

 

2,240

 

 

2,091

 

 

2,001

 

 

2,264

 

 

9,728

Ending Balance

$

1,106

 

$

138

 

$

4,086

 

$

3,287

 

$

2,455

 

$

2,267

 

$

13,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

80

 

$

-

 

$

2,038

 

$

1,561

 

$

335

 

$

6

 

$

4,020

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,118

 

 

168

 

 

2,277

 

 

1,884

 

 

1,962

 

 

2,002

 

 

9,411

Ending Balance

$

1,198

 

$

168

 

$

4,315

 

$

3,445

 

$

2,297

 

$

2,008

 

$

13,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

132

 

$

-

 

$

2,124

 

$

1,669

 

$

276

 

$

7

 

$

4,208

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,135

 

 

123

 

 

2,529

 

 

1,885

 

 

1,994

 

 

1,870

 

 

9,536

Ending Balance

$

1,267

 

$

123

 

$

4,653

 

$

3,554

 

$

2,270

 

$

1,877

 

$

13,744

 

15


 

The Company’s recorded investment in loans related to each balance in the allowance for loan losses by portfolio class and disaggregated on the basis of the Company’s impairment methodology was as follows:

  

 

 

Commercial,

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial,

 

Real Estate

 

Commercial

 

Real Estate

 

Real Estate

 

 

 

 

 

 

(Dollars in Thousands)

Agricultural

 

Construction

Mortgage

 

Residential

 

Home Equity

Consumer

 

Total

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

847

 

$

363

 

$

20,716

 

$

13,258

 

$

2,915

 

$

132

 

$

38,231

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

215,116

 

 

67,450

 

 

506,615

 

 

302,325

 

 

225,584

 

 

275,017

 

 

1,592,107

Total

$

215,963

 

$

67,813

 

$

527,331

 

$

315,583

 

$

228,499

 

$

275,149

 

$

1,630,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

1,042

 

$

247

 

$

23,855

 

$

15,596

 

$

3,375

 

$

174

 

$

44,289

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

215,362

 

 

58,196

 

 

480,123

 

 

265,913

 

 

233,137

 

 

264,269

 

 

1,517,000

Total

$

216,404

 

$

58,443

 

$

503,978

 

$

281,509

 

$

236,512

 

$

264,443

 

$

1,561,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

949

 

$

-

 

$

20,794

 

$

16,457

 

$

2,776

 

$

186

 

$

41,162

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

222,329

 

 

54,107

 

 

476,981

 

 

270,611

 

 

232,657

 

 

259,665

 

 

1,516,350

Total

$

223,278

 

$

54,107

 

$

497,775

 

$

287,068

 

$

235,433

 

$

259,851

 

$

1,557,512

 

Impaired Loans.  Loans are deemed to be impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due (principal and interest payments), according to the contractual terms of the loan agreement.  Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. 

 

The following table presents loans individually evaluated for impairment by class of loans.

  

 

 

Unpaid

 

Recorded

 

Recorded

 

 

 

 

 

Principal

 

Investment

 

Investment

 

Related

(Dollars in Thousands)

 

Balance

 

With No Allowance

With Allowance

 

Allowance

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

847

 

$

122

 

$

725

 

$

88

Real Estate – Construction

 

 

363

 

 

298

 

 

65

 

 

24

Real Estate – Commercial Mortgage

 

 

20,716

 

 

2,141

 

 

18,575

 

 

1,846

Real Estate – Residential

 

 

13,258

 

 

1,962

 

 

11,296

 

 

1,196

Real Estate – Home Equity

 

 

2,915

 

 

902

 

 

2,013

 

 

454

Consumer

 

 

132

 

 

58

 

 

74

 

 

3

Total

 

$

38,231

 

$

5,483

 

$

32,748

 

$

3,611

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

1,042

 

$

565

 

$

477

 

$

80

Real Estate – Construction

 

 

247

 

 

-

 

 

247

 

 

-

Real Estate – Commercial Mortgage

 

 

23,855

 

 

8,954

 

 

14,901

 

 

2,038

Real Estate – Residential

 

 

15,596

 

 

2,509

 

 

13,087

 

 

1,561

Real Estate – Home Equity

 

 

3,375

 

 

1,871

 

 

1,504

 

 

335

Consumer

 

 

174

 

 

65

 

 

109

 

 

6

Total

 

$

44,289

 

$

13,964

 

$

30,325

 

$

4,020

 

16


 

The following table summarizes the average recorded investment and interest income recognized by class of impaired loans.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

Average

 

Total

 

Average

 

Total

 

Average

 

Total

 

Average

 

Total

 

 

Recorded

 

Interest

 

Recorded

 

Interest

 

Recorded

 

Interest

 

Recorded

 

Interest

 (Dollars in Thousands)

 

Investment

 

  Income

 

 Investment 

 

Income

 

Investment

 

  Income

 

 Investment 

 

Income

Commercial, Financial and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Agricultural

 

$

963

 

$

12

 

$

871

 

$

12

 

$

1,051

 

$

35

 

$

847

 

$

37

Real Estate – Construction

 

 

363

 

 

-

 

 

-

 

 

-

 

 

334

 

 

2

 

 

24

 

 

-

Real Estate – Commercial Mortgage

 

 

21,109

 

 

219

 

 

20,692

 

 

203

 

 

22,283

 

 

662

 

 

20,757

 

 

658

Real Estate – Residential

 

 

14,068

 

 

162

 

 

17,091

 

 

197

 

 

14,608

 

 

516

 

 

17,743

 

 

602

Real Estate – Home Equity

 

 

3,114

 

 

28

 

 

2,824

 

 

29

 

 

3,280

 

 

81

 

 

3,001

 

 

84

Consumer

 

 

136

 

 

2

 

 

196

 

 

2

 

 

148

 

 

6

 

 

215

 

 

7

Total

 

$

39,753

 

$

423

 

$

41,674

 

$

443

 

$

41,704

 

$

1,302

 

$

42,587

 

$

1,388

 

Credit Risk Management.  The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures designed to maximize loan income within an acceptable level of risk.  Management and the Board of Directors review and approve these policies and procedures on a regular basis (at least annually).     

 

Reporting systems are used to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.  Management and the Credit Risk Oversight Committee periodically review our lines of business to monitor asset quality trends and the appropriateness of credit policies.  In addition, total borrower exposure limits are established and concentration risk is monitored.  As part of this process, the overall composition of the portfolio is reviewed to gauge diversification of risk, client concentrations, industry group, loan type, geographic area, or other relevant classifications of loans.  Specific segments of the loan portfolio are monitored and reported to the Board on a quarterly basis and have strategic plans in place to supplement Board approved credit policies governing exposure limits and underwriting standards.  Detailed below are the types of loans within the Company’s loan portfolio and risk characteristics unique to each.      

 

Commercial, Financial, and Agricultural – Loans in this category are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or other guarantees.  Lending policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt.  The majority of these loans are secured by the assets being financed or other business assets such as accounts receivable, inventory, or equipment.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy guidelines. 

 

Real Estate Construction – Loans in this category consist of short-term construction loans, revolving and non-revolving credit lines and construction/permanent loans made to individuals and investors to finance the acquisition, development, construction or rehabilitation of real property.  These loans are primarily made based on identified cash flows of the borrower or project and generally secured by the property being financed, including 1-4 family residential properties and commercial properties that are either owner-occupied or investment in nature.  These properties may include either vacant or improved property.  Construction loans are generally based upon estimates of costs and value associated with the completed project.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy guidelines.  The disbursement of funds for construction loans is made in relation to the progress of the project and as such these loans are closely monitored by on-site inspections.       

 

Real Estate Commercial Mortgage – Loans in this category consists of commercial mortgage loans secured by property that is either owner-occupied or investment in nature.  These loans are primarily made based on identified cash flows of the borrower or project with consideration given to underlying real estate collateral and personal guarantees.  Lending policy establishes debt service coverage ratios and loan to value ratios specific to the property type.  Collateral values are determined based upon third party appraisals and evaluations.  

 

Real Estate Residential – Residential mortgage loans held in the Company’s loan portfolio are made to borrowers that demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current income, employment status, current assets, and other financial resources, credit history, and the value of the collateral.  Collateral consists of mortgage liens on 1-4 family residential properties.  Collateral values are determined based upon third party appraisals and evaluations.  The Company does not originate sub-prime loans. 

 

17


 

Real Estate Home Equity – Home equity loans and lines are made to qualified individuals for legitimate purposes generally secured by senior or junior mortgage liens on owner-occupied 1-4 family homes or vacation homes.  Borrower qualifications include favorable credit history combined with supportive income and debt ratio requirements and combined loan to value ratios within established policy guidelines.  Collateral values are determined based upon third party appraisals and evaluations.  

 

Consumer Loans – This loan portfolio includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit.  The majority of the consumer loan portfolio consists of indirect and direct automobile loans.  Lending policy establishes maximum debt to income ratios, minimum credit scores, and includes guidelines for verification of applicants’ income and receipt of credit reports.

 

Credit Quality Indicators.  As part of the ongoing monitoring of the Company’s loan portfolio quality, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment performance, credit documentation, and current economic/market trends, among other factors.  Risk ratings are assigned to each loan and revised as needed through established monitoring procedures for individual loan relationships over a predetermined amount and review of smaller balance homogenous loan pools.  The Company uses the definitions noted below for categorizing and managing its criticized loans.  Loans categorized as “Pass” do not meet the criteria set forth for the Special Mention, Substandard, or Doubtful categories and are not considered criticized.

 

Special Mention – Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems.  Loans in this category may not meet required underwriting criteria and have no mitigating factors.  More than the ordinary amount of attention is warranted for these loans.

 

Substandard – Loans in this category exhibit well-defined weaknesses that would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower.  The possibility of loss is much more evident and above average supervision is required for these loans.

 

Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized as Substandard, with the characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

The following table presents the risk category of loans by segment.

 

 

 

Commercial,

 

 

 

 

 

 

 

 

 

 

 

Financial,

 

 

 

 

 

 

 

Total Criticized

(Dollars in Thousands)

 

Agriculture

 

Real Estate

 

Consumer

 

Loans

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

$

9,277

 

$

16,105

 

$

317

 

$

25,699

Substandard

 

 

1,322

 

 

34,367

 

 

856

 

 

36,545

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

Total Criticized Loans

 

$

10,599

 

$

50,472

 

$

1,173

 

$

62,244

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

$

3,300

 

$

23,183

 

$

216

 

$

26,699

Substandard

 

 

1,158

 

 

39,800

 

 

549

 

 

41,507

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

Total Criticized Loans

 

$

4,458

 

$

62,983

 

$

765

 

$

68,206

 

Troubled Debt Restructurings (“TDRs”)TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower that it would not otherwise consider.  In these instances, as part of a work-out alternative, the Company will make concessions including the extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof.  The impact of the TDR modifications and defaults are factored into the allowance for loan losses on a loan-by-loan basis as all TDRs are, by definition, impaired loans.  Thus, specific reserves are established based upon the results of either a discounted cash flow analysis or the underlying collateral value, if the loan is deemed to be collateral dependent.  A TDR classification can be removed if the borrower’s financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, and the loan is subsequently refinanced or restructured at market terms and qualifies as a new loan.

18


 

The following table presents loans classified as TDRs.

