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CAPITAL CITY BANK GROUP INC - Quarter Report: 2020 March (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 March 31, 2020

 

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 

 

Capital City Bank Group, Inc.

(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 every Interactive Data File required to be submitted 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 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 April 30, 2020, 16,811,781 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 MARCH 31, 2020

TABLE OF CONTENTS

 

PART I – Financial Information

 

Page

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

Consolidated Statements of Financial Condition – March 31, 2020 and December 31, 2019

4

 

Consolidated Statements of Income – Three Months Ended March 31, 2020 and 2019

5

 

Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2020 and 2019

6

 

Consolidated Statements of Changes in Shareowners’ Equity – Three Months Ended March 31, 2020 and 2019

7

 

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2020 and 2019

8

 

Notes to Consolidated Financial Statements

9

 

 

 

Item 2.

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

34

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

51

 

 

 

PART II – Other Information

 

 

 

Item 1.

Legal Proceedings

51

 

 

 

Item 1A.

Risk Factors

51

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

53

 

 

 

Item 4.

Mine Safety Disclosure

53

 

 

 

Item 5.

Other Information

53

 

 

 

Item 6.

Exhibits

54

 

 

 

Signatures

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           

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, 2019 (the “2019 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:

 

·          the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions and our business, results of operations and financial condition, including the impact of our participation in government programs related to COVID-19;

·          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;

·          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 effect of corporate restructuring, acquisitions or dispositions, including the actual restructuring and other related charges and the failure to achieve the expected gains, revenue growth or expense savings from such corporate restructuring, acquisitions or dispositions;

·          the effects of natural disasters, harsh weather conditions (including hurricanes), widespread health emergencies, military conflict, terrorism or other geopolitical events;

·          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)

 

 

 

 

 

 

March 31,

 

December 31,

(Dollars in Thousands)

2020

 

2019

ASSETS

 

 

 

 

 

Cash and Due From Banks

$

72,676

 

$

60,087

Federal Funds Sold and Interest Bearing Deposits

 

196,936

 

 

318,336

 

 

Total Cash and Cash Equivalents

 

269,612

 

 

378,423

 

 

 

 

 

 

 

 

Investment Securities, Available for Sale, at fair value

 

382,514

 

 

403,601

Investment Securities, Held to Maturity, (fair value of $257,929 and $241,429)

 

251,792

 

 

239,539

 

 

Total Investment Securities

 

634,306

 

 

643,140

 

 

 

 

 

 

 

 

Loans Held For Sale, at fair value

 

82,598

 

 

9,509

 

 

 

 

 

 

 

 

Loans Held for Investment

 

1,862,387

 

 

1,835,929

 

Allowance for Credit Losses

 

(21,083)

 

 

(13,905)

 

 

Loans Held for Investment, Net

 

1,841,304

 

 

1,822,024

 

 

 

 

 

 

 

 

Premises and Equipment, Net

 

87,684

 

 

84,543

Goodwill

 

89,275

 

 

84,811

Other Real Estate Owned

 

1,463

 

 

953

Other Assets

 

80,281

 

 

65,550

 

 

Total Assets

$

3,086,523

 

$

3,088,953

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest Bearing Deposits

$

1,066,607

 

$

1,044,699

 

Interest Bearing Deposits

 

1,478,978

 

 

1,600,755

 

 

Total Deposits

 

2,545,585

 

 

2,645,454

 

 

 

 

 

 

 

 

Short-Term Borrowings

 

76,516

 

 

6,404

Subordinated Notes Payable

 

52,887

 

 

52,887

Other Long-Term Borrowings

 

5,896

 

 

6,514

Other Liabilities

 

70,044

 

 

50,678

 

 

Total Liabilities

 

2,750,928

 

 

2,761,937

 

 

 

 

 

 

 

 

Temporary Equity

 

7,088

 

 

-

 

 

 

 

 

 

 

 

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; 16,811,781 and 16,771,544 shares

 

 

 

 

issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

168

 

 

168

Additional Paid-In Capital

 

32,100

 

 

32,092

Retained Earnings

 

321,772

 

 

322,937

Accumulated Other Comprehensive Loss, net of tax

 

(25,533)

 

 

(28,181)

Total Shareowners’ Equity

 

328,507

 

 

327,016

Total Liabilities and Shareowners' Equity

$

3,086,523

 

$

3,088,953

 

 

 

 

 

 

 

 

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 March 31,

(Dollars in Thousands, Except Per Share Data)

2020

 

2019

INTEREST INCOME

 

 

 

 

 

Loans, including Fees

$

23,593

 

$

22,616

Investment Securities:

 

 

 

 

 

 

Taxable Securities

 

2,996

 

 

3,387

 

Tax Exempt Securities

 

19

 

 

126

Federal Funds Sold and Interest Bearing Deposits

 

757

 

 

1,593

 

 

Total Interest Income

 

27,365

 

 

27,722

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

Deposits

 

939

 

 

2,099

Short-Term Borrowings

 

132

 

 

35

Subordinated Notes Payable

 

471

 

 

608

Other Long-Term Borrowings

 

50

 

 

72

 

Total Interest Expense

 

1,592

 

 

2,814

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

25,773

 

 

24,908

Provision for Credit Losses

 

4,990

 

 

767

Net Interest Income After Provision For Credit Losses

 

20,783

 

 

24,141

 

 

 

 

 

 

 

 

NONINTEREST INCOME

 

 

 

 

 

Deposit Fees

 

5,015

 

 

4,775

Bank Card Fees

 

3,051

 

 

2,855

Wealth Management Fees

 

2,604

 

 

2,323

Mortgage Banking Revenues

 

3,030

 

 

993

Other

 

1,778

 

 

1,606

Total Noninterest Income

 

15,478

 

 

12,552

 

 

 

 

 

 

 

 

NONINTEREST EXPENSE

 

 

 

 

 

Compensation

 

19,736

 

 

16,349

Occupancy, Net

 

4,979

 

 

4,509

Other Real Estate Owned, Net

 

(798)

 

 

363

Other

 

7,052

 

 

6,977

Total Noninterest Expense

 

30,969

 

 

28,198

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

5,292

 

 

8,495

Income Tax Expense

 

1,282

 

 

2,059

 

 

 

 

 

 

 

 

NET INCOME

 

4,010

 

 

6,436

Net Loss Attributable to Noncontrolling Interests

 

277

 

 

-

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO COMMON SHAREOWNERS

$

4,287

 

$

6,436

 

 

 

 

 

 

 

 

BASIC NET INCOME PER SHARE

$

0.26

 

$

0.38

DILUTED NET INCOME PER SHARE

$

0.25

 

$

0.38

 

 

 

 

 

 

 

 

Average Basic Shares Outstanding

 

16,808

 

 

16,791

Average Diluted Shares Outstanding

 

16,842

 

 

16,819

 

 

 

 

 

 

 

 

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

 

 

 

 

March 31,

(Dollars in Thousands)

2020

 

2019

Net Income attributable to common shareowners

$

4,287

 

$

6,436

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

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

 

3,538

 

 

1,250

 

 

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

 

9

 

 

12

 

 

Total Investment Securities

 

3,547

 

 

1,262

 

Other comprehensive income, before tax

 

3,547

 

 

1,262

 

Deferred tax expense related to other comprehensive income

 

899

 

 

321

 

Other comprehensive income, net of tax

 

2,648

 

 

941

Total Comprehensive Income attributable to common shareowners

 

6,935

 

 

7,377

 

 

 

 

 

 

 

 

 

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,

 

 

 

Except Share Data)

Outstanding

 

Stock

 

Capital

 

Earnings

 

Net of Taxes

 

Total

Balance, January 1, 2020

16,771,544

 

$

168

 

$

32,092

 

$

322,937

 

$

(28,181)

 

$

327,016

Adoption of ASC 326 - See Note 1

-

 

 

-

 

 

-

 

 

(3,095)

 

 

-

 

 

(3,095)

Net Income

-

 

 

-

 

 

-

 

 

4,287

 

 

-

 

 

4,287

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

2,648

 

 

2,648

Cash Dividends ($0.1400 per share)

-

 

 

-

 

 

-

 

 

(2,357)

 

 

-

 

 

(2,357)

Repurchase of Common Stock

(33,074)

 

 

(1)

 

 

(707)

 

 

-

 

 

-

 

 

(708)

Stock Based Compensation

-

 

 

-

 

 

291

 

 

-

 

 

-

 

 

291

Stock Compensation Plan Transactions, net

73,311

 

 

1

 

 

424

 

 

-

 

 

-

 

 

425

Balance, March 31, 2020

16,811,781

 

$

168

 

$

32,100

 

$

321,772

 

$

(25,533)

 

$

328,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

16,747,571

 

$

167

 

$

31,058

 

$

300,177

 

$

(28,815)

 

$

302,587

Net Income

-

 

 

-

 

 

-

 

 

6,436

 

 

-

 

 

6,436

Other Comprehensive Income, net of tax

-

 

 

-

 

 

-

 

 

-

 

 

941

 

 

941

Cash Dividends ($0.1100 per share)

-

 

 

-

 

 

-

 

 

(1,850)

 

 

-

 

 

(1,850)

Stock Based Compensation

-

 

 

-

 

 

499

 

 

-

 

 

-

 

 

499

Stock Compensation Plan Transactions, net

64,889

 

 

1

 

 

372

 

 

-

 

 

-

 

 

373

Balance, March 31, 2019

16,812,460

 

$

168

 

$

31,929

 

$

304,763

 

$

(27,874)

 

$

308,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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) 

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in Thousands)

2020

 

2019

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net Income

$

4,287

 

$

6,436

Adjustments to Reconcile Net Income to

 

 

 

 

 

   Cash Provided by Operating Activities:

 

 

 

 

 

      Provision for Credit Losses

 

4,990

 

 

767

      Depreciation

 

1,623

 

 

1,612

      Amortization of Premiums, Discounts and Fees, net

 

1,643

 

 

1,234

      Originations of Loans Held-for-Sale

 

(150,840)

 

 

(38,698)

      Proceeds From Sales of Loans Held-for-Sale

 

80,781

 

 

42,003

      Net Gain From Sales of Loans Held-for-Sale

 

(3,030)

 

 

(993)

      Stock Compensation

 

291

 

 

499

      Net Tax Benefit From Stock-Based Compensation

 

(84)

 

 

(14)

      Deferred Income Taxes

 

(511)

 

 

321

      Net Change in Operating Leases

 

192

 

 

23

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

 

(931)

 

 

215

      Net Increase in Other Assets

 

(20,255)

 

 

(4,854)

      Net Increase in Other Liabilities

 

26,646

 

 

6,689

Net Cash (Used In) Provided By Operating Activities

 

(55,198)

 

 

15,240

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Securities Held to Maturity:

 

 

 

 

 

      Purchases

 

(32,250)

 

 

(18,167)

      Payments, Maturities, and Calls

 

19,370

 

 

8,953

Securities Available for Sale:

 

 

 

 

 

      Purchases

 

(26,795)

 

 

(13,370)

      Payments, Maturities, and Calls

 

50,347

 

 

30,784

Purchases of Loans Held for Investment

 

(2,756)

 

 

(14,706)

Net Increase in Loans Held for Investment

 

(22,191)

 

 

(9,461)

Net Cash Paid for Brand Acquisition

 

(2,405)

 

 

-

Proceeds from Insurance Claims on Premises

 

-

 

 

790

Proceeds From Sales of Other Real Estate Owned

 

1,155

 

 

639

Purchases of Premises and Equipment

 

(4,773)

 

 

(1,268)

Net Cash Used In Investing Activities

 

(20,298)

 

 

(15,806)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net (Decrease) Increase in Deposits

 

(99,869)

 

 

85,438

Net Increase (Decrease) in Short-Term Borrowings

 

70,018

 

 

(4,918)

Repayment of Other Long-Term Borrowings

 

(524)

 

 

(547)

Dividends Paid

 

(2,357)

 

 

(1,850)

Payments to Repurchase Common Stock

 

(708)

 

 

-

Issuance of Common Stock Under Purchase Plans

 

125

 

 

157

Net Cash (Used In) Provided By Financing Activities

 

(33,315)

 

 

78,280

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(108,811)

 

 

77,714

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

378,423

 

 

276,000

Cash and Cash Equivalents at End of Period

$

269,612

 

$

353,714

 

 

 

 

 

 

Supplemental Cash Flow Disclosures:

 

 

 

 

 

   Interest Paid

$

1,562

 

$

2,813

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

   Loans Transferred to Other Real Estate Owned

$

734

 

$

527

 

 

 

 

 

 

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 –  BUSINESS AND BASIS OF PRESENTATION

 

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, 2019 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, 2019.

 

Business Combination.  On March 1, 2020, CCB completed its acquisition of a 51% membership interest in Brand Mortgage Group, LLC (“Brand”) which is now operated as Capital City Home Loans (“CCHL”).  CCHL was consolidated into CCBG’s financial statements effective March 1, 2020.  Assets acquired totaled $52 million (consisting primarily of loans held for sale) and liabilities assumed totaled $42 million (consisting primarily of warehouse line borrowings).  The primary purpose of the acquisition was to gain access to an expanded residential mortgage product line-up and investor base (including a mandatory delivery channel for loan sales) and to generate other operational synergies and cost savings.  CCB made a $7.1 million cash payment for its 51% membership interest and entered into a buyout agreement for the remaining 49% noncontrolling interest resulting in temporary equity with a fair value of $7.4 million.  Goodwill totaling $4.5 million was recorded in connection with this acquisition.  Factors that contributed to the purchase price resulting in goodwill include Brand’s strong management team and expertise in the mortgage industry, historical record of earnings, and operational synergies created as part of the strategic alliance.  At March 31, 2020, temporary equity totaled $7.1 million and reflected a $0.3 net loss for March, 2020 attributable to noncontrolling interest.            

 

Adoption of New Accounting Standard

 

On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.  The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.  It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments).  In addition, ASC 326-30 provides a new credit loss model for available-for-sale debt securities.  The most significant change requires credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is not more likely than not they will be required to sell.  

