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CAPITAL CITY BANK GROUP INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2019

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par value $0.01

CCBG

Nasdaq Stock Market, LLC

 

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 [  ]

 

 

 

Emerging growth company [  ]

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

 

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

 

At October 31, 2019, 16,748,858 shares of the Registrant's Common Stock, $.01 par value, were outstanding.

 

 


 

CAPITAL CITY BANK GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

 

PART I – Financial Information

 

Page

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

Consolidated Statements of Financial Condition – September 30, 2019 and December 31, 2018

4

 

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2019 and 2018

5

 

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018

6

 

Consolidated Statements of Changes in Shareowners’ Equity – Three and Nine Months Ended September 30, 2019 and 2018

7

 

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018

8

 

Notes to Consolidated Financial Statements

9

 

 

 

Item 2.

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

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

46

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

PART II – Other Information

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosure

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits

47

 

 

 

Signatures

 

48

 

 

 

 

 

 

 

 

 

 

 

           

2 


 

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

 

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

 

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

 

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and the following sections of our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 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;

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

·          inflation, interest rate, market and monetary fluctuations;

·          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 reserve, deferred tax asset valuation and pension plan;

·          changes in accounting principles, policies, practices or guidelines, including the effects of forthcoming Current Expected Credit Losses (“CECL”) accounting implementation;

·          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 subject to our capital requirements;

·          changes in the securities and real estate markets;

·          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;

·          the limited trading activity of our common stock;

·          the concentration of ownership of our common stock;

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

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

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

 

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

3 


 

PART I.      FINANCIAL INFORMATION

Item 1.

 

 

 

 

 

 

 

 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

September 30,

 

December 31,

(Dollars in Thousands)

2019

 

2018

ASSETS

 

 

 

 

 

Cash and Due From Banks

$

61,151

 

$

62,032

Federal Funds Sold and Interest Bearing Deposits

 

177,389

 

 

213,968

 

 

Total Cash and Cash Equivalents

 

238,540

 

 

276,000

 

 

 

 

 

 

 

 

Investment Securities, Available for Sale, at fair value

 

376,981

 

 

446,157

Investment Securities, Held to Maturity, at amortized cost (fair value of $241,887 and $214,413)

 

240,303

 

 

217,320

 

 

Total Investment Securities

 

617,284

 

 

663,477

 

 

 

 

 

 

 

 

Loans Held For Sale

 

13,075

 

 

6,869

 

 

 

 

 

 

 

 

Loans, Net of Unearned Income

 

1,827,753

 

 

1,774,225

 

Allowance for Loan Losses

 

(14,319)

 

 

(14,210)

 

 

Loans, Net

 

1,813,434

 

 

1,760,015

 

 

 

 

 

 

 

 

Premises and Equipment, net

 

85,810

 

 

87,190

Goodwill

 

84,811

 

 

84,811

Other Real Estate Owned

 

526

 

 

2,229

Other Assets

 

81,033

 

 

78,592

 

 

Total Assets

$

2,934,513

 

$

2,959,183

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest Bearing Deposits

$

1,022,774

 

$

947,858

 

Interest Bearing Deposits

 

1,450,233

 

 

1,583,998

 

 

Total Deposits

 

2,473,007

 

 

2,531,856

 

 

 

 

 

 

 

 

Short-Term Borrowings

 

10,622

 

 

13,541

Subordinated Notes Payable

 

52,887

 

 

52,887

Other Long-Term Borrowings

 

6,963

 

 

8,568

Other Liabilities

 

69,472

 

 

49,744

 

 

Total Liabilities

 

2,612,951

 

 

2,656,596

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

 

 

 

 

 

Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding

 

-

 

 

-

Common Stock, $.01 par value; 90,000,000 shares authorized; 16,748,858 and 16,747,571 shares

 

 

 

 

issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

167

 

 

167

Additional Paid-In Capital

 

31,075

 

 

31,058

Retained Earnings

 

316,551

 

 

300,177

Accumulated Other Comprehensive Loss, net of tax

 

(26,231)

 

 

(28,815)

Total Shareowners’ Equity

 

321,562

 

 

302,587

Total Liabilities and Shareowners' Equity

$

2,934,513

 

$

2,959,183

 

 

 

 

 

 

 

 

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

4 


 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands, Except Per Share Data)

2019

 

2018

 

2019

 

2018

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Loans, including Fees

$

23,992

 

$

21,618

 

$

70,373

 

$

61,686

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

3,249

 

 

3,290

 

 

9,937

 

 

8,757

 

Tax Exempt

 

58

 

 

182

 

 

276

 

 

633

Federal Funds Sold and Interest Bearing Deposits

 

1,142

 

 

302

 

 

4,242

 

 

1,949

Total Interest Income

 

28,441

 

 

25,392

 

 

84,828

 

 

73,025

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,596

 

 

1,068

 

 

5,683

 

 

2,931

Short-Term Borrowings

 

27

 

 

41

 

 

93

 

 

57

Subordinated Notes Payable

 

558

 

 

568

 

 

1,762

 

 

1,595

Other Long-Term Borrowings

 

63

 

 

92

 

 

201

 

 

286

Total Interest Expense

 

2,244

 

 

1,769

 

 

7,739

 

 

4,869

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

26,197

 

 

23,623

 

 

77,089

 

 

68,156

Provision for Loan Losses

 

776

 

 

904

 

 

2,189

 

 

2,464

Net Interest Income After Provision For Loan Losses

 

25,421

 

 

22,719

 

 

74,900

 

 

65,692

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Deposit Fees

 

4,961

 

 

5,207

 

 

14,492

 

 

14,921

Bank Card Fees

 

2,972

 

 

2,828

 

 

8,863

 

 

8,548

Wealth Management Fees

 

2,992

 

 

2,181

 

 

7,719

 

 

6,391

Mortgage Banking Fees

 

1,587

 

 

1,343

 

 

3,779

 

 

3,606

Other

 

1,391

 

 

1,749

 

 

4,372

 

 

4,861

Total Noninterest Income

 

13,903

 

 

13,308

 

 

39,225

 

 

38,327

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

16,203

 

 

15,891

 

 

48,989

 

 

47,599

Occupancy, net

 

4,710

 

 

4,645

 

 

13,756

 

 

13,699

Other Real Estate Owned, net

 

6

 

 

347

 

 

444

 

 

1,221

Other

 

6,954

 

 

7,816

 

 

21,278

 

 

22,479

Total Noninterest Expense

 

27,873

 

 

28,699

 

 

84,467

 

 

84,998

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

11,451

 

 

7,328

 

 

29,658

 

 

19,021

Income Tax Expense

 

2,970

 

 

1,338

 

 

7,416

 

 

1,255

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

$

8,481

 

$

5,990

 

$

22,242

 

$

17,766

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC NET INCOME PER SHARE

$

0.51

 

$

0.35

 

$

1.33

 

$

1.04

DILUTED NET INCOME PER SHARE

$

0.50

 

$

0.35

 

$

1.32

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Basic Shares Outstanding

 

16,747

 

 

17,056

 

 

16,776

 

 

17,043

Average Common Diluted Shares Outstanding

 

16,795

 

 

17,125

 

 

16,810

 

 

17,102

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5 


 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in Thousands)

2019

 

2018

 

2019

 

2018

NET INCOME

$

8,481

 

$

5,990

 

$

22,242

 

$

17,766

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on securities available for sale

 

443

 

 

(553)

 

 

3,427

 

 

(2,306)

Amortization of unrealized losses on securities transferred from

 

 

 

 

 

 

 

 

 

 

 

available for sale to held to maturity

 

11

 

 

13

 

 

33

 

 

42

Total Investment Securities

 

454

 

 

(540)

 

 

3,460

 

 

(2,264)

Other comprehensive income (loss), before tax

 

454

 

 

(540)

 

 

3,460

 

 

(2,264)

Deferred tax expense (benefit) related to other comprehensive income

 

115

 

 

(137)

 

 

876

 

 

(574)

Other comprehensive income (loss), net of tax

 

339

 

 

(403)

 

 

2,584

 

 

(1,690)

TOTAL COMPREHENSIVE INCOME

$

8,820

 

$

5,587

 

$

24,826

 

16,076

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Comprehensive

 

 

 

(Dollars In Thousands,

Shares

Common

 

 

Paid-In

 

Retained

 

(Loss) Income,

 

 

 

Except Share Data)

Outstanding

Stock

 

 

Capital

 

Earnings

 

Net of Taxes

 

Total

Three Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2019

16,745,866

 

$

167

 

$

30,751

 

$

310,247

 

$

(26,570)

 

$

314,595

Net Income

-

 

 

-

 

 

-

 

 

8,481

 

 

-

 

 

8,481

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

339

 

 

339

Cash Dividends ($0.1300 per share)

-

 

 

-

 

 

-

 

 

(2,177)

 

 

-

 

 

(2,177)

Stock Based Compensation

-

 

 

-

 

 

249

 

 

-

 

 

-

 

 

249

Impact of Transactions Under

  Compensation Plans, net

2,992

 

 

-

 

 

75

 

 

-

 

 

-

 

 

75

Balance, September 30, 2019

16,748,858

 

$

167

 

$

31,075

 

$

316,551

 

$

(26,231)

 

$

321,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2018

17,055,664

 

$

171

 

$

37,932

 

$

288,800

 

$

(33,332)

 

$

293,571

Net Income

-

 

 

-

 

 

-

 

 

5,990

 

 

-

 

 

5,990

Other Comprehensive Loss, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

(402)

 

 

(402)

Cash Dividends ($0.0900 per share)

-

 

 

-

 

 

-

 

 

(1,536)

 

 

-

 

 

(1,536)

Stock Based Compensation

-

 

 

-

 

 

323

 

 

-

 

 

-

 

 

323

Impact of Transactions Under

  Compensation Plans, net

2,857

 

 

-

 

 

70

 

 

-

 

 

-

 

 

70

Balance, September 30, 2018

17,058,521

 

$

171

 

$

38,325

 

$

293,254

 

$

(33,734)

 

$

298,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Other 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Comprehensive

 

 

 

(Dollars In Thousands,

Shares

 

Common

 

 

Paid-In

 

Retained

 

(Loss) Income,

 

 

 

Except Share Data)

Outstanding

 

Stock

 

 

Capital

 

Earnings

 

Net of Taxes

 

Total

Nine Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

16,747,571

 

$

167

 

$

31,058

 

$

300,177

 

$

(28,815)

 

$

302,587

Net Income

-

 

 

-

 

 

-

 

 

22,242

 

 

-

 

 

22,242

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

2,584

 

 

2,584

Cash Dividends ($0.3500 per share)

-

 

 

-

 

 

-

 

 

(5,868)

 

 

-

 

 

(5,868)

Repurchase of Common Stock

(77,000)

 

 

(1)

 

 

(1,805)

 

 

-

 

 

-

 

 

(1,806)

Stock Based Compensation

-

 

 

-

 

 

1,134

 

 

-

 

 

-

 

 

1,134

Impact of Transactions Under

  Compensation Plans, net

78,287

 

 

1

 

 

688

 

 

-

 

 

-

 

 

689

Balance, September 30, 2019

16,748,858

 

$

167

 

$

31,075

 

$

316,551

 

$

(26,231)

 

$

321,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

16,988,951

 

$

170

 

$

36,674

 

$

279,410

 

$

(32,044)

 

$

284,210

Net Income

-

 

 

-

 

 

-

 

 

17,766

 

 

-

 

 

17,766

Other Comprehensive Loss, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

(1,690)

 

 

(1,690)

Cash Dividends ($0.2300 per share)

-

 

 

-

 

 

-

 

 

(3,922)

 

 

-

 

 

(3,922)

Stock Based Compensation

-

 

 

-

 

 

978

 

 

-

 

 

-

 

 

978

Impact of Transactions Under

  Compensation Plans, net

69,570

 

 

1

 

 

673

 

 

-

 

 

-

 

 

674

Balance, September 30, 2018

17,058,521

 

$

171

 

$

38,325

 

$

293,254

 

$

(33,734)

 

$

298,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

7 


 

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited) 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(Dollars in Thousands)

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net Income

$

22,242

 

$

17,766

Adjustments to Reconcile Net Income to

 

 

 

 

 

   Cash Provided by Operating Activities:

 

 

 

 

 

      Provision for Loan Losses

 

2,189

 

 

2,464

      Depreciation

 

4,693

 

 

4,845

      Amortization of Premiums, Discounts and Fees, net

 

3,826

 

 

5,253

      Originations of Loans Held-for-Sale

 

(160,720)

 

 

(136,492)

      Proceeds From Sales of Loans Held-for-Sale

 

158,293

 

 

136,618

      Net Gain From Sales of Loans Held-for-Sale

 

(3,779)

 

 

(3,606)

      Stock Compensation

 

1,134

 

 

978

      Net Tax Benefit From Stock-Based Compensation

 

(14)

 

 

(41)

      Deferred Income Taxes

 

1,131

 

 

1,847

      Net Change in Operating Leases

 

68

 

 

-

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

 

165

 

 

941

      Proceeds From Insurance Claim for Operating Loss

 

268

 

 

-

      Loss on Disposal of Premises and Equipment

 

39

 

 

57

      Net (Increase) Decrease in Other Assets

 

(5,483)

 

 

3,040

      Net Increase (Decrease) in Other Liabilities

 

19,876

 

 

(12,208)

Net Cash Provided By Operating Activities

 

43,928

 

 

21,462

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Securities Held to Maturity:

 

 

 

 

 

      Purchases

 

(69,347)

 

 

(102,428)

      Payments, Maturities, and Calls

 

45,146

 

 

89,932

Securities Available for Sale:

 

 

 

 

 

      Purchases

 

(56,450)

 

 

(129,502)

      Payments, Maturities, and Calls

 

126,171

 

 

119,092

Purchases of Loans Held for Investment

 

(21,537)

 

 

(25,048)

Net Increase in Loans

 

(34,589)

 

 

(98,007)

Proceeds from Insurance Claims on Premises

 

814

 

 

-

Proceeds From Sales of Other Real Estate Owned

 

2,330

 

 

1,540

Purchases of Premises and Equipment

 

(3,352)

 

 

(2,771)

Net Cash Used In Investing Activities

 

(10,814)

 

 

(147,192)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net Decrease in Deposits

 

(58,849)

 

 

(88,661)

Net (Decrease) Increase in Short-Term Borrowings

 

(3,279)

 

 

9,164

Repayment of Other Long-Term Borrowings

 

(1,245)

 

 

(1,511)

Dividends Paid

 

(5,868)

 

 

(3,922)

Payments to Repurchase Common Stock

 

(1,806)

 

 

-

Issuance of Common Stock Under Compensation Plans

 

473

 

 

480

Net Cash Used In Financing Activities

 

(70,574)

 

 

(84,450)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(37,460)

 

 

(210,180)

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

276,000

 

 

285,442

Cash and Cash Equivalents at End of Period

$

238,540

 

$

75,262

 

 

 

 

 

 

Supplemental Cash Flow Disclosures:

 

 

 

 

 

   Interest Paid

$

7,761

 

$

4,837

   Income Taxes Paid

$

4,496

 

$

151

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

   Loans Transferred to Other Real Estate Owned

$

792

 

$

1,260

   Right-of-Use Assets Obtained in Exchange for Operating Lease Liabilities(1)

$

1,992

 

$

-

 

 

 

 

 

 

(1)Initial amount recorded upon implementation on January 1, 2019.

