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CAPITAL CITY BANK GROUP INC - Quarter Report: 2018 June (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 June 30, 2018

 

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 July 31, 2018, 17,055,664 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 JUNE 30, 2018

TABLE OF CONTENTS

 

PART I – Financial Information

 

Page

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

Consolidated Statements of Financial Condition – June 30, 2018 and December 31, 2017

4

 

Consolidated Statements of Changes in Shareowners’ Equity – Six Months Ended June 30, 2018 and 2017

7

 

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2018 and 2017

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

45

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

PART II – Other Information

 

 

 

Item 1.

Legal Proceedings

45

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3.

Defaults Upon Senior Securities

45

 

 

 

Item 4.

Mine Safety Disclosure

45

 

 

 

Item 5.

Other Information

45

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           

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, 2017 (the “2017 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, 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)

 

 

 

 

 

 

June 30,

 

December 31,

(Dollars in Thousands)

2018

 

2017

ASSETS

 

 

 

 

 

Cash and Due From Banks

$

56,573

 

$

58,419

Federal Funds Sold and Interest Bearing Deposits

 

107,066

 

 

227,023

 

 

Total Cash and Cash Equivalents

 

163,639

 

 

285,442

 

 

 

 

 

 

 

 

Investment Securities, Available for Sale, at fair value

 

493,662

 

 

480,911

Investment Securities, Held to Maturity, at amortized cost (fair value of $233,179 and $215,007)

 

236,764

 

 

216,679

 

 

Total Investment Securities

 

730,426

 

 

697,590

 

 

 

 

 

 

 

 

Loans Held For Sale

 

8,246

 

 

4,817

 

 

 

 

 

 

 

 

Loans, Net of Unearned Income

 

1,724,475

 

 

1,653,492

 

Allowance for Loan Losses

 

(13,563)

 

 

(13,307)

 

 

Loans, Net

 

1,710,912

 

 

1,640,185

 

 

 

 

 

 

 

 

Premises and Equipment, net

 

90,000

 

 

91,698

Goodwill

 

84,811

 

 

84,811

Other Real Estate Owned

 

3,373

 

 

3,941

Other Assets

 

88,871

 

 

90,310

 

 

Total Assets

$

2,880,278

 

$

2,898,794

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest Bearing Deposits

$

937,241

 

$

874,583

 

Interest Bearing Deposits

 

1,521,949

 

 

1,595,294

 

 

Total Deposits

 

2,459,190

 

 

2,469,877

 

 

 

 

 

 

 

 

Short-Term Borrowings

 

7,021

 

 

7,480

Subordinated Notes Payable

 

52,887

 

 

52,887

Other Long-Term Borrowings

 

12,897

 

 

13,967

Other Liabilities

 

54,712

 

 

70,373

 

 

Total Liabilities

 

2,586,707

 

 

2,614,584

 

 

 

 

 

 

 

 

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; 17,055,664 and 16,988,951 shares

 

 

 

 

issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

171

 

 

170

Additional Paid-In Capital

 

37,932

 

 

36,674

Retained Earnings

 

288,800

 

 

279,410

Accumulated Other Comprehensive Loss, net of tax

 

(33,332)

 

 

(32,044)

Total Shareowners’ Equity

 

293,571

 

 

284,210

Total Liabilities and Shareowners' Equity

$

2,880,278

 

$

2,898,794

 

 

 

 

 

 

 

 

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 June 30,

 

Six Months Ended June 30,

(Dollars in Thousands, Except Per Share Data)

2018

 

2017

 

2018

 

2017

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Loans, including Fees

$

20,533

 

$

18,720

 

$

40,068

 

$

36,725

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

2,944

 

 

1,899

 

 

5,467

 

 

3,682

 

Tax Exempt

 

212

 

 

270

 

 

451

 

 

529

Federal Funds Sold and Interest Bearing Deposits

 

730

 

 

533

 

 

1,647

 

 

1,026

Total Interest Income

 

24,419

 

 

21,422

 

 

47,633

 

 

41,962

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

995

 

 

388

 

 

1,863

 

 

669

Short-Term Borrowings

 

8

 

 

17

 

 

16

 

 

62

Subordinated Notes Payable

 

552

 

 

404

 

 

1,027

 

 

783

Other Long-Term Borrowings

 

94

 

 

117

 

 

194

 

 

216

Total Interest Expense

 

1,649

 

 

926

 

 

3,100

 

 

1,730

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

22,770

 

 

20,496

 

 

44,533

 

 

40,232

Provision for Loan Losses

 

815

 

 

589

 

 

1,560

 

 

899

Net Interest Income After Provision For Loan Losses

 

21,955

 

 

19,907

 

 

42,973

 

 

39,333

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Deposit Fees

 

4,842

 

 

5,052

 

 

9,714

 

 

10,142

Bank Card Fees

 

2,909

 

 

2,870

 

 

5,720

 

 

5,673

Wealth Management Fees

 

2,037

 

 

2,073

 

 

4,210

 

 

3,915

Mortgage Banking Fees

 

1,206

 

 

1,556

 

 

2,263

 

 

2,864

Other

 

1,548

 

 

1,584

 

 

3,112

 

 

3,259

Total Noninterest Income

 

12,542

 

 

13,135

 

 

25,019

 

 

25,853

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

15,797

 

 

15,641

 

 

31,708

 

 

31,500

Occupancy, net

 

4,503

 

 

4,555

 

 

9,054

 

 

8,936

Other Real Estate Owned, net

 

248

 

 

315

 

 

874

 

 

898

Other

 

7,845

 

 

7,410

 

 

14,663

 

 

14,509

Total Noninterest Expense

 

28,393

 

 

27,921

 

 

56,299

 

 

55,843

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

6,104

 

 

5,121

 

 

11,693

 

 

9,343

Income Tax Expense (Benefit)

 

101

 

 

1,560

 

 

(83)

 

 

3,038

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

$

6,003

 

$

3,561

 

$

11,776

 

$

6,305

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC NET INCOME PER SHARE

$

0.35

 

$

0.21

 

$

0.69

 

$

0.37

DILUTED NET INCOME PER SHARE

$

0.35

 

$

0.21

 

$

0.69

 

$

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Basic Shares Outstanding

 

17,045

 

 

16,955

 

 

17,037

 

 

16,937

Average Common Diluted Shares Outstanding

 

17,104

 

 

17,016

 

 

17,089

 

 

16,993

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Six Months Ended

 

June 30,

 

June 30,

(Dollars in Thousands)

2018

 

2017

 

2018

 

2017

NET INCOME

$

6,003

 

$

3,561

 

$

11,776

 

$

6,305

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

 

 

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

 

(265)

 

 

110

 

 

(1,752)

 

 

615

Amortization of unrealized losses on securities transferred from

 

 

 

 

 

 

 

 

 

 

 

available for sale to held to maturity

 

14

 

 

18

 

 

28

 

 

38

Total Investment Securities

 

(251)

 

 

128

 

 

(1,724)

 

 

653

Other comprehensive (loss) income, before tax

 

(251)

 

 

128

 

 

(1,724)

 

 

653

Deferred tax (benefit) expense related to other comprehensive income

 

(63)

 

 

49

 

 

(436)

 

 

253

Other comprehensive (loss) income, net of tax

 

(188)

 

 

79

 

 

(1,288)

 

 

400

TOTAL COMPREHENSIVE INCOME

$

5,815

 

$

3,640

 

$

10,488

 

6,705

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017

16,844,698

 

$

168

 

$

34,188

 

$

267,037

 

$

(26,225)

 

$

275,168

Net Income

-

 

 

-

 

 

-

 

 

6,305

 

 

-

 

 

6,305

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

400

 

 

400

Cash Dividends ($0.1000 per share)

-

 

 

-

 

 

-

 

 

(1,696)

 

 

-

 

 

(1,696)

Stock Based Compensation

-

 

 

-

 

 

869

 

 

-

 

 

-

 

 

869

Impact of Transactions Under Compensation Plans, net

119,317

 

 

2

 

 

465

 

 

-

 

 

-

 

 

467

Balance, June 30, 2017

16,964,015

 

$

170

 

$

35,522

 

$

271,646

 

$

(25,825)

 

$

281,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

16,988,951

 

$

170

 

$

36,674

 

$

279,410

 

$

(32,044)

 

$

284,210

Net Income

-

 

 

-

 

 

-

 

 

11,776

 

 

-

 

 

11,776

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

(1,288)

 

 

(1,288)

Cash Dividends ($0.1400 per share)

-

 

 

-

 

 

-

 

 

(2,386)

 

 

-

 

 

(2,386)

Stock Based Compensation

-

 

 

-

 

 

655

 

 

-

 

 

-

 

 

655

Impact of Transactions Under Compensation Plans, net

66,713

 

 

1

 

 

603

 

 

-

 

 

-

 

 

604

Balance, June 30, 2018

17,055,664

 

$

171

 

$

37,932

 

$

288,800

 

$

(33,332)

 

$

293,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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) 

 

 

 

 

 

 

 

Six Months Ended June 30,

(Dollars in Thousands)

2018

 

2017

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net Income

$

11,776

 

$

6,305

Adjustments to Reconcile Net Income to

 

 

 

 

 

   Cash Provided by Operating Activities:

 

 

 

 

 

      Provision for Loan Losses

 

1,560

 

 

899

      Depreciation

 

3,218

 

 

3,352

      Amortization of Premiums, Discounts, and Fees, net

 

3,495

 

 

3,279

      Net (Increase) Decrease in Loans Held-for-Sale

 

(3,429)

 

 

2,673

      Stock Compensation

 

655

 

 

869

      Net Tax Benefit From Stock-Based Compensation

 

(41)

 

 

(223)

      Deferred Income Taxes

 

2,156

 

 

944

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

 

693

 

 

695

      Loss on Disposal of Premises and Equipment

 

-

 

 

260

      Net Decrease in Other Assets

 

541

 

 

7,026

      Net (Decrease) Increase in Other Liabilities

 

(15,468)

 

 

9,948

Net Cash Provided By Operating Activities

 

5,156

 

 

36,027

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Securities Held to Maturity:

 

 

 

 

 

      Purchases

 

(84,617)

 

 

(28,298)

      Payments, Maturities, and Calls

 

63,724

 

 

48,096

Securities Available for Sale:

 

 

 

 

 

      Purchases

 

(102,974)

 

 

(87,273)

      Payments, Maturities, and Calls

 

84,991

 

 

77,973

Purchases of Loans Held for Investment

 

(16,106)

 

 

(35,499)

Net Increase in Loans

 

(56,981)

 

 

(26,101)

Proceeds From Sales of Other Real Estate Owned

 

715

 

 

3,393

Purchases of Premises and Equipment

 

(1,520)

 

 

(1,534)

Net Cash Used In Investing Activities

 

(112,768)

 

 

(49,243)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net Decrease in Deposits

 

(10,687)

 

 

(40,353)

Net Decrease in Short-Term Borrowings

 

(459)

 

 

(3,644)

Repayment of Other Long-Term Borrowings

 

(1,070)

 

 

(2,250)

Dividends Paid

 

(2,386)

 

 

(1,696)

Issuance of Common Stock Under Compensation Plans

 

411

 

 

290

Net Cash Used In Financing Activities

 

(14,191)

 

 

(47,653)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(121,803)

 

 

(60,869)

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

285,442

 

 

296,047

Cash and Cash Equivalents at End of Period

$

163,639

 

$

235,178

 

 

 

 

 

 

Supplemental Cash Flow Disclosures:

 

 

 

 

 

   Interest Paid

$

3,103

 

$

1,748

   Income Taxes Paid

$

101

 

$

4,024

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

   Loans Transferred to Other Real Estate Owned

$

840

 

$

1,685

 

 

 

 

 

 

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, 2017 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, 2017.

 

Accounting Changes

 

Revenue Recognition.   Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, and investment securities, and revenue related to the sale of residential mortgages in the secondary market, as these activities are subject to other GAAP discussed elsewhere within our disclosures.  Descriptions of the major revenue-generating activities that are within the scope of ASC 606, which are presented in the accompanying statements of income as components of non-interest income are as follows:

 

Deposit Fees - these represent general service fees for monthly account maintenance and activity- or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue.  Revenue is recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed.  Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

 

Wealth Management - trust fees and retail brokerage fees – trust fees represent monthly fees due from wealth management clients as consideration for managing the client’s assets. Trust services include custody of assets, investment management, fees for trust services and similar fiduciary activities. Revenue is recognized when the Company’s performance obligation is completed each month or quarter, which is the time that payment is received. Also, retail brokerage fees are received from a third party broker-dealer, for which the Company acts as an agent, as part of a revenue-sharing agreement for fees earned from customers that are referred to the third party.  These fees are for transactional and advisory services and are paid by the third party on a monthly basis and recognized ratably throughout the quarter as the Company’s performance obligation is satisfied.