 

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.  Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.  The adoption of ASC 326 (“CECL”) had an impact of $4.0 million ($3.3 million increase in the allowance for credit losses and $0.7 million increase in the allowance for unfunded loan commitments (liability account)) that was offset by a corresponding decrease in retained earnings of $3.1 million and $0.9 million increase in deferred tax assets.  The increase in the allowance for credit losses required under the ASC 326 generally reflected the impact of reserves calculated over the life of loan, and more specifically higher reserves required for longer duration loan portfolios, and the utilization of a longer historical look-back period in the calculation of loan loss rates (loss given default).  Upon analyzing the debt security portfolios, the Company determined that no allowance was required as these debt securities are government guaranteed treasuries or government agency-backed securities for which the risk of loss was deemed minimal.  Further, certain municipal debt securities held by the Company have been pre-refunded and secured by government guaranteed treasuries.  

9 


 

The following table illustrates the impact of adopting ASC 326 on January 1, 2020.

 

 

 

As Reported

 

 

 

 

Impact of

 

 

Under

 

Pre-ASC 326

 

ASC 326

(Dollars in Thousands)

 

ASC 326

 

Adoption

 

Adoption

Loans:

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 

 

2,163

 

 

1,675

 

 

488

Real Estate - Construction

 

 

672

 

 

370

 

 

302

Real Estate - Commercial Mortgage

 

 

4,874

 

 

3,416

 

 

1,458

Real Estate - Residential

 

 

4,371

 

 

3,128

 

 

1,243

Real Estate - Home Equity

 

 

2,598

 

 

2,224

 

 

374

Consumer, Other Loans and Overdrafts

 

 

2,496

 

 

3,092

 

 

(596)

Allowance for Credit Losses on Loans

 

 

17,174

 

 

13,905

 

 

3,269

 

 

 

 

 

 

 

 

 

 

Other Liabilities:

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

 

$

815

 

$

157

 

$

658

 

Significant Accounting Policy Changes

 

Upon adoption of ASC 326, the Company revised certain accounting policies for Investment Securities, Loans, and the Allowance for Credit Losses as detailed below. 

 

In addition, certain accounting policies were revised upon the acquisition of Brand on March 1, 2020 and are also discussed in further detail below under the Mortgage Banking Activities section.

 

Investment Securities

 

Investment securities are classified as held-to-maturity and carried at amortized cost when the Company has the positive intent and ability to hold them until maturity.  Investment securities not classified as held-to-maturity or trading securities are classified as available-for-sale and carried at fair value.  The Company determines the appropriate classification of securities at the time of purchase.  For reporting and risk management purposes, we further segment investment securities by the issuer of the security which correlates to its risk profile: U.S. government treasury, U.S. government agency, state and political subdivisions, and mortgage-backed securities.  Certain equity securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are classified as available-for-sale and carried at cost.   

 

Interest income includes amortization and accretion of purchase premiums and discounts.  Realized gains and losses are derived from the amortized cost of the security sold.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.  Securities transferred from available-for-sale to held-to-maturity are recorded at amortized cost plus or minus any unrealized gain or loss at the time of transfer.  Any existing unrecognized gain or loss continues to be reported in accumulated other comprehensive income (net of tax) and amortized as an adjustment to interest income over the remaining life of the security.  Any existing allowance for credit loss is reversed at the time of transfer.  Subsequent to transfer, the allowance for credit losses on the transferred security is evaluated in accordance with the accounting policy for held-to-maturity securities.  Additionally, any allowance amounts reversed or established as part of the transfer are presented on a gross basis in the consolidated statement of income. 

 

The accrual of interest is generally suspended on securities more than 90 days past due with respect to principal or interest.  When a security is placed on nonaccrual status, all previously accrued and uncollected interest is reversed against current income and thus not included in the estimate of credit losses. 

 

Credit losses and changes thereto, are established as an allowance for credit loss through a provision for credit loss expense.  Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

 

Certain debt securities in the Company’s investment portfolio were issued by a U.S. government entity or agency and are either explicitly or implicitly guaranteed by the U.S. government.  The Company considers the long history of no credit losses on these securities indicates that the expectation of nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default.  Further, certain municipal securities held by the Company have been pre-refunded and secured by government guaranteed treasuries.  Therefore, for the aforementioned securities, the Company does not assess or record expected credit losses due to the zero loss assumption.

10 


 

 

Impairment - Available-for-Sale Securities.

 

Unrealized gains on available-for-sale securities are excluded from earnings and reported, net of tax, in other comprehensive income (“OCI”).  For available-for-sale securities that are in an unrealized loss position, the Company first assesses whether it intends to sell, or whether it is more likely than not it will be required to sell the security before recovery of its amortized cost basis.  If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.  For available-for-sale securities that do not meet the aforementioned criteria or have a zero loss assumption, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.  In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.  If the assessment indicates that a credit loss exists, the present value of cash flows to be collected from the security are compared to the amortized cost basis of the security.  If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded through a provision for credit loss expense, limited by the amount that fair value is less than the amortized cost basis.  Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. 

 

Allowance for Credit Losses - Held-to-Maturity Securities.

 

Management measures expected credit losses on each individual held-to-maturity debt security that has not been deemed to have a zero assumption.  Each security that is not deemed to have zero credit losses is individually measured based on net realizable value, or the difference between the discounted value of the expected cash flows, based on the original effective rate, and the recorded amortized basis of the security.  To the extent a shortfall is related to credit loss, an allowance for credit loss is recorded through a provision for credit loss expense.  Any shortfall related to other noncredit-related factors is recognized in other comprehensive income.         

 

Loans

 

Loans are stated at amortized cost which includes the principal amount outstanding, net premiums and discounts, and net deferred loan fees and costs.  Accrued interest receivable on loans is reported in other assets and is not included in the amortized cost basis of loans.  Interest income is accrued on the effective yield method based on outstanding principal balances, and includes loan late fees.  Fees charged to originate loans and direct loan origination costs are deferred and amortized over the life of the loan as a yield adjustment.      

 

The Company defines loans as past due when one full payment is past due or a contractual maturity is over 30 days late.  The accrual of interest is generally suspended on loans more than 90 days past due with respect to principal or interest.  When a loan is placed on nonaccrual status, all previously accrued and uncollected interest is reversed against current income and thus a policy election has been made to not include in the estimate of credit losses.  Interest income on nonaccrual loans is recognized when the ultimate collectability is no longer considered 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. 

 

Loan charge-offs on commercial and investor real estate loans are recorded when the facts and circumstances of the individual loan confirm the loan is not fully collectible and the loss is reasonably quantifiable.  Factors considered in making these determinations are the borrower’s and any guarantor’s ability and willingness to pay, the status of the account in bankruptcy court (if applicable), and collateral value.  Charge-off decisions for consumer loans are dictated by the Federal Financial Institutions Examination Council’s (FFIEC) Uniform Retail Credit Classification and Account Management Policy which establishes standards for the classification and treatment of consumer loans, which generally require charge-off after 120 days of delinquency.

 

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures designed to maximize loan income within an acceptable level of risk.  Reporting systems are used to monitor loan originations, loan ratings, concentrations, loan delinquencies, nonperforming and potential problem loans, and other credit quality metrics.  The ongoing review of loan portfolio quality and trends by Management and the Credit Risk Oversight Committee support the process for estimating the allowance for credit losses.   

 

Allowance for Credit Losses

 

The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.  The allowance for credit losses is adjusted by a credit loss provision which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.  Loans are charged off against the allowance when management believes the uncollectibility of a loan balance in confirmed.  Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.  Expected credit loss inherent in non-cancellable off-balance sheet credit exposures is accounted for as a separate liability included in other liabilities.

 

11 


 

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.  Historical loan default and loss experience provides the basis for the estimation of expected credit losses.  Adjustments to historical loss information incorporate management’s view of current conditions and forecasts.   

 

The methodology for estimating the amount of credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving loans that do not share risk characteristics and the measurement of expected credit losses for such individual loans; and second, a pooled component for expected credit losses for pools of loans that share similar risk characteristics. 

 

Loans That Do Not Share Risk Characteristics (Individually Analyzed)

 

Loans that do not share similar risk characteristics are evaluated on an individual basis.  Loans deemed to be collateral dependent have differing risk characteristics and are individually analyzed to estimate the expected credit loss.  A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is dependent on the liquidation and sale of the underlying collateral.  For collateral dependent loans where foreclosure is probable, the expected credit loss is measured based on the difference between the fair value of the collateral (less selling cost) and the amortized cost basis of the asset.  For collateral dependent loans where foreclosure is not probable, the Company has elected the practical expedient allowed by ASC 326-20 to measure the expected credit loss under the same approach as those loans where foreclosure is probable.  For loans with balances greater than $250,000 the fair value of the collateral is obtained through independent appraisal of the underlying collateral.  For loans with balances less than $250,000, the Company has made a policy election to measure expected loss for these individual loans utilizing loss rates for similar loan types.  The aforementioned measurement criteria are applied for collateral dependent troubled debt restructurings. 

 

Loans That Share Similar Risk Characteristics (Pooled Loans)

 

The general steps in determining expected credit losses for the pooled loan component of the allowance are as follows:

·          Segment loans into pools according to similar risk characteristics

·          Develop historical loss rates for each loan pool segment

·          Incorporate the impact of forecasts

·          Incorporate the impact of other qualitative factors

·          Calculate and review pool specific allowance for credit loss estimate

 

Methodology –

 

A discounted cash flow (“DCF”) methodology is utilized to calculate expected cash flows for the life of each individual loan.  The discounted present value of expected cash flow is then compared to the loan’s amortized cost basis to determine the credit loss estimate.  Individual loan results are aggregated at the pool level in determining total reserves for each loan pool.     

 

The primary inputs used to calculate expected cash flows include historical loss rates which reflect probability of default (“PD”) and loss given default (“LGD”), and prepayment rates.  The historical look-back period is a key factor in the calculation of the PD rate and is based on management’s assessment of current and forecasted conditions and may vary by loan pool.  Loans subject to the Company’s risk rating process are further sub-segmented by risk rating in the calculation of PD rates.  LGD rates generally reflect the historical average net loss rate by loan pool.  Expected cash flows are further adjusted to incorporate the impact of loan prepayments which will vary by loan segment and interest rate conditions.  In general, prepayment rates are based on observed prepayment rates occurring in the loan portfolio and consideration of forecasted interest rates.

   

Forecast Factors –

 

In developing loss rates, adjustments are made to incorporate the impact of forecasted conditions.  Certain assumptions are also applied, including the length of the forecast and reversion periods.  The forecast period is the period within which management is able to make a reasonable and supportable assessment of future conditions.  The reversion period is the period beyond which management believes it can develop a reasonable and supportable forecast, and bridges the gap between the forecast period and the use of historical default and loss rates.  The remainder period reflects the remaining life of the loan.  The length of the forecast and reversion periods are periodically evaluated and based on management’s assessment of current and forecasted conditions and may vary by loan pool.  For purposes of developing a reasonable and supportable assessment of future conditions, management utilizes established industry and economic data points and sources, including the Federal Open Market Committee forecast, with the forecasted unemployment rate being a significant factor.  PD rates for the forecast period will be adjusted accordingly based on management’s assessment of future conditions.  PD rates for the remainder period will reflect the historical mean PD rate.  Reversion period PD rates reflect the difference between forecast and remainder period PD rates closed using a straight-line adjustment over the reversion period.  

 

12 


 

Qualitative Factors –

 

Loss rates are further adjusted to account for other risk factors that impact loan defaults and losses.  These basis point adjustments are based on management’s assessment of trends and conditions that impact credit risk and resulting loan losses, more specifically internal and external factors that are independent of and not reflected in the quantitative loss rate calculations.  Risk factors management considers in this assessment include trends in underwriting standards, nature/volume/terms of loan originations, past due loans, loan review systems, collateral valuations, concentrations, legal/regulatory/political conditions, and the unforeseen impact of natural disasters.

 

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

 

The Company estimates expected credit losses over the contractual period in which it is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.  The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense and is recorded in other liabilities.  The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life and applies the same estimated loss rate as determined for current outstanding loan balances by segment.  Off-balance sheet credit exposures are identified and classified in the same categories as the allowance for credit losses with similar risk characteristics that have been previously mentioned.

 

Mortgage Banking Activities

 

Mortgage Loans Held for Sale and Revenue Recognition

 

Mortgage loans held for sale are carried at fair value under the fair value option with changes in fair value recorded in gain on sale of mortgage loans held for sale on the statement of operations. The fair value of mortgage loans held for sale committed to investors is calculated using observable market information such as the investor commitment, assignment of trade (AOT) or other mandatory delivery commitment prices. The Company bases loans committed to Agency investors based on the Agency’s quoted mortgage backed security (MBS) prices. The fair value of mortgage loans held for sale not committed to investors is based on quoted best execution secondary market prices. If no such quoted price exists, the fair value is determined using quoted prices for a similar asset or assets, such as MBS prices, adjusted for the specific attributes of that loan, which would be used by other market participants.

 

Gains and losses from the sale of mortgage loans held for sale are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in gain on sale of mortgage loans held for sale on the statement of operations. Sales proceeds reflect the cash received from investors through the sale of the loan and servicing release premium. If the related mortgage servicing right (MSR) is sold servicing retained, the MSR addition is recorded in gain on sale of mortgage loans held for sale on the statement of operations. Gain on sale of mortgage loans held for sale also includes the unrealized gains and losses associated with the changes in the fair value of mortgage loans held for sale, and the realized and unrealized gains and losses from derivative instruments.

 

Mortgage loans held for sale are considered sold when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through either an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets. The Company typically considers the above criteria to have been met upon acceptance and receipt of sales proceeds from the purchaser.

 

Derivative Instruments

 

The Company holds and issues derivative financial instruments such as interest rate lock commitments (IRLCs) and other forward sale commitments. IRLCs are subject to price risk primarily related to fluctuations in market interest rates. To hedge the interest rate risk on certain IRLCs, the Company uses forward sale commitments, such as to-be-announced securities (TBAs) or mandatory delivery commitments with investors. Management expects these forward sale commitments to experience changes in fair value opposite to the changes in fair value of the IRLCs thereby reducing earnings volatility. Forward sale commitments are also used to hedge the interest rate risk on mortgage loans held for sale that are not committed to investors and still subject to price risk. If the mandatory delivery commitments are not fulfilled, the Company pays a pair-off fee. Best effort forward sale commitments are also executed with investors, whereby certain loans are locked with a borrower and simultaneously committed to an investor at a fixed price. If the best effort IRLC does not fund, there is no obligation to fulfill the investor commitment.