  

 

 

September 30, 2017

 

December 31, 2016

(Dollars in Thousands)

 

Accruing

 

Nonaccruing

 

Accruing

 

Nonaccruing

Commercial, Financial and Agricultural

 

$

826

 

$

21

 

$

772

 

$

40

Real Estate – Construction

 

 

-

 

 

65

 

 

-

 

 

-

Real Estate – Commercial Mortgage

 

 

18,460

 

 

1,061

 

 

20,673

 

 

1,259

Real Estate – Residential

 

 

11,494

 

 

991

 

 

13,969

 

 

444

Real Estate – Home Equity

 

 

2,515

 

 

187

 

 

2,647

 

 

-

Consumer

 

 

132

 

 

-

 

 

172

 

 

-

Total TDRs

 

$

33,427

 

$

2,325

 

$

38,233

 

$

1,743

 

Loans classified as TDRs during the periods indicated are presented in the table below.  The modifications made during the reporting period involved either an extension of the loan term, an interest rate adjustment, or a principal moratorium, and the financial impact of these modifications was not material.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2017

 

2017

 

 

 

 

Pre-

 

Post-

 

 

 

Pre-

 

Post-

 

 

Number

 

Modified

 

Modified

 

Number

 

Modified

 

Modified

 

 

of

 

Recorded

 

Recorded

 

of

 

Recorded

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment

 

Investment

 

Contracts

 

Investment

 

Investment

Commercial, Financial and Agricultural

 

1

 

$

32

 

$

22

 

1

 

$

32

 

$

22

Real Estate – Construction

 

-

 

 

-

 

 

-

 

1

 

 

64

 

 

65

Real Estate – Commercial Mortgage

 

1

 

 

160

 

 

70

 

1

 

 

160

 

 

70

Real Estate – Residential

 

1

 

 

101

 

 

102

 

2

 

 

316

 

 

283

Real Estate – Home Equity

 

3

 

 

149

 

 

147

 

4

 

 

205

 

 

203

Consumer

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Total TDRs

 

6

 

$

442

 

 $

341

 

9

 

$

777

 

$

643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2016

 

 

 

 

Pre-

 

Post-

 

 

 

Pre-

 

Post-

 

 

Number

 

Modified

 

Modified

 

Number

 

Modified

 

Modified

 

 

of

 

Recorded

 

Recorded

 

of

 

Recorded

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment

 

Investment

 

Contracts

 

Investment

 

Investment

Commercial, Financial and Agricultural

 

-

 

$

-

 

$

-

 

-

 

$

-

 

$

-

Real Estate – Construction

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Real Estate – Commercial Mortgage

 

-

 

 

-

 

 

-

 

1

 

 

332

 

 

332

Real Estate – Residential

 

-

 

 

-

 

 

-

 

6

 

 

589

 

 

590

Real Estate – Home Equity

 

1

 

 

17

 

 

17

 

5

 

 

205

 

 

206

Consumer

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Total TDRs

 

1

 

$

17

 

 $

17

 

12

 

$

1,126

 

$

1,128

19


 

For the three and nine months ended September 30, 2017, there were no loans modified as TDRs within the previous 12 months that have substantially defaulted.  For the three and nine months ended September 30, 2016, loans modified as TDRs within the previous 12 months that have substantially defaulted during periods indicated are presented in the table below. 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2016

 

 

Number

 

Post-Modified

 

 

Number

 

Post-Modified

 

 

 

of

 

Recorded

 

 

of

 

Recorded

 

(Dollars in Thousands)

 

Contracts

 

Investment(1)

 

 

Contracts

 

Investment(1)

 

Commercial, Financial and Agricultural

 

-

 

$

-

 

 

-

 

$

-

 

Real Estate – Construction

 

-

 

 

-

 

 

-

 

 

-

 

Real Estate – Commercial Mortgage

 

-

 

 

-

 

 

-

 

 

-

 

Real Estate – Residential

 

-

 

 

-

 

 

1

 

 

98

 

Real Estate – Home Equity

 

-

 

 

-

 

 

1

 

 

3

 

Consumer

 

-

 

 

-

 

 

1

 

 

35

 

Total TDRs

 

-

 

$

-

 

 

3

 

$

136

 

 

(1)      Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.

 

The following table provides information on how TDRs were modified during the periods indicated.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2017

 

2017

 

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment(1)

 

Contracts

 

Investment(1)

Extended amortization

 

1

 

$

70

 

1

 

$

70

Interest rate adjustment

 

-

 

 

-

 

3

 

 

302

Extended amortization and interest rate adjustment

 

4

 

 

249

 

4

 

 

249

Other

 

1

 

 

22

 

1

 

 

22

Total TDRs

 

6

 

$

341

 

9

 

$

643

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2016

 

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment(1)

 

Contracts

 

Investment(1)

Extended amortization

 

1

 

$

17

 

2

 

$

107

Interest rate adjustment

 

-

 

 

-

 

-

 

 

-

Extended amortization and interest rate adjustment

 

-

 

 

-

 

10

 

 

1,021

Total TDRs

 

1

 

$

17

 

12

 

$

1,128

 

(1)      Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.

 

NOTE 4 – OTHER REAL ESTATE OWNED

 

The following table presents other real estate owned activity for the periods indicated.

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2017

 

2016

 

2017

 

2016

Beginning Balance

$

7,968

 

$

14,622

 

$

10,638

 

$

19,290

Additions

 

339

 

 

890

 

 

2,024

 

 

3,309

Valuation Write-downs

 

(350)

 

 

(397)

 

 

(1,118)

 

 

(1,910)

Sales

 

(1,970)

 

 

(2,377)

 

 

(5,291)

 

 

(7,951)

Other

 

-

 

 

-

 

 

(266)

 

 

-

Ending Balance

$

5,987

 

$

12,738

 

$

5,987

 

$

12,738

 

20


 

Net expenses applicable to other real estate owned include the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2017

 

2016

 

2017

 

2016

Gains from the Sale of Properties

$

(711)

 

$

(70)

 

$

(980)

 

$

(364)

Losses from the Sale of Properties

 

123

 

 

216

 

 

318

 

 

977

Rental Income from Properties

 

(19)

 

 

(34)

 

 

(73)

 

 

(66)

Property Carrying Costs

 

139

 

 

312

 

 

397

 

 

849

Valuation Adjustments

 

350

 

 

397

 

 

1,118

 

 

1,910

Total

$

(118)

 

$

821

 

$

780

 

$

3,306

 

As of September 30, 2017, the Company had $0.8 million of loans secured by residential real estate in the process of foreclosure

 

NOTE 5 - EMPLOYEE BENEFIT PLANS

 

The Company has a defined benefit pension plan covering substantially all full-time and eligible part-time associates and a Supplemental Executive Retirement Plan (“SERP”) covering its executive officers.

 

The components of the net periodic benefit cost for the Company's qualified benefit pension plan were as follows:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2017

 

2016

 

2017

 

2016

Service Cost

$

1,688

 

$

1,613

 

$

5,064

 

$

4,839

Interest Cost

 

1,437

 

 

1,397

 

 

4,312

 

 

4,191

Expected Return on Plan Assets

 

(2,006)

 

 

(1,934)

 

 

(6,019)

 

 

(5,802)

Prior Service Cost Amortization

 

56

 

 

69

 

 

167

 

 

207

Net Loss Amortization

 

953

 

 

801

 

 

2,859

 

 

2,403

Net Periodic Benefit Cost

$

2,128

 

$

1,946

 

$

6,383

 

$

5,838

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

4.21%

 

 

4.52%

 

 

4.21%

 

 

4.52%

Long-term Rate of Return on Assets

 

7.25%

 

 

7.50%

 

 

7.25%

 

 

7.50%

 

The components of the net periodic benefit cost for the Company's SERP were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2017

 

2016

 

2017

 

2016

Interest Cost

$

48

 

$

40

 

$

143

 

$

120

Net Loss Amortization

 

149

 

 

190

 

 

448

 

 

570

Net Periodic Benefit Cost

$

197

 

$

230

 

$

591

 

$

690

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

3.92%

 

 

4.13%

 

 

3.92%

 

 

4.13%

 

NOTE 6 - COMMITMENTS AND CONTINGENCIES

 

Lending Commitments.  The Company is a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of its clients.  These financial instruments consist of commitments to extend credit and standby letters of credit.

 

The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amount of those instruments.  The Company uses the same credit policies in establishing commitments and issuing letters of credit as it does for on-balance sheet instruments.  The amounts associated with the Company’s off-balance sheet obligations were as follows:

 

21


 

 

September 30, 2017

 

December 31, 2016

(Dollars in Thousands)

Fixed

 

Variable

 

Total

 

Fixed

 

Variable

 

Total

Commitments to Extend Credit (1)

$

90,441

 

$

376,864

 

$

467,305

 

$

69,993

 

$

332,420

 

$

402,413

Standby Letters of Credit

 

4,676

 

 

-

 

 

4,676

 

 

4,768

 

 

-

 

 

4,768

Total

$

95,117

 

$

376,864

 

$

471,981

 

$

74,761

 

$

332,420

 

$

407,181

 

(1)     Commitments include unfunded loans, revolving lines of credit, and other unused commitments.

 

Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. In general, management does not anticipate any material losses as a result of participating in these types of transactions.  However, any potential losses arising from such transactions are reserved for in the same manner as management reserves for its other credit facilities.

 

For both on- and off-balance sheet financial instruments, the Company requires collateral to support such instruments when it is deemed necessary.  The Company evaluates each client’s creditworthiness on a case-by-case basis.  The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include deposits held in financial institutions; U.S. Treasury securities; other marketable securities; real estate; accounts receivable; property, plant and equipment; and inventory.

 

Contingencies.  The Company is a party to lawsuits and claims arising out of the normal course of business.  In management's opinion, there are no known pending claims or litigation, the outcome of which would, individually or in the aggregate, have a material effect on the consolidated results of operations, financial position, or cash flows of the Company.

 

Indemnification Obligation.  The Company is a member of the Visa U.S.A. network.  Visa U.S.A member banks are required to indemnify it for potential future settlement of certain litigation (the “Covered Litigation”) that relates to several antitrust lawsuits challenging the practices of Visa and MasterCard International.  In 2008, the Company, as a member of the Visa U.S.A. network, obtained Class B shares of Visa, Inc. upon its initial public offering.  Since its initial public offering, Visa, Inc. has funded a litigation reserve for the Covered Litigation resulting in a reduction in the Class B shares held by the Company.  During the first quarter of 2011, the Company sold its remaining Class B shares resulting in a $3.2 million pre-tax gain.  Associated with this sale, the Company entered into a swap contract with the purchaser of the shares that requires a payment to the counterparty in the event that Visa, Inc. makes subsequent revisions to the conversion ratio for its Class B shares.  Fixed charges included in the swap liability are payable quarterly until the litigation reserve is fully liquidated and at which time the aforementioned swap contract will be terminated.  Quarterly fixed payments approximate $89,000.  Conversion ratio payments and ongoing fixed quarterly charges are reflected in earnings in the period incurred.

 

NOTE 7 – FAIR VALUE MEASUREMENTS

 

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability.  In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  Such valuation techniques are consistently applied.  Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.  ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is as follows:

 

·         Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date

 

·         Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from, or corroborated, by market data by correlation or other means

 

22


 

·         Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Securities Available for Sale.  U.S. Treasury securities are reported at fair value utilizing Level 1 inputs.  Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs.  For these securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, credit information and the bond’s terms and conditions, among other things.

 

In general, the Company does not purchase securities that have a complicated structure.  The Company’s entire portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue based municipal bonds.  Pricing for such instruments is easily obtained.  From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

 

Fair Value Swap.  The Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares.  The valuation represents the amount due and payable to the counterparty based upon the revised share conversion rate, if any, during the period.  At September 30, 2017, there were no amounts payable.

A summary of fair values for assets and liabilities consisted of the following:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total Fair

(Dollars in Thousands)

Inputs

 

Inputs

 

Inputs

 

Value

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

256,798

 

$

-

 

$

-

 

$

256,798

 

U.S. Government Agency

 

-

 

 

147,989

 

 

-

 

 

147,989

 

States and Political Subdivisions

 

-

 

 

95,990

 

 

-

 

 

95,990

 

Mortgage-Backed Securities

 

-

 

 

1,332

 

 

-

 

 

1,332

 

Equity Securities 

 

-

 

 

8,737

 

 

-

 

 

8,737

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

286,278

 

$

-

 

$

-

 

$

286,278

 

U.S. Government Agency

 

-

 

 

131,640

 

 

-

 

 

131,640

 

States and Political Subdivisions

 

-

 

 

94,839

 

 

-

 

 

94,839

 

Mortgage-Backed Securities

 

-

 

 

1,430

 

 

-

 

 

1,430

 

Equity Securities 

 

-

 

 

8,547

 

 

-

 

 

8,547

 

Assets Measured at Fair Value on a Non-Recurring Basis

 

Certain assets are measured at fair value on a non-recurring basis (i.e., the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances).  An example would be assets exhibiting evidence of impairment.  The following is a description of valuation methodologies used for assets measured on a non-recurring basis. 

 

Impaired Loans.  Impairment for collateral dependent loans is measured using the fair value of the collateral less selling costs.  The fair value of collateral is determined by an independent valuation or professional appraisal in conformance with banking regulations.  Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market, and the judgment and estimation involved in the real estate appraisal process.  Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.  Valuation techniques are consistent with those techniques applied in prior periods.  Impaired collateral dependent loans had a carrying value of $5.7 million with a valuation allowance of $0.7 million at September 30, 2017 and $6.3 million and $0.6 million, respectively, at December 31, 2016.

 

Loans Held for Sale.  These loans are carried at the lower of cost or fair value and are adjusted to fair value on a non-recurring basis.  Fair value is based on observable markets rates for comparable loan products, which is considered a Level 2 fair value measurement.

 

23


 

Other Real Estate Owned.  During the first nine months of 2017, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for loan losses based on the fair value of the foreclosed asset less estimated cost to sell.  The fair value of the foreclosed asset is determined by an independent valuation or professional appraisal in conformance with banking regulations.  On an ongoing basis, we obtain updated appraisals on foreclosed assets and realize valuation adjustments as necessary.  The fair value of foreclosed assets is estimated using Level 3 inputs due to the judgment and estimation involved in the real estate valuation process. 