 

Bank Card Fees – bank card related fees primarily includes interchange income from client use of consumer and business debit cards.  Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network.  Interchange fees are set by the credit card associations and are based on cardholder purchase volumes.  The Company records interchange income as transactions occur.

 

9


 

Gains and Losses from the Sale of Bank Owned Property – the performance obligation in the sale of other real estate owned typically will be the delivery of control over the property to the buyer.  If the Company is not providing the financing of the sale, the transaction price is typically identified in the purchase and sale agreement.  However, if the Company provides seller financing, the Company must determine a transaction price, depending on if the sale contract is at market terms and taking into account the credit risk inherent in the arrangement. 

 

Other non-interest income primarily includes items such as mortgage banking fees (gains from the sale of residential mortgage loans held for sale), bank-owned life insurance, and safe deposit box fees none of which are subject to the requirements of ASC 606.

 

The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affects the determination of the amount and timing of revenue from the above-described contracts with clients.

 

The Company has applied ASC 606 using the modified retrospective approach effective on January 1, 2018 to all existing contracts with clients covered under the scope of the standard.  The Company did not have an aggregate effect of modification resulting from adoption of ASC 606, and no financial statement line items were affected by this change in accounting standard.  

 

Equity Securities. Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax.  Equity securities without readily determinable fair values are recorded at cost less any impairment, if any.  Upon adoption, the Company reclassified one security in the amount of $0.8 million to other assets in accordance with this accounting standard.

 

Employee Benefit Plans. Accounting Standards Update (“ASU”) 2017-07, Compensation – Retirement Benefits (Topic 715) 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 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. In accordance with this accounting standard, the Company reclassified the non-service cost components of its net periodic benefit cost to other noninterest expense in the accompanying statements of income (See Note 5 – Employee Benefit Plans). Prior year amounts were retrospectively adjusted in accordance with the accounting standard.  The effects on the statements of income were as follows:

 

Period Presented

Line Item

(Dollars in Thousands)

Compensation

Other Expense

Three Months Ended June 30, 2018

($457)

$457

Three Months Ended June 30, 2017

($651)

$651

Six Months Ended June 30, 2018

($914)

$914

Six Months Ended June 30, 2017

($1,288)

$1,288

  

 

10


 

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:

 

June 30, 2018

 

 

December 31, 2017

 

Amortized

Unrealized

Unrealized

Market

Amortized

Unrealized

Unrealized

Market

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gain

 

Losses

 

Value

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

262,471

 

$

12

 

$

3,745

 

$

258,738

 

$

237,505

 

$

-

 

$

2,164

 

$

235,341

U.S. Government Agency

 

159,906

 

 

656

 

 

653

 

 

159,909

 

 

144,324

 

 

727

 

 

407

 

 

144,644

States and Political Subdivisions

 

66,348

 

 

1

 

 

218

 

 

66,131

 

 

91,533

 

 

2

 

 

378

 

 

91,157

Mortgage-Backed Securities

 

940

 

 

58

 

 

-

 

 

998

 

 

1,102

 

 

83

 

 

-

 

 

1,185

Equity Securities(1)

 

7,886

 

 

-

 

 

-

 

 

7,886

 

 

8,584

 

 

-

 

 

-

 

 

8,584

Total

$

497,551

 

$

727

 

$

4,616

 

$

493,662

 

$

483,048

 

$

812

 

$

2,949

 

$

480,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

50,124

 

$

-

 

$

668

 

$

49,456

 

$

98,256

 

$

-

 

$

441

 

$

97,815

States and Political Subdivisions

 

6,621

 

 

-

 

 

32

 

 

6,589

 

 

6,996

 

 

-

 

 

41

 

 

6,955

Mortgage-Backed Securities

 

180,019

 

 

165

 

 

3,050

 

 

177,134

 

 

111,427

 

 

22

 

 

1,212

 

 

110,237

Total

$

236,764

 

$

165

 

$

3,750

 

$

233,179

 

$

216,679

 

$

22

 

$

1,694

 

$

215,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Securities

$

734,315

 

$

892

 

$

8,366

 

$

726,841

 

$

699,727

 

$

834

 

$

4,643

 

$

695,918

 

(1)     Includes Federal Home Loan Bank and Federal Reserve Bank stock, recorded at cost of $3.1 million, $4.8 million, respectively, at June 30, 2018 and includes Federal Home Loan Bank, Federal Reserve Bank and FNBB Inc. stock recorded at cost of $3.1 million, $4.8 million, and $0.8 million, respectively, at December 31, 2017.  The FNBB, Inc. equity investment was reclassified to other assets at March 31, 2018 in accordance with ASU 2016-01, which was adopted prospectively as allowed by the standard.

 

Securities with an amortized cost of $247.1 million and $328.1 million at June 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and for other purposes.

 

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 June 30, 2018, 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

$

92,474

 

$

92,106

 

$

16,635

 

$

16,617

Due after one year through five years

 

264,809

 

 

260,934

 

 

40,110

 

 

39,428

Mortgage-Backed Securities

 

940

 

 

998

 

 

180,019

 

 

177,134

U.S. Government Agency

 

131,442

 

 

131,738

 

 

-

 

 

-

Equity Securities

 

7,886

 

 

7,886

 

 

-

 

 

-

Total

$

497,551

 

$

493,662

 

$

236,764

 

$

233,179

11


 

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

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

146,449

 

$

2,127

 

$

97,386

 

$

1,618

 

$

243,835

 

$

3,745

U.S. Government Agency

 

67,628

 

 

377

 

 

25,212

 

 

276

 

 

92,840

 

 

653

States and Political Subdivisions

 

54,511

 

 

176

 

 

5,079

 

 

42

 

 

59,590

 

 

218

Mortgage-Backed Securities

 

2

 

 

-

 

 

-

 

 

-

 

 

2

 

 

-

Total

 

268,590

 

 

2,680

 

 

127,677

 

 

1,936

 

 

396,267

 

 

4,616

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

 

24,574

 

 

489

 

  

24,882

 

 

179

 

  

49,456

 

 

668

States and Political Subdivisions

 

6,093

 

 

25

 

 

496

 

 

7

 

 

6,589

 

 

32

Mortgage-Backed Securities

 

108,323

 

 

1,742

 

 

29,894

 

 

1,308

 

 

138,217

 

 

3,050

Total

$

138,990

 

$

2,256

 

$

55,272

 

$

1,494

 

$

194,262

 

$

3,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

155,443

 

$

963

 

$

79,900

 

$

1,201

 

$

235,343

 

$

2,164

U.S. Government Agency

 

45,737

 

 

150

 

 

25,757

 

 

257

 

 

71,494

 

 

407

States and Political Subdivisions

 

82,999

 

 

320

 

 

5,549

 

 

58

 

 

88,548

 

 

378

Mortgage-Backed Securities

 

2

 

 

-

 

 

-

 

 

-

 

 

2

 

 

-

Total

 

284,181

 

 

1,433

 

 

111,206

 

 

1,516

 

 

395,387

 

 

2,949

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

 

77,861

 

 

298

 

 

14,939

 

 

143

 

 

92,800

 

 

441

States and Political Subdivisions

 

6,955

 

 

41

 

 

-

 

 

-

 

 

6,955

 

 

41

Mortgage-Backed Securities

 

56,030

 

 

469

 

 

30,216

 

 

743

 

 

86,246

 

 

1,212

Total

$

140,846

 

$

808

 

$

45,155

 

$

886

 

$

186,001

 

$

1,694

 

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 June 30, 2018, there were 535 positions (combined AFS and HTM) with unrealized losses totaling $8.4 million. 61 of these positions were U.S. government treasury securities guaranteed by the U.S. government. 276 of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities, with the remaining 198 positions being municipal securities. 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 June 30, 2018.

12


 

NOTE 3 – LOANS, NET

 

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

 

(Dollars in Thousands)

June 30, 2018

 

December 31, 2017

Commercial, Financial and Agricultural

$

222,406

 

$

218,166

Real Estate – Construction

 

88,169

 

 

77,966

Real Estate – Commercial Mortgage

 

575,993

 

 

535,707

Real Estate – Residential(1)

 

331,944

 

 

311,906

Real Estate – Home Equity

 

218,851

 

 

229,513

Consumer(2)

 

287,112

 

 

280,234

 

Loans, Net of Unearned Income

$

1,724,475

 

$

1,653,492

             

 

(1)     Includes loans in process with outstanding balances of $15.9 million and $9.1 million at June 30, 2018 and December 31, 2017, respectively.  

(2)     Includes overdraft balances of $1.5 million and $1.6 million at June 30, 2018 and December 31, 2017, respectively.  

 

Net deferred costs included in loans were $1.5 million at June 30, 2018 and $1.5 million at December 31, 2017.

 

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 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.

 

 

June 30, 2018

 

December 31, 2017

(Dollars in Thousands)

Nonaccrual

 

90 + Days

 

Nonaccrual

 

90 + Days

Commercial, Financial and Agricultural

$

455

 

$

-

 

$

629

 

$

-

Real Estate – Construction

 

609

 

 

-

 

 

297

 

 

-

Real Estate – Commercial Mortgage

 

2,181

 

 

-

 

 

2,370

 

 

-

Real Estate – Residential

 

1,543

 

 

-

 

 

1,938

 

 

-

Real Estate – Home Equity

 

910

 

 

-

 

 

1,748

 

 

-

Consumer

 

43

 

 

-

 

 

177

 

 

36

Total Nonaccrual Loans

$

5,741

 

$

-

 

$

7,159

 

$

36

 

13


 

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)

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

204

 

$

113

 

$

-

 

$

317

 

$

221,634

 

$

222,406

Real Estate – Construction

 

62

 

 

-

 

 

-

 

 

62

 

 

87,498

 

 

88,169

Real Estate – Commercial Mortgage

 

483

 

 

189

 

 

-

 

 

672

 

 

573,140

 

 

575,993

Real Estate – Residential

 

495

 

 

391

 

 

-

 

 

886

 

 

329,515

 

 

331,944

Real Estate – Home Equity

 

255

 

 

-

 

 

-

 

 

255

 

 

217,686

 

 

218,851

Consumer

 

1,009

 

 

271

 

 

-

 

 

1,280

 

 

285,789

 

 

287,112

Total Past Due Loans

$

2,508

 

$

964

 

$

-

 

$

3,472

 

$

1,715,262

 

$

1,724,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

87

 

$

55

 

$

-

 

$

142

 

$

217,395

 

$

218,166

Real Estate – Construction

 

811

 

 

-

 

 

-

 

 

811

 

 

76,858

 

 

77,966

Real Estate – Commercial Mortgage

 

437

 

 

195

 

 

-

 

 

632

 

 

532,705

 

 

535,707

Real Estate – Residential

 

701

 

 

446

 

 

-

 

 

1,147

 

 

308,821

 

 

311,906

Real Estate – Home Equity

 

80

 

 

2

 

 

-

 

 

82

 

 

227,683

 

 

229,513

Consumer

 

1,316

 

 

413

 

 

36

 

 

1,765

 

 

278,292

 

 

280,234

Total Past Due Loans

$

3,432

 

$

1,111

 

$

36

 

$

4,579

 

$

1,641,754

 

$

1,653,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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. 