 

 

 

 

 

 

 

 

 

 

 

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, 2018 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, 2018.

 

Accounting Changes

 

Leases.   Accounting Standards Update ("ASU") 2016-02 requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.  ASU 2016-02 was effective for the Company on January 1, 2019.  ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients.  The Company elected to apply the modified retrospective transition approach as of the beginning of the period of adoption and has not restated comparative periods.  The Company also adopted the package of practical expedients provided under ASU 2016-02, which provided for the Company not to reassess: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial and direct costs of any existing leases.  The Company elected not to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by the accounting guidance). 

 

The Company’s operating leases related primarily to banking office locations.  As a result of implementing ASU 2016-02, the Company recognized operating lease right-of-use (“ROU”) assets of $2.0 million and operating lease liabilities of $2.8 million on January 1, 2019, with no significant impact on its consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model.  The difference between the lease assets and the lease liabilities of $0.8 million was prepaid rent, which was reclassified to lease assets.  The ROU asset and lease liability are recorded in other assets and other liabilities, respectively, in the consolidated statement of financial condition.  See Note 5 – Leases for additional information.

 

9 


 

NOTE 2 – INVESTMENT SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

held-to-maturity were as follows:

 

September 30, 2019

 

 

December 31, 2018

 

Amortized

Unrealized

Unrealized

Market

Amortized

Unrealized

Unrealized

Market

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gain

 

Losses

 

Value

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

216,707

 

$

858

 

$

300

 

$

217,265

 

$

264,298

 

$

167

 

$

2,616

 

$

261,849

U.S. Government Agency

 

137,798

 

 

572

 

 

332

 

 

138,038

 

 

133,201

 

 

520

 

 

515

 

 

133,206

States and Political Subdivisions

 

13,041

 

 

6

 

 

3

 

 

13,044

 

 

42,509

 

 

-

 

 

144

 

 

42,365

Mortgage-Backed Securities

 

708

 

 

79

 

 

-

 

 

787

 

 

903

 

 

40

 

 

-

 

 

943

Equity Securities(1)

 

7,847

 

 

-

 

 

-

 

 

7,847

 

 

7,794

 

 

-

 

 

-

 

 

7,794

Total

$

376,101

 

$

1,515

 

$

635

 

$

376,981

 

$

448,705

 

$

727

 

$

3,275

 

$

446,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

25,050

 

$

10

 

$

46

 

$

25,014

 

$

35,088

 

$

-

 

$

477

 

$

34,611

States and Political Subdivisions

 

3,356

 

 

-

 

 

1

 

 

3,355

 

 

6,512

 

 

-

 

 

26

 

 

6,486

Mortgage-Backed Securities

 

211,897

 

 

1,856

 

 

235

 

 

213,518

 

 

175,720

 

 

220

 

 

2,624

 

 

173,316

Total

$

240,303

 

$

1,866

 

$

282

 

$

241,887

 

$

217,320

 

$

220

 

$

3,127

 

$

214,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Securities

$

616,404

 

$

3,381

 

$

917

 

$

618,868

 

$

666,025

 

$

947

 

$

6,402

 

$

660,570

 

(1)     Includes Federal Home Loan Bank and Federal Reserve Bank stock, recorded at cost of $3.1 million, $4.8 million, respectively, at September 30, 2019 and includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $3.0 million and $4.8 million, respectively, at December 31, 2018.

 

Securities with an amortized cost of $262.8 million and $319.6 million at September 30, 2019 and December 31, 2018, 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 September 30, 2019, 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

$

141,609

 

$

141,370

 

$

13,354

 

$

13,331

Due after one year through five years

 

90,139

 

 

90,937

 

 

15,052

 

 

15,038

Mortgage-Backed Securities

 

708

 

 

787

 

 

211,897

 

 

213,518

U.S. Government Agency

 

135,798

 

 

136,040

 

 

-

 

 

-

Equity Securities

 

7,847

 

 

7,847

 

 

-

 

 

-

Total

$

376,101

 

$

376,981

 

$

240,303

 

$

241,887

10 


 

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

 

 

Less Than

 

Greater Than

 

 

 

 

 

 

 

12 Months

 

12 Months

 

Total

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

(Dollars in Thousands)

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

4,973

 

$

8

 

$

128,152

 

$

292

 

$

133,125

 

$

300

U.S. Government Agency

 

29,698

 

 

179

 

 

28,524

 

 

153

 

 

58,222

 

 

332

States and Political Subdivisions

 

5,428

 

 

3

 

 

-

 

 

-

 

 

5,428

 

 

3

Total

 

40,099

 

 

190

 

 

156,676

 

 

445

 

 

196,775

 

 

635

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

 

-

 

 

-

 

  

19,996

 

 

46

 

  

19,996

 

 

46

States and Political Subdivisions

 

1,794

 

 

1

 

 

500

 

 

-

 

 

2,294

 

 

1

Mortgage-Backed Securities

 

29,466

 

 

78

 

 

16,318

 

 

157

 

 

45,784

 

 

235

Total

$

31,260

 

$

79

 

$

36,814

 

$

203

 

$

68,074

 

$

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

28,420

 

$

80

 

$

193,501

 

$

2,536

 

$

221,921

 

$

2,616

U.S. Government Agency

 

53,237

 

 

271

 

 

28,735

 

 

244

 

 

81,972

 

 

515

States and Political Subdivisions

 

8,243

 

 

12

 

 

31,417

 

 

132

 

 

39,660

 

 

144

Mortgage-Backed Securities

 

10

 

 

-

 

 

-

 

 

-

 

 

10

 

 

-

Total

 

89,910

 

 

363

 

 

253,653

 

 

2,912

 

 

343,563

 

 

3,275

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

 

-

 

 

-

 

 

34,612

 

 

477

 

 

34,612

 

 

477

States and Political Subdivisions

 

204

 

 

-

 

 

6,281

 

 

26

 

 

6,485

 

 

26

Mortgage-Backed Securities

 

51,327

 

 

389

 

 

84,705

 

 

2,235

 

 

136,032

 

 

2,624

Total

$

51,531

 

$

389

 

$

125,598

 

$

2,738

 

$

177,129

 

$

3,127

 

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

 

At September 30, 2019, there were 242 positions (combined AFS and HTM) with unrealized losses totaling $0.9 million.  31 of these positions were U.S. government treasury securities guaranteed by the U.S. government.  187 of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities.  The remaining 24 positions were municipal securities. Because the declines in the market value of these securities were attributable to changes in interest rates and not credit quality, and because the Company had the ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2019.

11 


 

NOTE 3 – LOANS, NET

 

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

 

(Dollars in Thousands)

September 30, 2019

 

December 31, 2018

Commercial, Financial and Agricultural

$

259,870

 

$

233,689

Real Estate – Construction

 

111,358

 

 

89,527

Real Estate – Commercial Mortgage

 

610,726

 

 

602,061

Real Estate – Residential(1)

 

368,793

 

 

342,215

Real Estate – Home Equity

 

197,326

 

 

210,111

Consumer(2)

 

279,680

 

 

296,622

 

Loans, Net of Unearned Income

$

1,827,753

 

$

1,774,225

             

 

(1)     Includes loans in process with outstanding balances of $16.8 million and $9.2 million at September 30, 2019 and December 31, 2018, respectively.

(2)     Includes overdraft balances of $1.7 million and $1.6 million at September 30, 2019 and December 31, 2018, respectively.  

 

Net deferred costs, which include premiums on purchased loans, included in loans were $1.8 million at September 30, 2019 and $1.5 million at December 31, 2018.

 

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.

 

 

September 30, 2019

 

December 31, 2018

(Dollars in Thousands)

Nonaccrual

 

90 + Days

 

Nonaccrual

 

90 + Days

Commercial, Financial and Agricultural

$

324

 

$

-

 

$

267

 

$

-

Real Estate – Construction

 

158

 

 

-

 

 

722

 

 

-

Real Estate – Commercial Mortgage

 

2,159

 

 

-

 

 

2,860

 

 

-

Real Estate – Residential

 

1,059

 

 

-

 

 

2,119

 

 

-

Real Estate – Home Equity

 

894

 

 

-

 

 

584

 

 

-

Consumer

 

334

 

 

-

 

 

320

 

 

-

Total Nonaccrual Loans

$

4,928

 

$

-

 

$

6,872

 

$

-

 

12 


 

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

 

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

 

 

30-59

 

60-89

 

90 +

 

Total

 

Total

 

Total

(Dollars in Thousands)

DPD

 

DPD

 

DPD

 

Past Due

 

Current

 

Loans(1)

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

601

 

$

185

 

$

-

 

$

786

 

$

258,760

 

$

259,870

Real Estate – Construction

 

-

 

 

-

 

 

-

 

 

-

 

 

111,200

 

 

111,358

Real Estate – Commercial Mortgage

 

660

 

 

103

 

 

-

 

 

763

 

 

607,804

 

 

610,726

Real Estate – Residential

 

550

 

 

327

 

 

-

 

 

877

 

 

366,857

 

 

368,793

Real Estate – Home Equity

 

173

 

 

39

 

 

-

 

 

212

 

 

196,220

 

 

197,326

Consumer

 

1,883

 

 

599

 

 

-

 

 

2,482

 

 

276,864

 

 

279,680

Total Loans

$

3,867

 

$

1,253

 

$

-

 

$

5,120

 

$

1,817,705

 

$

1,827,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

104

 

$

58

 

$

-

 

$

162

 

$

233,260

 

$

233,689

Real Estate – Construction

 

489

 

 

-

 

 

-

 

 

489

 

 

88,316

 

 

89,527

Real Estate – Commercial Mortgage

 

124

 

 

-

 

 

-

 

 

124

 

 

599,077

 

 

602,061

Real Estate – Residential

 

745

 

 

627

 

 

-

 

 

1,372

 

 

338,724

 

 

342,215

Real Estate – Home Equity

 

512

 

 

124

 

 

-

 

 

636

 

 

208,891

 

 

210,111

Consumer

 

1,661

 

 

313

 

 

-

 

 

1,974

 

 

294,328

 

 

296,622

Total Loans

$

3,635

 

$

1,122

 

$

-

 

$

4,757

 

$

1,762,596

 

$

1,774,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Total Loans include nonaccrual loans of $4.9 million and $6.9 million at September 30, 2019 and December 31, 2018, respectively.