 

13 


 

The Company considers various factors and strategies in determining what portion of the IRLCs and uncommitted mortgage loans held for sale to economically hedge.  All derivative instruments are recognized as other assets or other liabilities on the balance sheet at their fair value. Changes in the fair value of the derivative instruments are recognized in gain on sale of mortgage loans held for sale on the statement of operations in the period in which they occur. Gains and losses resulting from the pairing-out of forward sale commitments are recognized in gain on sale of mortgage loans held for sale on the statement of operations. The Company accounts for all derivative instruments as free-standing derivative instruments and does not designate any for hedge accounting.

 

Mortgage Servicing Rights (“MSRs”) and Revenue Recognition

 

The Company sells residential mortgage loans in the secondary market and may retain the right to service the loans sold. Upon sale, an MSR asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities.  As the Company has not elected to subsequently measure any class of servicing assets under the fair value measurement method, the Company follows the amortization method.  MSRs are amortized to noninterest income (other income) in proportion to and over the period of estimated net servicing income, and assessed for impairment at each reporting date.  MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and included in other assets, net, on the consolidated statements of financial condition. 

 

The Company periodically evaluates its MSRs asset for impairment.  Impairment is assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate).  As mortgage interest rates fall, prepayment speeds are usually faster and the value of the MSRs asset generally decreases, requiring additional valuation reserve.  Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the MSRs asset generally increases, requiring less valuation reserve.  A valuation allowance is established, through a charge to earnings, to the extent the amortized cost of the MSRs exceeds the estimated fair value by stratification.  If it is later determined that all or a portion of the temporary impairment no longer exists for a stratification, the valuation is reduced through a recovery to earnings.  An other-than-temporary impairment (i.e., recoverability is considered remote when considering interest rates and loan pay off activity) is recognized as a write-down of the MSRs asset and the related valuation allowance (to the extent a valuation allowance is available) and then against earnings.  A direct write-down permanently reduces the carrying value of the MSRs asset and valuation allowance, precluding subsequent recoveries.

 

Accounting Standards Updates

 

ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.  ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation when there is a loss from continuing operations or a gain from other items and the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.   ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.  ASU 2019-12 is effective for the Company January 1, 2021 and is not expected to have a material impact on the Company’s consolidated financial statements.

 

ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).  ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.  ASU 2020-01 is effective for the Company on January 1, 2021 and is not expected to have a material impact on the Company’s consolidated financial statements.

 

ASU 2020-02, "Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)".  ASU 2020-02 incorporates SEC SAB 119 (updated from SAB 102) into the Accounting Standards Codification (the "Codification") by aligning SEC recommended policies and procedures with ASC 326.  ASU 2020-02 was effective on January 1, 2020 and had no material impact on the Company’s documentation requirements.

 

ASU 2020-03, "Codification Improvements to Financial Instruments".  ASU 2020-03 revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and did not have a material impact on the Company’s consolidated financial statements.

 

14 


 

ASU 2020-04, "Reference Rate Reform (Topic 848).  ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or re-measurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined if the LIBOR transition and this ASU will have material effects on the Company’s business operations and consolidated financial statements.

 

NOTE 2 – INVESTMENT SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Portfolio Composition. The following table summarizes the amortized cost and related market value of investment securities

available-for-sale and securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Amortized

Unrealized

Unrealized

Market

Amortized

Unrealized

Unrealized

Market

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gain

 

Losses

 

Value

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

198,640

 

$

2,874

 

$

-

 

$

201,514

 

$

231,996

 

$

849

 

$

67

 

$

232,778

U.S. Government Agency

 

164,070

 

 

1,955

 

 

131

 

 

165,894

 

 

155,706

 

 

697

 

 

325

 

 

156,078

States and Political Subdivisions

 

6,664

 

 

8

 

 

-

 

 

6,672

 

 

6,310

 

 

9

 

 

-

 

 

6,319

Mortgage-Backed Securities

 

581

 

 

75

 

 

-

 

 

656

 

 

693

 

 

80

 

 

-

 

 

773

Equity Securities(1)

 

7,778

 

 

-

 

 

-

 

 

7,778

 

 

7,653

 

 

-

 

 

-

 

 

7,653

Total

$

377,733

 

$

4,912

 

$

131

 

$

382,514

 

$

402,358

 

$

1,635

 

$

392

 

$

403,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

20,027

 

$

184

 

$

-

 

$

20,211

 

$

20,036

 

$

15

 

$

9

 

$

20,042

States and Political Subdivisions

 

340

 

 

-

 

 

-

 

 

340

 

 

1,376

 

 

-

 

 

-

 

 

1,376

Mortgage-Backed Securities

 

231,425

 

 

5,953

 

 

-

 

 

237,378

 

 

218,127

 

 

2,064

 

 

180

 

 

220,011

Total

$

251,792

 

$

6,137

 

$

-

 

$

257,929

 

$

239,539

 

$

2,079

 

$

189

 

$

241,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Investment Securities

$

629,525

 

$

11,049

 

$

131

 

$

640,443

 

$

641,897

 

$

3,714

 

$

581

 

$

645,030

 

(1)     Includes Federal Home Loan Bank and Federal Reserve Bank stock, recorded at cost of $3.0 million, $4.8 million, respectively, at March 31, 2020 and includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $2.9 million and $4.8 million, respectively, at December 31, 2019.

 

Securities with an amortized cost of $295.5 million and $353.8 million at March 31, 2020 and December 31, 2019, 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.

 

15 


 

Maturity Distribution.  At March 31, 2020, 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

$

131,848

 

$

132,886

 

$

20,367

 

$

20,551

Due after one year through five years

 

73,456

 

 

75,300

 

 

-

 

 

-

Mortgage-Backed Securities

 

581

 

 

656

 

 

231,425

 

 

237,378

U.S. Government Agency

 

164,070

 

 

165,894

 

 

-

 

 

-

Equity Securities

 

7,778

 

 

7,778

 

 

-

 

 

-

Total

$

377,733

 

$

382,514

 

$

251,792

 

$

257,929

 

Unrealized Losses on Investment Securities.   The following table summarizes the available for sale 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

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agency

 

22,589

 

 

108

 

 

6,736

 

 

23

 

 

29,325

 

 

131

Total

 

22,589

 

 

108

 

 

6,736

 

 

23

 

 

29,325

 

 

131

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

9,955

 

$

-

 

$

93,310

 

$

67

 

$

103,265

 

$

67

U.S. Government Agency

 

36,361

 

 

244

 

 

17,364

 

 

81

 

 

53,725

 

 

325

States and Political Subdivisions

 

578

 

 

-

 

 

-

 

 

-

 

 

578

 

 

-

Mortgage-Backed Securities

 

8

 

 

-

 

 

-

 

 

-

 

 

8

 

 

-

Total

 

46,902

 

 

244

 

 

110,674

 

 

148

 

 

157,576

 

 

392

 

At March 31, 2020, there were 42 positions (combined AFS and HTM) with unrealized losses totaling $0.1 million.  41 of these positions were U.S. government agency and mortgage-backed securities issued by U.S. government sponsored entities.  The remaining position was one municipal security.  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 record any allowance for credit losses on any investment securities at March 31, 2020.  Additionally, none of the AFS or HTM securities held by the Company were past due or in nonaccrual status at March 31, 2020.   

 

Credit Quality Indicators

 

The Company monitors the credit quality of its investment securities through various risk management procedures, including the monitoring of credit ratings.  A majority of the debt securities in the Company’s investment portfolio were issued by a U.S. government entity or agency and are either explicitly or implicitly guaranteed by the U.S. government.  The Company considers the long history of no credit losses on these securities indicates that the expectation of nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default.  Further, certain municipal securities held by the Company have been pre-refunded and secured by government guaranteed treasuries.  Therefore, for the aforementioned securities, the Company does not assess or record expected credit losses due to the zero loss assumption.  The Company monitors the credit quality of its municipal securities portfolio via credit ratings which are updated on a quarterly basis.  On a quarterly basis, municipal securities in an unrealized loss position are evaluated to determine if the loss is attributable to credit related factors and if an allowance for credit loss is needed.      

 

16 


 

NOTE 3 – LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES

 

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

 

(Dollars in Thousands)

March 31, 2020

 

December 31, 2019

Commercial, Financial and Agricultural

$

249,020

 

$

255,365

Real Estate – Construction

 

122,595

 

 

115,018

Real Estate – Commercial Mortgage

 

656,084

 

 

625,556

Real Estate – Residential(1)

 

360,730

 

 

361,450

Real Estate – Home Equity

 

196,443

 

 

197,360

Consumer(2)

 

277,515

 

 

281,180

 

Loans, Net of Unearned Income

$

1,862,387

 

$

1,835,929

             

 

(1)     Includes loans in process with outstanding balances of $7.3 million and $8.3 million at March 31, 2020 and December 31, 2019, respectively.

(2)     Includes overdraft balances of $1.5 million and $1.6 million at March 31, 2020 and December 31, 2019, respectively.  

 

Net deferred costs, which include premiums on purchased loans, included in loans were $1.8 million at March 31, 2020 and December 31, 2019.

 

Accrued interest receivable on loans which is excluded from amortized cost totaled $5.7 million at March 31, 2020 and $5.5 million at December 31, 2019, and is reported separately in Other Assets.

 

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.

 

Loan Purchases.  The Company will periodically purchase newly originated 1-4 family real estate secured adjustable rate loans from Capital City Home Loans, a related party effective on March 1, 2020 (see Note 1).  Loan purchases totaled $1.5 million for the three month period ended March 31, 2020, and were not credit impaired.

 

Allowance for Credit LossesThe methodology for estimating the amount of credit losses reported in the allowance for credit losses (“ACL”) has two basic components: first, an asset-specific component involving loans that do not share risk characteristics and the measurement of expected credit losses for such individual loans; and second, a pooled component for expected credit losses for pools of loans that share similar risk characteristics.  This methodology is discussed further in Note 1 – Business and Basis of Presentation/Significant Accounting Policies.   

 

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

 

 

17 


 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,675

 

$

370

 

$

3,416

 

$

3,128

 

$

2,224

 

$

3,092

 

$

13,905

 

Impact of Adopting ASC 326

 

488

 

 

302

 

 

1,458

 

 

1,243

 

 

374

 

 

(596)

 

 

3,269

 

Provision for Credit Losses

 

406

 

 

567

 

 

774

 

 

1,704

 

 

101

 

 

1,438

 

 

4,990

 

Charge-Offs

 

(362)

 

 

-

 

 

(11)

 

 

(110)

 

 

(31)

 

 

(1,566)

 

 

(2,080)

 

Recoveries

 

40

 

 

-

 

 

191

 

 

40

 

 

33

 

 

695

 

 

999

 

Net Charge-Offs

 

(322)

 

 

-

 

 

180

 

 

(70)

 

 

2

 

 

(871)

 

 

(1,081)

Ending Balance

$

2,247

 

$

1,239

 

$

5,828

 

$

6,005

 

$

2,701

 

$

3,063

 

$

21,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,434

 

$

280

 

$

4,181

 

$

3,400

 

$

2,301

 

$

2,614

 

$

14,210

 

Provision for Credit Losses

 

217

 

 

101

 

 

(103)

 

 

6

 

 

(20)

 

 

566

 

 

767

 

Charge-Offs

 

(95)

 

 

-

 

 

(155)

 

 

(264)

 

 

(52)

 

 

(795)

 

 

(1,361)

 

Recoveries

 

74

 

 

-

 

 

70

 

 

44

 

 

32

 

 

284

 

 

504

 

Net Charge-Offs

 

(21)

 

 

-

 

 

(85)

 

 

(220)

 

 

(20)

 

 

(511)

 

 

(857)

Ending Balance

$

1,630

 

$

381

 

$

3,993

 

$

3,186

 

$

2,261

 

$

2,669

 

$

14,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On January 1, 2020, we adopted ASC 326 and recorded a pre-tax cumulative effect transition adjustment of $3.3 million.  The adoption of ASC 326 is discussed further in Note 1 – Business and Basis of Presentation/Accounting Standards Updates.  For the first three months ended March, 31, 2020, the provision for credit losses totaled $5.0 million and net loan charge-offs totaled $1.1 million.  The additional $3.9 million increase in the allowance for credit losses was attributable to an expected decline in economic conditions, primarily a higher rate of unemployment due to the COVID-19 pandemic and its effect on rates of default.  Three unemployment rate forecast scenarios were utilized to estimate probability of default and were weighted based on management’s estimate of probability.  The mitigating impact of the unprecedented fiscal stimulus, including direct payments to individuals, increased unemployment benefits, as well as various government sponsored loan programs, was also considered.       

 

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 amortized cost basis of loans in nonaccrual status and loans past due over 90 days and still on accrual by class of loans.

 

 

March 31, 2020

 

December 31, 2019

 

 

 

 

Nonaccrual

 

 

 

 

 

 

 

Nonaccrual

 

 

 

 

Total

 

With No

 

90 + Days

 

Total

 

With No

 

90 + Days

(Dollars in Thousands)

Nonaccrual

 

ACL

 

Still Accruing

 

Nonaccrual

 

ACL

 

Still Accruing

Commercial, Financial and Agricultural

$

358

 

$

-

 

$

-

 

$

446

 

$

-

 

$

-

Real Estate – Commercial Mortgage

 

1,332

 

 

676

 

 

-

 

 

1,434

 

 

958

 

 

-

Real Estate – Residential

 

2,214

 

 

1,656

 

 

-

 

 

1,392

 

 

227

 

 

-

Real Estate – Home Equity

 

692

 

 

-

 

 

-

 

 

797

 

 

-

 

 

-

Consumer

 

278

 

 

-

 

 

-

 

 

403

 

 

-

 

 

-

Total Nonaccrual Loans

$

4,874

 

$

2,332

 

$

-

 

$

4,472

 

$

1,185

 

$

-

 

The Company recognized $29,000 of interest income on nonaccrual loans for the three months ended March 31, 2020.

 

 

 

18 


 

Collateral Dependent Loans.

 

The following table presents the amortized cost basis of collateral-dependent loans at March 31, 2020.