 

14


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,131

 

$

244

 

$

4,053

 

$

3,363

 

$

2,319

 

$

2,148

 

$

13,258

 

Provision for Loan Losses

 

137

 

 

39

 

 

364

 

 

(107)

 

 

110

 

 

272

 

 

815

 

Charge-Offs

 

(141)

 

 

-

 

 

-

 

 

(456)

 

 

(157)

 

 

(509)

 

 

(1,263)

 

Recoveries

 

87

 

 

-

 

 

15

 

 

346

 

 

22

 

 

283

 

 

753

 

Net Charge-Offs

 

(54)

 

 

-

 

 

15

 

 

(110)

 

 

(135)

 

 

(226)

 

 

(510)

Ending Balance

$

1,214

 

$

283

 

$

4,432

 

$

3,146

 

$

2,294

 

$

2,194

 

$

13,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,191

 

$

122

 

$

4,346

 

$

3,206

 

$

2,506

 

$

1,936

 

$

13,307

 

Provision for Loan Losses

 

93

 

 

167

 

 

238

 

 

73

 

 

20

 

 

969

 

 

1,560

 

Charge-Offs

 

(323)

 

 

(7)

 

 

(290)

 

 

(563)

 

 

(315)

 

 

(1,204)

 

 

(2,702)

 

Recoveries

 

253

 

 

1

 

 

138

 

 

430

 

 

83

 

 

493

 

 

1,398

 

Net Charge-Offs

 

(70)

 

 

(6)

 

 

(152)

 

 

(133)

 

 

(232)

 

 

(711)

 

 

(1,304)

Ending Balance

$

1,214

 

$

283

 

$

4,432

 

$

3,146

 

$

2,294

 

$

2,194

 

$

13,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,150

 

$

100

 

$

4,080

 

$

3,376

 

$

2,522

 

$

2,107

 

$

13,335

 

Provision for Loan Losses

 

229

 

 

14

 

 

165

 

 

(150)

 

 

(37)

 

 

368

 

 

589

 

Charge-Offs

 

(324)

 

 

-

 

 

(478)

 

 

(44)

 

 

-

 

 

(537)

 

 

(1,383)

 

Recoveries

 

40

 

 

-

 

 

58

 

 

202

 

 

39

 

 

362

 

 

701

 

Net Charge-Offs

 

(284)

 

 

-

 

 

(420)

 

 

158

 

 

39

 

 

(175)

 

 

(682)

Ending Balance

$

1,095

 

$

114

 

$

3,825

 

$

3,384

 

$

2,524

 

$

2,300

 

$

13,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,198

 

$

168

 

$

4,315

 

$

3,445

 

$

2,297

 

$

2,008

 

$

13,431

 

Provision for Loan Losses

 

193

 

 

(54)

 

 

(22)

 

 

(316)

 

 

251

 

 

847

 

 

899

 

Charge-Offs

 

(417)

 

 

-

 

 

(549)

 

 

(160)

 

 

(92)

 

 

(1,161)

 

 

(2,379)

 

Recoveries

 

121

 

 

-

 

 

81

 

 

415

 

 

68

 

 

606

 

 

1,291

 

Net Charge-Offs

 

(296)

 

 

-

 

 

(468)

 

 

255

 

 

(24)

 

 

(555)

 

 

(1,088)

Ending Balance

$

1,095

 

$

114

 

$

3,825

 

$

3,384

 

$

2,524

 

$

2,300

 

$

13,242

 

15


 

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

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

195

 

$

113

 

$

1,735

 

$

1,030

 

$

365

 

$

1

 

$

3,439

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,019

 

 

170

 

 

2,697

 

 

2,116

 

 

1,929

 

 

2,193

 

 

10,124

Ending Balance

$

1,214

 

$

283

 

$

4,432

 

$

3,146

 

$

2,294

 

$

2,194

 

$

13,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

215

 

$

1

 

$

2,165

 

$

1,220

 

$

515

 

$

1

 

$

4,117

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

976

 

 

121

 

 

2,181

 

 

1,986

 

 

1,991

 

 

1,935

 

 

9,190

Ending Balance

$

1,191

 

$

122

 

$

4,346

 

$

3,206

 

$

2,506

 

$

1,936

 

$

13,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

82

 

$

4

 

$

1,685

 

$

1,405

 

$

408

 

$

3

 

$

3,587

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,013

 

 

110

 

 

2,140

 

 

1,979

 

 

2,116

 

 

2,297

 

 

9,655

Ending Balance

$

1,095

 

$

114

 

$

3,825

 

$

3,384

 

$

2,524

 

$

2,300

 

$

13,242

 

16


 

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

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

1,093

 

$

671

 

$

18,368

 

$

11,416

 

$

2,589

 

$

95

 

$

34,232

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

221,313

 

 

87,498

 

 

557,625

 

 

320,528

 

 

216,262

 

 

287,017

 

 

1,690,243

Total

$

222,406

 

$

88,169

 

$

575,993

 

$

331,944

 

$

218,851

 

$

287,112

 

$

1,724,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

1,378

 

$

361

 

$

19,280

 

$

12,871

 

$

3,332

 

$

113

 

$

37,335

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

216,788

 

 

77,605

 

 

516,427

 

 

299,035

 

 

226,181

 

 

280,121

 

 

1,616,157

Total

$

218,166

 

$

77,966

 

$

535,707

 

$

311,906

 

$

229,513

 

$

280,234

 

$

1,653,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

1,078

 

$

363

 

$

21,502

 

$

14,879

 

$

3,314

 

$

140

 

$

41,276

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

212,466

 

 

66,968

 

 

497,638

 

 

304,250

 

 

227,681

 

 

270,917

 

 

1,579,920

Total

$

213,544

 

$

67,331

 

$

519,140

 

$

319,129

 

$

230,995

 

$

271,057

 

$

1,621,196

 

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

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

1,093

 

$

110

 

$

983

 

$

195

Real Estate – Construction

 

 

671

 

 

-

 

 

671

 

 

113

Real Estate – Commercial Mortgage

 

 

18,368

 

 

2,023

 

 

16,345

 

 

1,735

Real Estate – Residential

 

 

11,416

 

 

1,813

 

 

9,603

 

 

1,030

Real Estate – Home Equity

 

 

2,589

 

 

977

 

 

1,612

 

 

365

Consumer

 

 

95

 

 

39

 

 

56

 

 

1

Total

 

$

34,232

 

$

4,962

 

$

29,270

 

$

3,439

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

1,378

 

$

118

 

$

1,260

 

$

215

Real Estate – Construction

 

 

361

 

 

297

 

 

64

 

 

1

Real Estate – Commercial Mortgage

 

 

19,280

 

 

1,763

 

 

17,517

 

 

2,165

Real Estate – Residential

 

 

12,871

 

 

1,516

 

 

11,355

 

 

1,220

Real Estate – Home Equity

 

 

3,332

 

 

1,157

 

 

2,175

 

 

515

Consumer

 

 

113

 

 

45

 

 

68

 

 

1

Total

 

$

37,335

 

$

4,896

 

$

32,439

 

$

4,117

 

17


 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

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

 

$

1,188

 

$

22

 

$

1,158

 

$

11

 

$

1,251

 

$

50

 

$

1,119

 

$

23

Real Estate – Construction

 

 

671

 

 

1

 

 

363

 

 

1

 

 

568

 

 

1

 

 

324

 

 

2

Real Estate – Commercial Mortgage

 

 

18,406

 

 

168

 

 

22,281

 

 

220

 

 

18,697

 

 

344

 

 

22,806

 

 

443

Real Estate – Residential

 

 

12,310

 

 

136

 

 

14,789

 

 

174

 

 

12,497

 

 

284

 

 

15,058

 

 

353

Real Estate – Home Equity

 

 

2,894

 

 

24

 

 

3,414

 

 

27

 

 

3,040

 

 

51

 

 

3,401

 

 

54

Consumer

 

 

102

 

 

2

 

 

142

 

 

2

 

 

106

 

 

4

 

 

153

 

 

4

Total

 

$

35,571

 

$

353

 

$

42,147

 

$

435

 

$

36,159

 

$

734

 

$

42,861

 

$

879

 

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. 

 

18


 

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

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

$

5,143

 

$

12,187

 

$

59

 

$

17,389

Substandard

 

 

1,089

 

 

28,124

 

 

370

 

 

29,583

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

Total Criticized Loans

 

$

6,232

 

$

40,311

 

$

429

 

$

46,972

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

$

7,879

 

$

13,324

 

$

65

 

$

21,268

Substandard

 

 

1,057

 

 

29,291

 

 

654

 

 

31,002

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

Total Criticized Loans

 

$

8,936

 

$

42,615

 

$

719

 

$

52,270

 

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.

19


 

The following table presents loans classified as TDRs.

  

 

 

June 30, 2018

 

December 31, 2017

(Dollars in Thousands)

 

Accruing

 

Nonaccruing

 

Accruing

 

Nonaccruing

Commercial, Financial and Agricultural

 

$

666

 

$

224

 

$

822

 

$

-

Real Estate – Construction

 

 

62

 

 

-

 

 

64

 

 

-

Real Estate – Commercial Mortgage

 

 

16,282

 

 

1,250

 

 

17,058

 

 

1,636

Real Estate – Residential

 

 

10,571

 

 

631

 

 

11,666

 

 

503

Real Estate – Home Equity

 

 

2,305

 

 

99

 

 

2,441

 

 

186

Consumer

 

 

95

 

 

-

 

 

113

 

 

-

Total TDRs

 

$

29,981

 

$

2,204

 

$

32,164

 

$

2,325

 

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 June 30,

 

Six Months Ended June 30,

 

 

2018

 

2018

 

 

 

 

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

 

$

498

 

$

230

Real Estate – Construction

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Real Estate – Commercial Mortgage

 

-

 

 

-

 

 

-

 

1

 

 

227

 

 

227

Real Estate – Residential

 

1

 

 

33

 

 

33

 

1

 

 

33

 

 

33

Real Estate – Home Equity

 

1

 

 

27

 

 

27

 

1

 

 

27

 

 

27

Consumer

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Total TDRs

 

2

 

$

60

 

 $

60

 

4

 

$

785

 

$

517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 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

 

-

 

$

-

 

$

-

 

-

 

$

-

 

$

-

Real Estate – Construction

 

-

 

 

-

 

 

-

 

1

 

 

64

 

 

65

Real Estate – Commercial Mortgage

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Real Estate – Residential

 

1

 

 

215

 

 

182

 

1

 

 

215

 

 

182

Real Estate – Home Equity

 

-

 

 

-

 

 

-

 

1

 

 

56

 

 

55

Consumer

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Total TDRs

 

1

 

$

215

 

 $

182

 

3

 

$

335

 

$

302

20


 

For the three and six months ended June 30, 2018, the loans modified as TDRs within the previous 12 months that have substantially defaulted are presented below.  For the three and six month period ended June 30, 2017 there were no loans modified as TDRs within the previous 12 months that have substantially defaulted.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2018

 

2018

 

 

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

 

1

 

 

64

 

1

 

 

64

Real Estate – Residential

 

-

 

 

-

 

-

 

 

-

Real Estate – Home Equity

 

-

 

 

-

 

-

 

 

-

Consumer

 

-

 

 

-

 

-

 

 

-

Total TDRs

 

1

 

$

64

 

1

 

$

64

 

(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 June 30,

 

Six Months Ended June 30,

 

 

2018

 

2018

 

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment(1)

 

Contracts

 

Investment(1)

Extended amortization

 

-

 

$

-

 

1

 

$

227

Interest rate adjustment

 

1

 

 

33

 

1

 

 

33

Extended amortization and interest rate adjustment

 

1

 

 

27

 

1

 

 

27

Principal moratorium

 

-

 

 

-

 

1

 

 

230

Total TDRs

 

2

 

$

60

 

4

 

$

517

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2017

 

2017

 

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment(1)

 

Contracts

 

Investment(1)

Extended amortization

 

-

 

$

-

 

-

 

$

-

Interest rate adjustment

 

1

 

 

182

 

3

 

 

302

Extended amortization and interest rate adjustment

 

-

 

 

-

 

-

 

 

-

Total TDRs

 

1

 

$

182

 

3

 

$

302

 

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

21


 

NOTE 4 – OTHER REAL ESTATE OWNED

 

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

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(Dollars in Thousands)

2018

 

2017

 

2018

 

2017

Beginning Balance

$

3,330

 

$

9,501

 

$

3,941

 

$

10,638

Additions

 

533

 

 

144

 

 

840

 

 

1,685

Valuation Write-downs

 

(138)

 

 

(275)

 

 

(632)

 

 

(769)

Sales

 

(352)

 

 

(1,209)

 

 

(776)

 

 

(3,320)

Other

 

-

 

 

(193)

 

 

-

 

 

(266)

Ending Balance

$

3,373

 

$

7,968

 

$

3,373

 

$

7,968

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(Dollars in Thousands)

2018

 

2017

 

2018

 

2017

Gains from the Sale of Properties

$

(53)

 

$

(162)

 

$

(81)

 

$

(268)

Losses from the Sale of Properties

 

54

 

 

93

 

 

142

 

 

195

Rental Income from Properties

 

(3)

 

 

(22)

 

 

(6)

 

 

(54)

Property Carrying Costs

 

112

 

 

131

 

 

187

 

 

257

Valuation Adjustments

 

138

 

 

275

 

 

632

 

 

768

Total

$

248

 

$

315

 

$

874

 

$

898

 

As of June 30, 2018, the Company had $1.5 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 June 30,

 

Six Months Ended June 30,

(Dollars in Thousands)

2018

 

2017

 

2018

 

2017

Service Cost

$

1,721

 

$

1,688

 

$

3,442

 

$

3,376

Interest Cost

 

1,415

 

 

1,437

 

 

2,830

 

 

2,874

Expected Return on Plan Assets

 

(2,391)

 

 

(2,006)

 

 

(4,782)

 

 

(4,012)

Prior Service Cost Amortization

 

50

 

 

56

 

 

100

 

 

112

Net Loss Amortization

 

918

 

 

953

 

 

1,837

 

 

1,906

Net Periodic Benefit Cost

$

1,713

 

$

2,128

 

$

3,427

 

$

4,256

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

3.71%

 

 

4.21%

 

 

3.71%

 

 

4.21%

Long-term Rate of Return on Assets

 

7.25%

 

 

7.25%

 

 

7.25%

 

 

7.25%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(Dollars in Thousands)

2018

 

2017

 

2018

 

2017

Interest Cost

$

57

 

$

48

 

$

113

 

$

96

Net Loss Amortization

 

406

 

 

149

 

 

813

 

 

298

Net Periodic Benefit Cost

$

463

 

$

197

 

$

926

 

$

394

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

3.53%

 

 

3.92%

 

 

3.53%

 

 

3.92%

 

22


 

The service cost component of net periodic benefit cost is reflected in compensation expense in the accompanying statements of income.  The other components of net periodic cost are included in “other” within the noninterest expense category in the statements of income.  See Note 1 – Significant Accounting Policies for additional information.