 

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

 

13 


 

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

 

 

 

Commercial,

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial,

 

Real Estate

 

Commercial

 

Real Estate

 

Real Estate

 

 

 

 

 

 

(Dollars in Thousands)

Agricultural

 

Construction

 

Mortgage

 

Residential

 

Home Equity

Consumer

 

Total

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,648

 

$

521

 

$

3,889

 

$

3,210

 

$

2,383

 

$

2,942

 

$

14,593

 

Provision for Loan Losses

 

236

 

 

81

 

 

(304)

 

 

3

 

 

71

 

 

689

 

 

776

 

Charge-Offs

 

(289)

 

 

(223)

 

 

(26)

 

 

(44)

 

 

(333)

 

 

(744)

 

 

(1,659)

 

Recoveries

 

86

 

 

-

 

 

142

 

 

46

 

 

58

 

 

277

 

 

609

 

Net Charge-Offs

 

(203)

 

 

(223)

 

 

116

 

 

2

 

 

(275)

 

 

(467)

 

 

(1,050)

Ending Balance

$

1,681

 

$

379

 

$

3,701

 

$

3,215

 

$

2,179

 

$

3,164

 

$

14,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,434

 

$

280

 

$

4,181

 

$

3,400

 

$

2,301

 

$

2,614

 

$

14,210

 

Provision for Loan Losses

 

648

 

 

322

 

 

(611)

 

 

(125)

 

 

158

 

 

1,797

 

 

2,189

 

Charge-Offs

 

(619)

 

 

(223)

 

 

(181)

 

 

(373)

 

 

(430)

 

 

(2,059)

 

 

(3,885)

 

Recoveries

 

218

 

 

-

 

 

312

 

 

313

 

 

150

 

 

812

 

 

1,805

 

Net Charge-Offs

 

(401)

 

 

(223)

 

 

131

 

 

(60)

 

 

(280)

 

 

(1,247)

 

 

(2,080)

Ending Balance

$

1,681

 

$

379

 

$

3,701

 

$

3,215

 

$

2,179

 

$

3,164

 

$

14,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,214

 

$

283

 

$

4,432

 

$

3,146

 

$

2,294

 

$

2,194

 

$

13,563

 

Provision for Loan Losses

 

388

 

 

86

 

 

(30)

 

 

50

 

 

120

 

 

290

 

 

904

 

Charge-Offs

 

(268)

 

 

-

 

 

(25)

 

 

(106)

 

 

(112)

 

 

(463)

 

 

(974)

 

Recoveries

 

78

 

 

-

 

 

222

 

 

107

 

 

47

 

 

272

 

 

726

 

Net Charge-Offs

 

(190)

 

 

-

 

 

197

 

 

1

 

 

(65)

 

 

(191)

 

 

(248)

Ending Balance

$

1,412

 

$

369

 

$

4,599

 

$

3,197

 

$

2,349

 

$

2,293

 

$

14,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,191

 

$

122

 

$

4,346

 

$

3,206

 

$

2,506

 

$

1,936

 

$

13,307

 

Provision for Loan Losses

 

481

 

 

253

 

 

208

 

 

123

 

 

140

 

 

1,259

 

 

2,464

 

Charge-Offs

 

(591)

 

 

(7)

 

 

(315)

 

 

(669)

 

 

(427)

 

 

(1,667)

 

 

(3,676)

 

Recoveries

 

331

 

 

1

 

 

360

 

 

537

 

 

130

 

 

765

 

 

2,124

 

Net Charge-Offs

 

(260)

 

 

(6)

 

 

45

 

 

(132)

 

 

(297)

 

 

(902)

 

 

(1,552)

Ending Balance

$

1,412

 

$

369

 

$

4,599

 

$

3,197

 

$

2,349

 

$

2,293

 

$

14,219

 

14 


 

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

 

 

Commercial,

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial,

 

Real Estate

 

Commercial

 

Real Estate

 

Real Estate

 

 

 

 

 

 

(Dollars in Thousands

Agricultural

 

Construction

 

Mortgage

 

Residential

 

Home Equity

Consumer

 

Total

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

152

 

$

23

 

$

614

 

$

696

 

$

305

 

$

2

 

$

1,792

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,529

 

 

356

 

 

3,087

 

 

2,519

 

 

1,874

 

 

3,162

 

 

12,527

Ending Balance

$

1,681

 

$

379

 

$

3,701

 

$

3,215

 

$

2,179

 

$

3,164

 

$

14,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

118

 

$

52

 

$

1,026

 

$

919

 

$

289

 

$

1

 

$

2,405

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,316

 

 

228

 

 

3,155

 

 

2,481

 

 

2,012

 

 

2,613

 

 

11,805

Ending Balance

$

1,434

 

$

280

 

$

4,181

 

$

3,400

 

$

2,301

 

$

2,614

 

$

14,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-end amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Individually

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

$

185

 

$

181

 

$

1,719

 

$

954

 

$

357

 

$

1

 

$

3,397

Loans Collectively

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated for Impairment

 

1,227

 

 

188

 

 

2,880

 

 

2,243

 

 

1,992

 

 

2,292

 

 

10,822

Ending Balance

$

1,412

 

$

369

 

$

4,599

 

$

3,197

 

$

2,349

 

$

2,293

 

$

14,219

 

15 


 

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

 

 

 

Commercial,

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial,

 

Real Estate

 

Commercial

 

Real Estate

 

Real Estate

 

 

 

 

 

 

(Dollars in Thousands)

Agricultural

 

Construction

Mortgage

 

Residential

 

Home Equity

Consumer

 

Total

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

1,226

 

$

158

 

$

12,926

 

$

8,960

 

$

1,816

 

$

76

 

$

25,162

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

258,644

 

 

111,200

 

 

597,800

 

 

359,833

 

 

195,510

 

 

279,604

 

 

1,802,591

Total

$

259,870

 

$

111,358

 

$

610,726

 

$

368,793

 

$

197,326

 

$

279,680

 

$

1,827,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

873

 

$

781

 

$

12,650

 

$

10,593

 

$

2,210

 

$

88

 

$

27,195

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

232,816

 

 

88,746

 

 

589,411

 

 

331,622

 

 

207,901

 

 

296,534

 

 

1,747,030

Total

$

233,689

 

$

89,527

 

$

602,061

 

$

342,215

 

$

210,111

 

$

296,622

 

$

1,774,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

$

987

 

$

1,159

 

$

18,572

 

$

11,369

 

$

2,241

 

$

90

 

$

34,418

Collectively Evaluated for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

238,057

 

 

86,513

 

 

577,819

 

 

330,694

 

 

210,701

 

 

295,552

 

 

1,739,336

Total

$

239,044

 

$

87,672

 

$

596,391

 

$

342,063

 

$

212,942

 

$

295,642

 

$

1,773,754

 

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

 

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

 

 

 

Unpaid

 

Recorded

 

Recorded

 

 

 

 

 

Principal

 

Investment

 

Investment

 

Related

(Dollars in Thousands)

 

Balance

 

With No Allowance

With Allowance

 

Allowance

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

1,226

 

$

692

 

$

534

 

$

152

Real Estate – Construction

 

 

158

 

 

-

 

 

158

 

 

23

Real Estate – Commercial Mortgage

 

 

12,926

 

 

5,176

 

 

7,750

 

 

614

Real Estate – Residential

 

 

8,960

 

 

2,141

 

 

6,819

 

 

696

Real Estate – Home Equity

 

 

1,816

 

 

421

 

 

1,395

 

 

305

Consumer

 

 

76

 

 

40

 

 

36

 

 

2

Total

 

$

25,162

 

$

8,470

 

$

16,692

 

$

1,792

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

$

873

 

$

101

 

$

772

 

$

118

Real Estate – Construction

 

 

781

 

 

459

 

 

322

 

 

52

Real Estate – Commercial Mortgage

 

 

12,650

 

 

2,384

 

 

10,266

 

 

1,026

Real Estate – Residential

 

 

10,593

 

 

1,482

 

 

9,111

 

 

919

Real Estate – Home Equity

 

 

2,210

 

 

855

 

 

1,355

 

 

289

Consumer

 

 

88

 

 

49

 

 

39

 

 

1

Total

 

$

27,195

 

$

5,330

 

$

21,865

 

$

2,405

 

16 


 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2019

 

2018

 

2019

 

2018

 

 

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

 

$

1,244

 

$

21

 

$

1,040

 

$

19

 

$

1,037

 

$

53

 

$

1,185

 

$

69

Real Estate – Construction

 

 

270

 

 

-

 

 

915

 

 

2

 

 

426

 

 

-

 

 

716

 

 

3

Real Estate – Commercial Mortgage

 

 

13,082

 

 

143

 

 

18,470

 

 

167

 

 

12,681

 

 

410

 

 

18,666

 

 

511

Real Estate – Residential

 

 

9,163

 

 

127

 

 

11,393

 

 

133

 

 

9,461

 

 

380

 

 

12,215

 

 

417

Real Estate – Home Equity

 

 

2,070

 

 

16

 

 

2,415

 

 

23

 

 

2,245

 

 

61

 

 

2,840

 

 

74

Consumer

 

 

78

 

 

2

 

 

92

 

 

2

 

 

82

 

 

6

 

 

102

 

 

6

Total

 

$

25,907

 

$

309

 

$

34,325

 

$

346

 

$

25,932

 

$

910

 

$

35,724

 

$

1,080

 

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 we have strategic plans in place to supplement Board approved credit policies governing exposure limits and underwriting standards.  Detailed below are the types of loans within the Company’s loan portfolio and risk characteristics unique to each.      

 

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

 

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

 

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

 

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

 

17 


 

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

 

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

 

Credit Quality Indicators.  As part of the ongoing monitoring of the Company’s loan portfolio quality, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment performance, credit documentation, and current economic and 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

(Dollars in Thousands)

 

Agriculture

 

Real Estate

 

Consumer

 

Loans

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

258,457

 

$

1,259,949

 

$

278,705

 

$

1,797,111

Special Mention

 

 

286

 

 

8,998

 

 

35

 

 

9,319

Substandard

 

 

1,127

 

 

19,256

 

 

940

 

 

21,323

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

Total Loans

 

$

259,870

 

$

1,288,203

 

$

279,680

 

$

1,827,753

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

232,417

 

$

1,211,451

 

$

295,888

 

$

1,739,756

Special Mention

 

 

479

 

 

11,048

 

 

54

 

 

11,581

Substandard

 

 

793

 

 

21,415

 

 

680

 

 

22,888

Doubtful

 

 

-

 

 

-

 

 

-

 

 

-

Total Loans

 

$

233,689

 

$

1,243,914

 

$

296,622

 

$

1,774,225

 

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

18 


 

The following table presents loans classified as TDRs.

 

 

 

September 30, 2019

 

December 31, 2018

(Dollars in Thousands)

 

Accruing

 

Nonaccruing

 

Accruing

 

Nonaccruing

Commercial, Financial and Agricultural

 

$

564

 

$

56

 

$

873

 

$

-

Real Estate – Construction

 

 

-

 

 

58

 

 

59

 

 

-

Real Estate – Commercial Mortgage

 

 

8,459

 

 

832

 

 

9,910

 

 

1,239

Real Estate – Residential

 

 

7,769

 

 

285

 

 

9,234

 

 

1,222

Real Estate – Home Equity

 

 

1,416

 

 

173

 

 

1,920

 

 

179

Consumer

 

 

76

 

 

-

 

 

88

 

 

-

Total TDRs

 

$

18,284

 

$

1,404

 

$

22,084

 

$

2,640

 

For TDRs, the Company estimated $1.7 million and $2.3 million of impaired loan loss reserves for these loans at September 30, 2019 and December 31, 2018, respectively.

 

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, a principal moratorium, a reduction in the interest rate, or a combination thereof.  The financial impact of these modifications was not material.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2019

 

2019

 

 

 

 

Pre-

 

Post-

 

 

 

Pre-

 

Post-

 

 

Number

 

Modified

 

Modified

 

Number

 

Modified

 

Modified

 

 

of

 

Recorded

 

Recorded

 

of

 

Recorded

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment

 

Investment(1)

 

Contracts

 

Investment

 

Investment

Commercial, Financial and Agricultural

 

1

 

$

58

 

$

58

 

1

 

$

58

 

$

58

Real Estate – Construction

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Real Estate – Commercial Mortgage

 

1

 

 

151

 

 

157

 

2

 

 

209

 

 

218

Real Estate – Residential

 

1

 

 

92

 

 

88

 

2

 

 

138

 

 

162

Real Estate – Home Equity

 

1

 

 

26

 

 

25

 

2

 

 

56

 

 

56

Consumer

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Total TDRs

 

4

 

$

327

 

 $

328

 

7

 

$

461

 

$

494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 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(1)

 

Contracts

 

Investment

 

Investment

Commercial, Financial and Agricultural

 

-

 

$

-

 

$

-

 

1

 

$

498

 

$

230

Real Estate – Construction

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Real Estate – Commercial Mortgage

 

-

 

 

-

 

 

-

 

1

 

 

227

 

 

228

Real Estate – Residential

 

1

 

 

72

 

 

76

 

2

 

 

105

 

 

108

Real Estate – Home Equity

 

-

 

 

-

 

 

-

 

1

 

 

27

 

 

27

Consumer

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

Total TDRs

 

1

 

$

72

 

 $

76

 

5

 

$

857

 

$

593

 

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

 

For the three and nine months ended September 30, 2019, there were no loans modified as TDRs within the previous 12 months that had defaulted.  For the three and nine months ended September 30, 2018, loans classified as TDRs for which there was a payment default and the loans were modified within twelve months prior to default is presented below.

 

19 


 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 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

 

Real Estate – Residential

 

-

 

 

-

 

 

-

 

 

-

 

Real Estate – Home Equity

 

-

 

 

-

 

 

-

 

 

-

 

Consumer

 

-

 

 

-

 

 

-

 

 

-

 

Total TDRs

 

-

 

$

-

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

2019

 

2019

 

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment(1)

 

Contracts

 

Investment(1)

Extended amortization

 

-

 

$

-

 

-

 

$

-

Interest rate adjustment

 

1

 

 

25

 

1

 

 

25

Extended amortization and interest rate adjustment

 

3

 

 

303

 

6

 

 

469

Total TDRs

 

4

 

$

328

 

7

 

$

494

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2018

 

2018

 

 

Number of

 

Recorded

 

Number of

 

Recorded

(Dollars in Thousands)

 

Contracts

 

Investment(1)

 

Contracts

 

Investment(1)

Extended amortization

 

1

 

$

76

 

2

 

$

303

Interest rate adjustment

 

-

 

 

-

 

1

 

 

33

Extended amortization and interest rate adjustment

 

-

 

 

-

 

1

 

 

27

Principal moratorium

 

-

 

 

-

 

1

 

 

230

Total TDRs

 

1

 

$

76

 

5

 

$

593

 

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

20 


 

NOTE 4 – OTHER REAL ESTATE OWNED

 

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

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2019

 

2018

 

2019

 

2018

Beginning Balance

$

1,010

 

$

3,373

 

$

2,229

 

$

3,941

Additions

 

104

 

 

420

 

 

792

 

 

1,260

Valuation Write-downs

 

(35)

 

 

(224)

 

 

(266)

 

 

(856)

Sales

 

(553)

 

 

(849)

 

 

(2,229)

 

 

(1,625)

Ending Balance

$

526

 

$

2,720

 

$

526

 

$

2,720

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2019

 

2018

 

2019

 

2018

Gains from the Sale of Properties

$

(148)

 

$

(46)

 

$

(240)

 

$

(127)

Losses from the Sale of Properties

 

73

 

 

70

 

 

139

 

 

212

Rental Income from Properties

 

-

 

 

(3)

 

 

(3)

 

 

(9)

Property Carrying Costs

 

46

 

 

102

 

 

282

 

 

289

Valuation Adjustments

 

35

 

 

224

 

 

266

 

 

856

Total

$

6

 

$

347

 

$

444

 

$

1,221

 

At September 30, 2019, the Company had $0.8 million of loans secured by residential real estate in the process of foreclosure

 

NOTE 5 – LEASES

 

Operating leases in which the Company is the lessee are recorded as operating lease right of use (“ROU”) assets and operating liabilities, included in other assets and liabilities, respectively, on its consolidated statement of financial condition. 