 

 

March 31, 2020

 

Real Estate

 

Non Real Estate

(Dollars in Thousands)

Secured

 

Secured

Commercial, Financial and Agricultural

$

46

 

$

-

Real Estate - Commercial Mortgage

 

4,481

 

 

-

Real Estate - Residential

 

2,373

 

 

-

Real Estate - Home Equity

 

489

 

 

-

Consumer

 

-

 

 

-

Total

$

7,389

 

$

-

 

A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is dependent on the sale or operation of the underlying collateral.   

 

The Bank’s collateral dependent loan portfolio is comprised primarily of real estate secured loans, collateralized by either residential or commercial collateral types.  The loans are carried at fair value based on current values determined by either independent appraisals or internal evaluations, adjusted for selling costs or other amounts to be deducted when estimating expected net sales proceeds. 

 

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 amortized cost basis 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)

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

495

 

$

454

 

$

-

 

$

949

 

$

247,713

 

$

249,020

Real Estate – Construction

 

530

 

 

-

 

 

-

 

 

530

 

 

122,065

 

 

122,595

Real Estate – Commercial Mortgage

 

233

 

 

631

 

 

-

 

 

864

 

 

653,888

 

 

656,084

Real Estate – Residential

 

562

 

 

-

 

 

-

 

 

562

 

 

357,954

 

 

360,730

Real Estate – Home Equity

 

459

 

 

-

 

 

-

 

 

459

 

 

195,292

 

 

196,443

Consumer

 

1,557

 

 

156

 

 

-

 

 

1,713

 

 

275,524

 

 

277,515

Total Loans

$

3,836

 

$

1,241

 

$

-

 

$

5,077

 

$

1,852,436

 

$

1,862,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

$

489

 

$

191

 

$

-

 

$

680

 

$

254,239

 

$

255,365

Real Estate – Construction

 

300

 

 

10

 

 

-

 

 

310

 

 

114,708

 

 

115,018

Real Estate – Commercial Mortgage

 

148

 

 

84

 

 

-

 

 

232

 

 

623,890

 

 

625,556

Real Estate – Residential

 

629

 

 

196

 

 

-

 

 

825

 

 

359,233

 

 

361,450

Real Estate – Home Equity

 

155

 

 

20

 

 

-

 

 

175

 

 

196,388

 

 

197,360

Consumer

 

2,000

 

 

649

 

 

-

 

 

2,649

 

 

278,128

 

 

281,180

Total Loans

$

3,721

 

$

1,150

 

$

-

 

$

4,871

 

$

1,826,586

 

$

1,835,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Total Loans include nonaccrual loans of $4.9 million and $4.5 million at March 31, 2020 and December 31, 2019, respectively.

 

Residential Real Estate Loans In Process of Foreclosure.  At March 31, 2020 and December 31, 2019, the Company had $0.6 million in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.

 

19 


 

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.

 

At March 31, 2020, the Company had $16.9 million in TDRs, of which $15.9 million were performing in accordance with the modified terms.  At December 31, 2019 the Company had $17.6 million in TDRs, of which $16.9 million were performing in accordance with modified terms.  For TDRs, the Company estimated $0.8 million and $1.5 million of loan loss reserves at March 31, 2020 and December 31, 2019, respectively.

 

The modifications made to TDRs involved either an extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof.  For the three months ended March 31, 2020, there was one loan modified with a recorded investment of $0.2 million.  For the three months ended March 31, 2019, there were two loans modified with a recorded investment of $0.1 million.  The financial impact of these modifications was not material. 

 

For the three months ended March 31, 2020, there were two loans totaling $0.1 million classified as TDRs, for which there was a payment default and the loans were modified within the twelve months prior to default.  For the three months ended March 31, 2019, there were no loans classified as TDRs, for which there was a payment default and the loans were modified within twelve months prior.

 

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

 

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

 

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

 

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

 

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

 

20 


 

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. 

 

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 below  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.

 

Performing/Nonperforming – Loans within certain homogenous loan pools (home equity and consumer) are not individually reviewed, but are monitored for credit quality via the aging status of the loan and by payment activity.  The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality.

 

21 


 

The following table summarizes gross loans held for investment by years of origination and internally assigned credit risk ratings (refer to Credit Risk Management section

for detail on risk rating system).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loans by Origination Year

 

Revolving

 

 

 

(Dollars in Thousands)

2020

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Loans

 

Total

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial, Agriculture:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

15,540

 

$

59,938

 

$

56,515

 

$

22,991

 

$

19,601

 

$

16,357

 

$

57,074

 

$

248,016

Special Mention

 

-

 

 

4

 

 

61

 

 

17

 

 

-

 

 

65

 

 

-

 

 

147

Substandard

 

-

 

 

-

 

 

456

 

 

310

 

 

59

 

 

27

 

 

5

 

 

857

Total

$

15,540

 

$

59,942

 

$

57,032

 

$

23,318

 

$

19,660

 

$

16,449

 

$

57,079

 

$

249,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate - Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

10,866

 

$

73,609

 

$

24,500

 

$

9,548

 

$

-

 

$

104

 

$

3,968

 

$

122,595

Total

$

10,866

 

$

73,609

 

$

24,500

 

$

9,548

 

$

-

 

$

104

 

$

3,968

 

$

122,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate - Commercial Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

48,981

 

$

126,785

 

$

145,264

 

$

107,176

 

$

54,565

 

$

121,379

 

$

25,938

 

$

630,088

Special Mention

 

6,782

 

 

199

 

 

5,139

 

 

216

 

 

-

 

 

6,819

 

 

-

 

 

19,155

Substandard

 

155

 

 

434

 

 

305

 

 

2,384

 

 

32

 

 

3,037

 

 

494

 

 

6,841

Total

$

55,918

 

$

127,418

 

$

150,708

 

$

109,776

 

$

54,597

 

$

131,235

 

$

26,432

 

$

656,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate - Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

$

24,620

 

$

91,383

 

$

67,070

 

$

52,706

 

$

25,740

 

$

83,396

 

$

8,215

 

$

353,130

Special Mention

 

143

 

 

27

 

 

128

 

 

180

 

 

96

 

 

350

 

 

-

 

 

924

Substandard

 

-

 

 

1,134

 

 

1,123

 

 

566

 

 

727

 

 

3,126

 

 

-

 

 

6,676

Total

$

24,763

 

$

92,544

 

$

68,321

 

$

53,452

 

$

26,563

 

$

86,872

 

$

8,215

 

$

360,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate - Home Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$

72

 

$

405

 

$

278

 

$

867

 

$

206

 

$

3,001

 

$

190,922

 

$

195,751

Nonperforming

 

-

 

 

-

 

 

25

 

 

-

 

 

-

 

 

49

 

 

618

 

 

692

Total

$

72

 

$

405

 

$

303

 

$

867

 

$

206

 

$

3,050

 

$

191,540

 

$

196,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$

26,670

 

$

98,981

 

$

76,080

 

$

40,469

 

$

20,286

 

$

9,047

 

$

5,704

 

$

277,237

Nonperforming

 

-

 

 

59

 

 

23

 

 

103

 

 

54

 

 

28

 

 

11

 

 

278

Total

$

26,670

 

$

99,040

 

$

76,103

 

$

40,572

 

$

20,340

 

$

9,075

 

$

5,715

 

$

277,515

22 


 

 

NOTE 4 – MORTGAGE BANKING ACTIVITIES

 

Pursuant to the Brand acquisition on March 1, 2020, the Company’s mortgage banking activities at its subsidiary Capital City Homes Loans have expanded to include mandatory delivery loan sales, forward sales contracts used to manage residential loan pipeline price risk, utilization of warehouse lines to fund secondary market residential loan closings, and residential mortgage servicing.  Information provided below reflects CCHL activities post acquisition for the period March 1, 2020 to March 31, 2020 and CCB legacy residential real estate activities for the period January 1, 2020 to March 1, 2020. 

 

Residential Mortgage Loan Production

 

The Company originates, markets, and services conventional and government-sponsored residential mortgage loans.  Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans may be held for investment.  The volume of residential mortgage loans originated for sale and secondary market prices are the primary drivers of origination revenue.

 

Residential mortgage loan commitments are generally outstanding for 30 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor.  Residential mortgage loan commitments are subject to both credit and price risk.  Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets.  Price risk is primarily related to interest rate fluctuations and is partially managed through forward sales of residential mortgage-backed securities (primarily to-be announced securities, or TBAs) or mandatory delivery commitments with investors.    

 

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values are set- forth below.

 

 

 

March 31, 2020

 

 

Unpaid Principal

 

 

 

(Dollars in Thousands)

 

Balance/Notional

 

Fair Value

Residential Mortgage Loans Held for Sale

 

$

80,535

 

$

82,598

Residential Mortgage Loan Commitments ("IRLCs")(1)

 

 

131,007

 

 

3,898

Forward Sales Contracts(2)

 

 

115,500

 

 

(2,628)

 

 

 

 

 

$

83,868

 

 

 

 

 

 

 

(1)Recorded in other assets at fair value

 

 

 

 

 

 

(2)Recorded in other liabilities at fair value

 

 

 

 

 

 

 

Residential mortgage loans held for sale that were 90 days or more outstanding totaled $0.5 million at March 31, 2020.  These loans were not impaired and no credit loss has been recorded.  

 

Mortgage banking revenue was as follows:

 

 

 

Three Months Ended March 31,

(Dollars in Thousands)

 

2020

Net Realized Gains on Sales of Mortgage Loans

 

$

3,407

Net Change in Unrealized Gain on Mortgage Loans Held for Sale

 

 

738

Net Change in the Fair Value of Mortgage Loan Commitments (IRLCs)

 

 

1,655

Net Change in the Fair Value of Forward Sales Contracts

 

 

(1,394)

Pair-Offs on Net Settlement of Forward Sales Contracts

 

 

(1,376)

Total Mortgage Banking Revenues

 

$

3,030

 

Residential Mortgage Servicing

 

The Company may retain the right to service residential mortgage loans sold.  The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.

 

 

 

23 


 

The following represents a summary of mortgage servicing rights.

 

(Dollars in Thousands)

 

March 31, 2020

Number of Residential Mortgage Loans Serviced for Others

 

 

627

Outstanding Principal Balance of Residential Mortgage Loans Serviced for Others

 

$

165,274

Weighted Average Interest Rate

 

 

4.56%

Remaining Contractual Term (in months)

 

 

316

 

Conforming conventional loans serviced by the Company are sold to FNMA on a non-recourse basis, whereby foreclosure losses are generally the responsibility of FNMA and not the Company.  The government loans serviced by the Company are secured through GNMA, whereby the Company is insured against loss by the Federal Housing Administration or partially guaranteed against loss by the Veterans Administration.  At March 31, 2020, the servicing portfolio balance consisted of the following loan types: FNMA (8%), GNMA (23%), and private investor (69%).  FNMA and private investor loans are structured as actual/actual payment remittance.    

 

Activity in the capitalized mortgage servicing rights for the period ended March 31, 2020 was as follows:

 

(Dollars in Thousands)

 

Beginning Balance

$

910

Additions due to loans sold with servicing retained

 

25

Deletions and amortization

 

(25)

Ending Balance

$

910

 

The fair value of capitalized mortgage servicing rights at March 31, 2020 was $1.1 million.  The Company did not record any permanent impairment losses for the period March 1, 2020 to March 31, 2020. 

 

At March 31, 2020, the key unobservable inputs used in determining the fair value of the Company’s mortgage servicing rights were as follows:

 

 

Minimum

 

 

Maximum

Discount Rates

 

11.00%

 

 

15.00%

Annual prepayment speeds

 

13.20%

 

 

25.26%

Cost of Servicing (basis points)

 

90

 

 

110

 

Changes in residential mortgage interest rates directly affect the prepayment speeds used in valuing the Company’s mortgage servicing rights.  A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults, and other relevant factors.

 

Warehouse Line Borrowings

 

The Company has the following warehouse lines of credit and maser repurchase agreements with various financial institutions at March 31, 2020.  

 

 

Amounts

(Dollars in Thousands)

Outstanding

$25 million warehouse line of credit agreement expiring October 2020.  Interest is at LIBOR plus 2.25%, with a floor rate of 3.50%.  A cash pledge deposit of $0.1 million is required by the lender.

$

17,572

 

 

 

$50 million master repurchase agreement without defined expiration.  Interest is at the LIBOR plus 2.24% to 3.00%.  A cash pledge deposit of $0.5 million is required by the lender.

 

19,286

 

 

 

$50 million warehouse line of credit agreement expiring in September 2020.  Interest is at the LIBOR plus 2.25%

 

36,498

 

 

 

 

$

73,356

 

24 


 

Warehouse line borrowings are classified as short-term borrowings.  At March 31, 2020, the Company had mortgage loans held for sale pledged as collateral under the above warehouse lines of credit and master repurchase agreements.  The above agreements also contain covenants which include certain financial requirements, including maintenance of minimum tangible net worth, minimum liquid assets, maximum debt to net worth ratio and positive net income, as defined in the agreements.  The Company was in compliance with all significant debt covenants at March 31, 2020.

 

The Company intends to renew the warehouse lines of credit and master repurchase agreements when they mature.

 

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 statements of income. 

 

The Company’s operating leases primarily relate to banking offices with remaining lease terms from 1 to 30 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 March 31, 2020, the operating lease ROU assets and liabilities were $6.7 million and $7.6 million, respectively.  The Company does not have any finance leases or any significant lessor agreements.

 

 

 

25 


 

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

 

 

Three Months Ended March 31,

(Dollars in Thousands)

2020

 

2019

Operating lease expense

$

156

 

$

81

Short-term lease expense

 

79

 

 

35

Total lease expense

$

235

 

$

116

 

 

 

 

 

 

Other information:

 

 

 

 

 

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

 

 

 

 

 

Operating cash flows from operating leases

$

160

 

$

83

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

 

5,092

 

 

1,928

 

 

 

 

 

 

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

 

15.4

 

 

7.4

Weighted-average discount rate — operating leases

 

2.4%

 

 

2.9%

 

The table below summarizes the maturity of remaining lease liabilities:

 

 

 

 

 

(Dollars in Thousands)

March 31, 2020

2020

$

909

2021

 

1,193

2022

 

1,044

2023

 

672

2024

 

630

2025 and thereafter

 

4,840

Total

$

9,288

Less: Interest

 

(1,667)

Present Value of Lease liability

$

7,621

 

At March 31, 2020, the Company had additional operating lease payments for a banking office (to be constructed) that have not yet commenced of $1.9 million based on the initial contract term of 15 years.  Payments for the banking office are expected to commence after the construction period ends, which is expected to occur during the third quarter of 2021.   