 

During the first six months of 2018, the Company contributed $20 million (first quarter - $10 million, second quarter - $10 million) to its defined benefit pension plan for the 2017 plan year.

 

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:

 

 

June 30, 2018

 

December 31, 2017

(Dollars in Thousands)

Fixed

 

Variable

 

Total

 

Fixed

 

Variable

 

Total

Commitments to Extend Credit (1)

$

87,183

 

$

388,016

 

$

475,199

 

$

78,390

 

$

366,750

 

$

445,140

Standby Letters of Credit

 

4,722

 

 

-

 

 

4,722

 

 

4,678

 

 

-

 

 

4,678

Total

$

91,905

 

$

388,016

 

$

479,921

 

$

83,068

 

$

366,750

 

$

449,818

 

(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. 

 

23


 

In June 2018, Visa increased the litigation reserve by $600 million and revised the conversion ratio for the Class B shares resulting in a $0.2 million payable due the counterparty under the swap contract.  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 $119,000.  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

 

  • 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 June 30, 2018, there was $0.2 million payable to the counterparty.

 

 

24


 

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

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

258,738

 

$

-

 

$

-

 

$

258,738

 

U.S. Government Agency

 

-

 

 

159,909

 

 

-

 

 

159,909

 

States and Political Subdivisions

 

-

 

 

66,131

 

 

-

 

 

66,131

 

Mortgage-Backed Securities

 

-

 

 

998

 

 

-

 

 

998

 

Equity Securities 

 

-

 

 

7,886

 

 

-

 

 

7,886

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Fair Value Swap

 

-

 

 

-

 

 

220

 

 

220

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

235,341

 

$

-

 

$

-

 

$

235,341

 

U.S. Government Agency

 

-

 

 

144,644

 

 

-

 

 

144,644

 

States and Political Subdivisions

 

-

 

 

91,157

 

 

-

 

 

91,157

 

Mortgage-Backed Securities

 

-

 

 

1,185

 

 

-

 

 

1,185

 

Equity Securities 

 

-

 

 

8,584

 

 

-

 

 

8,584

 

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 $4.8 million with a valuation allowance of $0.7 million at June 30, 2018 and $6.1 million and $1.1 million, respectively, at December 31, 2017.

 

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.

 

Other Real Estate Owned.  During the first six months of 2018, 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”.

25


 

  

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. For values reported prior to 2018, the discount rates used to projecting cash flows reflected the credit and interest rate 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.  Pursuant to the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, for values reported for the 2018 period, fair value reflects the incorporation of a liquidity discount to meet the objective of “exit price” valuation.

 

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.

 

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

 

 

 

June 30, 2018

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

56,573

 

$

56,573

 

$

-

 

$

-

Short-Term Investments

 

 

107,066

 

 

107,066

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

493,662

 

 

258,738

 

 

234,924

 

 

-

Investment Securities, Held to Maturity

 

 

236,764

 

 

49,456

 

 

183,723

 

 

-

Equity Securities(1)

 

 

3,600

 

 

-

 

 

3,600

 

 

-

Loans Held for Sale

 

 

8,246

 

 

-

 

 

8,246

 

 

-

Loans, Net of Allowance for Loan Losses

 

 

1,710,912

 

 

-

 

 

-

 

 

1,675,884

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,459,190

 

$

-

 

$

2,457,218

 

$

-

Short-Term Borrowings

 

 

7,021

 

 

-

 

 

7,021

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

42,640

 

 

-

Long-Term Borrowings

 

 

12,897

 

 

-

 

 

12,903

 

 

-

 

 

 

December 31, 2017

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

58,419

 

$

58,419

 

$

-

 

$

-

Short-Term Investments

 

 

227,023

 

 

227,023

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

480,911

 

 

235,341

 

 

245,570

 

 

-

Investment Securities, Held to Maturity

 

 

216,679

 

 

97,815

 

 

117,192

 

 

-

Loans Held for Sale

 

 

4,817

 

 

-

 

 

4,817

 

 

-

Loans, Net of Allowance for Loan Losses

 

 

1,640,185

 

 

-

 

 

-

 

 

1,625,310

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,469,877

 

$

-

 

$

2,382,818

 

$

-

Short-Term Borrowings

 

 

7,480

 

 

-

 

 

7,482

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

41,718

 

 

-

Long-Term Borrowings

 

 

13,967

 

 

-

 

 

14,081

 

 

-

 

(1) Not readily marketable securities - reflected in other assets.

 

26


 

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.

 

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 June 30, 2018

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

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

$

(265)

 

$

67

 

$

(198)

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

 

 

 

 

 

 

 

 

 

maturity

  

14

 

 

(4)

 

 

10

 

 

Total Other Comprehensive Loss

$

(251)

 

$

63

 

$

(188)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

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

$

(1,752)

 

$

443

 

$

(1,309)

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

 

 

 

 

 

 

 

 

 

maturity

 

28

 

 

(7)

 

 

21

 

 

Total Other Comprehensive Loss

$

(1,724)

 

$

436

 

$

(1,288)

 

 

 

 

Before

 

Tax

 

Net of

 

 

 

Tax

 

(Expense)

 

Tax

 (Dollars in Thousands)

Amount

 

Benefit

 

Amount

Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

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

$

110

 

$

(42)

 

$

68

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

 

 

 

 

 

 

 

 

 

maturity

  

18

 

 

(7)

 

 

11

 

 

Total Other Comprehensive Income

$

128

 

$

(49)

 

$

79

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

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

$

615

 

$

(238)

 

$

377

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

 

 

 

 

 

 

 

 

 

maturity

 

38

 

 

(15)

 

 

23

 

 

Total Other Comprehensive Income

$

653

 

$

(253)

 

$

400

 

27


 

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, 2018

$

(1,743)

 

$

(30,301)

 

$

(32,044)

Other comprehensive loss during the period

 

(1,288)

 

 

-

 

 

(1,288)

Balance as of June 30, 2018

$

(3,031)

 

$

(30,301)

 

$

(33,332)

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2017

$

(583)

 

$

(25,642)

 

$

(26,225)

Other comprehensive income during the period

 

400

 

 

-

 

 

400

Balance as of June 30, 2017

$

(183)

 

$

(25,642)

 

$

(25,825)

 

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.   The Company adopted ASU 2014-09 January 1, 2018.  See Note 1 – Significant Accounting Policies for additional information. 

 

ASU 2016-02, “Leases (Topic 842).”  ASU 2016-02 requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet.  ASU 2016-02 is effective for the Company on January 1, 2019 and is not expected to have a significant impact on its financial statements.

 

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 and related disclosures.  As part of its implementation efforts to date, management has formed a cross-functional implementation team and developed a project plan.  The Company has also engaged a vendor to assist in model development.  The data set-up process is near completion and the overall project plan remains on schedule.  The Company expects the new guidance will result in an increase in the allowance for credit losses given the change from accounting for losses inherent in the loan portfolio to accounting for losses over the remaining expected life of the portfolio.  However, since the magnitude of the anticipated increase in the allowance for credit losses will be impacted by economic conditions and trends in the Company’s portfolio at the time of adoption, the quantitative impact cannot yet be reasonably estimated.

 

ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2018-03 clarifies certain aspects of the guidance issued in ASU 2016-01.  This includes the ability to irrevocably elect to change the measurement approach for equity securities measured using the practical expedient (at cost plus or minus observable transactions less impairment) to a fair value method in accordance with Topic 820, Fair Value Measurement; clarification that if an observable transaction occurs for such securities, the adjustment is as of the observable transaction date; clarification that the prospective transition approach for equity securities without a readily determinable fair values is meant only for instances in which the practical expedient is elected; and various other clarifications.  ASU 2018-03 is effective for the Company on July 1, 2018 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 2018 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 2017 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 59 full-service offices located in Florida, Georgia, and Alabama.  The Bank offers commercial and retail banking services, as well as trust and asset management, and retail securities brokerage.

 

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, noninterest income such as deposit fees, wealth management fees, mortgage banking fees and bank card fees, and operating expenses such as salaries and employee benefits, occupancy and other operating expenses, including income taxes.

 

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 2017 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.

 

 

29


 

 

 

2018

 

2017

 

2016

(Dollars in Thousands)

 

Second

 

First

 

Fourth

 

Third

 

Second

 

First

 

Fourth

 

Third

Shareowners' Equity (GAAP)

 

$

293,571

 

$

288,360

 

$

284,210

 

$

285,201

 

$

281,513

 

$

278,059

 

$

275,168

 

$

276,624

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

 

208,760

 

 

203,549

 

 

199,399

 

 

200,390

 

 

196,702

 

 

193,248

 

 

190,357

 

 

191,813

Total Assets (GAAP)

 

 

2,880,278

 

 

2,924,832

 

 

2,898,794

 

 

2,790,842

 

 

2,814,843

 

 

2,895,531

 

 

2,845,197

 

 

2,753,154

Less: Goodwill (GAAP)

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

Tangible Assets (non-GAAP)

B

$

2,795,467

 

$

2,840,021

 

$

2,813,983

 

$

2,706,031

 

$

2,730,032

 

$

2,810,720

 

$

2,760,386

 

$

2,668,343

Tangible Common Equity Ratio (non-GAAP)

A/B

 

7.47%

 

 

7.17%

 

 

7.09%

 

 

7.41%

 

 

7.21%

 

 

6.88%

 

 

6.90%

 

 

7.19%

Actual Diluted Shares Outstanding (GAAP)

C

 

17,114,380

 

 

17,088,419

 

 

17,071,107

 

 

17,045,326

 

 

17,025,148

 

 

16,978,681

 

 

16,949,359

 

 

16,873,822

Diluted Tangible Book Value (non-GAAP)

A/C

 

12.20

 

 

11.91

 

 

11.68

 

 

11.76

 

 

11.55

 

 

11.38

 

 

11.23

 

 

11.37

30


 

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands, Except

2018

 

2017

 

2016

(Per Share Data)

Second

 

 

First

 

 

Fourth

 

 

Third

 

 

Second

 

 

First

 

 

Fourth

 

 

Third

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

$

24,419

 

 

$

23,214

 

 

$

22,627

 

 

$

22,341

 

 

$

21,422

 

 

$

20,540

 

 

$

20,832

 

 

$

20,104

 

 

Interest Expense

 

1,649

 

 

 

1,451

 

 

 

1,138

 

 

 

1,080

 

 

 

926

 

 

 

804

 

 

 

773

 

 

 

784

 

 

Net Interest Income

 

22,770

 

 

 

21,763

 

 

 

21,489

 

 

 

21,261

 

 

 

20,496

 

 

 

19,736

 

 

 

20,059

 

 

 

19,320

 

 

Provision for Loan Losses

 