 

Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease.  ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date.  Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the consolidated statement of income. 

 

The Company’s operating leases primarily relate to banking offices with remaining lease terms from 1 to 9 years.  The Company’s leases are not complex and do not contain residual value guarantees, variable lease payments, or significant assumptions or judgments made in applying the requirements of Topic 842.  Operating leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.  At September 30, 2019, the operating lease ROU assets and liabilities were $1.8 million and $2.6 million, respectively.  The Company does not have any finance leases or any significant lessor agreements.

 

 

 

21 


 

The table below summarizes our lease expense and other information related to the Company’s operating leases: 

 

 

Three Months Ended

 

Nine Months Ended

(Dollars in Thousands)

September 30, 2019

 

September 30, 2019

Operating lease expense

$

81

 

$

243

Short-term lease expense

 

27

 

 

90

Total lease expense

$

108

 

$

333

 

 

 

 

 

 

 

 

 

 

September 30, 2019

Other information:

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

Operating cash flows from operating leases

 

 

 

$

254

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

 

 

1,794

 

 

 

 

 

 

Weighted-average remaining lease term — operating leases (in years)

 

 

 

 

7.0

Weighted-average discount rate — operating leases

 

 

 

 

2.9%

 

The table below summarizes the maturity of remaining lease liabilities:

 

 

 

 

 

(Dollars in Thousands)

September 30, 2019

2019

$

107

2020

 

451

2021

 

420

2022

 

417

2023

 

398

2024 and thereafter

 

1,085

Total

$

2,878

Less: Interest

 

(287)

Present Value of Lease liability

$

2,591

 

At September 30, 2019, the Company had additional operating lease payments for a banking office (to be constructed) that have not yet commenced of $1.4 million.  Payments for the banking office are expected to commence after the construction period ends, which is expected to occur during the second quarter of 2020.   

 

A related party is the lessor in an operating lease with the Company.  The Company’s minimum payment is $0.2 million annually through 2024, for an aggregate remaining obligation of $1.0 million at September 30, 2019.

22 


 

NOTE 6 - EMPLOYEE BENEFIT PLANS

 

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

 

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

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2019

 

2018

 

2019

 

2018

Service Cost

$

1,529

 

$

1,721

 

$

4,587

 

$

5,163

Interest Cost

 

1,545

 

 

1,415

 

 

4,635

 

 

4,246

Expected Return on Plan Assets

 

(2,382)

 

 

(2,391)

 

 

(7,146)

 

 

(7,173)

Prior Service Cost Amortization

 

4

 

 

50

 

 

12

 

 

150

Net Loss Amortization

 

965

 

 

918

 

 

2,895

 

 

2,754

Net Periodic Benefit Cost

$

1,661

 

$

1,713

 

$

4,983

 

$

5,140

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

4.43%

 

 

3.71%

 

 

4.43%

 

 

3.71%

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 September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2019

 

2018

 

2019

 

2018

Interest Cost

$

87

 

$

57

 

$

261

 

$

170

Net Loss Amortization

 

190

 

 

406

 

 

570

 

 

1,220

Net Periodic Benefit Cost

$

277

 

$

463

 

$

831

 

$

1,390

 

 

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

4.23%

 

 

3.53%

 

 

4.23%

 

 

3.53%

 

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.

 

NOTE 7 - 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:

 

 

September 30, 2019

 

December 31, 2018

(Dollars in Thousands)

Fixed

 

Variable

 

Total

 

Fixed

 

Variable

 

Total

Commitments to Extend Credit (1)

$

119,382

 

$

404,994

 

$

524,376

 

$

94,572

 

$

373,438

 

$

468,010

Standby Letters of Credit

 

6,369

 

 

-

 

 

6,369

 

 

4,986

 

 

-

 

 

4,986

Total

$

125,751

 

$

404,994

 

$

530,745

 

$

99,558

 

$

373,438

 

$

472,996

 

(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.

23 


 

 

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 the Visa U.S.A. network 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.  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. 

 

In September 2019, Visa increased the litigation reserve by $300 million and revised the conversion ratio for the Class B shares resulting in a $0.1 million payable due to 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 $153,000.  Conversion ratio payments and ongoing fixed quarterly charges are reflected in earnings in the period incurred.

 

NOTE 8 – 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.

 

24 


 

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.  At least annually, the Company will validate prices supplied by the independent pricing service by comparing them to prices obtained from an independent third-party source.

 

Fair Value Swap.  The Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares.  The valuation represents the amount due and payable to the counterparty based upon the revised share conversion rate, if any, during the period.  At September 30, 2019, there was $0.1 million payable to the counterparty.

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

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total Fair

(Dollars in Thousands)

Inputs

 

Inputs

 

Inputs

 

Value

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

217,265

 

$

-

 

$

-

 

$

217,265

 

U.S. Government Agency

 

-

 

 

138,038

 

 

-

 

 

138,038

 

States and Political Subdivisions

 

-

 

 

13,044

 

 

-

 

 

13,044

 

Mortgage-Backed Securities

 

-

 

 

787

 

 

-

 

 

787

 

Equity Securities 

 

-

 

 

7,847

 

 

-

 

 

7,847

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

261,849

 

$

-

 

$

-

 

$

261,849

 

U.S. Government Agency

 

-

 

 

133,206

 

 

-

 

 

133,206

 

States and Political Subdivisions

 

-

 

 

42,365

 

 

-

 

 

42,365

 

Mortgage-Backed Securities

 

-

 

 

943

 

 

-

 

 

943

 

Equity Securities 

 

-

 

 

7,794

 

 

-

 

 

7,794

 

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 $7.3 million with a valuation allowance of $0.5 million at September 30, 2019 and $5.6 million and $0.8 million, respectively, at December 31, 2018.

 

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 nine months of 2019, 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. 

 

25 


 

Assets and Liabilities Disclosed at Fair Value

 

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

 

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

  

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

 

Loans.  The loan portfolio is segregated into categories and the fair value of each loan category is calculated using present value techniques based upon projected cash flows, estimated discount rates, and incorporates 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:

 

 

 

September 30, 2019

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

61,151

 

$

61,151

 

$

-

 

$

-

Short-Term Investments

 

 

177,389

 

 

177,389

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

376,981

 

 

217,265

 

 

159,716

 

 

-

Investment Securities, Held to Maturity

 

 

240,303

 

 

25,014

 

 

216,873

 

 

-

Equity Securities(1)

 

 

3,588

 

 

-

 

 

3,588

 

 

-

Loans Held for Sale

 

 

13,075

 

 

-

 

 

13,075

 

 

-

Loans, Net of Allowance for Loan Losses

 

 

1,813,434

 

 

-

 

 

-

 

 

1,798,311

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,473,007

 

$

-

 

$

2,471,837

 

$

-

Short-Term Borrowings

 

 

10,622

 

 

-

 

 

10,622

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

40,281

 

 

-

Long-Term Borrowings

 

 

6,963

 

 

-

 

 

7,080

 

 

-

 

26 


 

 

 

December 31, 2018

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

62,032

 

$

62,032

 

$

-

 

$

-

Short-Term Investments

 

 

213,968

 

 

213,968

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

446,157

 

 

261,849

 

 

184,308

 

 

-

Investment Securities, Held to Maturity

 

 

217,320

 

 

34,611

 

 

179,802

 

 

-

Loans Held for Sale

 

 

6,869

 

 

-

 

 

6,869

 

 

-

Equity Securities(1)

 

 

3,591

 

 

-

 

 

3,591

 

 

-

Loans, Net of Allowance for Loan Losses

 

 

1,760,015

 

 

-

 

 

-

 

 

1,730,161

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,531,856

 

$

-

 

$

2,529,841

 

$

-

Short-Term Borrowings

 

 

13,541

 

 

-

 

 

13,541

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

42,359

 

 

-

Long-Term Borrowings

 

 

8,568

 

 

-

 

 

7,879

 

 

-

 

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

 

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 9 –  OTHER COMPREHENSIVE INCOME

 

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

 

 

 

 

Before

 

Tax

 

Net of

 

 

 

Tax

 

(Expense)

 

Tax

 (Dollars in Thousands)

Amount

 

Benefit

 

Amount

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on securities available for sale

$

443

 

$

(112)

 

$

331

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

 

 

 

 

 

 

 

 

 

maturity

  

11

 

 

(3)

 

 

8

 

 

Total Other Comprehensive Income

$

454

 

$

(115)

 

$

339

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on securities available for sale

$

3,427

 

$

(868)

 

$

2,559

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

 

 

 

 

 

 

 

 

 

maturity

 

33

 

 

(8)

 

 

25

 

 

Total Other Comprehensive Income

$

3,460

 

$

(876)

 

$

2,584

 

27 


 

 

 

 

Before

 

Tax

 

Net of

 

 

 

Tax

 

(Expense)

 

Tax

 (Dollars in Thousands)

Amount

 

Benefit

 

Amount

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on securities available for sale

$

(553)

 

$

140

 

$

(413)

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

 

 

 

 

 

 

 

 

 

maturity

  

13

 

 

(3)

 

 

10

 

 

Total Other Comprehensive Loss

$

(540)

 

$

137

 

$

(403)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on securities available for sale

$

(2,306)

 

$

585

 

$

(1,721)

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

 

 

 

 

 

 

 

 

 

maturity

 

42

 

 

(11)

 

 

31

 

 

Total Other Comprehensive Loss

$

(2,264)

 

$

574

 

$

(1,690)

 

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, 2019

$

(2,008)

 

$

(26,807)

 

$

(28,815)

Other comprehensive income during the period

 

2,584

 

 

-

 

 

2,584

Balance as of September 30, 2019

$

576

 

$

(26,807)

 

$

(26,231)

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2018

$

(1,743)

 

$

(30,301)

 

$

(32,044)

Other comprehensive loss during the period

 

(1,690)

 

 

-

 

 

(1,690)

Balance as of September 30, 2018

$

(3,433)

 

$

(30,301)

 

$

(33,734)

 

NOTE 10 – ACCOUNTING STANDARDS UPDATES

 

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 Company’s implementation plan has progressed through the design and build phase and has begun testing and parallel modeling.  The Company engaged a third party to validate the model during the third quarter which will enable the Company to complete parallel runs and refinement and documentation of end-to-end processes during the fourth quarter.  In conjunction with the implementation, the Company is reviewing business process and evaluating potential changes to the control environment.  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.   

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 2019 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 2018 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 57 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 2018 Form 10-K.

 

NON-GAAP FINANCIAL MEASURES

 

We present a tangible common equity ratio and a tangible book value per diluted share that, in each case, removes the effect of goodwill resulting from merger and acquisition activity.  We believe these measures are useful to investors because it allows investors to more easily compare our capital adequacy to other companies in the industry, although the manner in which we calculate non-GAAP financial measures may differ from that of other companies reporting non-GAAP measures with similar names.  The GAAP to non-GAAP reconciliation for each quarter presented on page 30 is provided below.

 

 

 

 

2019

 

2018

 

2017

(Dollars in Thousands, except per share data)

 

Third

 

Second

 

First

 

Fourth

 

Third

 

Second

 

First

 

Fourth

Shareowners' Equity (GAAP)

 

$

321,562

 

$

314,595

 

$

308,986

 

$

302,587

 

$

298,016

 

$

293,571

 

$

288,360

 

$

284,210

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

 

236,751

 

 

229,784

 

 

224,175

 

 

217,776

 

 

213,205

 

 

208,760

 

 

203,549

 

 

199,399

Total Assets (GAAP)

 

 

2,934,513

 

 

3,017,654

 

 

3,052,051

 

 

2,959,183

 

 

2,819,190

 

 

2,880,278

 

 

2,924,832

 

 

2,898,794

Less: Goodwill (GAAP)

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

Tangible Assets (non-GAAP)

B

$

2,849,702

 

$

2,932,843

 

$

2,967,240

 

$

2,874,372

 

$

2,734,379

 

$

2,795,467

 

$

2,840,021

 

$

2,813,983

Tangible Common Equity Ratio (non-GAAP)

A/B

 

8.31%

 

 

7.83%

 

 

7.56%

 

 

7.58%

 

 

7.80%

 

 

7.47%

 

 

7.17%

 

 

7.09%

Actual Diluted Shares Outstanding (GAAP)

C

 

16,797,241

 

 

16,773,449

 

 

16,840,496

 

 

16,808,542

 

 

17,127,846

 

 

17,114,380

 

 

17,088,419

 

 

17,071,107

Diluted Tangible Book Value (non-GAAP)

A/C

 

14.09

 

 

13.70

 

 

13.31

 

 

12.96

 

 

12.45

 

 

12.20

 

 

11.91

 

 

11.68

29 


 

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands, Except

2019

 

2018

 

2017

Per Share Data)

Third

 

 

Second

 

 

First

 

 

Fourth

 

 

Third

 

 

Second

 

 

First

 

 

Fourth

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

$

28,441

 

 

$

28,665

 

 

$

27,722

 

 

$

26,370

 

 

$

25,392

 

 

$

24,419

 

 

$

23,214

 

 

$

22,627

 

 

Interest Expense

 

2,244

 

 

 

2,681

 

 

 

2,814

 

 

 

2,022

 

 

 

1,769

 