 

Assets and Liabilities Disclosed at Fair Value

 

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities, for which it is practical to estimate fair value and the following is a description of valuation methodologies used for those assets and liabilities.

 

Cash and Short-Term Investments.  The carrying amount of cash and short-term investments is used to approximate fair value, given the short time frame to maturity and as such assets do not present unanticipated credit concerns.

  

Securities Held to Maturity.  Securities held to maturity are valued in accordance with the methodology previously noted in this footnote under the caption “Assets and Liabilities Measured at Fair Value on a Recurring Basis – Securities Available for Sale”.

  

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 that reflect the credit, interest rate, and liquidity risks inherent in each loan category.  The calculated present values are then reduced by an allocation of the allowance for loan losses against each respective loan category.

 

Deposits.  The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market Accounts and Savings Accounts are the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using present value techniques and rates currently offered for deposits of similar remaining maturities.

 

Subordinated Notes Payable.  The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar obligations.

 

Short-Term and 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.

 

24


 

A summary of estimated fair values of significant financial instruments consisted of the following:

 

 

 

September 30, 2017

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

50,420

 

$

50,420

 

$

-

 

$

-

Short-Term Investments

 

 

140,694

 

 

140,694

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

510,846

 

 

256,798

 

 

254,048

 

 

-

Investment Securities, Held to Maturity

 

 

184,262

 

 

93,128

 

 

90,395

 

 

-

Loans Held for Sale

 

 

7,800

 

 

-

 

 

7,800

 

 

-

Loans, Net of Allowance for Loan Losses

 

 

1,616,999

 

 

-

 

 

-

 

 

1,608,364

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,347,617

 

$

-

 

$

2,280,468

 

$

-

Short-Term Borrowings

 

 

6,777

 

 

-

 

 

6,808

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

41,012

 

 

-

Long-Term Borrowings

 

 

15,047

 

 

-

 

 

15,238

 

 

-

 

 

 

December 31, 2016

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

48,268

 

$

48,268

 

$

-

 

$

-

Short-Term Investments

 

 

247,779

 

 

247,779

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

522,734

 

 

286,278

 

 

236,456

 

 

-

Investment Securities, Held to Maturity

 

 

177,365

 

 

119,157

 

 

57,589

 

 

-

Loans Held for Sale

 

 

10,886

 

 

-

 

 

10,886

 

 

-

Loans, Net of Allowance for Loan Losses

 

 

1,547,858

 

 

-

 

 

-

 

 

1,543,576

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,412,286

 

$

-

 

$

2,272,572

 

$

-

Short-Term Borrowings

 

 

12,749

 

 

-

 

 

12,802

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

42,024

 

 

-

Long-Term Borrowings

 

 

14,881

 

 

-

 

 

15,122

 

 

-

 

All non-financial instruments are excluded from the above table.  The disclosures also do not include goodwill.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

25


 

NOTE 8 –  OTHER COMPREHENSIVE INCOME

 

The amounts allocated to other comprehensive income are presented in the table below.  Reclassification adjustments related to securities held for sale are included in net gain/loss on securities transactions in the accompanying consolidated statements of comprehensive income.  For the periods presented, reclassifications adjustments related to securities held for sale was not material. 

 

 

 

 

Before

 

Tax

 

Net of

 

 

 

Tax

 

(Expense)

 

Tax

 (Dollars in Thousands)

Amount

 

Benefit

 

Amount

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain/loss on securities available for sale

$

(99)

 

$

38

 

$

(61)

Amortization of losses on securities transferred from available for sale to held to

 

 

 

 

 

 

 

 

 

maturity

  

19

 

 

(7)

 

 

12

 

 

Total Other Comprehensive Loss

$

(80)

 

$

31

 

$

(49)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain/loss on securities available for sale

$

516

 

$

(200)

 

$

316

Amortization of losses on securities transferred from available for sale to held to

 

 

 

 

 

 

 

 

 

maturity

 

57

 

 

(22)

 

 

35

 

 

Total Other Comprehensive Income

$

573

 

$

(222)

 

$

351

 

 

 

 

Before

 

Tax

 

Net of

 

 

 

Tax

 

(Expense)

 

Tax

 (Dollars in Thousands)

Amount

 

Benefit

 

Amount

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain/loss on securities available for sale

$

(1,158)

 

$

447

 

$

(711)

Amortization of losses on securities transferred from available for sale to held to

 

 

 

 

 

 

 

 

 

maturity

  

21

 

 

(8)

 

 

13

 

 

Total Other Comprehensive Income

$

(1,137)

 

$

439

 

$

(698)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain/loss on securities available for sale

$

1,535

 

$

(592)

 

$

943

Amortization of losses on securities transferred from available for sale to held to

 

 

 

 

 

 

 

 

 

maturity

 

60

 

 

(23)

 

 

37

 

 

Total Other Comprehensive Income

$

1,595

 

$

(615)

 

$

980

 

Accumulated other comprehensive loss was comprised of the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Securities

 

 

 

 

Other

 

Available

 

Retirement

 

Comprehensive

 (Dollars in Thousands)

  for Sale

 

Plans

 

 Loss 

Balance as of January 1, 2017

$

(583)

 

$

(25,642)

 

$

(26,225)

Other comprehensive income during the period

 

351

 

 

-

 

 

351

Balance as of September 30, 2017

$

(232)

 

$

(25,642)

 

$

(25,874)

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2016

$

(127)

 

$

(22,130)

 

$

(22,257)

Other comprehensive income during the period

 

980

 

 

-

 

 

980

Balance as of September 30, 2016

$

853

 

$

(22,130)

 

$

(21,277)

 

26


 

NOTE 9 – ACCOUNTING STANDARDS UPDATES

 

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.  A significant portion of the Company’s revenue is comprised of net interest income on financial instruments, which is explicitly excluded from the scope of ASU 2014-09.  In addition to interest income, the Company has various noninterest income revenue streams that the Company is in the process of assessing.  The Company formed a revenue recognition working group that has completed its scoping and walk-through of noninterest income revenue streams.  Amongst non-interest income revenue streams, mortgage banking fees are not in the scope of the standard.  Management has substantially completed its detailed contract review for the remaining revenue streams and is in the process of evaluating any impact on its financial statements.  ASU 2014-09 is effective for the Company on January 1, 2018 and must be retrospectively applied.  The Company expects to adopt the standard with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

 

ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  ASU 2016-13 will be effective for the Company on January 1, 2020.  The Company is currently evaluating the potential impact of ASU 2016-13 on its financial statements.

 

ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350).” ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  ASU 2017-04 is effective for the Company on January 1, 2020 and is not expected to have a significant impact on its financial statements.

 

ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Asset.”  ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets, including partial sales of real estate.  Historically, accounting principles generally accepted in the United States (“GAAP”) contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. ASU 2017-05 is effective for the Company on January 1, 2018 and is not expected to have a significant impact on its financial statements.

ASU 2017-07, “Compensation – Retirement Benefits (Topic 715).” ASU 2017-07  requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.  ASU 2017-07 is effective for the Company on January 1, 2018 and is not expected to have a significant impact on its financial statements.

 

ASU 2017-09, “Compensation – Stock Compensation (Topic 718).” ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification.  Modification accounting is required only if the fair value, or calculated intrinsic value if it is used to measure the award, the vesting conditions, or the classification of the award as equity or liability changes as a result of the change in terms or conditions.  ASU 2017-09 is effective for the Company on January 1, 2018 and is not expected to have a significant impact on its financial statements.

 

27


 

 ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).” ASU 2017-11 has two parts (i) Accounting for Certain Financial Instruments with Down Round Features and (ii) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.  Part (i) changes the classification analysis of certain equity-linked financial instruments with down round features.  When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments.  Part (ii) re-characterizes the indefinite deferral of certain provisions of Topic 480 that are now presented as pending continent in the Codification, to a scope exception.  Those amendments do not have an accounting effect.  ASU 2017-11 is effective for the Company on January 1, 2019 and is not expected to have a significant impact on its financial statements.

 

ASU 2017-12, “Derivatives and Hedging (Topic 815).”    ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815. The amendments objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and to simplify the application of hedge accounting by preparers.  ASU 2017-12 is effective for the Company on January 1, 2019 and is not expected to have a significant impact on its financial statements.

  

28


 

Item 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes.  The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2017 compares with prior years.  Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, is referred to as "CCBG," "Company," "we," "us," or "our."

 

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including this MD&A section, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control.  The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.

 

All forward-looking statements, by their nature, are subject to risks and uncertainties.  Our actual future results may differ materially from those set forth in our forward-looking statements.  Please see the Introductory Note and Item 1A. Risk Factors of our 2016 Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

 

However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.  Any forward-looking statements made by us or on our behalf speak only as of the date they are made.  We do not undertake to update any forward-looking statement, except as required by applicable law.

 

BUSINESS OVERVIEW

 

We are a financial holding company headquartered in Tallahassee, Florida, and we are the parent of our wholly owned subsidiary, Capital City Bank (the "Bank" or "CCB").  The Bank offers a broad array of products and services through a total of 60 full-service offices located in Florida, Georgia, and Alabama.  The Bank offers commercial and retail banking services, as well as trust and asset management, retail securities brokerage and data processing services.

 

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest and fees received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings.  Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as deposit fees, wealth management fees, mortgage banking fees, and bank card fees.

 

A detailed discussion regarding the economic conditions in our markets and our long-term strategic objectives is included as part of the MD&A section of our 2016 Form 10-K.

 

NON-GAAP FINANCIAL MEASURE

 

We present a tangible common equity ratio that removes the effect of goodwill resulting from merger and acquisition activity.  We believe this measure is useful to investors because it allows investors to more easily compare our capital adequacy to other companies in the industry. The GAAP to non-GAAP reconciliation is provided below.

 

 

 

 

2017

 

2016

 

2015

(Dollars in Thousands)

 

Third

 

Second

 

First

 

Fourth

 

Third

 

Second

 

First

 

Fourth

Shareowners' Equity (GAAP)

 

$

285,201

 

$

281,513

 

$

278,059

 

$

275,168

 

$

276,624

 

$

274,824

 

$

276,833

 

$

274,352

Less: Goodwill (GAAP)

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

Tangible Shareowners' Equity (non-GAAP)

A

 

200,390

 

 

196,702

 

 

193,248

 

 

190,357

 

 

191,813

 

 

190,013

 

 

192,022

 

 

189,541

Total Assets (GAAP)

 

 

2,790,842

 

 

2,814,843

 

 

2,895,531

 

 

2,845,197

 

 

2,753,154

 

 

2,767,636

 

 

2,792,186

 

 

2,797,860

Less: Goodwill (GAAP)

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

Tangible Assets (non-GAAP)

B

$

2,706,031

 

$

2,730,032

 

$

2,810,720

 

$

2,760,386

 

$

2,668,343

 

$

2,682,825

 

$

2,707,375

 

$

2,713,049

Tangible Common Equity Ratio (non-GAAP)

A/B

 

7.41%

 

 

7.21%

 

 

6.88%

 

 

6.90%

 

 

7.19%

 

 

7.08%

 

 

7.09%

 

 

6.99%

29


 

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

(Dollars in Thousands, Except

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Per Share Data)

Third

 

 

Second

 

 

First

 

 

Fourth

 

 

Third

 

 

Second

 

 

First

 

 

Fourth

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

$

22,341

 

 

$

21,422

 

 

$

20,540

 

 

$

20,832

 

 

$

20,104

 

 

$

20,174

 

 

$

20,044

 

 

$

20,602

 

 

Interest Expense

 

1,080

 

 

 

926

 

 

 

804

 

 

 

773

 

 

 

784

 

 

 

798

 

 

 

834

 

 

 

808

 

 

Net Interest Income

 

21,261

 

 

 

20,496

 

 

 

19,736

 

 

 

20,059

 

 

 

19,320

 

 

 

19,376

 

 

 

19,210

 

 

 

19,794

 

 

Provision for Loan Losses

 

490

 

 

 

589

 

 

 

310

 

 

 

464

 

 

 

-

 

 

 

(97)

 

 

 

452

 

 

 

513

 

 

Net Interest Income After

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Provision for Loan Losses

 

20,771

 

 

 

19,907

 

 

 

19,426

 

 

 

19,595

 

 

 

19,320

 

 

 

19,473

 

 

 

18,758

 

 

 

19,281

 

 

Noninterest Income(2)

 

12,996

 

 

 

13,135

 

 

 

12,718

 

 

 

12,778

 

 

 

13,011

 

 

 

15,215

 

 

 

12,677

 

 

 

13,221

 

 

Noninterest Expense

 

26,707

 

 

 

27,921

 

 

 

27,922

 

 

 

27,560

 

 

 

28,022

 

 

 