815

 

 

 

745

 

 

 

826

 

 

 

490

 

 

 

589

 

 

 

310

 

 

 

464

 

 

 

-

 

 

Net Interest Income After

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Provision for Loan Losses

 

21,955

 

 

 

21,018

 

 

 

20,663

 

 

 

20,771

 

 

 

19,907

 

 

 

19,426

 

 

 

19,595

 

 

 

19,320

 

 

Noninterest Income

 

12,542

 

 

 

12,477

 

 

 

12,897

 

 

 

12,996

 

 

 

13,135

 

 

 

12,718

 

 

 

12,778

 

 

 

13,011

 

 

Noninterest Expense

 

28,393

 

 

 

27,906

 

 

 

26,897

 

 

 

26,707

 

 

 

27,921

 

 

 

27,922

 

 

 

27,560

 

 

 

28,022

 

 

Income  Before  Income Taxes

 

6,104

 

 

 

5,589

 

 

 

6,663

 

 

 

7,060

 

 

 

5,121

 

 

 

4,222

 

 

 

4,813

 

 

 

4,309

 

 

Income Tax Expense (Benefit)(2)

 

101

 

 

 

(184)

 

 

 

6,660

 

 

 

2,505

 

 

 

1,560

 

 

 

1,478

 

 

 

1,517

 

 

 

1,436

 

 

Net Income

 

6,003

 

 

 

5,773

 

 

 

3

 

 

 

4,555

 

 

 

3,561

 

 

 

2,744

 

 

 

3,296

 

 

 

2,873

 

 

Net Interest Income (FTE)

$

22,917

 

 

$

21,943

 

 

$

21,808

 

 

$

21,595

 

 

$

20,799

 

 

$

20,006

 

 

$

20,335

 

 

$

19,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Basic

$

0.35

 

 

$

0.34

 

 

$

0.00

 

 

$

0.27

 

 

$

0.21

 

 

$

0.16

 

 

$

0.20

 

 

$

0.18

 

 

Net Income Diluted

 

0.35

 

 

 

0.34

 

 

 

0.00

 

 

 

0.27

 

 

 

0.21

 

 

 

0.16

 

 

 

0.20

 

 

 

0.17

 

 

Cash Dividends Declared

 

0.07

 

 

 

0.07

 

 

 

0.07

 

 

 

0.07

 

 

 

0.05

 

 

 

0.05

 

 

 

0.05

 

 

 

0.04

 

 

Diluted Book Value

 

17.15

 

 

 

16.87

 

 

 

16.65

 

 

 

16.73

 

 

 

16.54

 

 

 

16.38

 

 

 

16.23

 

 

 

16.39

 

 

Diluted Tangible Book Value(1)

 

12.20

 

 

 

11.91

 

 

 

11.68

 

 

 

11.76

 

 

 

11.55

 

 

 

11.38

 

 

 

11.23

 

 

 

11.37

 

 

Market Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  High

 

25.99

 

 

 

26.50

 

 

 

26.01

 

 

 

24.58

 

 

 

22.39

 

 

 

21.79

 

 

 

23.15

 

 

 

15.35

 

 

  Low

 

22.28

 

 

 

22.80

 

 

 

22.21

 

 

 

19.60

 

 

 

17.68

 

 

 

19.22

 

 

 

14.29

 

 

 

13.32

 

 

  Close

 

23.63

 

 

 

24.75

 

 

 

22.94

 

 

 

24.01

 

 

 

20.42

 

 

 

21.39

 

 

 

20.48

 

 

 

14.77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Average Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net

$

1,691,287

 

 

$

1,647,612

 

 

$

1,640,738

 

 

$

1,638,578

 

 

$

1,608,629

 

 

$

1,585,561

 

 

$

1,573,264

 

 

$

1,555,889

 

 

Earning Assets

 

2,566,006

 

 

 

2,592,465

 

 

 

2,511,985

 

 

 

2,466,287

 

 

 

2,502,030

 

 

 

2,529,207

 

 

 

2,423,388

 

 

 

2,417,943

 

 

Total Assets

 

2,861,104

 

 

 

2,892,120

 

 

 

2,822,451

 

 

 

2,779,960

 

 

 

2,817,479

 

 

 

2,845,140

 

 

 

2,743,463

 

 

 

2,734,465

 

 

Deposits

 

2,431,956

 

 

 

2,456,106

 

 

 

2,378,411

 

 

 

2,329,162

 

 

 

2,373,423

 

 

 

2,407,278

 

 

 

2,306,917

 

 

 

2,288,741

 

 

Shareowners’ Equity

 

291,806

 

 

 

287,502

 

 

 

288,044

 

 

 

285,296

 

 

 

281,661

 

 

 

278,489

 

 

 

278,943

 

 

 

277,407

 

 

Common Equivalent Average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

17,045

 

 

 

17,028

 

 

 

16,967

 

 

 

16,965

 

 

 

16,955

 

 

 

16,919

 

 

 

16,809

 

 

 

16,804

 

 

  Diluted

 

17,104

 

 

 

17,073

 

 

 

17,050

 

 

 

17,044

 

 

 

17,016

 

 

 

16,944

 

 

 

16,913

 

 

 

16,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

0.84

%

 

 

0.81

%

 

 

0.00

%

 

 

0.65

%

 

 

0.51

%

 

 

0.39

%

 

 

0.48

%

 

 

0.42

%

 

Return on Average Equity

 

8.25

 

 

 

8.14

 

 

 

0.00

 

 

 

6.33

 

 

 

5.07

 

 

 

4.00

 

 

 

4.70

 

 

 

4.12

 

 

Net Interest Margin (FTE)

 

3.58

 

 

 

3.43

 

 

 

3.45

 

 

 

3.48

 

 

 

3.33

 

 

 

3.21

 

 

 

3.34

 

 

 

3.23

  

 

Noninterest Income as % of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Operating Revenue

 

35.52

 

 

 

36.44

 

 

 

37.51

 

 

 

37.94

 

 

 

39.05

 

 

 

39.19

 

 

 

38.91

 

 

 

40.24

 

 

Efficiency Ratio

 

80.07

 

 

 

81.07

 

 

 

77.50

 

 

 

77.21

 

 

 

82.28

 

 

 

85.33

 

 

 

83.23

 

 

 

85.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 $

13,563

 

 

$

13,258

 

 

 $

13,307

 

 

$

13,339

 

 

$

13,242

 

 

$

13,335

 

 

$

13,431

 

 

$

13,744

 

 

Allowance for Loan Losses to Loans

0.78

%

 

 

0.80

%

 

 

0.80

%

 

 

0.82

%

 

 

0.81

%

 

 

0.84

%

 

 

0.86

%

 

 

0.88

%

 

Nonperforming Assets (“NPAs”)

 

9,114

 

 

 

10,644

 

 

 

11,100

 

 

 

12,545

 

 

 

15,934

 

 

 

17,799

 

 

 

19,171

 

 

 

21,352

  

 

NPAs to Total Assets

 

0.32

 

 

 

0.36

 

 

 

0.38

 

 

 

0.45

 

 

 

0.57

 

 

 

0.61

 

 

 

0.67

 

 

 

0.78

 

 

NPAs to Loans plus OREO

 

0.52

 

 

 

0.64

 

 

 

0.67

 

 

 

0.76

 

 

 

0.97

 

 

 

1.11

 

 

 

1.21

 

 

 

1.35

 

 

Allowance to Non-Performing Loans

236.25

 

 

 

181.26

 

 

 

185.87

 

 

 

203.39

 

 

 

166.23

 

 

 

160.70

 

 

 

157.40

 

 

 

159.56

 

 

Net Charge-Offs to Average Loans

0.12

 

 

 

0.20

 

 

 

0.21

 

 

 

0.10

 

 

 

0.17

 

 

 

0.10

 

 

 

0.20

 

 

 

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

16.25

%

 

 

16.31

%

 

 

16.33

%

 

 

16.19

%

 

 

15.58

%

 

 

15.68

%

 

 

15.51

%

 

 

15.48

%

 

Total Capital

 

17.00

 

 

 

17.05

 

 

 

17.10

 

 

 

16.96

 

 

 

16.32

 

 

 

16.44

 

 

 

16.28

 

 

 

16.28

 

 

Common Equity Tier 1

 

13.46

 

 

 

13.44

 

 

 

13.42

 

 

 

13.26

 

 

 

12.72

 

 

 

12.77

 

 

 

12.61

 

 

 

12.55

 

 

Leverage

 

10.69

 

 

 

10.36

 

 

 

10.47

 

 

 

10.48

 

 

 

10.20

 

 

 

9.95

 

 

 

10.23

 

 

 

10.12

  

 

Tangible Common Equity(1)

 

7.47

 

 

 

7.17

 

 

 

7.09

 

 

 

7.41

 

 

 

7.21

 

 

 

6.88

 

 

 

6.90

 

 

 

7.19

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Non-GAAP financial measure.  See non-GAAP reconciliation on page 30.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)Includes $1.4 million and $1.5 million income tax benefit in the second and first quarter of 2018, respectively, related to two 2017 plan year pension plan contributions.  Also, a $4.1 million 

 

 

   income tax expense adjustment in the fourth quarter, 2017 related to the Tax Cuts and Jobs act of 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31


 

FINANCIAL OVERVIEW

 

A summary overview of our financial performance is provided below.

 

Results of Operations

 

·          Net income of $6.0 million, or $0.35 per diluted share, for the second quarter of 2018 compared to net income of $5.8 million, or $0.34 per diluted share, for the first quarter of 2018, and net income of $3.6 million, or $0.21 per diluted share for the second quarter of 2017.  For the first six months of 2018, we realized net income of $11.8 million, or $0.69 per diluted share, compared to net income of $6.3 million, or $0.37 per diluted share, for the same period of 2017. 

 

·          Tax equivalent net interest income for the second quarter of 2018 was $22.9 million compared to $21.9 million for the first quarter of 2018 and $20.8 million for the second quarter of 2017.  For the first six months of 2018, tax equivalent net interest income totaled $44.9 million compared to $40.8 million for the comparable period of 2017.  The increase compared to all prior periods reflected higher interest rates and a favorable shift in the earning asset mix.  Higher rates earned on overnight funds, investment securities, and variable rate loans were partially offset by a higher cost on our negotiated rate deposits.  

 

·          Provision for loan losses was $0.8 million for the second quarter of 2018 compared to $0.8 million for the first quarter of 2018 and $0.6 million for the second quarter of 2017.  For the first six months of 2018, the loan loss provision totaled $1.6 million compared to $0.9 million for the same period of 2017.  The higher provision in 2018 reflected growth in the loan portfolio

 

·           Noninterest income for the second quarter of 2018 totaled $12.5 million, an increase of $0.1 million, or 0.5%, over the first quarter of 2018 and a $0.6 million, or 4.5%, decrease from the second quarter of 2017.  For the first six months of 2018, noninterest income totaled $25.0 million, a $0.8 million, or 3.2%, decrease from the same period of 2017.  The decrease from both prior year periods was primarily attributable to lower mortgage banking fees and deposit fees.    

 

·          Noninterest expense for the second quarter of 2018 totaled $28.4 million, an increase of $0.5 million, or 1.7%, over the first quarter of 2018 and the second quarter of 2017.  For the first six months of 2018, noninterest expense totaled $56.3 million, an increase of $0.5 million, or 0.8%, over the same period of 2017.  The increase over all prior periods was primarily due to higher professional fees as well as a non-routine expense for our VISA Class B share swap contract related to VISA’s funding of their litigation reserve.   

 

Financial Condition

 

·          Average earning assets were $2.566 billion for the second quarter of 2018, a decrease of $26.5 million, or 1.0%, from the first quarter of 2018, and an increase of $54.0 million, or 2.2%, over the fourth quarter of 2017.  The change in average earning assets compared to the first quarter 2018 was attributable to decreases in our short-term investments, primarily due to a decline in our seasonal public fund balances.  The change in average earning assets over the fourth quarter 2017 was attributable to growth in our loan and investment portfolios primarily funded by increases in our noninterest bearing deposits and savings accounts.

 

·          Average loans increased by $43.7 million, or 2.7%, over the first quarter of 2018, and $50.5 million, or 3.1%, over the fourth quarter of 2017.  The increase compared to the first quarter of 2018 reflected growth in all loans types except home equity loans. Growth over the fourth quarter of 2017 was experienced in all loan products except for commercial and home equity loans.     