 

 

1,649

 

 

 

1,451

 

 

 

1,138

 

 

Net Interest Income

 

26,197

 

 

 

25,984

 

 

 

24,908

 

 

 

24,348

 

 

 

23,623

 

 

 

22,770

 

 

 

21,763

 

 

 

21,489

 

 

Provision for Loan Losses

 

776

 

 

 

646

 

 

 

767

 

 

 

457

 

 

 

904

 

 

 

815

 

 

 

745

 

 

 

826

 

 

Net Interest Income After

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Provision for Loan Losses

 

25,421

 

 

 

25,338

 

 

 

24,141

 

 

 

23,891

 

 

 

22,719

 

 

 

21,955

 

 

 

21,018

 

 

 

20,663

 

 

Noninterest Income

 

13,903

 

 

 

12,770

 

 

 

12,552

 

 

 

13,238

 

 

 

13,308

 

 

 

12,542

 

 

 

12,477

 

 

 

12,897

 

 

Noninterest Expense

 

27,873

 

 

 

28,396

 

 

 

28,198

 

 

 

26,505

 

 

 

28,699

 

 

 

28,393

 

 

 

27,906

 

 

 

26,897

 

 

Income  Before  Income Taxes

 

11,451

 

 

 

9,712

 

 

 

8,495

 

 

 

10,624

 

 

 

7,328

 

 

 

6,104

 

 

 

5,589

 

 

 

6,663

 

 

Income Tax Expense (Benefit)(2)

 

2,970

 

 

 

2,387

 

 

 

2,059

 

 

 

2,166

 

 

 

1,338

 

 

 

101

 

 

 

(184)

 

 

 

6,660

 

 

Net Income

 

8,481

 

 

 

7,325

 

 

 

6,436

 

 

 

8,458

 

 

 

5,990

 

 

 

6,003

 

 

 

5,773

 

 

 

3

 

 

Net Interest Income (FTE)

$

26,333

 

 

$

26,116

 

 

$

25,042

 

 

$

24,513

 

 

$

23,785

 

 

$

22,917

 

 

$

21,943

 

 

$

21,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Basic

$

0.51

 

 

$

0.44

 

 

$

0.38

 

 

$

0.50

 

 

$

0.35

 

 

$

0.35

 

 

$

0.34

 

 

$

0.00

 

 

Net Income Diluted

 

0.50

 

 

 

0.44

 

 

 

0.38

 

 

 

0.50

 

 

 

0.35

 

 

 

0.35

 

 

 

0.34

 

 

 

0.00

 

 

Cash Dividends Declared

 

0.13

 

 

 

0.11

 

 

 

0.11

 

 

 

0.09

 

 

 

0.09

 

 

 

0.07

 

 

 

0.07

 

 

 

0.07

 

 

Diluted Book Value

 

19.14

 

 

 

18.76

 

 

 

18.35

 

 

 

18.00

 

 

 

17.40

 

 

 

17.15

 

 

 

16.87

 

 

 

16.65

 

 

Diluted Tangible Book Value(1)

 

14.09

 

 

 

13.70

 

 

 

13.31

 

 

 

12.96

 

 

 

12.45

 

 

 

12.20

 

 

 

11.91

 

 

 

11.68

 

 

Market Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  High

 

28.00

 

 

 

25.00

 

 

 

25.87

 

 

 

26.95

 

 

 

25.91

 

 

 

25.99

 

 

 

26.50

 

 

 

26.01

 

 

  Low

 

23.70

 

 

 

21.57

 

 

 

21.04

 

 

 

19.92

 

 

 

23.19

 

 

 

22.28

 

 

 

22.80

 

 

 

22.21

 

 

  Close

 

27.45

 

 

 

24.85

 

 

 

21.78

 

 

 

23.21

 

 

 

23.34

 

 

 

23.63

 

 

 

24.75

 

 

 

22.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Average Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net

$

1,837,548

 

 

$

1,823,311

 

 

$

1,780,406

 

 

$

1,785,570

 

 

$

1,747,093

 

 

$

1,691,287

 

 

$

1,647,612

 

 

$

1,640,738

 

 

Earning Assets

 

2,670,081

 

 

 

2,719,217

 

 

 

2,704,802

 

 

 

2,554,482

 

 

 

2,535,292

 

 

 

2,566,006

 

 

 

2,592,465

 

 

 

2,511,985

 

 

Total Assets

 

2,959,310

 

 

 

3,010,662

 

 

 

2,996,511

 

 

 

2,849,245

 

 

 

2,826,924

 

 

 

2,861,104

 

 

 

2,892,120

 

 

 

2,822,451

 

 

Deposits

 

2,495,755

 

 

 

2,565,431

 

 

 

2,564,715

 

 

 

2,412,375

 

 

 

2,392,272

 

 

 

2,431,956

 

 

 

2,456,106

 

 

 

2,378,411

 

 

Shareowners’ Equity

 

320,273

 

 

 

313,599

 

 

 

307,262

 

 

 

302,196

 

 

 

297,757

 

 

 

291,806

 

 

 

287,502

 

 

 

288,044

 

 

Common Equivalent Average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

16,747

 

 

 

16,791

 

 

 

16,791

 

 

 

16,989

 

 

 

17,056

 

 

 

17,045

 

 

 

17,028

 

 

 

16,967

 

 

  Diluted

 

16,795

 

 

 

16,818

 

 

 

16,819

 

 

 

17,050

 

 

 

17,125

 

 

 

17,104

 

 

 

17,073

 

 

 

17,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

1.14

%

 

 

0.98

%

 

 

0.87

%

 

 

1.18

%

 

 

0.84

%

 

 

0.84

%

 

 

0.81

%

 

 

0.00

%

 

Return on Average Equity

 

10.51

 

 

 

9.37

 

 

 

8.49

 

 

 

11.10

 

 

 

7.98

 

 

 

8.25

 

 

 

8.14

 

 

 

0.00

 

 

Net Interest Margin (FTE)

 

3.92

 

 

 

3.85

 

 

 

3.75

 

 

 

3.81

 

 

 

3.72

 

 

 

3.58

 

 

 

3.43

 

 

 

3.45

  

 

Noninterest Income as % of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Operating Revenue

 

34.67

 

 

 

32.95

 

 

 

33.51

 

 

 

35.22

 

 

 

36.04

 

 

 

35.52

 

 

 

36.44

 

 

 

37.51

 

 

Efficiency Ratio

 

69.27

 

 

 

73.02

 

 

 

75.01

 

 

 

70.21

 

 

 

77.37

 

 

 

80.07

 

 

 

81.07

 

 

 

77.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 $

14,319

 

 

$

14,593

 

 

 $

14,120

 

 

$

14,210

 

 

$

14,219

 

 

$

13,563

 

 

$

13,258

 

 

$

13,307

 

 

Allowance for Loan Losses to Loans

0.78

%

 

 

0.79

%

 

 

0.78

%

 

 

0.80

%

 

 

0.80

%

 

 

0.78

%

 

 

0.80

%

 

 

0.80

%

 

Nonperforming Assets (“NPAs”)

 

5,454

 

 

 

6,632

 

 

 

6,949

 

 

 

9,101

 

 

 

9,587

 

 

 

9,114

 

 

 

10,644

 

 

 

11,100

  

 

NPAs to Total Assets

 

0.19

 

 

 

0.22

 

 

 

0.23

 

 

 

0.31

 

 

 

0.34

 

 

 

0.32

 

 

 

0.36

 

 

 

0.38

 

 

NPAs to Loans plus OREO

 

0.30

 

 

 

0.36

 

 

 

0.39

 

 

 

0.51

 

 

 

0.54

 

 

 

0.52

 

 

 

0.64

 

 

 

0.67

 

 

Allowance to Non-Performing Loans

290.55

 

 

 

259.55

 

 

 

279.77

 

 

 

206.79

 

 

 

207.06

 

 

 

236.25

 

 

 

181.26

 

 

 

185.87

 

 

Net Charge-Offs to Average Loans

0.23

 

 

 

0.04

 

 

 

0.20

 

 

 

0.10

 

 

 

0.06

 

 

 

0.12

 

 

 

0.20

 

 

 

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

16.83

%

 

 

16.36

%

 

 

16.34

%

 

 

16.36

%

 

 

16.17

%

 

 

16.25

%

 

 

16.31

%

 

 

16.33

%

 

Total Capital

 

17.59

 

 

 

17.13

 

 

 

17.09

 

 

 

17.13

 

 

 

16.94

 

 

 

17.00

 

 

 

17.05

 

 

 

17.10

 

 

Common Equity Tier 1

 

14.13

 

 

 

13.67

 

 

 

13.62

 

 

 

13.58

 

 

 

13.43

 

 

 

13.46

 

 

 

13.44

 

 

 

13.42

 

 

Leverage

 

11.09

 

 

 

10.64

 

 

 

10.53

 

 

 

10.89

 

 

 

10.99

 

 

 

10.69

 

 

 

10.36

 

 

 

10.47

  

 

Tangible Common Equity(1)

 

8.31

 

 

 

7.83

 

 

 

7.56

 

 

 

7.58

 

 

 

7.80

 

 

 

7.47

 

 

 

7.17

 

 

 

7.09

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)Includes $0.4 million, $1.4 million, and $1.5 million income tax benefit in the third, second and first quarter of 2018, respectively, related to 2017 plan year pension plan  

 

 

   contributions.  Also includes $4.1 million income tax expense adjustment in the fourth quarter of 2017 related to the Tax Cuts and Jobs Act of 2017.

 

 

 

 

 

30 


 

FINANCIAL OVERVIEW

 

A summary overview of our financial performance is provided below.

 

Results of Operations

 

·          Net income of $8.5 million, or $0.50 per diluted share, for the third quarter of 2019 compared to net income of $7.3 million, or $0.44 per diluted share, for the second quarter of 2019, and net income of $6.0 million, or $0.35 per diluted share, for the third quarter of 2018.  For the first nine months of 2019, we realized net income of $22.2 million, or $1.32 per diluted share, compared to net income of $17.8 million, or $1.04 per diluted share, for the same period of 2018.  Net income for the first nine months of 2018 included tax benefits totaling $3.3 million, or $0.19 per diluted share, related to 2017 plan year pension plan contributions.        

 

·          Tax-equivalent net interest income for the third quarter of 2019 was $26.3 million compared to $26.1 million for the second quarter of 2019 and $23.8 million for the third quarter of 2018.  For the first nine months of 2019, tax-equivalent net interest income totaled $77.5 million compared to $68.6 million for the comparable period of 2018.  The increase compared to the second quarter of 2019 was primarily due to a reduction in interest expense.  The increase compared to the third quarter of 2018 primarily reflected higher interest rates and loan growth.  The year-over-year increase was driven by growth in the loan portfolio, coupled with higher short-term rates, partially offset by higher rates paid on our negotiated rate deposits.

  

·          Provision for loan losses was $0.8 million for the third quarter of 2019 compared to $0.6 million for the second quarter of 2019 and $0.9 million for the third quarter of 2018.  For the first nine months of 2019, the loan loss provision was $2.2 million compared to $2.5 million for the same period of 2018.     

 

·           Noninterest income for the third quarter of 2019 totaled $13.9 million, an increase of $1.1 million, or 8.9%, over the second quarter of 2019 and $0.6 million, or 4.5%, over the third quarter of 2018.  The increase compared to the second quarter of 2019 was primarily attributable to higher wealth management fees and to a lesser extent higher mortgage banking fees and deposit fees.  For the first nine months of 2019, noninterest income totaled $39.2 million, a $0.9 million, or 2.3%, increase over the same period of 2018.  Higher wealth management fees and mortgage banking fees drove the favorable comparisons to 2018.    

 

·          Noninterest expense for the third quarter of 2019 totaled $27.9 million, a decrease of $0.5 million, or 1.8%, from the second quarter of 2019 and $0.8 million, or 2.9%, from the third quarter of 2018.  For the first nine months of 2019, noninterest expense totaled $84.5 million, a decrease of $0.5 million, or 0.6%, from the same period of 2018.  The decrease compared to the second quarter of 2019 was primarily due to lower FDIC insurance premiums.  The decrease compared to both prior year periods was primarily due to lower other real estate owned (“OREO”) expense and FDIC insurance premiums.      

 

Financial Condition

 

·          Average earning assets were $2.670 billion for the third quarter of 2019, a decrease of $49.1 million, or 1.8%, from the second quarter of 2019, and an increase of $115.6 million, or 4.5%, over the fourth quarter of 2018.   The reduction in average earning assets compared to the second quarter of 2019 was attributable to a decrease in short-term investments, primarily due to a decline in seasonal public fund balances and certificates of deposits.  The increase over the fourth quarter of 2018 was attributable to growth in our loan portfolio, which was primarily funded by increases in our noninterest bearing and savings deposits.

 

·          Average loans increased by $14.2 million, or 0.8%, over the second quarter of 2019, and $52.0 million, or 2.9%, over the fourth quarter of 2018.  The increase compared to the second quarter of 2019 reflected growth in all loan types except commercial real estate, consumer loans and home equity loans.  The increase compared to the fourth quarter of 2018 reflected growth in all product types except consumer and home equity loans.  During 2019, we purchased commercial and residential loan pools totaling $21.5 million.          

 

·          Nonperforming assets totaled $5.5 million at September 30, 2019, a decrease of $1.2 million, or 17.8%, from June 30, 2019 and $3.6 million, or 40.1%, from December 31, 2018.  Nonperforming assets represented 0.19% of total assets at September 30, 2019 compared to 0.22% at June 30, 2019 and 0.31% at December 31, 2018.   

 

·          At September 30, 2019, we were well-capitalized with a total risk-based capital ratio of 17.59% and a tangible common equity ratio (a non-GAAP financial measure) of 8.31% compared to 17.13% and 7.83%, respectively, at June 30, 2019 and 17.13% and 7.58%, respectively, at December 31, 2018.  At September 30, 2019, all of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards.   