 

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 $0.9 million at March 31, 2020.

26 


 

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 defined benefit plan was amended in December 2019 to remove plan eligibility for new associates hired after December 31, 2019.    

 

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

 

 

Three Months Ended March 31,

(Dollars in Thousands)

2020

 

2019

Service Cost

$

1,457

 

$

1,529

Interest Cost

 

1,411

 

 

1,545

Expected Return on Plan Assets

 

(2,748)

 

 

(2,382)

Prior Service Cost Amortization

 

4

 

 

4

Net Loss Amortization

 

1,011

 

 

965

Special Termination Charge

 

61

 

 

-

Net Periodic Benefit Cost

$

1,196

 

$

1,661

 

 

 

 

 

 

Discount Rate Used for Benefit Cost

 

3.53%

 

 

4.43%

Long-term Rate of Return on Assets

 

7.00%

 

 

7.25%

 

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

 

 

 

 

 

 

 

Three Months Ended March 31,

(Dollars in Thousands)

2020

 

2019

Interest Cost

$

72

 

$

87

Net Loss Amortization

 

247

 

 

190

Net Periodic Benefit Cost

$

319

 

$

277

 

 

 

 

 

 

Discount Rate Used for Benefit Cost

 

3.16%

 

 

4.23%

 

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:

 

 

March 31, 2020

 

December 31, 2019

(Dollars in Thousands)

Fixed

 

Variable

 

Total

 

Fixed

 

Variable

 

Total

Commitments to Extend Credit (1)

$

102,660

 

$

481,270

 

$

583,930

 

$

114,903

 

$

404,345

 

$

519,248

Standby Letters of Credit

 

6,087

 

 

-

 

 

6,087

 

 

5,783

 

 

-

 

 

5,783

Total

$

108,747

 

$

481,270

 

$

590,017

 

$

120,686

 

$

404,345

 

$

525,031

 

(1)     Commitments include unfunded loans, revolving lines of credit, and off-balance sheet residential loan commitments.

 

27 


 

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

 

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

 

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

 

The allowance for credit losses for off-balance sheet credit commitments that are not unconditionally cancellable by the bank totaled $1.0 million at March 31, 2020 and $0.2 million at December 31, 2019.  The allowance is adjusted as a provision for credit loss expense and is recorded in other liabilities.  The allowance was increased by $0.7 million on January 1, 2020 upon the adoption of ASC 326 and by $0.1 million through a provision for credit loss expense for the three months period ended March 31, 2020. 

 

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. 

 

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 $155,000.  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.

 

28 


 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

In general, the Company does not purchase securities that have a complicated structure.  The Company’s entire portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation or revenue-based municipal bonds.  Pricing for such instruments is easily obtained.  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.

 

Loans Held for Sale.  The fair value of residential mortgage loans held for sale based on Level 2 inputs is determined, when possible, using either quoted secondary-market prices or investor commitments.  If no such quoted price exists, the fair value is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.  The Company has elected the fair value option accounting for its held for sale loans.

 

Mortgage Banking Derivative Instruments.  The fair values of interest rate lock commitments (“IRLCs”) are derived by valuation models incorporating market pricing for instruments with similar characteristics, commonly referred to as best execution pricing, or investor commitment prices for best effort IRLCs have unobservable inputs, such as an estimate of the fair value of the servicing rights expected to be recorded upon sale of the loans, net estimated costs to originate the loans, and the pull-through rate, and are therefore classified as Level 3 within the fair value hierarchy.  The fair value of forward sale commitments is based on observable market pricing for similar instruments and are therefore classified as Level 2 within the fair value hierarchy.

 

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.

 

  

 

 

29 


 

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

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

201,514

 

$

-

 

$

-

 

$

201,514

 

U.S. Government Agency

 

-

 

 

165,894

 

 

-

 

 

165,894

 

States and Political Subdivisions

 

-

 

 

6,672

 

 

-

 

 

6,672

 

Mortgage-Backed Securities

 

-

 

 

656

 

 

-

 

 

656

 

Equity Securities 

 

-

 

 

7,778

 

 

-

 

 

7,778

 

Loans Held for Sale

 

-

 

 

82,598

 

 

-

 

 

82,598

 

Mortgage Banking Derivative Asset

 

-

 

 

-

 

 

3,898

 

 

3,898

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Banking Derivative Liability

 

-

 

 

2,628

 

 

-

 

 

2,628

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Treasury

$

232,778

 

$

-

 

$

-

 

$

232,778

 

U.S. Government Agency

 

-

 

 

156,078

 

 

-

 

 

156,078

 

States and Political Subdivisions

 

-

 

 

6,319

 

 

-

 

 

6,319

 

Mortgage-Backed Securities

 

-

 

 

773

 

 

-

 

 

773

 

Equity Securities 

 

-

 

 

7,653

 

 

-

 

 

7,653

 

Mortgage Banking Activities.  The Company had changes in the fair value of Level 1 and Level 2 assets and liabilities measured on a recurring basis for the period from March 1, 2020 to March 31, 2020.  These changes totaled $0.7 million for residential mortgage loans held for sale and ($1.4 million) related to its mortgage banking derivative liability.

 

The Company had Level 3 issuances and transfers of $1.2 million and $1.8 million, respectively, for the period from March 1, 2020 to March 31, 2020 related to mortgage banking activities.  Issuances represent the lock-date market value of IRLCs issued to borrowers during the period, net of estimated pull-through and costs to originate.  IRLCs transferred out of Level 3 represent IRLCs that were funded and moved to mortgage loans held for sale, at fair value.

 

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. 

 

Collateral Dependent 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.  Collateral-dependent loans had a carrying value of $7.3 million with a valuation allowance of $0.3 million at March 31, 2020 and $6.6 million and $0.5 million, respectively, at December 31, 2019.

 

Other Real Estate Owned.  During the first three months of 2020, 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.

 

30 


 

Mortgage Servicing Rights.    

 

Residential mortgage loan servicing rights are evaluated for impairment at each reporting period based upon the fair value of the rights as compared to the carrying amount.  Fair value is determined by a third party valuation model using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans (predominantly loan type and note interest rate).  The fair value is estimated using Level 3 inputs, including a discount rate, weighted average prepayment speed, and the cost of loan servicing.  Further detail on the key inputs utilized are provided in Note 4 – Mortgage Banking Activities.  At March 31, 2020, there was no valuation allowance for loan servicing rights. 

 

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.

 

 

 

31 


 

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

 

 

 

March 31, 2020

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

72,676

 

$

72,676

 

$

-

 

$

-

Short-Term Investments

 

 

196,936

 

 

196,936

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

382,514

 

 

201,514

 

 

181,000

 

 

-

Investment Securities, Held to Maturity

 

 

251,792

 

 

20,211

 

 

237,718

 

 

-

Equity Securities(1)

 

 

3,588

 

 

-

 

 

3,588

 

 

-

Loans Held for Sale

 

 

82,598

 

 

-

 

 

82,598

 

 

-

Loans, Net of Allowance for Credit Losses

 

 

1,841,304

 

 

-

 

 

-

 

 

1,842,002

Mortgage Banking Derivative Asset

 

 

3,898

 

 

-

 

 

-

 

 

3,898

Mortgage Servicing Rights

 

 

910

 

 

-

 

 

-

 

 

1,086

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,545,585

 

$

-

 

$

2,577,836

 

$

-

Short-Term Borrowings

 

 

76,516

 

 

-

 

 

76,516

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

45,268

 

 

-

Long-Term Borrowings

 

 

5,896

 

 

-

 

 

6,077

 

 

-

Mortgage Banking Derivative Liability

 

 

2,628

 

 

-

 

 

2,628

 

 

-

 

 

 

December 31, 2019

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

(Dollars in Thousands)

 

Value

 

Inputs

 

Inputs

 

Inputs

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

60,087

 

$

60,087

 

$

-

 

$

-

Short-Term Investments

 

 

318,336

 

 

318,336

 

 

-

 

 

-

Investment Securities, Available for Sale

 

 

403,601

 

 

232,778

 

 

170,823

 

 

-

Investment Securities, Held to Maturity

 

 

239,539

 

 

20,042

 

 

221,387

 

 

-

Loans Held for Sale

 

 

9,509

 

 

-

 

 

9,509

 

 

-

Equity Securities(1)

 

 

3,591

 

 

-

 

 

3,591

 

 

-

Loans, Net of Allowance for Credit Losses

 

 

1,822,024

 

 

-

 

 

-

 

 

1,804,930

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,645,454

 

$

-

 

$

2,644,430

 

$

-

Short-Term Borrowings

 

 

6,404

 

 

-

 

 

6,404

 

 

-

Subordinated Notes Payable

 

 

52,887

 

 

-

 

 

40,280

 

 

-

Long-Term Borrowings

 

 

6,514

 

 

-

 

 

6,623

 

 

-

 

(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.

32 


 

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

March 31, 2020

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

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

$

3,538

 

$

(897)

 

$

2,641

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

 

 

 

 

 

 

 

 

 

maturity

  

9

 

 

(2)

 

 

7

 

 

Total Other Comprehensive Income

$

3,547

 

$

(899)

 

$

2,648

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

Investment Securities:

 

 

 

 

 

 

 

 

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

$

1,250

 

$

(317)

 

$

933

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

 

 

 

 

 

 

 

 

 

maturity

 

12

 

 

(4)

 

 

8

 

 

Total Other Comprehensive Income

$

1,262

 

$

(321)

 

$

941

 

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, 2020

$

864

 

$

(29,045)

 

$

(28,181)

Other comprehensive income during the period

 

2,648

 

 

-

 

 

2,648

Balance as of March 31, 2020

$

3,512

 

$

(29,045)

 

$

(25,533)

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2019

$

(2,008)

 

$

(26,807)

 

$

(28,815)

Other comprehensive income during the period

 

941

 

 

-

 

 

941

Balance as of March 31, 2019

$

(1,067)

 

$

(26,807)

 

$

(27,874)

33 


 

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 2020 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 2019 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.  We offer residential mortgage banking services through Capital City Home Loans.

 

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 credit 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 2019 Form 10-K.

 

Strategic Alliance.  On March 1, 2020, CCB completed its acquisition of a 51% membership interest in Brand Mortgage Group, LLC (“Brand”) which is now operated as a Capital City Home Loans (“CCHL”).  CCHL was consolidated into CCBG’s financial statements effective March 1, 2020.  See Note 1 – Business Combination in the Consolidated Financial Statements.  The primary purpose of the strategic alliance with Brand was to gain access to an expanded residential mortgage product line-up, investor base (including mandatory delivery channel for loan sales) and to generate other operational synergies and cost savings.   

 

34 


 

RESPONSE TO COVID-19 PANDEMIC

 

In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.  Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing, and shelter in place.  These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation, monetary stimulus, and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

 

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including a strong liquidity position and the build of reserves supported by a strong capital position.  Our business and consumer clients are experiencing varying degrees of financial distress, which is expected to increase in coming months.  In order to protect the health of our clients and associates and comply with applicable government directives, we have modified our business practices as noted below.  We will continue to closely monitor this pandemic and respond with needed changes as this situation evolves.  We discuss the potential impacts on our financial performance in more detail throughout parts of the MD&A section.

 

Clients

·    Implemented business continuity plans to help ensure that clients have adequate access to banking services while at the same time working to protect clients through heightened safety procedures

·    We have chosen to participate in the CARES Act Paycheck Protection Program that provides government guaranteed and forgivable loans to our clients.  We have obtained Small Business Administration (“SBA”) loan approvals of approximately $135 million for the first phase of funding and $50 million for the second phase of funding.

·    Implemented a loan extension program to support eligible clients and communities throughout this period of uncertainty

·    Announced temporary closure of banking office lobbies (operating drive-thru only) – focused on the enhanced digital banking experience

Associates

·    Heightened safety procedures, including social-distancing and work-at-home arrangements for associates with positions/responsibilities enabling them to work remotely

·    Increased hourly wage for non-exempt associates for a period of time

·    Increased paid time off for affected associates for a period of time

·    Enhanced medical benefits in the near short-term

 

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 36 is provided below.