28,702

 

 

 

28,930

 

 

 

28,280

 

 

Income  Before  Income Taxes

 

7,060

 

 

 

5,121

 

 

 

4,222

 

 

 

4,813

 

 

 

4,309

 

 

 

5,986

 

 

 

2,505

 

 

 

4,222

 

 

Income Tax Expense

 

2,505

 

 

 

1,560

 

 

 

1,478

 

 

 

1,517

 

 

 

1,436

 

 

 

2,056

 

 

 

858

 

 

 

1,620

 

 

Net Income

 

4,555

 

 

 

3,561

 

 

 

2,744

 

 

 

3,296

 

 

 

2,873

 

 

 

3,930

 

 

 

1,647

 

 

 

2,602

 

 

Net Interest Income (FTE)

$

21,595

 

 

$

20,799

 

 

$

20,006

 

 

$

20,335

 

 

$

19,603

 

 

$

19,617

 

 

$

19,421

 

 

$

20,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Basic

$

0.27

 

 

$

0.21

 

 

$

0.16

 

 

$

0.20

 

 

$

0.18

 

 

$

0.22

 

 

$

0.10

 

 

$

0.16

 

 

Net Income Diluted

 

0.27

 

 

 

0.21

 

 

 

0.16

 

 

 

0.20

 

 

 

0.17

 

 

 

0.22

 

 

 

0.10

 

 

 

0.16

 

 

Cash Dividends Declared

 

0.07

 

 

 

0.05

 

 

 

0.05

 

 

 

0.05

 

 

 

0.04

 

 

 

0.04

 

 

 

0.04

 

 

 

0.04

 

 

Diluted Book Value

 

16.73

 

 

 

16.54

 

 

 

16.38

 

 

 

16.23

 

 

 

16.39

 

 

 

16.31

 

 

 

16.04

 

 

 

15.93

 

 

Market Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  High

 

24.58

 

 

 

22.39

 

 

 

21.79

 

 

 

23.15

 

 

 

15.35

 

 

 

15.96

 

 

 

15.88

 

 

 

16.05

 

 

  Low

 

19.60

 

 

 

17.68

 

 

 

19.22

 

 

 

14.29

 

 

 

13.32

 

 

 

13.16

 

 

 

12.83

 

 

 

13.56

 

 

  Close

 

24.01

 

 

 

20.42

 

 

 

21.39

 

 

 

20.48

 

 

 

14.77

 

 

 

13.92

 

 

 

14.59

 

 

 

15.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Average Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net

$

1,638,578

 

 

$

1,608,629

 

 

$

1,585,561

 

 

$

1,573,264

 

 

$

1,555,889

 

 

$

1,531,777

 

 

$

1,507,508

 

 

$

1,492,521

 

 

Earning Assets

 

2,466,287

 

 

 

2,502,030

 

 

 

2,529,207

 

 

 

2,423,388

 

 

 

2,417,943

 

 

 

2,447,777

 

 

 

2,440,718

 

 

 

2,353,729

 

 

Total Assets

 

2,779,960

 

 

 

2,817,479

 

 

 

2,845,140

 

 

 

2,743,463

 

 

 

2,734,465

 

 

 

2,767,854

 

 

 

2,763,746

 

 

 

2,678,214

 

 

Deposits

 

2,329,162

 

 

 

2,373,423

 

 

 

2,407,278

 

 

 

2,306,917

 

 

 

2,288,741

 

 

 

2,276,553

 

 

 

2,258,600

 

 

 

2,174,718

 

 

Shareowners’ Equity

 

285,296

 

 

 

281,661

 

 

 

278,489

 

 

 

278,943

 

 

 

277,407

 

 

 

279,532

 

 

 

277,464

 

 

 

275,893

 

 

Common Equivalent Average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

16,965

 

 

 

16,955

 

 

 

16,919

 

 

 

16,809

 

 

 

16,804

 

 

 

17,144

 

 

 

17,202

 

 

 

17,145

 

 

  Diluted

 

17,044

 

 

 

17,016

 

 

 

16,944

 

 

 

16,913

 

 

 

16,871

 

 

 

17,196

 

 

 

17,235

 

 

 

17,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

0.65

%

 

 

0.51

%

 

 

0.39

%

 

 

0.48

%

 

 

0.42

%

 

 

0.57

%

 

 

0.24

%

 

 

0.39

%

 

Return on Average Equity

 

6.33

 

 

 

5.07

 

 

 

4.00

 

 

 

4.70

 

 

 

4.12

 

 

 

5.65

 

 

 

2.39

 

 

 

3.74

 

 

Net Interest Margin (FTE)

 

3.48

 

 

 

3.33

 

 

 

3.21

 

 

 

3.34

 

 

 

3.23

 

 

 

3.22

 

 

 

3.20

 

 

 

3.37

  

 

Noninterest Income as % of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Operating Revenue

 

37.94

 

 

 

39.05

 

 

 

39.19

 

 

 

38.91

 

 

 

40.24

 

 

 

43.99

 

 

 

39.76

 

 

 

40.05

 

 

Efficiency Ratio

 

77.21

 

 

 

82.28

 

 

 

85.33

 

 

 

83.23

 

 

 

85.92

 

 

 

82.40

 

 

 

90.13

 

 

 

85.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 $

13,339

 

 

$

13,242

 

 

 $

13,335

 

 

$

13,431

 

 

$

13,744

 

 

$

13,677

 

 

$

13,613

 

 

$

13,953

 

 

Allowance for Loan Losses to Loans

0.82

%

 

 

0.81

%

 

 

0.84

%

 

 

0.86

%

 

 

0.88

%

 

 

0.89

%

 

 

0.90

%

 

 

0.93

%

 

Nonperforming Assets (“NPAs”)

 $

12,545

 

 

 $

15,934

 

 

 $

17,799

 

 

 $

19,171

 

 

 $

21,352

 

 

 $

22,836

 

 

 $

26,499

 

 

 $

29,595

  

 

NPAs to Total Assets

 

0.45

%

 

 

0.57

%

 

 

0.61

%

 

 

0.67

%

 

 

0.78

%

 

 

0.83

%

 

 

0.95

%

 

 

1.06

%

 

NPAs to Loans plus OREO

 

0.76

 

 

 

0.97

 

 

 

1.11

 

 

 

1.21

 

 

 

1.35

 

 

 

1.48

 

 

 

1.73

 

 

 

1.94

 

 

Allowance to Non-Performing Loans

203.39

 

 

 

166.23

 

 

 

160.70

 

 

 

157.40

 

 

 

159.56

 

 

 

166.50

 

 

 

150.44

 

 

 

135.40

 

 

Net Charge-Offs to Average Loans

0.10

 

 

 

0.17

 

 

 

0.10

 

 

 

0.20

 

 

 

(0.02)

 

 

 

(0.04)

 

 

 

0.21

 

 

 

0.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

16.19

%

 

 

15.58

%

 

 

15.68

%

 

 

15.51

%

 

 

15.48

%

 

 

15.63

%

 

 

16.39

%

 

 

16.42

%

 

Total Capital

 

16.96

 

 

 

16.32

 

 

 

16.44

 

 

 

16.28

 

 

 

16.28

 

 

 

16.44

 

 

 

17.20

 

 

 

17.25

 

 

Common Equity Tier 1

 

13.26

 

 

 

12.72

 

 

 

12.77

 

 

 

12.61

 

 

 

12.55

 

 

 

12.65

 

 

 

12.82

 

 

 

12.84

 

 

Leverage

 

10.48

 

 

 

10.20

 

 

 

9.95

 

 

 

10.23

 

 

 

10.12

 

 

 

9.98

 

 

 

10.34

 

 

 

10.65

  

 

Tangible Common Equity(1)

 

7.41

 

 

 

7.21

 

 

 

6.88

 

 

 

6.90

 

 

 

7.19

 

 

 

7.08

 

 

 

7.09

 

 

 

6.99

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Non-GAAP financial measure.  See non-GAAP reconciliation on page 29.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)Includes $2.5 million gain on partial retirement of trust preferred securities in second quarter, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30


 

FINANCIAL OVERVIEW

 

A summary overview of our financial performance is provided below.

 

Results of Operations

 

·         Net income of $4.6 million, or $0.27 per diluted share, for the third quarter of 2017 compared to net income of $3.6 million, or $0.21 per diluted share, for the second quarter of 2017, and net income of $2.9 million, or $0.17 per diluted share for the third quarter of 2016.  For the first nine months of 2017, we realized net income of $10.9 million, or $0.64 per diluted share, compared to net income of $8.4 million, or $0.49 per diluted share, for the same period of 2016. 

 

·         Tax equivalent net interest income for the third quarter of 2017 was $21.6 million compared to $20.8 million for the second quarter of 2017 and $19.6 million for the third quarter of 2016.  The increase over both the prior quarters was driven by growth in the loan portfolio, coupled with higher short-term interest rates, partially offset by a higher rate paid on negotiated rate deposits.  For the first nine months of 2017, tax equivalent net interest income totaled $62.4 million compared to $58.6 million for the comparable period in 2016.  The year over year increase was driven by growth in the loan and investment portfolios, coupled with higher short-term interest rates, partially offset by a higher rate paid on negotiated rate deposits and one less calendar day. 

 

·         Provision for loan losses was $0.5 million for the third quarter of 2017 compared to $0.6 million for the second quarter of 2017 and no provision for the third quarter of 2016.  For the first nine months of 2017, the loan loss provision totaled $1.4 million compared to $0.4 million for the same period of 2016.  The increase in the loan loss provision compared to the prior year periods was primarily due to growth in the loan portfolio

 

·          Noninterest income for the third quarter of 2017 totaled $13.0 million, a decrease of $0.1 million, or 1.1%, from the second quarter of 2017 and comparable to the third quarter of 2016.  For the first nine months of 2017, noninterest income totaled $38.8 million, a $2.0 million, or 5.0%, decrease from the same period of 2016, primarily due to a $2.5 million gain from the partial retirement of our trust preferred securities (“TRUPs”) in the second quarter of 2016, that was partially offset by higher wealth management fees and mortgage banking fees. 

 

·         Noninterest expense for the third quarter of 2017 totaled $26.7 million, a decrease of $1.2 million, or 4.3% from the second quarter of 2017 and a decrease of $1.3 million, or 4.7%, from the third quarter of 2016.  The decrease from both prior periods was due to lower other real estate owned (“OREO”) expense (primarily related to gains on sale) and various other expenses (advertising, legal, professional, processing).  For the first nine months of 2017, noninterest expense totaled $82.6 million, a decrease of $3.1 million, or 3.6%, from the same period of 2016 due to lower OREO expense (all categories: gain/loss on sale, carrying costs, and valuation adjustments), occupancy expense, and various other expenses (primarily legal and FDIC insurance), partially offset by higher compensation expense (stock compensation). 

 

Financial Condition

 

·         Average earning assets were $2.466 billion for the third quarter of 2017, a decrease of $35.7 million, or 1.4%, from the second quarter of 2017, and an increase of $42.9 million, or 1.8%, over the fourth quarter of 2016.  The decrease in average earning assets from the second quarter of 2017 was attributable to a decline in short-term investments, partially offset by growth in our loan portfolio.  The increase in earning assets compared to the fourth quarter 2016 was primarily due to growth in the loan portfolio, partially offset by a decline in total investment securities.

 

·         Average loans increased by $29.9 million, or 1.9%, over the second quarter of 2017, and $65.3 million, or 4.2%, over the fourth quarter of 2016.  Increases over both prior periods reflected growth in all loan types except commercial loans and home equity loans.      

 

·         Nonperforming assets totaled $12.5 million at September 30, 2017, a decrease of $3.4 million, or 21%, from June 30, 2017 and $6.6 million, or 35%, from December 31, 2016.  Nonperforming assets represented 0.45% of total assets at September 30, 2017 compared to 0.57% at June 30, 2017 and 0.67% at December 31, 2016. 

 

·         At September 30, 2017, we were well-capitalized with a risk based capital ratio of 16.96% and a tangible common equity ratio of 7.41% compared to 16.32% and 7.21%, respectively, at June 30, 2017, and 16.28% and 6.90%, respectively, at December 31, 2016.  All of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards. 

 

31


 

RESULTS OF OPERATIONS

 

Net Income

 

For the third quarter of 2017, we realized net income of $4.6 million, or $0.27 per diluted share, compared to net income of $3.6 million, or $0.21 per diluted share for the second quarter of 2017, and net income of $2.9 million, or $0.17 per diluted share, for the third quarter of 2016.  For the first nine months of 2017, we realized net income of $10.9 million, or $0.64 per diluted share, compared to net income of $8.4 million, or $0.49 per diluted share for the same period in 2016.   