 

31 


 

RESULTS OF OPERATIONS

 

Net Income

 

For the third quarter of 2019, we realized net income of $8.5 million, or $0.50 per diluted share, compared to net income of $7.3 million, or $0.44 per diluted share, for the second quarter of 2019 and net income of $6.0 million, or $0.35 per diluted share, for the third quarter of 2018. 

   

For the first nine months of 2019, net income totaled $22.2 million, or $1.32 per diluted share, compared to net income of $17.8 million, or $1.04 per diluted share, for the same period of 2018.  Net income for the first nine months of 2018 included tax benefits totaling $3.3 million, or $0.19 per diluted share (1Q - $1.5 million, or $0.09 per diluted share, 2Q - $1.4 million, or $0.08 per diluted share, and 3Q - $0.4 million, or $0.02 per diluted share), related to 2017 plan year pension contributions made in 2018.

 

Compared to the second quarter of 2019, the $1.7 million increase in operating profit reflected a $1.1 million increase in noninterest income, lower noninterest expense $0.5 million, and higher net interest income $0.2 million, partially offset by an increase in the loan loss provision of $0.1 million.

 

Compared to the third quarter of 2018, the $4.1 million increase in operating profit was attributable to higher net interest income of $2.6 million, lower noninterest expense of $0.8 million, higher noninterest income of $0.6 million, and a $0.1 million decrease in the loan loss provision.

 

The $10.6 million increase in operating profit for the first nine months of 2019 versus the comparable period of 2018 was attributable to higher net interest income of $8.9 million, higher noninterest income of $0.9 million, lower noninterest expense of $0.5 million, and a $0.3 million decrease in the loan provision.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands, except per share data)

 

2019

 

2019

 

2018

 

2019

 

2018

Interest Income

 

$

28,441

 

$

28,665

 

$

25,392

 

$

84,828

 

$

73,025

Taxable Equivalent Adjustments

 

 

136

 

 

132

 

 

162

 

 

402

 

 

489

Total Interest Income (FTE)

 

 

28,577

 

 

28,797

 

 

25,554

 

 

85,230

 

 

73,514

Interest Expense

 

 

2,244

 

 

2,681

 

 

1,769

 

 

7,739

 

 

4,869

Net Interest Income (FTE)

 

 

26,333

 

 

26,116

 

 

23,785

 

 

77,491

 

 

68,645

Provision for Loan Losses

 

 

776

 

 

646

 

 

904

 

 

2,189

 

 

2,464

Taxable Equivalent Adjustments

 

 

136

 

 

132

 

 

162

 

 

402

 

 

489

Net Interest Income After Provision for Loan Losses

 

 

25,421

 

 

25,338

 

 

22,719

 

 

74,900

 

 

65,692

Noninterest Income

 

 

13,903

 

 

12,770

 

 

13,308

 

 

39,225

 

 

38,327

Noninterest Expense

 

 

27,873

 

 

28,396

 

 

28,699

 

 

84,467

 

 

84,998

Income Before Income Taxes

 

 

11,451

 

 

9,712

 

 

7,328

 

 

29,658

 

 

19,021

Income Tax Expense

 

 

2,970

 

 

2,387

 

 

1,338

 

 

7,416

 

 

1,255

Net Income

 

$

8,481

 

$

7,325

 

$

5,990

 

$

22,242

 

$

17,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Net Income Per Share

 

$

0.51

 

$

0.44

 

$

0.35

 

$

1.33

 

$

1.04

Diluted Net Income Per Share

 

$

0.50

 

$

0.44

 

$

0.35

 

$

1.32

 

$

1.04

 

Net Interest Income

 

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

 

32 


 

Tax-equivalent net interest income for the third quarter of 2019 was $26.3 million compared to $26.1 million for the second quarter of 2019 and $23.8 million for the third quarter of 2018.  The increase compared to the second quarter of 2019 was primarily due to a reduction in interest expense.  The increase compared to the third quarter of 2018 primarily reflected higher interest rates and loan growth.  For the first nine months of 2019, tax-equivalent net interest income totaled $77.5 million compared to $68.6 million for the comparable period of 2018.  The year-over-year increase was driven by growth in the loan portfolio, coupled with higher short-term rates, partially offset by higher rates paid on our negotiated rate deposits.

 

The federal funds target rate reached a recent high in the second quarter of 2019 at a range of 2.25% to 2.50%.  During the third quarter, 2019, the Federal Open Market Committee (“FOMC”) reduced rates by an aggregate of 50 basis points to the current range of 1.75% to 2.00%.  These rate cuts have resulted in downward repricing of our variable/adjustable rate earning assets, which to date has been offset by loan growth and lower rates paid on our negotiated rate deposit products.  We continue to prudently manage our overall cost of funds, which was 33 basis points for the third quarter of 2019, compared to 40 basis points for the second quarter of 2019.  Due to highly competitive fixed-rate loan pricing in our markets, we continue to review our loan pricing and make adjustments where we believe appropriate and prudent.   

 

Our net interest margin for the third quarter of 2019 was 3.92%, an increase of seven basis points over the second quarter of 2019 and an increase of 20 basis points over the third quarter of 2018.  For the first nine months of 2019, the net interest margin increased 26 basis points to 3.84% compared to the same period of 2018. The increase in margin compared to the second quarter of 2019 was fully attributable to a seven basis point decline in our cost of funds, as both the rate and balance of our seasonal public deposits declined in the third quarter of 2019.  The increase in the margin compared to both prior year periods reflected a favorable shift in our earning asset mix and higher interest rates.

 

Provision for Loan Losses

 

The provision for loan losses for the third quarter of 2019 was $0.8 million compared to $0.6 million for the second quarter of 2019 and $0.9 million for the third quarter of 2018.  For the first nine months of 2019, the loan loss provision was $2.2 million compared to $2.5 million in 2018.   We realized net loan charge-offs of $1.1 million, or 0.23% (annualized), of average loans for the third quarter of 2019.  This compares to net loan charge-offs of $0.2 million, or 0.04% (annualized) for the second quarter of 2019 and net charge-offs of $0.2 million, or 0.06% (annualized) for the third quarter of 2018.  For the first nine months of 2019, net charge-offs totaled $2.1 million, or 0.15% (annualized), of average loans compared to $1.6 million, or 0.12% (annualized), for the same period of 2018.

 

33 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands, except per share data)

2019

 

2019

 

2018

 

2019

 

2018

CHARGE-OFFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

289

 

 

235

 

 

268

 

 

619

 

 

591

 

Real Estate - Construction

 

223

 

 

 

-

 

 

 

-

 

 

 

223

 

 

 

7

 

Real Estate - Commercial Mortgage

 

26

 

 

 

-

 

 

 

25

 

 

 

181

 

 

 

315

 

Real Estate - Residential

 

44

 

 

 

65

 

 

 

106

 

 

 

373

 

 

 

669

 

Real Estate - Home Equity

 

333

 

 

 

45

 

 

 

112

 

 

 

430

 

 

 

427

 

Consumer

 

744

 

 

 

520

 

 

 

463

 

 

 

2,059

 

 

 

1,667

 

Total Charge-offs

$

1,659

 

 

$

865

 

 

$

974

 

 

$

3,885

 

 

$

3,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RECOVERIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

86

 

 

58

 

 

78

 

 

218

 

 

331

 

Real Estate - Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

Real Estate - Commercial Mortgage

 

142

 

 

 

100

 

 

 

222

 

 

 

312

 

 

 

360

 

Real Estate - Residential

 

46

 

 

 

223

 

 

 

107

 

 

 

313

 

 

 

537

 

Real Estate - Home Equity

 

58

 

 

 

60

 

 

 

47

 

 

 

150

 

 

 

130

 

Consumer

 

277

 

 

 

251

 

 

 

272

 

 

 

812

 

 

 

765

 

Total Recoveries

$

609

 

 

$

692

 

 

$

726

 

 

$

1,805

 

 

$

2,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs

1,050

 

 

173

 

 

248

 

 

2,080

 

 

1,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs (Annualized) as a

 

0.23

%

 

 

0.04

%

 

 

0.06

%

 

 

0.15

%

 

 

0.12

%

 

percent of Average Loans Outstanding, Net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

Noninterest income for the third quarter of 2019 totaled $13.9 million, an increase of $1.1 million, or 8.9%, over the second quarter of 2019 and $0.6 million, or 4.5%, over the third quarter of 2018.  For the first nine months of 2019, noninterest income totaled $39.2 million, a $0.9 million, or 2.3%, increase over the same period of 2018.  Higher wealth management fees, mortgage banking fees, and deposit fees drove the increase compared to the second quarter of 2019.  The increase over both prior year periods was primarily attributable to higher wealth management fees, bankcard fees, and mortgage banking fees.

   

Noninterest income represented 34.7% of operating revenues (net interest income plus noninterest income) in the third quarter of 2019 compared to 33.0% in the second quarter of 2019 and 36.0% in the third quarter of 2018.  For the first nine months of 2019, noninterest income represented 33.7% of operating revenues compared to 36.0% for the same period of 2018.  The declining trend was due to continued improvement in our net interest income, which has become a larger portion of our total operating revenues.

 

The table below reflects the major components of noninterest income.

 

 

 

 Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands)

2019

 

2019

 

2018

 

2019

 

2018

Deposit Fees

 $

4,961

 

 $

4,756

 

 $

5,207

 

 $

14,492

 

 $

14,921

Bank Card Fees

 

2,972

 

 

3,036

 

 

2,828

 

 

8,863

 

 

8,548

Wealth Management Fees

 

2,992

 

 

2,404

 

 

2,181

 

 

7,719

 

 

6,391

Mortgage Banking Fees

 

1,587

 

 

1,199

 

 

1,343

 

 

3,779

 

 

3,606

Other

 

1,391

 

 

1,375

 

 

1,749

 

 

4,372

 

 

4,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Income

 $

13,903

 

 $

12,770

 

 $

13,308

 

 $

39,225

 

 $

38,327

 

34 


 

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

 

Deposit Fees. Deposit fees for the third quarter of 2019 totaled $5.0 million, an increase of $0.2 million, or 4.3%, over the second quarter of 2019, and a decrease of $0.2 million, or 4.7%, from the third quarter of 2018.  For the first nine months of 2019, deposit fees totaled $14.5 million, a decrease of $0.4 million, or 2.9%, from the same period of 2018.  The increase over the second quarter of 2019 reflected higher overdraft fees.  The decrease from both prior year periods reflected lower overdraft fees due to a reduction in accounts using this service as well as lower utilization by existing users.

 

Bank Card Fees.  Bank card fees for the third quarter of 2019 totaled $3.0 million, comparable to the second quarter of 2019, and a $0.1 million, or 5.1%, increase over the third quarter of 2018.  For the first nine months of 2019, bank card fees totaled $8.9 million, an increase of $0.3 million, or 3.7%, over the same period of 2018.  During 2018 and 2019, we have implemented various strategies to drive interchange revenues, including a refresh of our deposit account product line-up, an account acquisition program, and various reward programs.  

 

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 $3.0 million for the third quarter of 2019, an increase of $0.6 million, or 24.5%, over the second quarter of 2019 and $0.8 million, or 37.2%, over the third quarter of 2018.  For the first nine months of 2019, wealth management fees totaled $7.7 million, an increase of $1.3 million, or 20.8%, over the same period of 2018.  The increase over all periods was driven by increased trading activity by our retail brokerage clients, and to a lesser extent, higher assets under management.  At September 30, 2019, total assets under management were approximately $1.692 billion compared to $1.500 billion at December 31, 2018 and $1.496 billion at September 30, 2018.    

 

Mortgage Banking Fees. Mortgage banking fees totaled $1.6 million for the third quarter of 2019, an increase of $0.4 million, or 32.4%, over the second quarter of 2019 and an increase of $0.2 million, or 18.2%, over the third quarter of 2018.  For the first nine months of 2019, fees totaled $3.8 million, an increase of $0.2 million, or 4.8%, over the same period of 2018.  The higher level of fees was primarily attributable to an increase in loan production driven by lower long-term interest rates.

 

Noninterest Expense

 

Noninterest expense for the third quarter of 2019 totaled $27.9 million, a decrease of $0.5 million, or 1.8%, from the second quarter of 2019 and $0.8 million, or 2.9%, from the third quarter of 2018.  For the first nine months of 2019, noninterest expense totaled $84.5 million, a $0.5 million, or 0.6%, decrease from the same period of 2018.  The decrease compared to the second quarter of 2019 was primarily attributable to lower other expense (FDIC insurance fees).  Compared to both prior year periods, the favorable variance was driven by lower other expense (OREO and FDIC insurance premiums), partially offset by higher compensation expense (merit raises and commissions).    