 

·          Nonperforming assets totaled $9.1 million at June 30, 2018, a decrease of $1.5 million, or 14.4%, from March 31, 2018 and $2.0 million, or 17.9%, from December 31, 2017.  Nonperforming assets represented 0.32% of total assets at June 30, 2018 compared to 0.36% at March 31, 2018 and 0.38% at December 31, 2017. 

 

·          At June 30, 2018, we were well-capitalized with a risk based capital ratio of 17.00% and a tangible common equity ratio of 7.47% compared to 17.05% and 7.17%, respectively, at March 31, 2018, and 17.10% and 7.09%, respectively, at December 31, 2017.  All of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards. 

 

RESULTS OF OPERATIONS

 

Net Income

 

For the second quarter of 2018, we realized net income of $6.0 million, or $0.35 per diluted share, compared to net income of $5.8 million, or $0.34 per diluted share for the first quarter of 2018, and net income of $3.6 million, or $0.21 per diluted share, for the second quarter of 2017.  For the first six months of 2018, we realized net income of $11.8 million, or $0.69 per diluted share, compared to net income of $6.3 million, or $0.37 per diluted share for the same period of 2017.   

 

Net income for the first six months of 2018 included tax benefits totaling $2.9 million, or $0.17 per diluted share (1Q - $1.5 million, or $0.09 per diluted share and 2Q - $1.4 million, or $0.08 per diluted share) related to 2017 plan year pension plan contributions.        

32


 

 

Compared to the first quarter of 2018, the $0.5 million increase in operating profit reflected a $1.0 million increase in net interest income and higher noninterest income of $0.1 million, partially offset by higher noninterest expense of $0.5 million and a $0.1 million increase in the loan loss provision.

 

Compared to the second quarter of 2017, the $1.0 million increase in operating profit was attributable to higher net interest income of $2.3 million, partially offset by lower noninterest income of $0.6 million, a $ 0.5 million increase in noninterest expense, and a $0.2 million increase in the loan loss provision.

 

The increase in operating profit for the first six months of 2018 versus the comparable period of 2017 was attributable to higher net interest income of $4.3 million that was partially offset by lower noninterest income of $0.8 million, higher noninterest expense of $0.5 million, and $0.7 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

 

Six Months Ended

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

(Dollars in Thousands, except per share data)

 

2018

 

2018

 

2017

 

2018

 

2017

Interest Income

 

$

24,419

 

$

23,214

 

$

21,422

 

$

47,633

 

$

41,962

Taxable Equivalent Adjustments

 

 

147

 

 

180

 

 

303

 

 

327

 

 

573

Total Interest Income (FTE)

 

 

24,566

 

 

23,394

 

 

21,725

 

 

47,960

 

 

42,535

Interest Expense

 

 

1,649

 

 

1,451

 

 

926

 

 

3,100

 

 

1,730

Net Interest Income (FTE)

 

 

22,917

 

 

21,943

 

 

20,799

 

 

44,860

 

 

40,805

Provision for Loan Losses

 

 

815

 

 

745

 

 

589

 

 

1,560

 

 

899

Taxable Equivalent Adjustments

 

 

147

 

 

180

 

 

303

 

 

327

 

 

573

Net Interest Income After Provision for Loan Losses

 

 

21,955

 

 

21,018

 

 

19,907

 

 

42,973

 

 

39,333

Noninterest Income

 

 

12,542

 

 

12,477

 

 

13,135

 

 

25,019

 

 

25,853

Noninterest Expense

 

 

28,393

 

 

27,906

 

 

27,921

 

 

56,299

 

 

55,843

Income Before Income Taxes

 

 

6,104

 

 

5,589

 

 

5,121

 

 

11,693

 

 

9,343

Income Tax Expense (Benefit)

 

 

101

 

 

(184)

 

 

1,560

 

 

(83)

 

 

3,038

Net Income

 

$

6,003

 

$

5,773

 

$

3,561

 

$

11,776

 

$

6,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Net Income Per Share

 

$

0.35

 

$

0.34

 

$

0.21

 

$

0.69

 

$

0.37

Diluted Net Income Per Share

 

$

0.35

 

$

0.34

 

$

0.21

 

$

0.69

 

$

0.37

 

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 44.

 

Tax-equivalent net interest income was $22.9 million for the second quarter of 2018 compared to $21.9 million for the first quarter of 2018 and $20.8 million for the second quarter of 2017.  For the first six months of 2018, tax equivalent net interest income totaled $44.9 million compared to $40.8 million for the comparable period of 2017. The increase in tax-equivalent net interest income compared to all prior periods reflected growth in the loan and investment portfolios, coupled with higher short-term rates, partially offset by higher rates paid on negotiated rate deposits.  

 

The federal funds target rate was increased seven times since December 2015 to 2.00% as of the end of the second quarter of 2018, which positively affected our net interest income due to favorable repricing of our variable and adjustable rate earning assets. Although these increases have also resulted in higher rates paid on our negotiated rate deposit products, we continue to prudently manage our overall cost of funds, which was 26 basis points for the second quarter of 2018 and 24 basis points for the first six months of 2018.  Due to highly competitive fixed-rate loan pricing across most markets, we have continued to review our loan pricing and make adjustments where appropriate and prudent.   

 

Our net interest margin for the second quarter of 2018 was 3.58%, an increase of 15 basis points over the first quarter of 2018 and an increase of 25 basis points over the second quarter of 2017.  For the first six months of 2018, the net interest margin increased 24 basis points to 3.51% compared to the same period of 2017.  The increase in the margin as compared to all prior periods reflected rising interest rates and a favorable shift in our earning asset mix, which has produced higher net interest income in each period.

33


 

 

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 second quarter of 2018 was $0.8 million compared to $0.8 million provision expense for the first quarter of 2018 and $0.6 million for the second quarter of 2017.  For the first six months of 2018, the loan loss provision was $1.6 million compared to $0.9 million for the same period of 2017.  The higher provision in 2018 reflected growth in the loan portfolio.  We realized net loan charge-offs of $0.5 million, or 0.12% (annualized), of average loans for the second quarter of 2018.  This compares to net loan charge-offs of $0.8 million, or 0.20% (annualized) for the first quarter of 2018 and net charge-offs of $0.7 million, or 0.17% (annualized) for the second quarter of 2017.  For the first six months of 2018, net charge-offs totaled $1.3 million, or 0.16% (annualized), of average loans compared to $1.1 million, or 0.14% (annualized), for the same period of 2017.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

 

Six Months Ended

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

(Dollars in Thousands, except per share data)

2018

 

2018

 

2017

 

2018

 

2017

CHARGE-OFFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

141

 

 

182

 

 

324

 

 

323

 

 

417

 

Real Estate - Construction

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

 

 

-

 

Real Estate - Commercial Mortgage

 

-

 

 

 

290

 

 

 

478

 

 

 

290

 

 

 

549

 

Real Estate - Residential

 

456

 

 

 

107

 

 

 

44

 

 

 

563

 

 

 

160

 

Real Estate - Home Equity

 

157

 

 

 

158

 

 

 

-

 

 

 

315

 

 

 

92

 

Consumer

 

509

 

 

 

695

 

 

 

537

 

 

 

1,204

 

 

 

1,161

 

Total Charge-offs

$

1,263

 

 

$

1,439

 

 

$

1,383

 

 

$

2,702

 

 

$

2,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RECOVERIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

87

 

 

166

 

 

40

 

 

253

 

 

121

 

Real Estate - Construction

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

-

 

Real Estate - Commercial Mortgage

 

15

 

 

 

123

 

 

 

58

 

 

 

138

 

 

 

81

 

Real Estate - Residential

 

346

 

 

 

84

 

 

 

202

 

 

 

430

 

 

 

415

 

Real Estate - Home Equity

 

22

 

 

 

61

 

 

 

39

 

 

 

83

 

 

 

68

 

Consumer

 

283

 

 

 

210

 

 

 

362

 

 

 

493

 

 

 

606

 

Total Recoveries

$

753

 

 

$

645

 

 

$

701

 

 

$

1,398

 

 

$

1,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs

510

 

 

794

 

 

682

 

 

1,304

 

 

1,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs (Annualized) as a

 

0.12

%

 

 

0.20

%

 

 

0.17

%

 

 

0.16

%

 

 

0.14

%

 

percent of Average Loans Outstanding, Net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

Noninterest income for the second quarter of 2018 totaled $12.5 million, an increase of $0.1 million, or 0.5%, over the first quarter of 2018 and a $0.6 million, or 4.5%, decrease from the second quarter of 2017.  For the first six months of 2018, noninterest income totaled $25.0 million, a $0.8 million, or 3.2%, decrease from the same period of 2017, primarily due to lower mortgage banking fees of $0.6 million and deposit fees of $0.4 million, partially offset by higher wealth management fees of $0.3 million.  The decrease from the second quarter of 2017 also reflected lower mortgage banking fees and deposit fees.

   

Noninterest income represented 35.5% of operating revenues (net interest income plus noninterest income) in the second quarter of 2018 compared to 36.4% in the first quarter of 2018 and 39.1% in the second quarter of 2017.  For the first six months of 2018, noninterest income represented 36.0% of operating revenues compared to 39.1% for the same period of 2017.

 

 

34


 

The table below reflects the major components of noninterest income.

 

 

 

 Three Months Ended

 

Six Months Ended

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

(Dollars in Thousands)

2018

 

2018

 

2017

 

2018

 

2017

Deposit Fees

 $

4,842

 

 $

4,872

 

 $

5,052

 

 $

9,714

 

 $

10,142

Bank Card Fees

 

2,909

 

 

2,811

 

 

2,870

 

 

5,720

 

 

5,673

Wealth Management Fees

 

2,037

 

 

2,173

 

 

2,073

 

 

4,210

 

 

3,915

Mortgage Banking Fees

 

1,206

 

 

1,057

 

 

1,556

 

 

2,263

 

 

2,864

Other

 

1,548

 

 

1,564

 

 

1,584

 

 

3,112

 

 

3,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Income

 $

12,542

 

 $

12,477

 

 $

13,135

 

 $

25,019

 

 $

25,853

 

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

 

Deposit Fees.  Deposit fees for the second quarter of 2018 totaled $4.8 million, a decrease of $0.1 million, or 0.6%, from the first quarter of 2018, and a decrease of $0.2 million, or 4.2%, from the second quarter of 2017.  For the first six months of 2018, deposit fees totaled $9.7 million, a decrease of $0.4 million, or 4.2%, from the same period of 2017.  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.  Late in the second quarter of 2018, we continued the restructuring of our deposit product line-up as we migrate from a free to fee checking account model.  We expect this change to have a favorable impact on deposit fees for the second half of 2018.      

 

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 $2.0 million for the second quarter of 2018, a decrease of $0.1 million, or 6.3%, from the first quarter of 2018 and $0.1 million, or 1.7%, from the second quarter of 2017.  For the first six months of 2018, wealth management fees totaled $4.2 million, an increase of $0.3 million, or 7.5%, over the same period of 2017.  At June 30, 2018, total assets under management were approximately $1.421 billion compared to $1.418 billion at December 31, 2017 and $1.178 billion at June 30, 2017.    

 

Mortgage Banking Fees.  Mortgage banking fees totaled $1.2 million for the second quarter of 2018, an increase of $0.1 million, or 14.1%, from the first quarter of 2018 and a decrease of $0.4 million, or 22.5%, from the second quarter of 2017.  For the first six months of 2018, fees totaled $2.3 million, a decrease of $0.6 million, or 21.0%, over the same period of 2017.  The lower level of mortgage banking fees was due to a slowdown in secondary market loan production as adjustable rate loan production has picked up momentum and is being booked into our loan portfolio.  Total (secondary market sales and portfolio) residential loan production during the first two quarters of 2018 was comparable to the prior year.

 

Noninterest Expense

 

Noninterest expense for the second quarter of 2018 totaled $28.4 million, an increase of $0.5 million, or 1.7%, over the first quarter of 2018 and second quarter of 2017.  For the first six months of 2018, noninterest expense totaled $56.3 million, a $0.5 million, or 0.8%, increase over the same period of 2017.  The increase over the first quarter of 2018 primarily reflected higher professional fees of $0.2 million and a $0.2 million expense for our VISA Class B share swap contract related to VISA’s funding of their litigation reserve.  Compared to the three and six month periods of 2017, the increase was primarily attributable to higher professional fees.  The increase in professional fees is related to non-routine consulting engagements that will be concluded early in the second half of 2018.          