 

Compared to the second quarter of 2017, the increase in earnings reflected higher net interest income of $0.8 million, a $1.2 million decrease in noninterest expense, and a $0.1 million reduction in the loan loss provision, partially offset by higher income taxes of $1.0 million and a $0.1 million decrease in noninterest income.

 

Compared to the third quarter of 2016, performance reflected higher net interest income of $1.9 million and a $1.3 million decrease in noninterest expense, partially offset by higher income taxes of $1.1 million and a $0.4 million increase in the loan loss provision.

 

The increase in earnings for the first nine months of 2017 versus the comparable period in 2016 was attributable to higher net interest income of $3.6 million and a $3.1 million reduction in noninterest expense, partially offset by lower noninterest income of $2.0 million, a $1.2 million increase in income taxes, and a $1.0 million increase in the loan loss provision.

 

A condensed earnings summary of each major component of our financial performance is provided below:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands, except per share data)

 

2017

 

2017

 

2016

 

2017

 

2016

Interest Income

 

$

22,341

 

$

21,422

 

$

20,104

 

$

64,303

 

$

60,322

Taxable Equivalent Adjustments

 

 

334

 

 

303

 

 

283

 

 

907

 

 

735

Total Interest Income (FTE)

 

 

22,675

 

 

21,725

 

 

20,387

 

 

65,210

 

 

61,057

Interest Expense

 

 

1,080

 

 

926

 

 

784

 

 

2,810

 

 

2,416

Net Interest Income (FTE)

 

 

21,595

 

 

20,799

 

 

19,603

 

 

62,400

 

 

58,641

Provision for Loan Losses

 

 

490

 

 

589

 

 

-

 

 

1,389

 

 

355

Taxable Equivalent Adjustments

 

 

334

 

 

303

 

 

283

 

 

907

 

 

735

Net Interest Income After Provision for Loan Losses

 

 

20,771

 

 

19,907

 

 

19,320

 

 

60,104

 

 

57,551

Noninterest Income

 

 

12,996

 

 

13,135

 

 

13,011

 

 

38,849

 

 

40,903

Noninterest Expense

 

 

26,707

 

 

27,921

 

 

28,022

 

 

82,550

 

 

85,654

Income Before Income Taxes

 

 

7,060

 

 

5,121

 

 

4,309

 

 

16,403

 

 

12,800

Income Tax Expense

 

 

2,505

 

 

1,560

 

 

1,436

 

 

5,543

 

 

4,350

Net Income

 

$

4,555

 

$

3,561

 

$

2,873

 

$

10,860

 

$

8,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Net Income Per Share

 

$

0.27

 

$

0.21

 

$

0.18

 

$

0.64

 

$

0.50

Diluted Net Income Per Share

 

$

0.27

 

$

0.21

 

$

0.17

 

$

0.64

 

$

0.49

 

Net Interest Income

 

Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets less interest expense paid on interest bearing liabilities.  This information is provided on a "taxable equivalent" basis to reflect the tax-exempt status of income earned on certain loans and state and local government debt obligations.  We provide an analysis of our net interest income including average yields and rates in Table I on page 45.

 

Tax equivalent net interest income was $21.6 million for the third quarter of 2017 compared to $20.8 million for the second quarter of 2017 and $19.6 million for the third quarter of 2016.  The increase in tax equivalent net interest income compared to the both prior periods reflected a favorable shift in the earning asset mix and improved yields, partially offset by higher rates paid on negotiated rate deposits. Also, as compared to the second quarter of 2017, there was one additional calendar day.  For the first nine months of 2017, tax equivalent net interest income totaled $62.4 million compared to $58.6 million for the comparable period in 2016.  The year over year increase was driven by growth in the loan and investment portfolios, coupled with higher short-term rates, partially offset by a higher rate paid on negotiated rate deposits and one less calendar day as 2016 was a leap year.

 

32


 

The overnight funds rate has increased four times since December 2015, positively affecting our net interest income due to favorable repricing of our variable and adjustable rate earning assets.  Although these rate increases have also resulted in higher rates paid on our negotiated rate deposit products, we continue to monitor and manage our overall cost of funds, which was 17 basis points in the third quarter of 2017, and 15 basis points for the first nine months of 2017.  Despite highly competitive loan pricing across most markets, the yield of the overall loan portfolio increased quarter-over-quarter.

 

Our net interest margin for the third quarter of 2017 was 3.48%, an increase of 15 basis points over the second quarter of 2017 and an increase of 25 basis points over the third quarter of 2016.  For the first nine months of 2017, the net interest margin increased 12 basis points to 3.34% compared to the same period of 2016.  The increase in the margin as compared to all respective periods reflects rising interest rates and a favorable shift in our earning asset mix, which has produced higher net interest income in each period.

 

We continue to maintain short duration portfolios on both sides of the balance sheet and believe we are well positioned to respond to changing market conditions.  

 

Provision for Loan Losses

 

The provision for loan losses for the third quarter of 2017 was $0.5 million compared to $0.6 million provision expense for the second quarter of 2017 and no provision for the third quarter of 2016.  For the first nine months of 2017, the loan loss provision totaled $1.4 million compared to $0.4 million for the same period of 2016.  The increase in the loan loss provision compared to the prior year periods was primarily attributable to growth in the loan portfolio.  We realized net loan charge-offs of $0.4 million, or 0.10% (annualized), of average loans for the third quarter of 2017.  This compares to net loan charge-offs of $0.7 million, or 0.17% (annualized) for the second quarter of 2017 and net loan recoveries of $0.1 million, or 0.02% (annualized) for the third quarter of 2016.  For the first nine months of 2017, net charge-offs totaled $1.5 million, or 0.12% (annualized), of average loans compared to $0.6 million, or 0.05% (annualized), for the same period of 2016.

 

Charge-off activity for the respective periods is set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands, except per share data)

2017

 

2017

 

2016

 

2017

 

2016

CHARGE-OFFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

276

 

 

324

 

 

143

 

 

693

 

 

484

 

Real Estate - Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Real Estate - Commercial Mortgage

 

94

 

 

 

478

 

 

 

5

 

 

 

643

 

 

 

279

 

Real Estate - Residential

 

125

 

 

 

44

 

 

 

96

 

 

 

285

 

 

 

779

 

Real Estate - Home Equity

 

50

 

 

 

-

 

 

 

51

 

 

 

142

 

 

 

412

 

Consumer

 

455

 

 

 

537

 

 

 

479

 

 

 

1,616

 

 

 

1,356

 

Total Charge-offs

$

1,000

 

 

$

1,383

 

 

$

774

 

 

$

3,379

 

 

$

3,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RECOVERIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

79

 

 

40

 

 

199

 

 

200

 

 

287

 

Real Estate - Construction

 

50

 

 

 

-

 

 

 

-

 

 

 

50

 

 

 

-

 

Real Estate - Commercial Mortgage

 

69

 

 

 

58

 

 

 

45

 

 

 

150

 

 

 

363

 

Real Estate - Residential

 

60

 

 

 

202

 

 

 

139

 

 

 

475

 

 

 

954

 

Real Estate - Home Equity

 

84

 

 

 

39

 

 

 

237

 

 

 

152

 

 

 

377

 

Consumer

 

265

 

 

 

362

 

 

 

221

 

 

 

871

 

 

 

765

 

Total Recoveries

$

607

 

 

$

701

 

 

$

841

 

 

$

1,898

 

 

$

2,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Recoveries) Charge-offs

393

 

 

682

 

 

(67)

 

 

1,481

 

 

564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Recoveries) Charge-offs (Annualized) as a

 

0.10

%

 

 

0.17

%

 

 

(0.02)

%

 

 

0.12

%

 

 

0.05

%

 

percent of Average Loans Outstanding, Net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33


 

Noninterest Income

 

Noninterest income for the third quarter of 2017 totaled $13.0 million, a decrease of $0.1 million, or 1.1%, from the second quarter of 2017 and unchanged from the third quarter of 2016.  For the first nine months of 2017, noninterest income totaled $38.8 million, a $2.0 million, or 5.0%, decrease from the same period of 2016, due to lower other income of $2.5 million and deposit fees of $0.8 million, partially offset by higher wealth management fees of $0.9 million and mortgage banking fees of $0.5 million.  The decrease in other income was attributable to a $2.5 million gain from the partial retirement of our trust preferred securities (“TRUPs”) in the second quarter of 2016. 

 

Noninterest income represented 37.9% of operating revenues (net interest income plus noninterest income) in the third quarter of 2017 compared to 39.1% in the second quarter of 2017 and 40.2% in the third quarter of 2016.  For the first nine months of 2017, noninterest income represented 38.7% of operating revenues compared to 41.4% for the same period of 2016.

 

The table below reflects the major components of noninterest income.

 

 

 

 Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands)

2017

 

2017

 

2016

 

2017

 

2016

Deposit Fees

 $

5,153

 

 $

5,052

 

 $

5,373

 

 $

15,295

 

 $

16,094

Bank Card Fees

 

2,688

 

 

2,870

 

 

2,759

 

 

8,361

 

 

8,467

Wealth Management Fees

 

2,197

 

 

2,073

 

 

1,774

 

 

6,112

 

 

5,256

Mortgage Banking Fees

 

1,480

 

 

1,556

 

 

1,503

 

 

4,344

 

 

3,800

Other

 

1,478

 

 

1,584

 

 

1,602

 

 

4,737

 

 

7,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Income

 $

12,996

 

 $

13,135

 

 $

13,011

 

 $

38,849

 

 $

40,903

 

Significant components of noninterest income are discussed in more detail below.

 

Deposit Fees.  Deposit fees for the third quarter of 2017 totaled $5.2 million, an increase of $0.1 million, or 2.0% over the second quarter of 2017, and a decrease of $0.2 million, or 4.1%, from the third quarter of 2016.  For the first nine months of 2017, deposit fees totaled $15.3 million, a decrease of $0.8 million, or 5.0%, from the same period of 2016.  The decrease from both prior year periods reflected lower overdraft service fees due to a reduction in accounts using this service as well as lower utilization by existing users.

 

Wealth Management Fees.  Wealth management fees, which include both trust fees (i.e., managed accounts, trusts/estates, and retirement plans) and retail brokerage fees (i.e., investment and insurance products) totaled $2.2 million for the third quarter of 2017, an increase of $0.1 million, or 6.0%, over the second quarter of 2017 and $0.4 million, or 23.8% over the third quarter of 2016.  For the first nine months of 2017, wealth management fees totaled $6.1 million, an increase of $0.9 million, or 16.3%, over the same period of 2016.  The increase over all respective prior periods was due to higher trust fees and retail brokerage fees driven by an increase in assets under management and improved sales efforts.  Third quarter 2017 wealth management fees reflected a large account booked during the quarter that contributed $0.2 million in gross fees.  At September 30, 2017, total assets under management were approximately $1.370 billion compared to $1.192 billion at December 31, 2016 and $1.182 billion at September 30, 2016.    

 

Mortgage Banking Fees.  Mortgage banking fees totaled $1.5 million for the third quarter of 2017, a decrease of $0.1 million, or 4.9%, from the second quarter of 2017 and comparable to the third quarter of 2016.  For the first nine months of 2017, fees totaled $4.3 million, an increase of $0.5 million, or 14.3%, over the same period of 2016.  Strong home sales in our markets and a growing market share of residential loan production continue to enhance our mortgage banking fees.  Loan closings slowed during the third quarter of 2017 due to the impact of hurricanes during the quarter, but have since resumed normal closing timeframes.

    

Other.  Other income totaled $1.5 million for the third quarter of 2017, a decrease of $0.1 million, or 6.7%, from the second quarter of 2017 and a decrease of $0.1 million, or 7.7%, from the third quarter of 2016.    For the first nine months of 2017, other income decreased $2.5 million, or 35.0%, compared to the same period of 2016 attributable to a $2.5 million gain from the partial retirement of our TRUPs in the second quarter of 2016. 

 

34


 

Noninterest Expense

 

Noninterest expense for the third quarter of 2017 totaled $26.7 million, a decrease of $1.2 million, or 4.3%, from the second quarter of 2017, and a decrease of $1.3 million, or 4.7%, from the third quarter of 2016.  The decrease from both prior periods was due to lower OREO expense (primarily related to gains on sale) and various other expenses (advertising, legal, professional, and processing).  For the first nine months of 2017, noninterest expense totaled $82.6 million, a decrease of $3.1 million, or 3.6%, from the same period of 2016 attributable to lower OREO expense of $2.5 million (all categories: gain/loss on sale, carrying costs, and valuation adjustments), occupancy expense of $0.3 million, and various other expenses totaling $0.9 million (primarily legal and FDIC insurance), partially offset by higher compensation expense $0.8 million (stock compensation).  Expense management is an important part of our culture and strategic focus as we continue to review and evaluate opportunities to optimize our operations, reduce operating costs, and manage our discretionary expenses.