 

35 


 

The table below reflects the major components of noninterest expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

June 30,

 

September 30,

 

September 30,

 

September 30,

(Dollars in Thousands)

2019

 

2019

 

2018

 

2019

 

2018

Salaries

$

12,533

 

 $

12,496

 

 $

12,012

 

 $

37,314

 

 $

35,755

Associate Benefits

 

3,670

 

 

3,941

 

 

3,879

 

 

11,675

 

 

11,844

 

Total Compensation

 

16,203

 

 

16,437

 

 

15,891

 

 

48,989

 

 

47,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premises

 

2,305

 

 

2,140

 

 

2,234

 

 

6,506

 

 

6,634

Equipment

 

2,405

 

 

2,397

 

 

2,411

 

 

7,250

 

 

7,065

 

Total Occupancy

 

4,710

 

 

4,537

 

 

4,645

 

 

13,756

 

 

13,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal Fees

 

361

 

 

439

 

 

500

 

 

1,176

 

 

1,545

Professional Fees

 

1,042

 

 

1,102

 

 

1,315

 

 

3,116

 

 

3,835

Processing Services

 

1,605

 

 

1,451

 

 

1,439

 

 

4,534

 

 

4,695

Advertising

 

531

 

 

643

 

 

433

 

 

1,670

 

 

1,133

Travel and Entertainment

 

282

 

 

276

 

 

262

 

 

763

 

 

719

Printing and Supplies

 

189

 

 

162

 

 

159

 

 

524

 

 

484

Telephone

 

664

 

 

609

 

 

547

 

 

1,952

 

 

1,722

Postage

 

180

 

 

166

 

 

160

 

 

514

 

 

548

Insurance - Other

 

4

 

 

408

 

 

418

 

 

803

 

 

1,228

Other Real Estate Owned, net

 

6

 

 

75

 

 

347

 

 

444

 

 

1,221

Miscellaneous

 

2,096

 

 

2,091

 

 

2,583

 

 

6,226

 

 

6,570

 

Total Other

 

6,960

 

 

7,422

 

 

8,163

 

 

21,722

 

 

23,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Noninterest Expense 

$

27,873

 

 $

28,396

 

 $

28,699

 

 $

84,467

 

 $

84,998

 

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

 

Compensation.  Compensation expense totaled $16.2 million for the third quarter of 2019, a decrease of $0.2 million, or 1.4%, from the second quarter of 2019 and an increase of $0.3 million, or 2.0%, over the third quarter of 2018.  For the first nine months of 2019, compensation expense totaled $49.0 million, an increase of $1.4 million, or 2.9%, over the same period of 2018.  The decrease from the second quarter of 2019 was primarily due to lower incentive plan expense.  The increase over both prior year periods was attributable to higher salary expense, primarily merit raises and commissions.

 

Other.  Other noninterest expense totaled $7.0 million for the third quarter of 2019, a decrease of $0.5 million, or 6.2%, from the second quarter of 2019, and $1.2 million, or 14.7%, from the third quarter of 2018.  For the first nine months of 2019, other noninterest expense totaled $21.7 million, a decrease of $2.0 million, or 8.3%, from the same period of 2018.  The decrease from the second quarter of 2019 was primarily attributable to lower FDIC insurance premiums as our small bank assessment credits were used to offset our quarterly FDIC insurance assessment.  Compared to both prior year periods, other expense reflected lower OREO fees, FDIC insurance premiums, professional fees, and legal fees. 

 

Our operating efficiency ratio (expressed as noninterest expense as a percentage of the sum of taxable-equivalent net interest income plus noninterest income) was 69.27% for the third quarter of 2019 compared to 73.02% for the second quarter of 2019 and 77.37% for the third quarter of 2018.  For the first nine months of 2019, this ratio was 72.37% compared to 79.46% for the same period of 2018.  The improvement was driven by higher operating revenues coupled with our continued focus on controlling our expenses, which has contributed to improved operating leverage.      

 

Income Taxes

 

We realized income tax expense of $3.0 million (effective rate of 26%) for the third quarter of 2019 compared to $2.4 million (effective rate of 25%) for second quarter of 2019 and $1.3 million (effective rate of 18%) for the third quarter of 2018.  For the first nine months of 2019, we realized income tax expense of $7.4 million (effective rate of 25%) compared to $1.3 million (effective tax rate of 6.6%) for the same period of 2018.  Income tax expense for the third quarter of 2019 was unfavorably impacted by net discrete items totaling $0.2 million.  During 2018, we realized tax benefits totaling $3.3 million (1Q - $1.5 million, 2Q - $1.4 million, 3Q - $0.4 million) resulting from the effect of federal tax reform on pension plan contributions made in 2018 for the plan year 2017.

 

36 


 

FINANCIAL CONDITION

 

Average earning assets were $2.670 billion for the third quarter of 2019, a decrease of $49.1 million, or 1.8%, from the second quarter of 2019, and an increase of $115.6 million, or 4.5%, over the fourth quarter of 2018.  The change in average earning assets compared to the second quarter of 2019 was attributable to a decrease in short-term investments, primarily due to a decline in seasonal public fund balances and certificates of deposit.  The increase in average earning assets over the fourth quarter of 2018 was attributable to growth in both the loan portfolio and overnight funds, which was primarily funded by increases in deposits, particularly noninterest bearing and savings accounts.

 

Investment Securities

 

In the third quarter of 2019, our average investment portfolio decreased $18.7 million, or 2.9%, from the second quarter of 2019 and decreased $62.7 million, or 9.1%, from the fourth quarter of 2018.  Securities in our investment portfolio represented 23.4% of our average earning assets for the third quarter of 2019 compared to 23.7% in the second quarter of 2019, and 26.9% in the fourth quarter of 2018.  For the remainder of 2019, we will continue to closely monitor liquidity levels and the interest rate environment to determine the extent to which investment cash flow may be reinvested into securities.

 

The investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management.  Two types of classifications are approved for investment securities which are Available-for-Sale (“AFS”) and Held-to-Maturity (“HTM”).  During the third quarter of 2019, we purchased securities under both the AFS and HTM designations.  At September 30, 2019, $376.1 million, or 61.0%, of our investment portfolio was classified as AFS, and $240.3 million, or 39.0%, classified as HTM.  The average maturity of our total portfolio at September 30, 2019 was 2.11 years compared to 1.99 years and 2.11 years at June 30, 2019 and December 31, 2018, 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.  HTM investments are measured at amortized cost.  We do not trade, nor do we presently intend to begin trading investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio.

 

At September 30, 2019, there were 242 positions (combined AFS and HTM) with unrealized losses totaling $0.9 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, are 0% risk-weighted assets for regulatory capital purposes and constitute over 99% of the $0.9 million unrealized loss.  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

46

$

29,466

$

78

 

38

$

16,318

$

157

 

84

$

45,784

$

235

UST

1

 

4,973

 

8

 

30

 

148,148

 

338

 

31

 

153,121

 

346

SBA

42

 

29,698

 

179

 

60

 

26,526

 

152

 

102

 

56,224

 

331

FHLB and FFCB

 -    

 

-

 

-

 

1

 

1,998

 

1

 

1

 

1,998

 

1

States and Political Subdivisions

23

 

7,222

 

4

 

1

 

500

 

0

 

24

 

7,722

 

4

Total

112

$

71,359

$

269

 

130

$

193,490

$

648

 

242

$

264,849

$

917

 

Loans

 

Average loans increased $14.2 million, or 0.8% compared to the second quarter of 2019, and grew by $52.0 million, or 2.9% compared to the fourth quarter of 2018.  The average increase compared to the second quarter of 2019 reflected growth in all loan types except commercial real estate, consumer loans, and home equity loans.  The increase compared to the fourth quarter of 2018 reflected growth in all loan types except consumer and home equity loans. Over the course of 2019, we purchased adjustable rate residential loans totaling $11.2 million and a fixed rate commercial loan pool totaling $10.3 million based on principal balances at the time of purchase.  All loan purchases are individually reviewed and evaluated in accordance with our credit underwriting standards.

 

Without compromising our credit standards, changing our underwriting standards, or taking on inordinate interest rate risk, we continue to closely monitor our markets and make minor rate adjustments as necessary.

37 


 

 

We originate mortgage loans secured by 1-4 family residential properties through our Residential Real Estate line of business, a majority of which are fixed-rate loans that are sold into the secondary market to third party purchasers on a best efforts basis with servicing released.  A majority of our adjustable rate loans are retained in our loan portfolio.  We also retain construction/permanent 1-4 family residential loans within our loan portfolio for a period of time (typically 9-12 months) until they are modified and sold into the secondary market.

 

Nonperforming Assets

 

Nonperforming assets (nonaccrual loans and OREO) totaled $5.5 million at September 30, 2019, a decrease of $1.2 million, or 17.8%, from June 30, 2019, and $3.6 million, or 40.1%, from December 31, 2018.  Nonaccrual loans totaled $4.9 million at September 30, 2019, a $0.7 million decrease from June 30, 2019 and $1.9 million from December 31, 2018.  The balance of OREO totaled $0.5 million at September 30, 2019, a decrease of $0.5 million and $1.7 million, respectively, from June 30, 2019 and December 31, 2018. 

 

(Dollars in Thousands)

September 30, 2019

 

June 30, 2019

 

December 31, 2018

Nonaccruing Loans:

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial, Financial and Agricultural

$

324

 

 

$

187

 

 

$

267

 

 

  Real Estate - Construction

 

158

 

 

 

381

 

 

 

722

 

 

  Real Estate - Commercial Mortgage

 

2,159

 

 

 

2,107

 

 

 

2,860

 

 

  Real Estate - Residential

 

1,059

 

 

 

1,166

 

 

 

2,119

 

 

  Real Estate - Home Equity

 

894

 

 

 

1,569

 

 

 

584

 

 

  Consumer

 

334

 

 

 

212

 

 

 

320

 

Total Nonaccruing Loans (“NALs”)(1)

$

4,928

 

 

$

5,622

 

 

$

6,872

 

Other Real Estate Owned

 

526

 

 

 

1,010

 

 

 

2,229

 

Total Nonperforming Assets (“NPAs”)

$

5,454

 

 

$

6,632

 

 

$

9,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due Loans 30 – 89 Days

$

5,120

 

 

$

5,443

 

 

$

4,757

 

Performing Troubled Debt Restructurings

$

18,284

 

 

$

18,737

 

 

$

22,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccruing Loans/Loans

 

0.27

%

 

 

0.30

%

 

 

0.39

%

Nonperforming Assets/Total Assets

 

0.19

 

 

 

0.22

 

 

 

0.31

 

Nonperforming Assets/Loans Plus OREO

 

0.30

 

 

 

0.36

 

 

 

0.51

 

Allowance/Nonaccruing Loans

 

290.55

 

 

 

259.55

 

 

 

206.79

 

 

(1)    Nonaccrual TDRs totaling $1.4 million, $1.4 million, and $2.6 million are included in NALs for September 30, 2019, June 30, 2019 and December 31, 2018, respectively.

 

38 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2019

 

2018

 

2019

 

2018

NPA Beginning Balance:

$

6,632

 

$

9,114

 

$

9,101

 

$

11,100

Change in Nonaccrual Loans:

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

5,622

 

 

5,741

 

 

6,872

 

 

7,159

 

  Additions

 

2,049

 

 

2,872

 

 

6,265

 

 

9,152

 

  Charge-Offs

 

(1,424)

 

 

(364)

 

 

(2,809)

 

 

(2,077)

 

  Transferred to OREO

 

(104)

 

 

(371)

 

 

(722)

 

 

(1,211)

 

  Paid Off/Payments

 

(131)

 

 

(489)

 

 

(2,163)

 

 

(2,109)

 

  Restored to Accrual

 

(1,084)

 

 

(522)

 

 

(2,515)

 

 

(4,047)

Ending Balance

 

4,928

 

 

6,867

 

  

4,928

 

  

6,867

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in OREO:

 

 

 

 

 

 

 

 

 

 

 

 

  Beginning Balance

 

1,010

 

 

3,373

 

 

2,229

 

 

3,941

 

  Additions

 

104

 

 

420

 

 

792

 

 

1,260

 

  Valuation Write-downs

 

(35)

 

 

(224)

 

 

(266)

 

 

(856)

 

  Sales

 

(553)

 

 

(849)

 

 

(2,229)

 

 

(1,625)

Ending Balance

 

526

 

 

2,720

 

  

526

 

  

2,720

 

 

 

 

 

 

 

 

 

 

 

 

 

NPA Net Change

 

(1,178)

 

 

473

 

 

(3,647)

 

 

(1,513)

NPA Ending Balance

$

5,454

 

$

9,587

 

$

5,454

 

$

9,587

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in Thousands)

2019

 

2018

 

2019

 

2018

TDR Beginning Balance:

$

20,278

 

$

32,185

 

$

24,724

 

$

34,489

 

  Additions

 

328

 

 

76

 

 

494

 

 

593

 

  Charge-Offs

 

(15)

 

 

(136)

 

 

(284)

 

 

(527)

 

  Paid Off/Payments

 

(888)

 

 

(767)

 

 

(4,109)

 

 

(2,828)

 

  Removal Due to Change in TDR Status

 

-

 

 

-

 

 

(692)

 

 

(296)

 

  Transferred to OREO

 

(15)

 

 

(35)

 

 

(445)

 

 

(108)

TDR Ending Balance(1)

$

19,688

 

$

31,323

 

$

19,688

 

$

31,323

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 losses are probable and reasonably quantifiable.  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 $14.3 million at September 30, 2019 compared to $14.6 million at June 30, 2019, and $14.2 million at December 31, 2018.  The allowance for loan losses was 0.78% of outstanding loans (net of overdrafts) and provided coverage of 291% of nonperforming loans at September 30, 2019 compared to 0.79% and 260%, respectively, at June 30, 2019 and 0.80% and 207%, respectively, at December 31, 2018.  We believe that the allowance for loan losses was adequate to absorb losses inherent in our loan portfolio at September 30, 2019.

 

39 


 

Deposits

 

Average total deposits were $2.496 billion for the third quarter of 2019, a decrease of $69.7 million, or 2.7%, from the second quarter of 2019, and an increase of $83.4 million, or 3.5%, over the fourth quarter of 2018.  The decline in average deposits compared to the second quarter of 2019 reflected lower public fund and certificates of deposit balances, partially offset by increases in noninterest bearing and savings accounts.  The increase in average deposits compared to the fourth quarter of 2018 primarily reflected growth in noninterest bearing deposits. Public fund accounts typically peak in the first quarter and trend downwards through the fourth quarter due to the cycle of tax receipts. 

 

We closely monitor and manage deposit levels as part of our overall liquidity position and believe 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 also 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 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.

 

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.