  

 

35


 

The table below reflects the major components of noninterest expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

 

Six Months Ended

 

 

June 30,

 

March 31,

 

June 30,

 

June 30,

 

June 30,

(Dollars in Thousands)

2018

 

2018

 

2017

 

2018

 

2017

Salaries

$

11,869

 

 $

11,873

 

 $

11,560

 

 $

23,743

 

 $

23,324

Associate Benefits

 

3,928

 

 

4,038

 

 

4,080

 

 

7,965

 

 

8,176

 

Total Compensation

 

15,797

 

 

15,911

 

 

15,640

 

 

31,708

 

 

31,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises

 

2,191

 

 

2,209

 

 

2,217

 

 

4,400

 

 

4,421

Equipment

 

2,312

 

 

2,342

 

 

2,338

 

 

4,654

 

 

4,515

 

Total Occupancy

 

4,503

 

 

4,551

 

 

4,555

 

 

9,054

 

 

8,936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal Fees

 

569

 

 

476

 

 

537

 

 

1,045

 

 

1,023

Professional Fees

 

1,374

 

 

1,146

 

 

885

 

 

2,520

 

 

1,789

Processing Services

 

1,724

 

 

1,532

 

 

1,700

 

 

3,256

 

 

3,345

Advertising

 

412

 

 

287

 

 

531

 

 

700

 

 

998

Travel and Entertainment

 

277

 

 

180

 

 

222

 

 

457

 

 

396

Printing and Supplies

 

162

 

 

163

 

 

188

 

 

325

 

 

364

Telephone

 

581

 

 

594

 

 

527

 

 

1,175

 

 

1,356

Postage

 

182

 

 

206

 

 

185

 

 

388

 

 

402

Insurance - Other

 

408

 

 

401

 

 

410

 

 

809

 

 

812

Other Real Estate Owned, net

 

248

 

 

626

 

 

315

 

 

874

 

 

898

Miscellaneous

 

2,156

 

 

1,833

 

 

2,226

 

 

3,988

 

 

4,024

 

Total Other

 

8,093

 

 

7,444

 

 

7,726

 

 

15,537

 

 

15,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Expense 

$

28,393

 

 $

27,906

 

 $

27,921

 

 $

56,299

 

 $

55,843

 

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

 

Compensation.  Compensation expense totaled $15.8 million for the second quarter of 2018, a decrease of $0.1 million, or 0.7%, from the first quarter of 2018 and an increase of $0.2 million, or 1.0%, over the second quarter of 2017.  For the first six months of 2018, compensation expense totaled $31.7 million, an increase of $0.2 million, or 0.7%, over the same period of 2017 and reflected higher salary expense of $0.4 million, partially offset by lower associate benefit expense of $0.2 million.  The increase in salary expense was attributable to higher cash incentive plan expense reflective of improved performance.  The reduction in associate benefit expense was primarily due to lower stock compensation expense.

 

Other.  Other noninterest expense totaled $8.1 million for the second quarter of 2018, an increase of $0.6 million, or 8.7% over the first quarter of 2018 and $0.4 million, or 4.8%, over the second quarter of 2017.  The increase over both prior periods was primarily attributable to higher professional fees related to non-routine consulting engagements that will be concluded early in the second half of 2018.  Additionally, a non-routine payment of $0.2 million related to our VISA share swap contract contributed to the increase.  For the first six months of 2018, other expense increased $0.1 million, or 0.8%, over the same period of 2017, and reflected higher professional fees of $0.7 million, partially offset by lower advertising of $0.3 million and telephone expense of $0.2 million.  The increase in professional fees was related to the aforementioned consulting engagements. 

 

Our operating efficiency ratio (expressed as noninterest expense as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 80.07% for the second quarter of 2018 compared to 81.07% for the first quarter of 2018 and 82.28% for the second quarter of 2017.  For the first six months of 2018, this ratio was 80.57% compared to 83.78% for the same period of 2017.

 

Income Taxes

 

We realized an income tax benefit of $0.1 million for the six months ended June 30, 2018 which reflected two discrete tax benefit items totaling $2.9 million resulting from the effect of federal tax reform, enacted in December 2017, on pension plan contributions made in 2018.  The discrete tax item for the first quarter of 2018 totaled $1.5 million and the item for the second quarter of 2018 totaled $1.4 million.  Absent these discrete items, our effective tax rate was approximately 24%.

 

36


 

FINANCIAL CONDITION

 

Average earning assets were $2.566 billion for the second quarter of 2018, a decrease of $26.5 million, or 1.0%, from the first quarter of 2018, and an increase of $54.0 million, or 2.2%, over the fourth quarter of 2017.  The change in average earning assets compared to the first quarter 2018 was attributable to decreases in our short-term investments, primarily due to a decline in our seasonal public fund balances.  The change in average earning assets over the fourth quarter 2017 was attributable to growth in our loan and investment portfolios primarily funded by increases in our noninterest bearing deposits and savings accounts.

 

Investment Securities

 

In the second quarter of 2018, our average investment portfolio increased $12.1 million, or 1.7%, over the first quarter of 2018 and increased $19.3 million, or 2.8%, over the fourth quarter of 2017.  Securities in our investment portfolio represented 27.9% of our average earning assets in the second quarter of 2018, compared to 27.2% in the first quarter of 2018, and 27.7% in the fourth quarter of 2017.   For the remainder of 2018, 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 second quarter of 2018, we purchased securities under both the AFS and HTM designations.  At June 30, 2018, $493.7 million, or 67.6%, of our investment portfolio was classified as AFS, and $236.8 million, or 32.4%, classified as HTM.  The average maturity of our total portfolio at June 30, 2018 was 2.21 years compared to 2.11 years and 1.96 years at March 31, 2018 and December 31, 2017, respectively.

 

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 June 30, 2018, there were 535 positions (combined AFS and HTM) with unrealized losses totaling $8.4 million. GNMA mortgage-backed securities, U.S. treasury 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

128

$

108,325

$

1,742

 

50

$

29,894

$

1,308

 

178

$

138,219

$

3,050

UST

35

 

171,023

 

2,616

 

26

 

122,268

 

1,797

 

61

 

293,291

 

4,413

SBA

78

 

63,166

 

340

 

2

 

1,503

 

21

 

80

 

64,669

 

361

FHLB and FFCB

2

 

4,462

 

37

 

16

 

23,709

 

255

 

18

 

28,171

 

292

States and Political Subdivisions

184

 

60,604

 

201

 

14

 

5,575

 

49

 

198

 

66,179

 

250

Total

427

$

407,580

$

4,936

 

108

$

182,949

$

3,430

 

535

$

590,529

$

8,366

 

Loans

 

Average loans increased $43.7 million, or 2.7% compared to the first quarter of 2018, and have grown $50.5 million, or 3.1% compared to the fourth quarter of 2017.  The increase compared to the prior quarter reflected growth in all loans types except home equity loans. Growth over the fourth quarter of 2017 was experienced in all loan products except for commercial and home equity loans.  During 2018, we have purchased a $4.0 million pool of adjustable rate residential loans (late in first quarter) and a $12.1 million pool of fixed and adjustable rate commercial real estate loans (late in second quarter).

 

37


 

We continue to make minor modifications on some of our lending programs to mitigate the impact that consumer and business deleveraging has had on our portfolio.  These programs, coupled with economic improvements in our anchor markets and strategic loan purchases, have helped increase overall loan growth.

 

Nonperforming Assets

 

Nonperforming assets (nonaccrual loans and OREO) totaled $9.1 million at June 30, 2018, a decrease of $1.5 million, or 14.4%, from March 31, 2018 and $2.0 million, or 17.9%, from December 31, 2017.  Nonaccrual loans totaled $5.7 million at June 30, 2018, a $1.6 million decrease from March 31, 2018 and a $1.4 million decrease from December 31, 2017.  Nonaccrual loan additions totaled $2.5 million for the second quarter of 2018 compared to $3.8 million for the first quarter of 2018 and $5.6 million for the fourth quarter of 2017.  The balance of OREO totaled $3.4 million at June 30, 2018, an increase of $0.1 million over March 31, 2018 and a decrease of $0.6 million from December 31, 2017.  For the second quarter of 2018, we added properties totaling $0.5 million, sold properties totaling $0.3 million, and recorded valuation adjustments totaling $0.1 million.

 

(Dollars in Thousands)

June 30, 2018

 

March 31, 2018

 

December 30, 2017

Nonaccruing Loans:

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial, Financial and Agricultural

$

455

 

 

$

567

 

 

$

629

 

 

  Real Estate - Construction

 

609

 

 

 

608

 

 

 

298

 

 

  Real Estate - Commercial Mortgage

 

2,181

 

 

 

1,940

 

 

 

2,370

 

 

  Real Estate - Residential

 

1,543

 

 

 

2,398

 

 

 

1,938

 

 

  Real Estate - Home Equity

 

910

 

 

 

1,686

 

 

 

1,748

 

 

  Consumer

 

43

 

 

 

115

 

 

 

176

 

Total Nonperforming Loans (“NPLs”)(1)

$

5,741

 

 

$

7,314

 

 

$

7,159

 

Other Real Estate Owned

 

3,373

 

 

 

3,330

 

 

 

3,941

 

Total Nonperforming Assets (“NPAs”)

$

9,114

 

 

$

10,644

 

 

$

11,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due Loans 30 – 89 Days

$

3,472

 

 

$

4,268

 

 

$

4,543

 

Past Due Loans 90 Days or More (accruing)

 

-

 

 

 

-

 

 

 

36

 

Performing Troubled Debt Restructurings

$

29,981

 

 

$

31,472

 

 

$

32,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming Loans/Loans

 

0.33

%

 

 

0.44

%

 

 

0.43

%

Nonperforming Assets/Total Assets

 

0.32

 

 

 

0.36

 

 

 

0.38

 

Nonperforming Assets/Loans Plus OREO

 

0.52

 

 

 

0.64

 

 

 

0.67

 

Allowance/Nonperforming Loans

 

236.25

%

 

 

181.26

%

 

 

185.87

%

 

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

 

38


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(Dollars in Thousands)

2018

 

2017

 

2018

 

2017

NPA Beginning Balance:

$

10,644

 

$

17,799

 

$

11,100

 

$

19,171

Change in Nonaccrual Loans:

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

7,314

 

 

8,298

 

 

7,159

 

 

8,533

 

  Additions

 

2,506

 

 

3,247

 

 

6,280

 

 

6,115

 

  Charge-Offs

 

(758)

 

 

(1,046)

 

 

(1,713)

 

 

(1,602)

 

  Transferred to OREO

 

(533)

 

 

(144)

 

 

(840)

 

 

(782)

 

  Paid Off/Payments

 

(1,046)

 

 

(700)

 

 

(1,620)

 

 

(1,393)

 

  Restored to Accrual

 

(1,742)

 

 

(1,689)

 

 

(3,525)

 

 

(2,905)

Ending Balance

 

5,741

 

 

7,966

 

  

5,741

 

  

7,966

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in OREO:

 

 

 

 

 

 

 

 

 

 

 

 

  Beginning Balance

 

3,330

 

 

9,501

 

 

3,941

 

 

10,638

 

  Additions

 

533

 

 

144

 

 

840

 

 

1,685

 

  Valuation Write-downs

 

(138)

 

 

(275)

 

 

(632)

 

 

(769)

 

  Sales

 

(352)

 

 

(1,209)

 

 

(776)

 

 

(3,320)

 

  Other

 

-

 

 

(193)

 

 

-

 

 

(266)

Ending Balance

 

3,373

 

 

7,968

 

  

3,373

 

  

7,968

NPA Net Change

 

(1,530)

 

 

(1,865)

 

 

(1,986)

 

 

(3,237)

NPA Ending Balance

$

9,114

 

$

15,934

 

$

9,114

 

$

15,934

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

(Dollars in Thousands)

2018

 

2017

 

2018

 

2017

TDR Beginning Balance:

$

33,703

 

$

39,066

 

$

34,489

 

$

39,976

 

  Additions

 

59

 

 

182

 

 

517

 

 

302

 

  Charge-Offs

 

(21)

 

 

(375)

 

 

(391)

 

 

(453)

 

  Paid Off/Payments

 

(1,187)

 

 

(956)

 

 

(2,061)

 

 

(1,868)

 

  Removal Due to Change in TDR Status

 

(296)

 

 

-

 

 

(296)

 

 

-

 

  Transferred to OREO

 

(73)

 

 

-

 

 

(73)

 

 

(40)

TDR Ending Balance(1)

$

32,185

 

$

37,917

 

$

32,185

 

$

37,917

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 $13.6 million at June 30, 2018 compared to $13.3 million at March 31, 2018 and December 31, 2017.  The allowance for loan losses was 0.78% of outstanding loans (net of overdrafts) and provided coverage of 236% of nonperforming loans at June 30, 2018 compared to 0.80% and 181%, respectively, at March 31, 2018 and 0.80% and 186%, respectively, at December 31, 2017.  We believe that the allowance for loan losses was adequate to absorb losses inherent in our loan portfolio at June 30, 2018.