 

The table below reflects the major components of noninterest expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands)

2017

 

2017

 

2016

 

2017

 

2016

Salaries

$

11,793

 

 $

11,560

 

 $

11,796

 

 $

35,118

 

 $

35,562

Associate Benefits

 

4,556

 

 

4,732

 

 

4,197

 

 

14,019

 

 

12,723

 

Total Compensation

 

16,349

 

 

16,292

 

 

15,993

 

 

49,137

 

 

48,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises

 

2,205

 

 

2,217

 

 

2,269

 

 

6,626

 

 

6,852

Equipment

 

2,296

 

 

2,338

 

 

2,465

 

 

6,811

 

 

6,925

 

Total Occupancy

 

4,501

 

 

4,555

 

 

4,734

 

 

13,437

 

 

13,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal Fees

 

405

 

 

537

 

 

452

 

 

1,428

 

 

1,788

Professional Fees

 

816

 

 

885

 

 

896

 

 

2,605

 

 

2,649

Processing Services

 

1,567

 

 

1,700

 

 

1,747

 

 

4,913

 

 

5,097

Advertising

 

296

 

 

531

 

 

441

 

 

1,293

 

 

1,310

Travel and Entertainment

 

194

 

 

222

 

 

230

 

 

590

 

 

653

Printing and Supplies

 

115

 

 

188

 

 

160

 

 

478

 

 

554

Telephone

 

502

 

 

527

 

 

699

 

 

1,858

 

 

1,637

Postage

 

185

 

 

185

 

 

201

 

 

586

 

 

685

Insurance - Other

 

409

 

 

410

 

 

397

 

 

1,221

 

 

1,658

Other Real Estate Owned, net

 

(118)

 

 

315

 

 

821

 

 

780

 

 

3,306

Miscellaneous

 

1,486

 

 

1,574

 

 

1,251

 

 

4,224

 

 

4,255

 

Total Other

 

5,857

 

 

7,074

 

 

7,295

 

 

19,976

 

 

23,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Expense 

$

26,707

 

 $

27,921

 

 $

28,022

 

 $

82,550

 

 $

85,654

 

Significant components of noninterest expense are discussed in more detail below.

 

Compensation.  Compensation expense totaled $16.3 million for the third quarter of 2017, comparable to the second quarter of 2017 and an increase of $0.4 million, or 2.2% over the third quarter of 2016.  The increase over the third quarter of 2016 was due to higher associate benefit expense.  For the first nine months of 2017, compensation expense totaled $49.1 million, an increase of $0.8 million, or 1.8%, over the same period of 2016 attributable to higher associate benefit expense of $1.3 million, partially offset by lower salary expense of $0.5 million.  Compared to both prior year periods, the increase in other associate benefit expense was primarily due to higher stock compensation attributable to higher pay-out values reflective of improving financial performance.  To a lesser extent, higher pension plan expense attributable to a reduction in the discount rate for plan liabilities contributed to the increase.  The reduction in salary expense was due to lower associate headcount.

 

Occupancy.  Occupancy expense (including premises and equipment) totaled $4.5 million for the third quarter of 2017, a decrease of $0.1 million, or 1.2%, from the second quarter of 2017 and a decrease of $0.2 million from the third quarter of 2016.  The decrease from the second quarter of 2017 was due to lower equipment and premises maintenance expense.  The decrease from the third quarter of 2016 was due to lower depreciation on furniture and equipment.  For the first nine months of 2017, occupancy expense totaled $13.4 million, a decrease of $0.3 million, or 2.5%, from the same period of 2016 and reflects a reduction in the number of banking offices as well as lower depreciation expense for furniture and fixtures reflective of assets being fully depreciated.    

 

35


 

Other.  Other noninterest expense totaled $5.9 million for the third quarter of 2017, a decrease of $1.2 million, or 17.2% from the second quarter of 2017 and a decrease of $1.4 million, or 19.7%, from the third quarter of 2016.  The decrease from the second quarter of 2017 was primarily due to lower OREO expense of $0.4 million and various other expenses, including, advertising of $0.2 million, legal of $0.1 million, processing of $0.1 million, professional of $0.1 million, and printing/supplies of $0.1 million.  The decrease in OREO expense reflects a higher level of gains from sale of properties.  The decrease from the third quarter of 2016 primarily reflects lower OREO expense of $0.9 million and various other expenses, including, processing of $0.2 million, and telephone of $0.2 million.  For the first nine months of 2017, other expense decreased $3.6 million, or 15.3%, from the same period of 2016, primarily attributable to lower OREO expense of $2.5 million, FDIC insurance expense of $0.4 million, legal fees of $0.4 million, and telephone expense of $0.2 million.  All OREO expense categories (gain/loss on sale, carrying costs, and valuation adjustments) continue to improve as we liquidate our remaining properties.  Lower FDIC assessment factors have driven the reduction in FDIC insurance premiums.  Legal fees continue to decline as a result of lower support needed for problem asset resolutions.  The higher level of telephone expense reflected the running of dual circuits for the first half of 2017 as our new telephone system was implemented. 

 

Our operating efficiency ratio (expressed as noninterest expense as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 77.21% for the third quarter of 2017 compared to 82.28% for the second quarter of 2017 and 85.92% for the third quarter of 2016.  For the first nine months of 2017, this ratio was 81.53% compared to 86.05% for the same period of 2016.

 

Income Taxes

 

We realized income tax expense of $2.5 million (35% effective rate) for the third quarter of 2017 compared to $1.6 million (30% effective rate) for the second quarter of 2017 and $1.4 million (33% effective rate) for the third quarter of 2016.  The lower effective tax rate for the second quarter of 2017 reflected income tax benefits realized in connection with stock based compensation awards.  For the first nine months of 2017, income tax expense totaled $5.5 million (34% effective rate) compared to $4.3 million (34% effective rate) for the comparable period of 2016.  Absent any other future discrete events, we anticipate our effective income tax rate to approximate 35%.

 

FINANCIAL CONDITION

 

Average earning assets were $2.466 billion for the third quarter of 2017, a decrease of $35.7 million, or 1.4%, from the second quarter of 2017, and an increase of $42.9 million, or 1.8%, over the fourth quarter of 2016.  The decline in earning assets compared to the second quarter 2017 was attributable to a decrease in our short-term investments, partially offset by growth in our loan portfolio. The increase in earning assets compared to the fourth quarter 2016 was primarily due to growth in the loan portfolio, partially offset by a decline in total investment securities. The decline in the level of our short-term investments (which consists primarily of overnight funds) during the third quarter was mostly attributable to the seasonality of our public fund deposits.

 

Investment Securities

 

In the third quarter of 2017, our average investment portfolio decreased $5.6 million, or 0.8%, from the second quarter of 2017 and decreased $17.6 million, or 2.5%, from the fourth quarter of 2016.  Securities in our investment portfolio represented 27.9% of our average earning assets in the third quarter of 2017, compared to 27.7% in the second quarter of 2017, and 29.1% in the fourth quarter of 2016.  Investment securities as a percent of average earning assets increased slightly compared to the second quarter of 2017, as the decline in average earning assets was greater relative to the decline in the investment portfolio. The decrease in the average balance of our investment portfolio compared to both prior periods primarily reflected a decrease in U.S. Treasury (“UST”) securities, partially offset by an increase in Ginnie Mae (“GNMA”) mortgage-backed securities. For the remainder of 2017, we will continue to closely monitor liquidity levels, as well as look for new investment products that are prudent relative to our risk profile and overall investment strategy.  L iquidity levels, including anticipated cash flow from the investment portfolio, will determine the extent to which investment cash flow will be reinvested into securities.

 

The investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management.  Two types of classifications are approved for investment securities which are Available-for-Sale (“AFS”) and Held-to-Maturity (“HTM”).  During the third quarter of 2017, we purchased securities under both the AFS and HTM designations.  At September 30, 2017, $510.8 million, or 73.5%, of our investment portfolio was classified as AFS, and $184.3 million, or 26.5%, classified as HTM.

 

36


 

We determine the classification of a security at the time of acquisition based on how the purchase will affect our asset/liability strategy and future business plans and opportunities.  We consider multiple factors in determining classification, including regulatory capital requirements, volatility in earnings or other comprehensive income, and liquidity needs.  Securities in the AFS portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive income component of shareowners’ equity.  HTM securities are acquired or owned with the intent of holding them to maturity (final payment date).  HTM investments are measured at amortized cost. We do not trade, nor do we presently intend to begin trading investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio.

 

At September 30, 2017, there were 266 positions (combined AFS and HTM) with unrealized losses totaling $2.0 million. GNMA mortgage-backed securities, UST, and Small Business Administration (“SBA”) investments carry the full faith and credit guarantee of the U.S. Government, and are 0% risk-weighted assets for regulatory capital purposes.  SBA securities float monthly or quarterly to the prime rate and are uncapped. Federal Home Loan Bank (“FHLB”) and Federal Farm Credit Bureau (“FFCB”) are direct obligations of U.S. Government Agencies. None of these positions with unrealized losses are considered impaired, and all are expected to mature at par.  The table below provides further detail on investment securities with unrealized losses.

 

 

        Less Than 12 months

 

         12 months or Longer

 

Total

 

 

 

Market

Unrealized

 

 

 

Market

Unrealized

 

 

 

Market

Unrealized

(Dollars in Thousands)

Count

 

 Value 

 Losses 

 

Count

 

Value

 Losses 

 

Count

 

Value

 Losses 

GNMA

58

$

47,159

$

579

 

13

$

4,373

$

63

 

71

$

51,532

$

642

UST

56

 

274,893

 

942

 

2

 

9,981

 

110

 

58

 

284,874

 

1,052

SBA

24

 

9,618

 

70

 

8

 

4,657

 

34

 

32

 

14,275

 

104

FHLB and FFCB

18

 

25,158

 

56

 

6

 

13,196

 

130

 

24

 

38,354

 

186

States and Political Subdivisions

67

 

23,534

 

24

 

14

 

5,129

 

32

 

81

 

28,663

 

56

Total

223

$

380,362

$

1,671

 

43

$

37,336

$

369

 

266

$

417,698

$

2,040

 

The average maturity of our total portfolio at September 30, 2017 was 1.87 years compared to 1.86 years and 1.85 years at June 30, 2017 and December 31, 2016, respectively.

 

Loans

 

Average loans increased $29.9 million, or 1.9% compared to the second quarter of 2017, and have grown $65.3 million, or 4.2% compared to the fourth quarter of 2016.  Increases over both prior periods reflected growth in all loan types except commercial loans and home equity loans.  We acquired three loan pools during the first nine months of 2017, including $18.3 million of adjustable rate residential loans in the first quarter, $16.4 million of fixed and adjustable commercial real estate loans in the second quarter, and $8.5 million of adjustable residential real estate loans in the third quarter.  The loans were individually reviewed and evaluated in accordance with our credit underwriting standards.

 

We continue to make minor modifications on some of our lending programs to try to mitigate the impact that consumer and business deleveraging has had on our portfolio. None of these changes involved lowering our credit standards. These programs, coupled with economic improvements in our anchor markets, have helped to increase overall production.

 

Nonperforming Assets

 

Nonperforming assets (nonaccrual loans and OREO) totaled $12.5 million at September 30, 2017, a decrease of $3.4 million, or 21.3%, from June 30, 2017 and $6.6 million, or 34.6%, from December 31, 2016.  Nonaccrual loans totaled $6.6 million at September 30, 2017, a $1.4 million decrease from June 30, 2017 and a $2.0 million decrease from December 31, 2016.  The balance of OREO totaled $6.0 million at September 30, 2017, a decrease of $2.0 million from June 30, 2017 and $4.6 million from December 31, 2016.  Nonperforming assets represented 0.45% of total assets at September 30, 2017 compared to 0.57% at June 30, 2017 and 0.67% at December 31, 2016.

 

37


 

(Dollars in Thousands)

September 30, 2017

 

June 30, 2017

 

December 31, 2016

Nonaccruing Loans:

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial, Financial and Agricultural

$

41

 

 

$

455

 

 

$

468

 

 

  Real Estate - Construction

 

362

 

 

 

363

 

 

 

311

 

 

  Real Estate - Commercial Mortgage

 

2,425

 

 

 

2,984

 

 

 

3,410

 

 

  Real Estate - Residential

 

2,350

 

 

 

2,485

 

 

 

2,330

 

 

  Real Estate - Home Equity

 

1,108

 

 

 

1,496

 

 

 

1,774

 

 

  Consumer

 

272

 

 

 

183

 

 

 

240

 

Total Nonperforming Loans (“NPLs”)(1)

$

6,558

 

 

$

7,966

 

 

$

8,533

 

Other Real Estate Owned

 

5,987

 

 

 

7,968

 

 

 

10,638

 

Total Nonperforming Assets (“NPAs”)

$

12,545

 

 

$

15,934

 

 

$

19,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due Loans 30 – 89 Days

$

5,687

 

 

$

3,789

 

 

$

6,438

 

Performing Troubled Debt Restructurings

$

33,427

 

 

$

35,436

 

 

$

38,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming Loans/Loans

 

0.40

%

 

 

0.49

%

 

 

0.54

%

Nonperforming Assets/Total Assets

 

0.45

 

 

 

0.57

 

 

 

0.67

 

Nonperforming Assets/Loans Plus OREO

 

0.76

 

 

 

0.97

 

 

 

1.21

 

Allowance/Nonperforming Loans

 

203.39

%

 

 

166.23

%

 

 

157.40

%

 

(1)    Nonperforming TDRs are included in the NPL totals.