 

 

 

 

2020

 

2019

 

2018

(Dollars in Thousands, except per share data)

 

First

 

Fourth

 

Third

 

Second

 

First

 

Fourth

 

Third

 

Second

Shareowners' Equity (GAAP)

 

$

328,507

 

$

327,016

 

$

321,562

 

$

314,595

 

$

308,986

 

$

302,587

 

$

298,016

 

$

293,571

Less: Goodwill (GAAP)

 

 

89,275

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

Tangible Shareowners' Equity (non-GAAP)

A

 

239,232

 

 

242,205

 

 

236,751

 

 

229,784

 

 

224,175

 

 

217,776

 

 

213,205

 

 

208,760

Total Assets (GAAP)

 

 

3,086,523

 

 

3,088,953

 

 

2,934,513

 

 

3,017,654

 

 

3,052,051

 

 

2,959,183

 

 

2,819,190

 

 

2,880,278

Less: Goodwill (GAAP)

 

 

89,275

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

 

 

84,811

Tangible Assets (non-GAAP)

B

$

2,997,248

 

$

3,004,142

 

$

2,849,702

 

$

2,932,843

 

$

2,967,240

 

$

2,874,372

 

$

2,734,379

 

$

2,795,467

Tangible Common Equity Ratio (non-GAAP)

A/B

 

7.98%

 

 

8.06%

 

 

8.31%

 

 

7.83%

 

 

7.56%

 

 

7.58%

 

 

7.80%

 

 

7.47%

Actual Diluted Shares Outstanding (GAAP)

C

 

16,845,462

 

 

16,855,161

 

 

16,797,241

 

 

16,773,449

 

 

16,840,496

 

 

16,808,542

 

 

17,127,846

 

 

17,114,380

Diluted Tangible Book Value (non-GAAP)

A/C

 

14.20

 

 

14.37

 

 

14.09

 

 

13.70

 

 

13.31

 

 

12.96

 

 

12.45

 

 

12.20

35 


 

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands, Except

2020

 

2019

 

2018

Per Share Data)

First

 

 

Fourth

 

 

Third

 

 

Second

 

 

First

 

 

Fourth

 

 

Third

 

 

Second

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

$

27,365

 

 

$

28,008

 

 

$

28,441

 

 

$

28,665

 

 

$

27,722

 

 

$

26,370

 

 

$

25,392

 

 

$

24,419

 

 

Interest Expense

 

1,592

 

 

 

1,754

 

 

 

2,244

 

 

 

2,681

 

 

 

2,814

 

 

 

2,022

 

 

 

1,769

 

 

 

1,649

 

 

Net Interest Income

 

25,773

 

 

 

26,254

 

 

 

26,197

 

 

 

25,984

 

 

 

24,908

 

 

 

24,348

 

 

 

23,623

 

 

 

22,770

 

 

Provision for Credit Losses

 

4,990

 

 

 

(162)

 

 

 

776

 

 

 

646

 

 

 

767

 

 

 

457

 

 

 

904

 

 

 

815

 

 

Net Interest Income After

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Provision for Credit Losses

 

20,783

 

 

 

26,416

 

 

 

25,421

 

 

 

25,338

 

 

 

24,141

 

 

 

23,891

 

 

 

22,719

 

 

 

21,955

 

 

Noninterest Income

 

15,478

 

 

 

13,828

 

 

 

13,903

 

 

 

12,770

 

 

 

12,552

 

 

 

13,238

 

 

 

13,308

 

 

 

12,542

 

 

Noninterest Expense

 

30,969

 

 

 

29,142

 

 

 

27,873

 

 

 

28,396

 

 

 

28,198

 

 

 

26,505

 

 

 

28,699

 

 

 

28,393

 

 

Income  Before  Income Taxes

 

5,292

 

 

 

11,102

 

 

 

11,451

 

 

 

9,712

 

 

 

8,495

 

 

 

10,624

 

 

 

7,328

 

 

 

6,104

 

 

Income Tax Expense(2)

 

1,282

 

 

 

2,537

 

 

 

2,970

 

 

 

2,387

 

 

 

2,059

 

 

 

2,166

 

 

 

1,338

 

 

 

101

 

 

Net Loss Attributable to NCI

 

277

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Net Income Attributable to CCBG

 

4,287

 

 

 

8,565

 

 

 

8,481

 

 

 

7,325

 

 

 

6,436

 

 

 

8,458

 

 

 

5,990

 

 

 

6,003

 

 

Net Interest Income (FTE)

$

25,877

 

 

$

26,378

 

 

$

26,333

 

 

$

26,116

 

 

$

25,042

 

 

$

24,513

 

 

$

23,785

 

 

$

22,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Basic

$

0.26

 

 

$

0.51

 

 

$

0.51

 

 

$

0.44

 

 

$

0.38

 

 

$

0.50

 

 

$

0.35

 

 

$

0.35

 

 

Net Income Diluted

 

0.25

 

 

 

0.51

 

 

 

0.50

 

 

 

0.44

 

 

 

0.38

 

 

 

0.50

 

 

 

0.35

 

 

 

0.35

 

 

Cash Dividends Declared

 

0.14

 

 

 

0.13

 

 

 

0.13

 

 

 

0.11

 

 

 

0.11

 

 

 

0.09

 

 

 

0.09

 

 

 

0.07

 

 

Diluted Book Value

 

19.50

 

 

 

19.40

 

 

 

19.14

 

 

 

18.76

 

 

 

18.35

 

 

 

18.00

 

 

 

17.40

 

 

 

17.15

 

 

Diluted Tangible Book Value(1)

 

14.20

 

 

 

14.37

 

 

 

14.09

 

 

 

13.70

 

 

 

13.31

 

 

 

12.96

 

 

 

12.45

 

 

 

12.20

 

 

Market Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  High

 

30.62

 

 

 

30.95

 

 

 

28.00

 

 

 

25.00

 

 

 

25.87

 

 

 

26.95

 

 

 

25.91

 

 

 

25.99

 

 

  Low

 

15.61

 

 

 

25.75

 

 

 

23.70

 

 

 

21.57

 

 

 

21.04

 

 

 

19.92

 

 

 

23.19

 

 

 

22.28

 

 

  Close

 

20.12

 

 

 

30.50

 

 

 

27.45

 

 

 

24.85

 

 

 

21.78

 

 

 

23.21

 

 

 

23.34

 

 

 

23.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Average Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net

$

1,882,703

 

 

$

1,846,190

 

 

$

1,837,548

 

 

$

1,823,311

 

 

$

1,780,406

 

 

$

1,785,570

 

 

$

1,747,093

 

 

$

1,691,287

 

 

Earning Assets

 

2,751,880

 

 

 

2,694,700

 

 

 

2,670,081

 

 

 

2,719,217

 

 

 

2,704,802

 

 

 

2,554,482

 

 

 

2,535,292

 

 

 

2,566,006

 

 

Total Assets

 

3,038,788

 

 

 

2,982,204

 

 

 

2,959,310

 

 

 

3,010,662

 

 

 

2,996,511

 

 

 

2,849,245

 

 

 

2,826,924

 

 

 

2,861,104

 

 

Deposits

 

2,552,690

 

 

 

2,524,951

 

 

 

2,495,755

 

 

 

2,565,431

 

 

 

2,564,715

 

 

 

2,412,375

 

 

 

2,392,272

 

 

 

2,431,956

 

 

Shareowners’ Equity

 

331,891

 

 

 

326,904

 

 

 

320,273

 

 

 

313,599

 

 

 

307,262

 

 

 

302,196

 

 

 

297,757

 

 

 

291,806

 

 

Common Equivalent Average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

16,808

 

 

 

16,750

 

 

 

16,747

 

 

 

16,791

 

 

 

16,791

 

 

 

16,989

 

 

 

17,056

 

 

 

17,045

 

 

  Diluted

 

16,842

 

 

 

16,834

 

 

 

16,795

 

 

 

16,818

 

 

 

16,819

 

 

 

17,050

 

 

 

17,125

 

 

 

17,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

0.57

%

 

 

1.14

%

 

 

1.14

%

 

 

0.98

%

 

 

0.87

%

 

 

1.18

%

 

 

0.84

%

 

 

0.84

%

 

Return on Average Equity

 

5.20

 

 

 

10.39

 

 

 

10.51

 

 

 

9.37

 

 

 

8.49

 

 

 

11.10

 

 

 

7.98

 

 

 

8.25

 

 

Net Interest Margin (FTE)

 

3.78

 

 

 

3.89

 

 

 

3.92

 

 

 

3.85

 

 

 

3.75

 

 

 

3.81

 

 

 

3.72

 

 

 

3.58

  

 

Noninterest Income as % of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Operating Revenue

 

37.52

 

 

 

34.50

 

 

 

34.67

 

 

 

32.95

 

 

 

33.51

 

 

 

35.22

 

 

 

36.04

 

 

 

35.52

 

 

Efficiency Ratio

 

74.89

 

 

 

72.48

 

 

 

69.27

 

 

 

73.02

 

 

 

75.01

 

 

 

70.21

 

 

 

77.37

 

 

 

80.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses

 $

21,083

 

 

$

13,905

 

 

 $

14,319

 

 

$

14,593

 

 

$

14,120

 

 

$

14,210

 

 

$

14,219

 

 

$

13,563

 

 

Allowance for Credit Losses to Loans

1.13

%

 

 

0.75

%

 

 

0.78

%

 

 

0.79

%

 

 

0.78

%

 

 

0.80

%

 

 

0.80

%

 

 

0.78

%

 

Nonperforming Assets (“NPAs”)

 

6,337

 

 

 

5,425

 

 

 

5,454

 

 

 

6,632

 

 

 

6,949

 

 

 

9,101

 

 

 

9,587

 

 

 

9,114

  

 

NPAs to Total Assets

 

0.21

 

 

 

0.18

 

 

 

0.19

 

 

 

0.22

 

 

 

0.23

 

 

 

0.31

 

 

 

0.34

 

 

 

0.32

 

 

NPAs to Loans plus OREO

 

0.34

 

 

 

0.29

 

 

 

0.30

 

 

 

0.36

 

 

 

0.39

 

 

 

0.51

 

 

 

0.54

 

 

 

0.52

 

 

Allowance to Non-Performing Loans

432.61

 

 

 

310.99

 

 

 

290.55

 

 

 

259.55

 

 

 

279.77

 

 

 

206.79

 

 

 

207.06

 

 

 

236.25

 

 

Net Charge-Offs to Average Loans

0.23

 

 

 

0.05

 

 

 

0.23

 

 

 

0.04

 

 

 

0.20

 

 

 

0.10

 

 

 

0.06

 

 

 

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

16.12

%

 

 

17.16

%

 

 

16.83

%

 

 

16.36

%

 

 

16.34

%

 

 

16.36

%

 

 

16.17

%

 

 

16.25

%

 

Total Capital

 

17.19

 

 

 

17.90

 

 

 

17.59

 

 

 

17.13

 

 

 

17.09

 

 

 

17.13

 

 

 

16.94

 

 

 

17.00

 

 

Common Equity Tier 1

 

13.55

 

 

 

14.47

 

 

 

14.13

 

 

 

13.67

 

 

 

13.62

 

 

 

13.58

 

 

 

13.43

 

 

 

13.46

 

 

Leverage

 

10.81

 

 

 

11.25

 

 

 

11.09

 

 

 

10.64

 

 

 

10.53

 

 

 

10.89

 

 

 

10.99

 

 

 

10.69

  

 

Tangible Common Equity(1)

 

7.98

 

 

 

8.06

 

 

 

8.31

 

 

 

7.83

 

 

 

7.56

 

 

 

7.58

 

 

 

7.80

 

 

 

7.47

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Non-GAAP financial measure.  See non-GAAP reconciliation on page 35.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)Includes $0.4 million and $1.4 million income tax benefit in the third and second quarter of 2018, respectively, for 2017 plan year pension plan contributions made in 2018.

 

 

 

 

 

 

 

 

36 


 

FINANCIAL OVERVIEW

 

Results of Operations

 

Performance SummaryNet income of $4.3 million, or $0.25 per diluted share, for the first quarter of 2020 compared to net income of $8.6 million, or $0.51 per diluted share, for the fourth quarter of 2019 and net income of $6.4 million, or $0.38 per diluted share, for the first quarter of 2019.  Compared to the prior periods, the decline in net income for the first quarter of 2020 reflected a build in credit loss reserves in response to the potential effects of the COVID-19 pandemic (discussed further below).

 

Net Interest Income.  Taxable equivalent net interest income for the first quarter of 2020 was $25.9 million compared to $26.4 million for the fourth quarter of 2019 and $25.0 million for the first quarter of 2019.  The decrease compared to the fourth quarter of 2019 reflected lower rates earned on overnight funds, investment securities and variable rate loans driven by the aggregate 150bp FED rate reduction during the first quarter of 2020.  The increase compared to the first quarter of 2019 reflected loan growth and a reduction in the cost of our negotiated rate deposits, partially offset by lower rates on our earning assets.

 

Provision and Allowance for Credit Losses.  The provision for credit losses for the first quarter of 2020 was $5.0 million, which exceeded net loan charge-offs of $1.1 million.  The increase in the provision reflected a build in reserves due to deteriorating economic conditions related to COVID-19.  At March 31, 2020, the allowance for credit losses of $21.1 million represented 1.13% of outstanding loans (excluding HFS loans) and provided coverage of 433% of nonperforming loans.  The adoption of ASC 326 (“CECL”) on January 1, 2020 resulted in a $3.3 million increase in the allowance for credit losses.    

 

Noninterest Income.  Noninterest income for the first quarter of 2020 totaled $15.5 million, an increase of $1.7 million, or 11.9%, over the fourth quarter of 2019 and a $2.9 million, or 23.3%, increase over the first quarter of 2019.  The increase over both prior periods was primarily attributable to higher mortgage banking revenues, which reflected the strategic alliance with Brand on March 1, 2020 (discussed further below).  Higher deposit fees also contributed to the increase in both periods and bank card fees contributed to the increase over the first quarter of 2019.

 

Noninterest Expense.  Noninterest expense for the first quarter of 2020 totaled $31.0 million, an increase of $1.8 million, or 6.3%, over the fourth quarter of 2019 and $2.8 million, or 9.8%, over the first quarter of 2019.  The increase over the fourth quarter of 2019 was primarily attributable to higher compensation expense and occupancy expense, partially offset by lower other real estate owned (“ORE0”) expense.  The increase in compensation and occupancy expense was primarily due to the aforementioned integration of Brand.  The reduction in ORE expense reflected a $1.0 million gain on the sale of a banking office.  The same aforementioned factors were the primary drivers in the variance compared to the first quarter of 2019.

 

Impact of Capital City Home Loans (CCHL).  For the month of March, CCHL’s mortgage banking operations impacted our noninterest income and noninterest expense, and thus, the period over period comparison due to the late quarter closing.  Overall, CCHL operations for the month of March had a nominal negative impact on our net income for the first quarter of 2020.  Excluding CCHL, our noninterest income totaled $13.3 million and noninterest expense totaled $28.0 million for the first quarter of 2020.  We provide further detail below on the impact of CCHL’s operations on select noninterest income and expense categories as well as a discussion of trends realized by CCB.

 

Financial Condition

 

Earning Assets.  Average earning assets were $2.752 billion for the first quarter of 2020, an increase of $57.2 million, or 2.1%, over the fourth quarter of 2020, and an increase of $47.1 million, or 1.7%, over the first quarter of 2019.   The increase over the fourth quarter of 2019 was primarily driven by higher deposit balances which funded growth in the loan and investment portfolios.  The change in the earning asset mix compared to the first quarter of 2019 reflected higher loan balances that were funded with overnight funds and investment balances.  The Brand acquisition on March 1st increased average earning assets by $29 million for the first quarter of 2020.

 

LoansAverage loans (excluding held for sale (“HFS”) loans) increased $13.7 million, or 0.8%, compared to the fourth quarter of 2019 and $74.8 million, or 4.2% compared to the first quarter of 2019.  Period end loan balances increased $26.5 million, or 1.4% over the fourth quarter of 2019 and $65.3 million, or 3.6% over the first quarter of 2019.