 

39


 

Deposits

 

Average total deposits were $2.432 billion for the second quarter of 2018, a decrease of $24.1 million, or 1.0%, from the first quarter of 2018, and an increase of $53.5 million, or 2.3% over the fourth quarter of 2017.  The decline in deposits compared to the first quarter of 2018 reflected lower public fund NOW accounts and certificates of deposit balances, partially offset by increases in all other deposit types.  The increase in deposits when compared to the fourth quarter of 2017 reflected growth in all deposit products except certificates of deposit.  Public fund accounts typically peak in the first quarter and trend downwards through the fourth quarter due to the cycle of tax receipts.

 

Deposit levels remain strong, particularly given the recent increases in the overnight funds rate. Average core deposits continue to experience growth. We monitor deposit rates on an ongoing basis as 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 interest rate 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.

 

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 variable and 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 present the analysis to ALCO, with the risk metrics being reported 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. At this time, all shock scenarios for net interest earnings at risk and EVE are within the desired ranges.

 

40


 

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 and do not necessarily indicate the long-term prospects or economic value of the institution.

 

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%

June 30, 2018

9.2%

6.9%

4.5%

2.3%

-5.9%

March 31, 2018

13.1%

9.7%

6.3%

3.1%

-7.5%

 

 

 

 

 

 

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%

June 30, 2018

37.7%

29.4%

21.1%

13.1%

-7.8%

March 31, 2018

40.7%

31.4%

22.1%

13.2%

-9.6%

 

The Net Interest Income at Risk position indicates that in the short-term, all rising rate environments will positively impact our net interest margin, while a declining rate environment of 100bp will have a negative impact on our net interest income. Compared to the prior quarter-end, both the 12-month and 24-month Net Interest Income at Risk positions declined in a rising rate environment, and became more favorable in the down 100bp scenario. 

 

All measures of Net Interest Income at Risk are within our prescribed policy limits over both the 12-month and 24-month periods. Quarter-over-quarter, these metrics became less favorable in a rising rate environment as most of our high beta deposit rates are now off their floors. The metrics in the down 100 bp scenario became more favorable as we have a greater ability to lower our deposit rates relative to the decline in market rates. To a lesser degree, limited amounts of slightly longer investment purchases also reduced exposure to a falling rate scenario. 

 

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%

June 30, 2018

24.0%

19.2%

13.6%

7.9%

-14.8%

March 31, 2018

28.3%

22.4%

15.7%

8.9%

-17.5%

 

At June 30, 2018, 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. Quarter-over-quarter, EVE became less favorable in a rising rate environment as most of our high beta deposit rates are now off their floors. EVE in the down 100 bps rate shock scenario became more favorable as high Beta deposit rates have risen enough off their floors to give us room to reduce them in response to a falling rate environment. To a lesser degree, slightly longer investment purchases also reduced exposure in a falling rate scenario.

 

(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 June 30, 2018, we had the ability to generate $1.417 billion in additional liquidity through all of our available resources (this excludes $107 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 June 30, 2018, 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 2.21 years, and at June 30, 2018, it had a net unrealized pre-tax loss of $3.9 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 $158.7 million during the second quarter of 2018 compared to an average net overnight funds sold position of $240.9 million in the first quarter of 2018 and $174.6 million in the fourth quarter of 2017.  The decrease in average net overnight funds compared to both prior periods reflected growth in our loan and investment portfolios.  Additionally, part of the decrease compared to the first quarter of 2018 was attributable to the decline in our public deposits. 

 

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 June 30, 2018, advances from the FHLB totaled $10.7 million in outstanding debt consisting of 13 notes. During the first six months of 2018, the Bank made FHLB advance payments totaling approximately $0.8 million. No advances matured or were paid off in the first half of 2018, and we did not obtain any new FHLB advances during this period. 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 quarterly 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


 

Capital

   

Shareowners’ equity was $293.6 million at June 30, 2018, compared to $288.4 million at March 31, 2018 and $284.2 million at December 31, 2017.  Our leverage ratio was 10.69%, 10.36%, and 10.47%, respectively, on these dates.  Further, at June 30, 2018, our risk-adjusted capital ratio was 17.00% compared to 17.05% and 17.10% at March 31, 2018 and December 31, 2017, respectively.  Our common equity tier 1 ratio was 13.46% at June 30, 2018 compared to 13.44% and 13.42% at March 31, 2018 and December 31, 2017, respectively.  All of our capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards at June 30, 2018. 

 

During the first six months of 2018, shareowners’ equity increased $9.4 million, or 6.6%, on an annualized basis.  During this same period, shareowners’ equity was positively impacted by net income of $11.8 million, stock compensation accretion of $0.7 million, and net adjustments totaling $0.6 million related to transactions under our stock compensation plans.  Shareowners’ equity was reduced by common stock dividends totaling $2.4 million and a $1.3 million net increase in the unrealized loss on investment securities.

 

At June 30, 2018, our common stock had a book value of $17.15 per diluted share compared to $16.87 at March 31, 2018 and $16.65 at December 31, 2017.  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 June 30, 2018, the net unrealized loss on investment securities available for sale was $3.0 million and the amount of our unfunded pension liability was $30.3 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 2018.  At June 30, 2018, 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 June 30, 2018, we had $475.2 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 2017 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.

 

We have identified accounting for (i) the allowance for loan and lease losses, (ii) valuation of goodwill, (iii) pension benefits, and (iv) income taxes 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 2017 Form 10-K.

 

43


 

TABLE I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE BALANCES & INTEREST RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2018

 

2017

 

2018

 

 

2017

 

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)

1,691,287

 

20,625

 

4.89

%

 

1,608,629

 

18,880

 

4.71

%

 

1,669,571

 

40,261

 

4.86

%

 

1,597,159

 

37,017

 

4.67

%

Taxable Securities(2)

 

643,516

 

 

2,945

 

1.83

 

 

 

591,825

 

 

1,898

 

1.28

 

 

 

631,394

 

 

5,468

 

1.74

 

 

 

596,153

 

 

3,682

 

1.24

 

Tax-Exempt Securities

 

72,478

 

 

266

 

1.47

 

 

 

100,742

 

 

414

 

1.64

 

 

 

78,605

 

 

584

 

1.49

 

 

 

99,361

 

 

810

 

1.63

 

Funds Sold

 

158,725

 

 

730

 

1.84

 

 

 

200,834

 

 

533

 

1.06

 

 

 

199,593

 

 

1,647

 

1.66

 

 

 

222,871

 

 

1,026

 

0.93

 

Total Earning Assets

 

2,566,006

 

 

24,566

 

3.84

%

 

 

2,502,030

 

 

21,725

 

3.48

%

 

 

2,579,163

 

 

47,960

 

3.75

%

 

 

2,515,544

 

 

42,535

 

3.41

%

Cash & Due From Banks

 

50,364

 

 

 

 

 

 

 

 

52,312

 

 

 

 

 

 

 

 

51,531

 

 

 

 

 

 

 

 

50,618

 

 

 

 

 

 

Allowance For Loan Losses

 

(13,521)

 

 

 

 

 

 

 

 

(13,662)

 

 

 

 

 

 

 

 

(13,586)

 

 

 

 

 

 

 

 

(13,550)

 

 

 

 

 

 

Other Assets

 

258,255

 

 

 

 

 

 

 

 

276,799

 

 

 

 

 

 

 

 

259,418

 

 

 

 

 

 

 

 

278,621

 

 

 

 

 

 

TOTAL ASSETS

2,861,104

 

 

 

 

 

 

 

2,817,479

 

 

 

 

 

 

 

2,876,526

 

 

 

 

 

 

 

2,831,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW Accounts

790,335

 

725

 

0.37

%

 

806,621

 

222

 

0.11

%

 

826,554

 

1,384

 

0.34

%

 

843,459

 

356

 

0.09

%

Money Market Accounts

 

255,143

 

 

166

 

0.26

 

 

 

261,726

 

 

57

 

0.09

 

 

 

250,883

 

 

269

 

0.22

 

 

 

260,423

 

 

92

 

0.07

 

Savings Accounts

 

351,664

 

 

43

 

0.05

 

 

 

322,833

 

 

39

 

0.05

 

 

 

347,847

 

 

85

 

0.05

 

 

 

317,055

 

 

77

 

0.05

 

Other Time Deposits

 

134,171

 

 

61

 

0.18

 

 

 

152,811

 

 

70

 

0.18

 

 

 

137,248

 

 

125

 

0.18

 

 

 

155,535

 

 

144

 

0.19

 

Total Interest Bearing Deposits

 

1,531,313

 

 

995

 

0.27

 

 

 

1,543,991

 

 

388

 

0.10

 

 

 

1,562,532

 

 

1,863

 

0.25

 

 

 

1,576,472

 

 

669

 

0.09

 

Short-Term Borrowings

 

6,633

 

 

8

 

0.49

 

 

 

8,957

 

 

17

 

0.75

 

 

 

7,745

 

 

16

 

0.42

 

 

 

10,873

 

 

62

 

1.15

 

Subordinated Notes Payable

 

52,887

 

 

552

 

4.13

 

 

 

52,887

 

 

404

 

3.02

 

 

 

52,887

 

 

1,027

 

3.86

 

 

 

52,887

 

 

783

 

2.94

 

Other Long-Term Borrowings

 

13,151

 

 

94

 

2.88

 

 

 

16,065

 

 

117

 

2.93

 

 

 

13,467

 

 

194

 

2.91

 

 

 

15,271

 

 

216

 

2.85

 

Total Interest Bearing Liabilities

 

1,603,984

 

 

1,649

 

0.43

%

 

 

1,621,900

 

 

926

 

0.23

%

 

 

1,636,631

 

 

3,100

 

0.40

%

 

 

1,655,503

 

 

1,730

 

0.22

%

Noninterest Bearing Deposits

 

900,643

 

 

 

 

 

 

 

 

829,432

 

 

 

 

 

 

 

 

881,433

 

 

 

 

 

 

 

 

813,785

 

 

 

 

 

 

Other Liabilities

 

64,671

 

 

 

 

 

 

 

 

84,486

 

 

 

 

 

 

 

 

68,796

 

 

 

 

 

 

 

 

81,861

 

 

 

 

 

 

TOTAL LIABILITIES

 

2,569,298

 

 

 

 

 

 

 

 

2,535,818

 

 

 

 

 

 

 

 

2,586,860

 

 

 

 

 

 

 

 

2,551,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL SHAREOWNERS’ EQUITY

 

291,806

 

 

 

 

 

 

 

 

281,661

 

 

 

 

 

 

 

 

289,666

 

 

 

 

 

 

 

 

280,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

2,861,104

 

 

 

 

 

 

 

2,817,479

 

 

 

 

 

 

 

2,876,526

 

 

 

 

 

 

 

2,831,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Spread

 

 

 

 

 

 

3.41

%

 

 

 

 

 

 

 

3.25

%

 

 

 

 

 

 

 

3.35

%

 

 

 

 

 

 

 

3.19

%

Net Interest Income

 

 

 

22,917

 

 

 

 

 

 

 

20,799

 

 

 

 

 

 

 

44,860

 

 

 

 

 

 

 

40,805

 

 

 

Net Interest Margin(3)

 

 

 

 

 

 

3.58

%

 

 

 

 

 

 

 

3.33

%

 

 

 

 

 

 

 

3.51

%

 

 

 

 

 

 

 

3.27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Average Balances include nonaccrual loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)Interest income includes the effects of taxable equivalent adjustments using a 21% tax rate for 2018 and a 35% Federal tax rate for 2017.

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44


 

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, 2017.

 

Item 4.           CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

At June 30, 2018, 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 June 30, 2018, 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 2017 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2017 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

Not Applicable.  

 

Item 5.           Other Information

None.  

45


 

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.

 

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 

 

                                                                                                                                                                                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

46


 

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: August 3, 2018

 

 

47