 

Activity within our nonperforming asset portfolio is provided in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2017

 

2016

 

2017

 

2016

NPA Beginning Balance:

$

15,934

 

$

22,836

 

$

19,171

 

$

29,595

Change in Nonaccrual Loans:

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

7,966

 

 

8,214

 

 

8,533

 

 

10,305

 

  Additions

 

2,440

 

 

2,844

 

 

8,555

 

 

9,120

 

  Charge-Offs

 

(644)

 

 

(414)

 

 

(2,246)

 

 

(2,053)

 

  Transferred to OREO

 

(261)

 

 

(832)

 

 

(1,043)

 

 

(3,011)

 

  Paid Off/Payments

 

(1,534)

 

 

(529)

 

 

(2,927)

 

 

(1,892)

 

  Restored to Accrual

 

(1,409)

 

 

(669)

 

 

(4,314)

 

 

(3,855)

Ending Balance

 

6,558

 

 

8,614

 

  

6,558

 

  

8,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in OREO:

 

 

 

 

 

 

 

 

 

 

 

 

  Beginning Balance

 

7,968

 

 

14,622

 

 

10,638

 

 

19,290

 

  Additions

 

339

 

 

890

 

 

2,024

 

 

3,309

 

  Valuation Write-downs

 

(350)

 

 

(397)

 

 

(1,118)

 

 

(1,910)

 

  Sales

 

(1,970)

 

 

(2,377)

 

 

(5,291)

 

 

(7,951)

 

  Other

 

-

 

 

-

 

 

(266)

 

 

-

Ending Balance

 

5,987

 

 

12,738

 

  

5,987

 

  

12,738

NPA Net Change

 

(3,389)

 

 

(1,484)

 

 

(6,626)

 

 

(8,243)

NPA Ending Balance

$

12,545

 

$

21,352

 

$

12,545

 

$

21,352

 

38


 

Activity within our TDR portfolio is provided in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2017

 

2016

 

2017

 

2016

TDR Beginning Balance:

$

37,917

 

$

37,539

 

$

39,976

 

$

38,321

 

  Additions

 

341

 

 

17

 

 

643

 

 

1,128

 

  Charge-Offs

 

(5)

 

 

(10)

 

 

(458)

 

 

(10)

 

  Paid Off/Payments

 

(2,416)

 

 

(519)

 

 

(4,284)

 

 

(2,001)

 

  Transferred to OREO

 

(85)

 

 

(179)

 

 

(125)

 

 

(590)

TDR Ending Balance(1)

$

35,752

 

$

36,848

 

$

35,752

 

$

36,848

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Includes performing and nonaccrual TDR loan balances.

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

We maintain an allowance for loan losses at a level that management believes to be sufficient to provide for probable losses inherent in the loan portfolio as of the balance sheet date.  Credit losses arise from borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process, including collateral risk, operations risk, concentration risk and economic risk.  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 loan portfolio's overall credit quality.  We evaluate the adequacy of the allowance for loan losses on a quarterly basis.

 

The allowance for loan losses was $13.3 million at September 30, 2017 compared to $13.2 million at June 30, 2017 and $13.4 million at December 31, 2016.  The allowance for loan losses was 0.82% of outstanding loans and provided coverage of 203% of nonperforming loans at September 30, 2017 compared to 0.81% and 166%, respectively, at June 30, 2017 and 0.86% and 157%, respectively, at December 31, 2016.  We believe that the allowance for loan losses was adequate to absorb losses inherent in our loan portfolio at June 30, 2017.

 

Deposits

 

Average total deposits were $2.329 billion for the third quarter of 2017, a decrease of $44.3 million, or 1.9%, from the second quarter of 2017, and an increase of $22.2 million, or 1.0% over the fourth quarter of 2016.  The decline in average deposits compared to the second quarter of 2017 reflected lower public NOW account and certificates of deposit balances, partially offset by increases in all other deposit types. The increase over the fourth quarter 2016 reflects higher levels of noninterest bearing deposits, savings accounts, and money market accounts, partially offset by declines in public NOW accounts and certificates of deposit.  The seasonal inflows of public funds peaked in the first quarter of 2017 for this cycle, and are expected to decline into the fourth quarter of 2017.

 

Deposit levels remain strong, as the seasonal decline in public NOW accounts was partially offset by increases in all other non-maturity deposits during the quarter.  Although rates remain at historical lows and we have not adjusted our rate structure average core deposits grew year over year.  We continue to monitor our overall liquidity position and deposit rates as we believe that a prudent pricing discipline remains the key to managing our mix of deposits.

 

MARKET RISK AND INTEREST RATE SENSITIVITY

 

Market Risk and Interest Rate Sensitivity

 

Overview. Market risk management arises from changes in interest rates, exchange rates, commodity prices, and equity prices.  We have risk management policies to monitor and limit exposure to market risk and do not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices. Our risk management policies are primarily designed to minimize structural interest rate risk.

 

39


 

Interest Rate Risk Management. Our net income is largely dependent on net interest income.  Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets.  When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income.  Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.  Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and shareowners’ equity.

  

We have established a comprehensive interest rate risk management policy, which is administered by management’s Asset/Liability Management Committee (“ALCO”).  The policy establishes risk limits, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years.  We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling.  The simulation model is designed to capture optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts.  As with any method of analyzing interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology that we use.  When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from the assumptions that we use in our modeling. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.

 

We prepare a current base case and several alternative simulations, at least once per quarter, and report the analysis to the Board of Directors.  In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions so dictate.

 

Our interest rate risk management goal is to maintain expected changes in our net interest income and capital levels due to fluctuations in market interest rates within acceptable limits.  Management attempts to achieve this goal by balancing, within policy limits, the volume of variable-rate liabilities with a similar volume of variable-rate assets, by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by maintaining our core deposits as a significant component of our total funding sources, and by adjusting pricing rates to market conditions on a continuing basis.

 

We test our balance sheet using varying interest rate shock scenarios to analyze our interest rate risk. Average interest rates are shocked by plus or minus 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determined are impractical in a current rate environment.  It is management’s goal to structure the balance sheet so that net interest earnings at risk over 12-month and 24-month periods, and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. Management also acknowledges that at this time, policy guidelines are exceeded in the down 100 bp shock scenario. To bring these metrics into compliance with our policy limits would require the bank to extend its asset duration considerably, which we do not believe is prudent given the current historically low interest environment.

 

We augment our interest rate shock analysis with alternative external interest rate scenarios on a quarterly basis.  These alternative interest rate scenarios may include non-parallel rate ramps.

 

Analysis.  Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments.  These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

 

40


 

ESTIMATED CHANGES IN NET INTEREST INCOME (1)

 

 

 

 

 

 

 

 

Percentage Change (12-month shock)

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

 

 

 

 

 

 

Policy Limit

-15.0%

-12.5%

-10.0%

-7.5%

-7.5%

September 30, 2017

14.8%

10.9%

6.9%

3.3%

-8.1%

June 30,2017

12.5%

9.0%

5.6%

2.7%

-8.7%

 

 

 

 

 

 

Percentage Change (24-month shock)

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

 

 

 

 

 

 

Policy Limit

-17.5%

-15.0%

-12.5%

-10.0%

-10.0%

September 30, 2017

41.4%

31.0%

20.6%

10.9%

-13.0%

June 30,2017

41.3%

30.9%

20.7%

11.3%

-13.2%

 

The Net Interest Income at Risk position indicates that in the short-term, all rising rate environments will positively impact our interest margin, while a declining rate environment of 100bp will have a negative impact on our net interest margin. The 12-month Net Interest Income at Risk positions improved at the end of the third quarter of 2017 when compared to the prior quarter-end in all rate scenarios primarily due to declines in average negotiated rate deposits, which are our most rate sensitive deposits. The 24-month Net Income at Risk positions had minimal movement in either direction for the various shock scenarios. 

 

All measures of net interest income at risk are within our prescribed policy limits with the exception of an instantaneous rate shock of -100 bp over both a 12-month and 24-month period, which were -8.1% and -13.0% compared to limits of -7.50% and -10.0%, respectively. These metrics remain out of compliance due to our limited ability to lower our deposits rates in response to a decline in market rates. To bring this metric into compliance with our policy limits in the down 100bp scenario would require the bank to extend its asset duration considerably, which we do not believe is prudent given the historically low interest rate environment.

 

The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on all of our cash flows, and discounting the cash flows to estimate the present value of assets and liabilities.  The difference between the aggregated discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of our net assets.

 

ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (1)

 

 

 

 

 

 

 

 

Changes in Interest Rates

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

 

 

 

 

 

 

Policy Limit

-30.0%

-25.0%

-20.0%

-15.0%

-15.0%

September 30, 2017

34.4%

27.3%

19.2%

10.6%

-21.7%

June 30,2017

35.1%

27.8%

19.6%

10.8%

-23.7%

 

At September 30, 2017, the economic value of equity in all rising rate scenarios versus the base case was slightly less favorable compared to the prior quarter, but more favorable in the falling rate scenario compared to the prior quarter, as average balances of our negotiated rate deposits declined .  The EVE in the rates down 100 bp scenario remains outside of the desired parameters as exposure to falling rates is more extreme due to the low level of current deposit costs and limited capacity to reduce those costs relative to comparable discount benchmarks used to value them. To bring this metric into compliance with our policy limits in the down 100 bp scenario would require the bank to extend its asset duration considerably, which we do not believe is prudent given the historically low interest rate environment.

 

(1)     Down 200, 300, and 400 bp scenarios have been excluded due to the historically low interest rate environment.

 

41


 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

In general terms, liquidity is a measurement of our ability to meet our cash needs.  Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings.  Our liquidity strategy is guided by policies that are formulated and monitored by our ALCO and senior management, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments.  We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.  Our principal source of funding has been our client deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, federal funds purchased and FHLB borrowings.  We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements.

  

At September 30, 2017, we had the ability to generate $1.363 billion in additional liquidity through all of our available resources (this excludes $141 million in overnight funds sold).  In addition to the primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window and through brokered deposits.  We recognize the importance of maintaining liquidity and have developed a Contingency Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity.  We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases that certain credit facilities may no longer be available.  We conduct a liquidity stress test on a quarterly basis based on events that could potentially occur at the Bank and report results to ALCO, our Market Risk Oversight Committee, and the Board of Directors. At September 30, 2017, we believe the liquidity available to us was sufficient to meet our needs.

  

We view our investment portfolio primarily as a source of liquidity and have the option to pledge the portfolio as collateral for borrowings or deposits, and/or sell selected securities.  The portfolio consists of debt issued by the U.S. Treasury, U.S. governmental and federal agencies, and municipal governments.  The weighted average life of the portfolio was approximately 1.87 years, and at September 30, 2017, it had a net unrealized loss of $0.2 million in the available-for-sale portfolio.

  

Our average overnight funds position (defined as funds sold plus interest bearing deposits with other banks less funds purchased) was $140.7 million during the third quarter of 2017 compared to an average net overnight funds sold position of $200.8 million in the second quarter of 2017 and $145.5 million in the fourth quarter of 2016. The decrease in net overnight funds compared to the second quarter of 2017 reflected growth in our loan portfolio and declines in public fund balances. The decrease in net overnight funds compared to the fourth quarter of 2016 primarily reflected higher levels of loan growth, partially offset by higher deposit balances, specifically noninterest bearing deposits and savings accounts.

 

We expect our capital expenditures will be approximately $5.0 million over the next 12 months, which will primarily consist of office remodeling, office equipment/furniture, and technology purchases.  Management expects that these capital expenditures will be funded with existing resources without impairing our ability to meet our on-going obligations.

 

Borrowings

 

At September 30, 2017, advances from the FHLB totaled $14.2 million in outstanding debt consisting of 17 notes. During the first nine months of 2017, the Bank made FHLB advance payments totaling approximately $3.9 million, which included paying off two advances totaling $1.4 million, and one maturing advance of $0.6 million.  We did not obtain any new FHLB advances during the third quarter of 2017. The FHLB notes are collateralized by a blanket floating lien on all of our 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity mortgage loans.