 

Deposits.  Average total deposits increased $27.7 million, or 1.1%, over the fourth quarter of 2019, and decreased $12.0 million, or 0.5%, from the first quarter of 2019.  The increase compared to the fourth quarter of 2019 reflected increases in negotiated NOW public fund deposits and savings accounts.  The decrease compared to the first quarter of 2019 was primarily due to declines in certificates of deposit, money market accounts, and one large, non-public negotiated account, which were partially offset by increases in noninterest bearing accounts and savings accounts.

 

 

37 


 

Credit Quality.  Nonperforming assets totaled $6.3 million at March 31, 2020, an increase of $0.9 million, or 16.8%, over December 31, 2019 and a decrease of $0.6 million, or 8.8%, from March 31, 2019.  Nonperforming assets represented 0.21% of total assets at March 31, 2020 compared to 0.18% at December 31, 2019 and 0.23% at March 31, 2019.   

 

Capital.  At March 31, 2020, we were well-capitalized with a total risk-based capital ratio of 17.19% and a tangible common equity ratio (a non-GAAP financial measure) of 7.98% compared to 17.90% and 8.06%, respectively, at December 31, 2019 and 17.09% and 7.56%, respectively, at March 31, 2019.  At March 31, 2020, all of our regulatory capital ratios exceeded the threshold to be well-capitalized under the Basel III capital standards. 

 

RESULTS OF OPERATIONS

 

Net Income

 

For the first quarter of 2020, we realized net income of $4.3 million, or $0.25 per diluted share, compared to net income of $8.6 million, or $0.51 per diluted share, for the fourth quarter of 2019, and $6.4 million, or $0.38 per diluted share, for the first quarter of 2019. 

 

Net income for the first quarter of 2020 included a $5.0 million provision for credit losses, which exceeded net loan charge-offs of $1.1 million.  The higher provision reflected a build in reserves due to deteriorating economic conditions related to the COVID-19 pandemic.

 

Compared to the fourth quarter of 2019, the $5.8 million decrease in operating profit was attributable to a $5.2 million increase in the provision for credit losses, higher noninterest expense of $1.8 million, and lower net interest income of $0.5 million, partially offset by higher noninterest income of $1.7 million.

 

Compared to the first quarter of 2019, the $3.2 million decrease in operating profit reflected a $4.2 million increase in the provision for credit losses and higher noninterest expense of $2.8 million, partially offset by higher noninterest income of $2.9 million and net interest income of $0.9 million.

 

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

 

 

 

Three Months Ended

(Dollars in Thousands, except per share data)

 

March 31, 2020

 

December 31, 2019

 

March 31, 2019

Interest Income

 

$

27,365

 

$

28,008

 

$

27,722

Taxable Equivalent Adjustments

 

 

104

 

 

124

 

 

134

Total Interest Income (FTE)

 

 

27,469

 

 

28,132

 

 

27,856

Interest Expense

 

 

1,592

 

 

1,754

 

 

2,814

Net Interest Income (FTE)

 

 

25,877

 

 

26,378

 

 

25,042

Provision for Credit Losses

 

 

4,990

 

 

(162)

 

 

767

Taxable Equivalent Adjustments

 

 

104

 

 

124

 

 

134

Net Interest Income After Provision for Credit Losses

 

 

20,783

 

 

26,416

 

 

24,141

Noninterest Income

 

 

15,478

 

 

13,828

 

 

12,552

Noninterest Expense

 

 

30,969

 

 

29,142

 

 

28,198

Income Before Income Taxes

 

 

5,292

 

 

11,102

 

 

8,495

Income Tax Expense

 

 

1,282

 

 

2,537

 

 

2,059

Net Loss Attributable to Noncontrolling Interests

 

 

277

 

 

-

 

 

-

Net Income Attributable to Common Shareowners

 

$

4,287

 

$

8,565

 

$

6,436

 

 

 

 

 

 

 

 

 

 

Basic Net Income Per Share

 

$

0.26

 

$

0.51

 

$

0.38

Diluted Net Income Per Share

 

$

0.25

 

$

0.51

 

$

0.38

 

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 50.

 

38 


 

Tax-equivalent net interest income for the first quarter of 2020 was $25.9 million compared to $26.4 million for the fourth quarter of 2019 and $25.0 million for the first quarter of 2019.  The decrease in tax-equivalent net interest income compared to the fourth quarter of 2019 reflected lower rates earned on overnight funds, investment securities and variable rate loans, partially offset by a lower cost on our negotiated rate deposits.  The increase in tax-equivalent net interest income compared to the first quarter of 2019 was primarily due to loan growth and a reduction in the cost of our negotiated rate deposits, partially offset by lower rates on our earning assets.

 

Our net interest margin for the first quarter of 2020 was 3.78%, a decrease of 11 basis points compared to the fourth quarter of 2019 and an increase of three basis points over the first quarter of 2019.  The decrease in margin compared to the fourth quarter of 2019 was attributable to lower rates on our variable and adjustable rate earning assets.  The increase in the margin compared to the first quarter of 2019 was due to a 19 basis point reduction in our cost of funds, partially offset by a 16 basis point reduction in yield on earning assets.

 

The federal funds target rate ended the first quarter of 2020 at a range of 0.00%-0.25%, after two unscheduled FED cuts during the quarter totaling 150 basis points.  These rate decreases have resulted in lower repricing of our variable and adjustable rate earning assets and will put pressure on our net interest margin.  We continue to prudently manage our deposit mix and overall cost of funds, which were 23 basis points for the first quarter of 2020 compared to 26 basis points for the fourth quarter of 2019.  In response to the FED rate cuts in the first quarter of 2020, we lowered our rates for our negotiable rate deposit accounts to buffer the effect.

 

We expect the significant decline in rates late in the first quarter of 2020 related to the FEDs emergency actions will put pressure on net interest income until rates normalize.  Interest and fee income related to the SBA Payment Protection Program (See Loans below) will partially offset the effect of lower rates.  Further, we will adjust deposit rates as needed to partially offset the effect.

      

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.  

 

Provision for Credit Losses

 

The provision for credit loss expense for the first quarter of 2020 was $5.0 million compared to negative provision of $0.2 million for the fourth quarter of 2019 and provision expense of $0.8 million for the first quarter of 2019.  The increase in the provision over prior periods reflected a build in reserves due to deteriorating economic conditions related to the COVID-19 pandemic.  We further discuss the various factors that impacted our provision expense for the first quarter of 2020 in the Note 3 – Loans Held for Investment and Allowance for Credit Losses in the Consolidated Financial Statements.      

 

39 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

(Dollars in Thousands, except per share data)

March 31, 2020

 

December 31, 2019

 

March 31, 2019

CHARGE-OFFS

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

 $

362

 

 

 $

149

 

 

 $

95

 

Real Estate - Construction

 

-

 

 

 

58

 

 

 

-

 

Real Estate - Commercial Mortgage

 

11

 

 

 

33

 

 

 

155

 

Real Estate - Residential

 

110

 

 

 

27

 

 

 

264

 

Real Estate - Home Equity

 

31

 

 

 

-

 

 

 

52

 

Consumer(1)

 

1,566

 

 

 

819

 

 

 

795

 

Total Charge-offs

 $

2,080

 

 

1,086

 

 

 $

1,361

 

 

 

 

 

 

 

 

 

 

 

 

 

RECOVERIES

 

 

 

 

 

 

 

 

 

 

 

Commercial, Financial and Agricultural

40

 

 

 $

127

 

 

 $

74

 

Real Estate - Construction

 

-

 

 

 

-

 

 

 

-

 

Real Estate - Commercial Mortgage

 

191

 

 

 

266

 

 

 

70

 

Real Estate - Residential

 

40

 

 

 

116

 

 

 

44

 

Real Estate - Home Equity

 

33

 

 

 

25

 

 

 

32

 

Consumer(1)

 

695

 

 

 

300

 

 

 

284

 

Total Recoveries

 $

999

 

 

 $

834

 

 

 $

504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs

 $

1,081

 

 

 $

252

 

 

 $

857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs (Annualized) as a percent of Average Loans

 

0.23

%

 

 

0.05

%

 

 

0.20

%

 

Outstanding, Net of Unearned Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Includes overdrafts.  Prior to the first quarter 2020, overdraft losses were reflected in noninterest income (deposit fees)

 

 

Noninterest Income

 

Noninterest income for the first quarter of 2020 totaled $15.5 million compared to $13.8 million for the fourth quarter of 2019 and $12.6 million for the first quarter of 2019.  CCHL’s mortgage banking operations impacted our noninterest income (mortgage banking fees) for the first quarter of 2020, and thus, the period over comparison due to the late quarter closing.  Excluding CCHL, our noninterest income totaled $13.3 million for the first quarter of 2020. 

 

Wealth management and bank card fees were negatively affected in the first quarter of 2020 by the COVID-19 pandemic.  Market volatility at March 31st had an unfavorable impact on wealth management fees and slower consumer spending negatively impacted our bank card fees.  Compared to fourth quarter of 2019, wealth management fees decreased by $0.2 million, or 5.7%, and bank card fees declined by $0.1 million, or 2.6%.  Compared to the first quarter of 2019, we realized solid improvement in deposit fees of $0.2 million, or 5.0%, bank card fees of $0.2 million, or 6.7%, and wealth management fees of $0.3 million, or 12.1%.   

 

Noninterest income represented 37.5% of operating revenues (net interest income plus noninterest income) for the first quarter of 2020 compared to 34.5% for the fourth quarter of 2019 and 33.5% for the first quarter of 2019. 

 

The table below reflects the major components of noninterest income.

 

 

 

 Three Months Ended

(Dollars in Thousands)

March 31, 2020

 

December 31, 2019

 

March 31, 2019

Deposit Fees

 $

5,015

 

 $

4,980

 

 $

4,775

Bank Card Fees

 

3,051

 

 

3,131

 

 

2,855

Wealth Management Fees

 

2,604

 

 

2,761

 

 

2,323

Mortgage Banking Revenues

 

3,030

 

 

1,542

 

 

993

Other

 

1,778

 

 

1,414

 

 

1,606

Total Noninterest Income

 $

15,478

 

 $

13,828

 

 $

12,552

 

40 


 

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

 

Deposit Fees.  Deposit fees for the first quarter of 2020 totaled $5.0 million, comparable to the fourth quarter of 2019 and an increase of $0.2 million, or 5.0%, over the first quarter of 2019.  The increase over the first quarter of 2019 reflected higher overdraft fees.  

 

Bank Card Fees.  Bank card fees for the first quarter of 2020 totaled $3.1 million, comparable to the fourth quarter of 2019 and an increase of $0.2 million, or 6.9%, over the first quarter of 2019.  The increase over the first quarter of 2019 reflected various initiatives aimed at growing our bank card revenues, including a checking account acquisition initiative that began in early 2019 and periodic debit and credit card promotions.

 

Wealth Management Fees.  Wealth management fees, which include both trust fees (i.e., managed accounts and trusts/estates) and retail brokerage fees (i.e., investment, insurance products, and retirement accounts), totaled $2.6 million for the first quarter of 2020, a decrease of $0.2 million, or 5.7%, from the fourth quarter of 2019 and an increase of $0.3 million, or 12.1%, over the first quarter of 2019.  The decrease compared to the fourth quarter of 2019 reflected lower trust fees attributable to a decrease in assets under management driven by market volatility at March 31st on which quarterly client fees are based.  The increase over the first quarter of 2019 reflected higher retail brokerage fees which was attributable to account acquisition and higher trading activity in existing accounts.  At March 31, 2020, total assets under management were approximately $1.561 billion compared to $1.774 billion at December 31, 2019 and $1.675 billion at March 31, 2019.  The reduction in assets under management from both prior periods reflected the decline in stock market values due primarily to COVID-19 and its anticipated impact on the economy going forward.

 

Mortgage Banking Revenues.  Mortgage banking revenues totaled $3.0 million for the first quarter of 2020, an increase of $1.5 million, or 96.5%, over the fourth quarter of 2019 and $2.0 million, or 205.1% over the first quarter of 2019.  The increase over both prior periods was primarily attributable to aforementioned strategic alliance with CCHL that began on March 1, 2020.     

 

Noninterest Expense

 

Noninterest expense for the first quarter of 2020 totaled $31.0 million compared to $29.1 million for the fourth quarter of 2019 and $28.2 million for the first quarter of 2019.  CCHL’s mortgage banking operations impacted our noninterest expense for the first quarter of 2020, and thus, the period over comparison due to the late quarter closing.  Excluding CCHL, our noninterest expense totaled $28.0 million for the first quarter of 2020.  In the first quarter of 2020, we realized lower OREO expense attributable to a $1.0 million gain from the sale of a banking office.  Expense variances versus prior periods including the impact of CCHL’s operations on select expense categories for the first quarter of 2020 are discussed in further detail below.     

 

 

 

41 


 

The table below reflects the major components of noninterest expense.

 

 

 

 

 

 

 

 

 

 

 

 

 Three Months Ended

(Dollars in Thousands)

March 31, 2020

 

December 31, 2019

 

March 31, 2019

Salaries

$

15,730

 

 $

13,374

 

 $

12,285

Associate Benefits

 

4,006

 

 

3,989

 

 

4,064

 

Total Compensation

 

19,736

 

 

17,363

 

 

16,349

 

 

 

 

 

 

 

 

 

 

Premises

 

2,383

 

 

2,228

 

 

2,061

Equipment

 

2,596

 

 

2,452

 

 

2,448

 

Total Occupancy

 

4,979

 

 

4,680

 

 

4,509

 

 

 

 

 

 

 

 

 

 

Legal Fees

 

468

 

 

546

 

 

376

Professional Fees

 

1,121

 

 

1,229

 

 

972

Processing Services

 

1,582

 

 

1,245

 

 

1,478

Advertising

 

584

 

 

386

 

 

497

Travel and Entertainment

 

317

 

 

282

 

 

204

Printing and Supplies

 

200

 

 

166

 

 

173

Telephone

 

610

 

 

693

 

 

680

Postage

 

186

 

 

173

 

 

169

Insurance - Other

 

296

 

 

205

 

 

391

Other Real Estate Owned, net

 

(798)

 

 

102

 

 

363

Miscellaneous

 

1,688

 

 

2,072

 

 

2,037

 

Total Other

 

6,254

 

 

7,099

 

 

7,340

 

 

 

 

 

 

 

 

 

 

Total Noninterest Expense 

$

30,969

 

 $

29,142

 

 $

28,198

 

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

 

Compensation.  Compensation expense totaled $19.7 million for the first quarter of 2020, an increase of $2.4 million, or 13.7%, over the fourth quarter of 2019 and $3.4 million, or 20.7%, over the first quarter of 2019.  The increases were due to the aforementioned integration of CCHL which drove $2.3 million of the increase over both prior periods, primarily reflective of commissions paid to mortgage loan officers and to a lesser extent base salary and benefit expense for CCHL operational personnel. Higher base salary expense (primarily related to merit raises) and cash incentive expense at CCB contributed to the increase over the first quarter of 2019.         