40 


 

 

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%

September 30, 2019

13.7%

10.3%

6.9%

3.5%

-5.8%

June 30,2019

13.2%

9.9%

6.6%

3.4%

-6.0%

 

 

 

 

 

 

Percentage Change (24-month shock)

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

 

 

 

 

 

 

Policy Limit

-17.5%

-15.0%

-12.5%

-10.0%

-10.0%

September 30, 2019

35.1%

26.0%

17.0%

8.2%

-12.8%

June 30,2019

37.5%

28.5%

19.5%

10.8%

-10.9%

 

The Net Interest Income at Risk position indicates that in the short-term, all rising rate environments will positively impact the net interest margin of the Company, while a declining rate environment of 100bp will have a negative impact on the net interest margin. Compared to the prior quarter-end, the 12-month Net Interest Income at Risk positions became more favorable in all rate environments. The 24-month Net Interest Income at Risk positions became slightly less favorable in all scenarios. The primary driver for the unfavorable quarter-over-quarter comparisons was lower replacement rates for both our loan and investment portfolios, as the yield curve shifted considerably lower compared to last quarter.   Down 200bp rate scenarios were not modeled for this quarter and have been suspended due to the recent FOMC rate cuts. These cuts have brought short-term and long-term rates below 2.00%, and therefore we are unable to lower rates 200 basis points.

 

All measures of Net Interest Income at Risk are within our prescribed policy limits over the next 12-months.  Over the next 24-month period, we are out of compliance in the down 100bp scenario due to our limited ability to lower our deposit rates relative to the decline in market rates. 

    

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

 

ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (1)

 

 

 

 

 

 

 

 

Changes in Interest Rates

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

 

 

 

 

 

 

Policy Limit

-30.0%

-25.0%

-20.0%

-15.0%

-15.0%

September 30, 2019

42.6%

34.5%

24.9%

14.1%

-22.4%

June 30,2019

40.2%

32.3%

23.1%

13.0%

-21.1%

 

At September 30, 2019, the economic value of equity results are favorable in all rising rate environments and are within prescribed tolerance levels with the exception of the rates down 100bp scenario. Quarter-over-quarter EVE comparisons are more favorable in the rising rate scenarios, and became less favorable in the down rate scenario. The EVE in the rates down scenario is outside the policy limit as we have limited ability to lower our deposit rates relative to the decline in market rate.  If we were to cap the value of our nonmaturity deposits at their book value in the down 100bp scenario, EVE would be within the policy limit parameters for that scenario.

 

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

 

41 


 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

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

  

At September 30, 2019, we had the ability to generate $1.349 billion in additional liquidity through all of our available resources (this excludes $177 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 Contingent 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, Risk Oversight Committee, and the Board of Directors. At September 30, 2019, we believe the liquidity available to us was sufficient to meet our on-going needs and execute our business strategy.

  

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 2.11 years at September 30, 2019, and the available for sale portfolio had a net unrealized pre-tax gain of $0.9 million.

  

Our average overnight funds position (defined as funds sold plus interest bearing deposits with other banks less funds purchased) was $207.1 million during the third quarter of 2019 compared to an average net overnight funds sold position of $251.8 million in the second quarter of 2019 and $80.8 million in the fourth quarter of 2018.  The decrease in average net overnight funds compared to the second quarter 2019 reflected a decline in public fund deposits, partially offset by cash flow received from the investment portfolio. Overnight funds grew compared to the fourth quarter 2018 primarily due to higher balances of noninterest bearing deposits and cash flow from our investment portfolio, partially offset by loan growth.  

 

We expect our capital expenditures will be approximately $7.0 million over the next 12 months, which will primarily consist of office remodeling, office equipment/furniture, and technology purchases.  Management expects that these capital expenditures will be funded with existing resources without impairing our ability to meet our on-going obligations.

 

Borrowings

 

At September 30, 2019, fixed rate credit advances from the FHLB totaled $8.9 million in outstanding debt consisting of 11 notes. During the first nine months of 2019, the Bank made FHLB advance payments totaling approximately $1.0 million.  No advances matured or were paid off, 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.  We are in the process of evaluating the impact of the expected discontinuation of LIBOR in 2021 on our two junior subordinated deferrable interest notes.

 

42 


 

Capital

   

Our capital ratios are presented in the table below.  At September 30, 2019, our regulatory capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards.

 

 

 

September 30,

 

June 30,

 

December 31,

(Dollars in Thousands)

 

2019

 

2019

 

2018

Shareowner's Equity

 

$

321,562

 

 

$

314,595

 

 

$

302,587

 

Leverage Ratio

 

 

11.09

%

 

 

10.64

%

 

 

10.89

%

Tier 1 Capital Ratio

 

 

16.83

%

 

 

16.36

%

 

 

16.36

%

Total Risk Based Capital Ratio

 

 

17.59

%

 

 

17.13

%

 

 

17.13

%

Common Equity Tier 1 Capital Ratio

 

 

14.13

%

 

 

13.67

%

 

 

13.58

%

Tangible Common Equity Ratio(1)

 

 

8.31

%

 

 

7.83

%

 

 

7.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

During the first nine months of 2019, shareowners’ equity increased $19.0 million, or 8.4%, on an annualized basis.  During this same period, shareowners’ equity was positively impacted by net income of $22.2 million, a $2.6 million increase in the unrealized gain on investment securities, stock compensation accretion of $1.2 million, and net adjustments totaling $0.7 million related to transactions under our stock compensation plans.  Shareowners’ equity was reduced by common stock dividends totaling $5.9 million and common stock repurchases totaling $1.8 million.

 

At September 30, 2019, our common stock had a book value of $19.14 per diluted share compared to $18.76 at June 30, 2019 and $18.00 at December 31, 2018.  Book value is impacted through other comprehensive income by the net unrealized gains and losses in our available for sale investment portfolio.  At September 30, 2019, the net after tax unrealized gain was $0.6 million compared to $0.2 million at June 30, 2019 and $2.0 million at December 31, 2018.  Book value is also impacted by the recording of our unfunded pension liability through other comprehensive income.  At September 30, 2019, the net after tax pension liability reflected in accumulated other comprehensive loss was $26.8 million.  This liability is re-measured annually on December 31st based on an actuarial calculation of our pension liability.  Significant assumptions used in calculating the liability are discussed in our 2018 Form 10-K “Critical Accounting Policies” and include the weighted average discount rate used to measure the present value of the pension liability, the weighted-average expected long-term rate of return on pension plan assets, and the assumed rate of annual compensation increases, all of which will vary when re-measured.  The discount rate assumption used to calculate the pension liability is subject to long-term corporate bond rates at December 31st.  The estimated impact to the pension liability based on a 25-basis point increase or decrease in long-term corporate bond rates used to discount the pension obligation would decrease or increase the pension liability by approximately $4.7 million (after-tax) using the balances from the December 31, 2018 measurement date. 

 

In January 2019, our Board of Directors authorized the repurchase of up to 750,000 shares of our outstanding common stock through February 2024, which replaced our prior repurchase program that was set to expire in 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.  During the second quarter of 2019, we repurchased 77,000 shares at an average price of $23.40 per share 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. 

 

At September 30, 2019, we had $524.4 million in commitments to extend credit and $6.4 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.

43 


 

CRITICAL ACCOUNTING POLICIES

 

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2018 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 2018 Form 10-K.

 

44 


 

TABLE I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE BALANCES & INTEREST RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

 

2018

 

2019

 

 

2018

 

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)

1,837,548

 

24,113

 

5.21

%

 

1,747,093

 

21,733

 

4.94

%

 

1,813,964

 

70,705

 

5.21

%

 

1,695,695

 

61,994

 

4.89

%

Taxable Securities(2)

 

607,363

 

 

3,249

 

2.13

 

 

 

663,639

 

 

3,290

 

1.98

 

 

 

613,382

 

 

9,936

 

2.16

 

 

 

642,260

 

 

8,758

 

1.82

 

Tax-Exempt Securities

 

18,041

 

 

73

 

1.63

 

 

 

60,952

 

 

229

 

1.50

 

 

 

29,237

 

 

347

 

1.59

 

 

 

72,656

 

 

813

 

1.49

 

Funds Sold

 

207,129

 

 

1,142

 

2.19

 

 

 

63,608

 

 

302

 

1.88

 

 

 

241,323

 

 

4,242

 

2.35

 

 

 

153,767

 

 

1,949

 

1.69

 

Total Earning Assets

 

2,670,081

 

 

28,577

 

4.25

%

 

 

2,535,292

 

 

25,554

 

4.00

%

 

 

2,697,906

 

 

85,230

 

4.22

%

 

 

2,564,378

 

 

73,514

 

3.83

%

Cash & Due From Banks

 

50,981

 

 

 

 

 

 

 

 

49,493

 

 

 

 

 

 

 

 

52,210

 

 

 

 

 

 

 

 

50,844

 

 

 

 

 

 

Allowance For Loan Losses

 

(14,863)

 

 

 

 

 

 

 

 

(14,146)

 

 

 

 

 

 

 

 

(14,576)

 

 

 

 

 

 

 

 

(13,774)

 

 

 

 

 

 

Other Assets

 

253,111

 

 

 

 

 

 

 

 

256,285

 

 

 

 

 

 

 

 

253,152

 

 

 

 

 

 

 

 

258,363

 

 

 

 

 

 

TOTAL ASSETS

2,959,310

 

 

 

 

 

 

 

2,826,924

 

 

 

 

 

 

 

2,988,692

 

 

 

 

 

 

 

2,859,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW Accounts

749,678

 

1,235

 

0.65

%

 

733,255

 

773

 

0.42

%

 

821,819

 

4,613

 

0.75

%

 

795,112

 

2,157

 

0.36

%

Money Market Accounts

 

238,565

 

 

264

 

0.44

 

 

 

254,440

 

 

190

 

0.30

 

 

 

238,664

 

 

775

 

0.43

 

 

 

252,082

 

 

459

 

0.24

 

Savings Accounts

 

372,593

 

 

46

 

0.05

 

 

 

352,833

 

 

43

 

0.05

 

 

 

369,726

 

 

136

 

0.05

 

 

 

349,527

 

 

128

 

0.05

 

Other Time Deposits

 

111,447

 

 

51

 

0.18

 

 

 

129,927

 

 

62

 

0.19

 

 

 

115,215

 

 

159

 

0.18

 

 

 

134,781

 

 

187

 

0.19

 

Total Interest Bearing Deposits

 

1,472,283

 

 

1,596

 

0.43

 

 

 

1,470,455

 

 

1,068

 

0.30

 

 

 

1,545,424

 

 

5,683

 

0.49

 

 

 

1,531,502

 

 

2,931

 

0.27

 

Short-Term Borrowings

 

8,697

 

 

27

 

1.24

 

 

 

12,949

 

 

41

 

1.24

 

 

 

9,890

 

 

93

 

1.27

 

 

 

9,499

 

 

57

 

0.80

 

Subordinated Notes Payable

 

52,887

 

 

558

 

4.13

 

 

 

52,887

 

 

568

 

4.20

 

 

 

52,887

 

 

1,762

 

4.39

 

 

 

52,887

 

 

1,595

 

3.98

 

Other Long-Term Borrowings

 

7,158

 

 

63

 

3.47

 

 

 

12,729

 

 

92

 

2.87

 

 

 

7,619

 

 

201

 

3.52

 

 

 

13,218

 

 

286

 

2.89

 

Total Interest Bearing Liabilities

 

1,541,025

 

 

2,244

 

0.58

%

 

 

1,549,020

 

 

1,769

 

0.47

%

 

 

1,615,820

 

 

7,739

 

0.64

%

 

 

1,607,106

 

 

4,869

 

0.42

%

Noninterest Bearing Deposits

 

1,023,472

 

 

 

 

 

 

 

 

921,817

 

 

 

 

 

 

 

 

996,290

 

 

 

 

 

 

 

 

895,042

 

 

 

 

 

 

Other Liabilities

 

74,540

 

 

 

 

 

 

 

 

58,330

 

 

 

 

 

 

 

 

62,823

 

 

 

 

 

 

 

 

65,270

 

 

 

 

 

 

TOTAL LIABILITIES

 

2,639,037

 

 

 

 

 

 

 

 

2,529,167

 

 

 

 

 

 

 

 

2,674,933

 

 

 

 

 

 

 

 

2,567,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL SHAREOWNERS’ EQUITY

 

320,273

 

 

 

 

 

 

 

 

297,757

 

 

 

 

 

 

 

 

313,759

 

 

 

 

 

 

 

 

292,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

2,959,310

 

 

 

 

 

 

 

2,826,924

 

 

 

 

 

 

 

2,988,692

 

 

 

 

 

 

 

2,859,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Spread

 

 

 

 

 

 

3.67

%

 

 

 

 

 

 

 

3.53

%

 

 

 

 

 

 

 

3.58

%

 

 

 

 

 

 

 

3.41

%

Net Interest Income

 

 

 

26,333

 

 

 

 

 

 

 

23,785

 

 

 

 

 

 

 

77,491

 

 

 

 

 

 

 

68,645

 

 

 

Net Interest Margin(3)

 

 

 

 

 

 

3.92

%

 

 

 

 

 

 

 

3.72

%

 

 

 

 

 

 

 

3.84

%

 

 

 

 

 

 

 

3.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Average Balances include nonaccrual loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45 


 

Item 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See “Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference.  Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2018.

 

Item 4.           CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

At September 30, 2019, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that at September 30, 2019, 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 2018 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2018 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.  

46 


 

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 

 

                                                                                                                                                                                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47 


 

 

SIGNATURES

 

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

 

CAPITAL CITY BANK GROUP, INC.

        (Registrant)

 

/s/ J. Kimbrough Davis                                                        

J. Kimbrough Davis

Executive Vice President and Chief Financial Officer

(Mr. Davis is the Principal Financial Officer and has

been duly authorized to sign on behalf of the Registrant)

 

Date: November 4, 2019

 

 

48