  

We have issued two junior subordinated deferrable interest notes to our wholly owned Delaware statutory trusts.  The first note for $30.9 million was issued to CCBG Capital Trust I in November 2004, of which $10 million was retired in April 2016.  The second note for $32.0 million was issued to CCBG Capital Trust II in May 2005.  The interest payment for the CCBG Capital Trust I borrowing is due quarterly and adjusts quarterly to a variable rate of three-month LIBOR plus a margin of 1.90%.  This note matures on December 31, 2034.  The interest payment for the CCBG Capital Trust II borrowing is due quarterly and adjusts annually to a variable rate of three-month LIBOR plus a margin of 1.80%.  This note matures on June 15, 2035.  The proceeds from these borrowings were used to partially fund acquisitions.  Under the terms of each junior subordinated deferrable interest note, in the event of default or if we elect to defer interest on the note, we may not, with certain exceptions, declare or pay dividends or make distributions on our capital stock or purchase or acquire any of our capital stock.  

 

42


 

On April 12, 2016, we retired $10 million in face value of trust preferred securities that were auctioned as part of a liquidation of a pooled collateralized debt obligation fund.  The trust preferred securities were originally issued through CCBG Capital Trust I.  Our winning bid equated to approximately 75% of the $10 million par value, with the 25% discount resulting in a pre-tax gain of approximately $2.5 million. 

 

We utilized internal resources and a $3.75 million draw on a short-term borrowing facility to fund the repurchase. 

 

Late in the first quarter 2017, the remaining $3.0 million balance of this short-term facility was transferred to a long-term facility with a rate that floats to the prime rate.  During the third quarter 2017, $150,000 was been paid down, leaving a balance of $2.85 million.  

 

Capital

   

Shareowners’ equity was $285.2 million at September 30, 2017, compared to $281.5 million at June 30, 2017 and $275.2 million at December 31, 2016.  Our leverage ratio was 10.48%, 10.20%, and 10.23%, respectively, for these periods.  Further, at September 30, 2017, our risk-adjusted capital ratio was 16.96% compared to 16.32% and 16.28% at June 30, 2017 and December 31, 2016, respectively.  Our common equity tier 1 ratio was 13.26% at September 30, 2017 compared to 12.72% and 12.61% at June 30, 2017 and December 31, 2016, respectively.  All of our capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards at September 30, 2017. 

 

During the first nine months of 2017, shareowners’ equity increased $10.0 million, or 4.9%, on an annualized basis.  During this same period, shareowners’ equity was positively impacted by net income of $10.9 million, stock compensation accretion of $1.2 million, a $0.3 million net decrease in the unrealized loss on investment securities, and net adjustments totaling $0.5 million related to transactions under our stock compensation plans.  Shareowners’ equity was reduced by common stock dividends totaling $2.9 million.

 

At September 30, 2017, our common stock had a book value of $16.73 per diluted share compared to $16.54 at June 30, 2017 and $16.23 at December 31, 2016.  Book value is impacted by changes in the amount of our net unrealized gain or loss on investment securities available-for-sale and changes to the amount of our unfunded pension liability both of which impact other comprehensive income.  At September 30, 2017, the net unrealized loss on investment securities available for sale was $0.2 million and the amount of our unfunded pension liability was $25.6 million.

 

In February 2014, our Board of Directors authorized the repurchase of up to 1,500,000 shares of our outstanding common stock through February 2019.  Repurchases may be made in the open market or in privately negotiated transactions; however, we are not obligated to repurchase any specified number of shares.  We have not repurchased any shares during 2017.  At September 30, 2017, we were authorized to repurchase up to 640,000 additional shares under the plan.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not currently engage in the use of derivative instruments to hedge interest rate risks.  However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients. 

 

As of September 30, 2017, we had $467.0 million in commitments to extend credit and $4.7 million in standby letters of credit.  Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party.  We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

 

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet our on-going obligations.  In the event these commitments require funding in excess of historical levels, management believes current liquidity, advances available from the FHLB and the Federal Reserve, and investment security maturities provide a sufficient source of funds to meet these commitments.

 

CRITICAL ACCOUNTING POLICIES

 

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2016 Form 10-K.  The preparation of our Consolidated Financial Statements in accordance with GAAP and reporting practices applicable to the banking industry requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities.  Actual results could differ from those estimates.

 

43


 

We have identified accounting for (i) the allowance for loan and lease losses, (ii) valuation of goodwill, and (iii) pension benefits as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain.  These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2016 Form 10-K.

 

44


 

TABLE I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE BALANCES & INTEREST RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2017

 

2016

 

2017

 

 

2016

 

Average

 

 

 

 

Average

 

Average

 

 

 

 

Average

 

Average

 

 

 

 

Average

 

 

Average

 

 

 

 

Average

(Dollars in Thousands)

Balances

 

Interest

 

Rate

 

Balances

 

Interest

 

Rate

 

Balances

 

Interest

 

Rate

 

 

Balances

 

Interest

 

Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)(2)

1,638,578

 

19,672

 

4.76

%

 

1,555,889

 

18,216

 

4.66

%

 

1,611,117

 

56,689

 

4.70

%

 

1,531,813

 

54,590

 

4.76

%

Taxable Securities(2)

 

588,518

 

 

2,150

 

1.45

 

 

 

606,606

 

 

1,632

 

1.07

 

 

 

593,579

 

 

5,832

 

1.31

 

 

 

576,790

 

 

4,591

 

1.03

 

Tax-Exempt Securities

 

98,463

 

 

407

 

1.65

 

 

 

89,241

 

 

327

 

1.47

 

 

 

99,059

 

 

1,217

 

1.64

 

 

 

91,399

 

 

984

 

1.44

 

Funds Sold

 

140,728

 

 

446

 

1.26

 

 

 

166,207

 

 

212

 

0.51

 

 

 

195,189

 

 

1,472

 

1.01

 

 

 

235,414

 

 

892

 

0.51

 

Total Earning Assets

 

2,466,287

 

 

22,675

 

3.65

%

 

 

2,417,943

 

 

20,387

 

3.35

%

 

 

2,498,944

 

 

65,210

 

3.49

%

 

 

2,435,416

 

 

61,057

 

3.35

%

Cash & Due From Banks

 

51,880

 

 

 

 

 

 

 

 

45,139

 

 

 

 

 

 

 

 

51,043

 

 

 

 

 

 

 

 

46,521

 

 

 

 

 

 

Allowance For Loan Losses

 

(13,542)

 

 

 

 

 

 

 

 

(14,052)

 

 

 

 

 

 

 

 

(13,547)

 

 

 

 

 

 

 

 

(14,102)

 

 

 

 

 

 

Other Assets

 

275,335

 

 

 

 

 

 

 

 

285,435

 

 

 

 

 

 

 

 

277,514

 

 

 

 

 

 

 

 

287,444

 

 

 

 

 

 

TOTAL ASSETS

2,779,960

 

 

 

 

 

 

 

2,734,465

 

 

 

 

 

 

 

2,813,954

 

 

 

 

 

 

 

2,755,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW Accounts

755,620

 

339

 

0.18

%

 

774,899

 

78

 

0.04

%

 

813,858

 

694

 

0.11

%

 

778,840

 

214

 

0.04

%

Money Market Accounts

 

262,486

 

 

80

 

0.12

 

 

 

258,183

 

 

30

 

0.05

 

 

 

261,118

 

 

172

 

0.09

 

 

 

255,885

 

 

89

 

0.05

 

Savings Accounts

 

327,675

 

 

40

 

0.05

 

 

 

297,172

 

 

37

 

0.05

 

 

 

320,634

 

 

118

 

0.05

 

 

 

288,740

 

 

107

 

0.05

 

Other Time Deposits

 

148,652

 

 

71

 

0.19

 

 

 

165,324

 

 

78

 

0.19

 

 

 

153,215

 

 

215

 

0.19

 

 

 

171,052

 

 

245

 

0.19

 

Total Interest Bearing Deposits

 

1,494,433

 

 

530

 

0.14

 

 

 

1,495,578

 

 

223

 

0.06

 

 

 

1,548,825

 

 

1,199

 

0.11

 

 

 

1,494,517

 

 

655

 

0.06

 

Short-Term Borrowings

 

9,920

 

 

15

 

0.59

 

 

 

12,162

 

 

43

 

1.39

 

 

 

10,552

 

 

77

 

0.97

 

 

 

44,147

 

 

91

 

0.28

 

Subordinated Notes Payable

 

52,887

 

 

420

 

3.11

 

 

 

52,887

 

 

341

 

2.52

 

 

 

52,887

 

 

1,203

 

3.00

 

 

 

56,683

 

 

1,071

 

2.48

 

Other Long-Term Borrowings

 

15,427

 

 

115

 

2.95

 

 

 

23,629

 

 

177

 

2.98

 

 

 

15,324

 

 

331

 

2.89

 

 

 

26,031

 

 

599

 

3.07

 

Total Interest Bearing Liabilities

 

1,572,667

 

 

1,080

 

0.28

%

 

 

1,584,256

 

 

784

 

0.20

%

 

 

1,627,588

 

 

2,810

 

0.24

%

 

 

1,621,378

 

 

2,416

 

0.20

%

Noninterest Bearing Deposits

 

834,729

 

 

 

 

 

 

 

 

793,163

 

 

 

 

 

 

 

 

820,843

 

 

 

 

 

 

 

 

780,167

 

 

 

 

 

 

Other Liabilities

 

87,268

 

 

 

 

 

 

 

 

79,639

 

 

 

 

 

 

 

 

83,683

 

 

 

 

 

 

 

 

75,603

 

 

 

 

 

 

TOTAL LIABILITIES

 

2,494,664

 

 

 

 

 

 

 

 

2,457,058

 

 

 

 

 

 

 

 

2,532,114

 

 

 

 

 

 

 

 

2,477,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL SHAREOWNERS’ EQUITY

 

285,296

 

 

 

 

 

 

 

 

277,407

 

 

 

 

 

 

 

 

281,840

 

 

 

 

 

 

 

 

278,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

2,779,960

 

 

 

 

 

 

 

2,734,465

 

 

 

 

 

 

 

2,813,954

 

 

 

 

 

 

 

2,755,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Spread

 

 

 

 

 

 

3.37

%

 

 

 

 

 

 

 

3.15

%

 

 

 

 

 

 

 

3.25

%

 

 

 

 

 

 

 

3.15

%

Net Interest Income

 

 

 

21,595

 

 

 

 

 

 

 

19,603

 

 

 

 

 

 

 

62,400

 

 

 

 

 

 

 

58,641

 

 

 

Net Interest Margin(3)

 

 

 

 

 

 

3.48

%

 

 

 

 

 

 

 

3.23

%

 

 

 

 

 

 

 

3.34

%

 

 

 

 

 

 

 

3.22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Average Balances include nonaccrual loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3)Taxable equivalent net interest income divided by average earnings assets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45


 

Item 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See “Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference.  Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2016.

 

Item 4.           CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

At September 30, 2017, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that at September 30, 2017, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.

 

Changes in Internal Control over Financial Reporting

 

Our management, including our Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934).  There have been no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.       OTHER INFORMATION

 

Item 1.           Legal Proceedings

 

We are party to lawsuits arising out of the normal course of business.  In management's opinion, there is no known pending litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows.

 

Item 1A.        Risk Factors

 

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2016 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2016 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

                         None.              

 

Item 3.           Defaults Upon Senior Securities

None.

 

Item 4.           Mine Safety Disclosure

None.  

 

Item 5.           Other Information

None.  

 

Item 6.           Exhibits

 

(A)      Exhibits

 

31.1              Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

31.2              Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

32.1              Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

46


 

 

32.2                     Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

 

101.INS       XBRL Instance Document

 

101.SCH     XBRL Taxonomy Extension Schema Document

 

101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document

 

101.LAB     XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE      XBRL Taxonomy Extension Presentation Linkbase Document

 

101.DEF      XBRL Taxonomy Extension Definition Linkbase Document

47


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized.

 

CAPITAL CITY BANK GROUP, INC.

        (Registrant)

 

/s/ J. Kimbrough Davis

 

J. Kimbrough Davis

 

Executive Vice President and Chief Financial Officer

 

(Mr. Davis is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)

 

 

 

Date: November 2, 2017

 

48


 

Exhibit Index

 

 

Exhibit                           Description 

 

31.1              Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

31.2              Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

32.1              Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

 

32.2              Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

 

101.INS       XBRL Instance Document

 

101.SCH     XBRL Taxonomy Extension Schema Document

 

101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document

 

101.LAB     XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE      XBRL Taxonomy Extension Presentation Linkbase Document

 

101.DEF      XBRL Taxonomy Extension Definition Linkbase Document 

 

                                                                                                                                                                                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49