 

Occupancy.  Occupancy expense (including premises and equipment) totaled $5.0 million for the first quarter of 2020, an increase of $0.3 million, or 6.4%, over the fourth quarter of 2019 and $0.5 million, or 10.4%, over the first quarter of 2019.  The increases were influenced by the aforementioned integration of CCHL which drove $0.2 million of the increase over both prior periods, primarily related to lease expense for loan production offices.  Higher maintenance and repairs expense at CCB contributed to the increase over the first quarter of 2019.       

 

Other.  Other noninterest expense totaled $6.3 million for the first quarter of 2020, a decrease of $0.8 million, or 11.9%, from the fourth quarter of 2019 and $1.1 million, or 14.8%, from the first quarter of 2019.  The decrease from both prior periods was primarily due to lower OREO expense driven by a $1.0 million gain from the sale of a banking office in the first quarter of 2020.  

       

Our operating efficiency ratio (expressed as noninterest expense as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 74.89% for the first quarter of 2020 compared to 72.48% for the fourth quarter of 2019 and 75.01% for the first quarter of 2019.  The increase compared to the fourth quarter of 2019 reflected the increase in noninterest expense related to the aforementioned integration of CCHL in March of 2020.  As this entity begins to scale its operations, we expect our efficiency ratio to improve.

 

Income Taxes

 

We realized income tax expense of $1.3 million (effective rate 24%) for the first quarter of 2020 compared to $2.5 million (effective rate 23%) for the fourth quarter of 2019 and $2.1 million (effective rate 24%) for the first quarter of 2019.  Absent discrete items, we expect our annual effective tax rate to approximate 24%. 

 

42 


 

FINANCIAL CONDITION

 

Average earning assets were $2.752 billion for the first quarter of 2020, an increase of $57.2 million, or 2.1%, over the fourth quarter of 2019, and an increase of $47.1 million, or 1.7%, over the first quarter of 2019.  The increase in average earning assets over the fourth quarter of 2019 was primarily driven by higher deposit balances which funded growth in the loan and investment portfolios.  The change in the earning asset mix compared to the first quarter 2019 reflected higher loan balances that were funded with overnight funds and investment balances.  The Brand acquisition on March 1st increased average earning assets by $29 million for the first quarter of 2020.    

 

Investment Securities

 

In the first quarter of 2020, our average investment portfolio increased $14.4 million, or 2.3%, over the fourth quarter of 2019 and decreased $23.9 million, or 3.6%, from the first quarter of 2019.  Securities in our investment portfolio represented 23.1% of our average earning assets for the first quarter of 2020 compared to 23.0% for the fourth quarter of 2019, and 24.4% for the first quarter of 2019.  For the remainder of 2020, 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 first quarter of 2020, we purchased securities under both the AFS and HTM designations.  At March 31, 2020, $377.7 million, or 60.0%, of our investment portfolio was classified as AFS, and $251.8 million, or 40.0%, classified as HTM.  The average maturity of our total portfolio at March 31, 2020 was 2.20 years compared to 2.11 years and 2.10 years at December 31, 2019 and March 31, 2019, 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 March 31, 2020 there were 42 positions (combined AFS and HTM) with unrealized losses totaling $0.1 million.  GNMA mortgage-backed securities, U.S. treasury securities, and SBA investments carry the full faith and credit guarantee of the U.S. government and are 0% risk-weighted assets for regulatory capital purposes.  Further, we consider the long history of no credit losses on these securities indicates that the expectation of nonpayment of the amortized cost basis is zero, even if the U.S. government were to technically default. 

 

Loans

 

Average loans (excluding held for sale (“HFS”) loans) increased $13.7 million, or 0.8% compared to the fourth quarter of 2019 and $74.8 million, or 4.2%, compared to the first quarter of 2019.  Average HFS loans increased $22.8 million and $27.5 million over the same respective periods and reflected the integration of CCHL.  The increase (excluding HFS loans) reflected growth in all loan types except commercial, institutional, and HELOCs.  The increase compared to the first quarter of 2019 reflected growth in all loan types, except institutional and HELOCs.  Loan demand from the SBA Paycheck Protection Program (“PPP”) has been extremely strong, and as of May 5, 2020, the Company has obtained approximately 1,100 SBA loan approvals totaling $135 million for the first phase of funding and 1,000 loan approvals totaling $50 million for the second phase of funding.  The majority, if not all of these loans are expected to be funded from our current on balance sheet liquidity.

 

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.

 

43 


 

Credit Quality

 

Nonperforming assets (nonaccrual loans and OREO) totaled $6.3 million at March 31, 2020, a $0.9 million increase over December 31, 2019 and a $0.6 million decrease from March 31, 2019.  Nonaccrual loans totaled $4.9 million at March 31, 2020, a $0.4 million increase over December 31, 2019 and a $0.2 million decrease from March 31, 2019.  Gross additions to nonaccrual status totaled $3.6 million for the first quarter of 2020 compared to $3.0 million for the fourth quarter of 2019 and $2.5 million for the first quarter of 2019.  The balance of OREO totaled $1.5 million at March 31, 2020, an increase of $0.5 million over December 31, 2019 and a decrease of $0.4 million from March 31, 2019.  For the first quarter of 2020, we added properties totaling $0.7 million, sold properties totaling $0.2 million, and recorded valuation adjustments totaling $0.1 million.  Nonperforming assets represented 0.21% of total assets at March 31, 2020 compared to 0.18% at December 31, 2019 and 0.23% at March 31, 2019.  

 

COVID-19 Exposure

 

We continue to analyze our loan portfolio for segments that might be directly affected by the stressed economic and business conditions caused by the pandemic.  Certain at-risk segments total 11% of our loan balances at March 31, 2020, including hotel (3%), restaurant (1%), retail and shopping centers (5%), stock secured (1%), and other (1%).  The other segment includes churches, non-profits, education, and recreational.  To assist our clients, we have allowed short term 60 to 90 day loan extensions for affected borrowers with a majority being 60 day extensions.  Through May 5, 2020, we have extended 2,100 loans totaling $310 million (17% of loan portfolio).  Approximately 81% of these loans were for commercial borrowers and 19% for consumer borrowers.

 

(Dollars in Thousands)

March 31, 2020

 

December 31, 2019

 

March 31, 2019

Nonaccruing Loans:

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial, Financial and Agricultural

$

358

 

 

$

446

 

 

$

223

 

 

  Real Estate - Construction

 

-

 

 

 

-

 

 

 

323

 

 

  Real Estate - Commercial Mortgage

 

1,332

 

 

 

1,434

 

 

 

1,976

 

 

  Real Estate - Residential

 

2,213

 

 

 

1,392

 

 

 

1,341

 

 

  Real Estate - Home Equity

 

692

 

 

 

797

 

 

 

1,033

 

 

  Consumer

 

279

 

 

 

403

 

 

 

151

 

Total Nonaccruing Loans (“NALs”)(1)

$

4,874

 

 

$

4,472

 

 

$

5,047

 

Other Real Estate Owned

 

1,463

 

 

 

953

 

 

 

1,902

 

Total Nonperforming Assets (“NPAs”)

$

6,337

 

 

$

5,425

 

 

$

6,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Past Due Loans 30 – 89 Days

$

5,077

 

 

$

4,871

 

 

$

4,682

 

Performing Troubled Debt Restructurings

$

15,934

 

 

$

16,888

 

 

$

20,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccruing Loans/Loans

 

0.26

%

 

 

0.24

%

 

 

0.28

%

Nonperforming Assets/Total Assets

 

0.21

 

 

 

0.18

 

 

 

0.23

 

Nonperforming Assets/Loans Plus OREO

 

0.34

 

 

 

0.29

 

 

 

0.39

 

Allowance/Nonaccruing Loans

 

432.61

 

 

 

310.99

 

 

 

279.77

 

 

(1)    Nonaccrual TDRs totaling $1.0 million, $0.7 million, and $1.4 million are included in NALs for March 31, 2020, December 31, 2019 and March 31, 2019, respectively.

 

Allowance for Credit Losses

 

The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.  The allowance for credit losses is adjusted by a credit loss provision which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.  Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.  Expected credit loss inherent in non-cancellable off-balance sheet credit exposures is provided through the credit loss provision, but recorded as a separate liability included in other liabilities.

 

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.  Historical loan default and loss experience provides the basis for the estimation of expected credit losses.  Adjustments to historical loss information incorporate management’s view of current conditions and forecasts.   

 

Detailed information regarding the methodology for estimating the amount reported in the allowance for credit losses is provided in Note 1 – Business and Basis of Presentation/Allowance for Credit Losses in the Consolidated Financial Statements.

44 


 

 

At March 31, 2020, the allowance for credit losses of $21.1 million represented 1.13% of outstanding loans (excluding HFS loans) and provided coverage of 433% of nonperforming loans compared to $13.9 million, or 0.75% and 311% of loans at December 31, 2019.  The adoption of ASC 326 (“CECL”) on January 1, 2020 had an impact of $4.0 million ($3.3 million increase in the allowance for credit losses and $0.7 million increase in the allowance for unfunded loan commitments (liability account)).  The $3.9 million build in the allowance for credit losses for the first quarter of 2020 reflected a forecasted decline in economic conditions, primarily a higher rate of unemployment due to the impact of the COVID-19 pandemic.  At March 31, 2020, we had not realized significant deterioration in our credit quality metrics primarily due to actions taken under a loan extension program.  We will continue to adjust our allowance as the effects of the pandemic on our borrowers becomes more clear and in consideration of our ongoing risk mitigation efforts as well as the effectiveness of the government’s stimulus actions, including the SBA Paycheck Protection Program and the Economic Impact Payments.     

 

Deposits

 

Average total deposits were $2.553 billion for the first quarter of 2020, an increase of $27.7 million, or 1.1%, over the fourth quarter of 2019, and a decrease of $12.0 million, or 0.5%, over the first quarter of 2019.  The increase in average deposits compared to the fourth quarter of 2019 reflected increases in negotiated NOW public fund deposits and savings accounts.  The seasonal influx of negotiated public NOW accounts has most likely peaked for this cycle, and is expected to gradually decline through the fourth quarter of 2020.  The decrease in average deposits compared to the first quarter of 2019 was primarily due to declines in certificates of deposit, money market accounts, and one large, non-public negotiated account, which were partially offset by increases in noninterest bearing accounts and savings accounts.

 

Deposit levels remain strong, and average core deposits grew over last quarter.  As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and our participation in the Paycheck Participation Program (PPP) to support small businesses, the potential exists for our deposit levels to be volatile over the coming quarters due to the government’s distribution of economic impact payments and the funding of PPP loans. 

 

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.

 

45 


 

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.

 

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%

March 31, 2020

13.6%

9.7%

5.9%

2.7%

-2.1%

December 31, 2019

13.8%

10.3%

6.8%

3.4%

-6.2%

 

 

 

 

 

 

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%

March 31, 2020

31.6%

21.8%

12.2%

3.3%

-8.4%

December 31, 2019

35.5%

26.4%

17.2%

8.2%

-13.4%

 

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 100  bp will have a negative impact on the net interest margin. Compared to the prior quarter-end, the 12-month and 24-month periods of Net Interest Income at Risk positions became less favorable in the rising rate scenarios, and more favorable in the falling rate scenario. The Net Interest Income position became more favorable in the down 100 bp scenario as index rates were so low, that they can’t adjust to the full 100 bp reduction in rates. The Net Interest Income position became less favorable in rising rate scenarios due to the increased level of loans below their floors that will lag as rates rise until floors are pierced. 

 

All measures of Net Interest Income at Risk are within our prescribed policy limits over the next 12-month and 24-month periods. 

    

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.

 

46 


 

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%

March 31, 2020 (Base Scenario)

56.1%

45.3%

32.5%

18.1%

-41.3%

December 31, 2019 (Base Scenario)

37.5%

30.2%

21.7%

12.2%

-22.0%

 

 

 

 

 

 

March 31, 2020 (Alternate Scenario)(2)

38.0%

28.5%

17.2%

4.5%

7.7%

December 31, 2019 (Alternate Scenario)

37.5%

30.2%

21.7%

12.2%

7.4%

 

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

(2) The calculation of EVE results in a negative value in the rates down 100 bp scenario in the base case, as it assigns a negative value    to our nonmaturity deposits. Since we believe our nonmaturity deposits are highly valued core franchise deposits, we run an alternate EVE calculation which caps the value of our nonmaturity deposits at their book value, and results in an EVE of 7.7% in the down 100 bp scenario, which is within policy guidelines.

 

At March 31, 2020, 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 100 bp scenario, as we have limited ability to lower our deposit rates relative to the decline in market rates.  If we were to cap the value of our nonmaturity deposits at their book value in the down 100 bp scenario, EVE would be within the policy limit parameters for that scenario.

 

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 March 31, 2020, we had the ability to generate $1.362 billion in additional liquidity through all of our available resources (this excludes $197 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 March 31, 2020, 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 2.20 years at March 31, 2020, and the available for sale portfolio had a net unrealized pre-tax gain of $4.8 million.

  

Our average overnight funds position (defined deposits with banks plus FED funds sold less FED funds purchased) was $234.4 million in the first quarter of 2020 compared to $228.1 million in the fourth quarter of 2019 and $265.7 million in the first quarter of 2019.  The increase in the average net overnight funds compared to the fourth quarter of 2019 was driven by higher deposit balances, primarily seasonally higher public fund balances.  The decrease in overnight funds compared to the first quarter of 2019 was driven by loan growth.   It is anticipated that current on balance sheet liquidity levels will remain adequate to fund loans under the SBA PPP program in the coming months due to our strong overnight funds sold position, in addition to cash flow generated from the investment portfolio.  However, if necessary, short-term advances from the FHLB or FRB could be considered.    

 

47 


 

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 March 31, 2020, short term borrowings totaled $76.5 million compared to $6.4 million at December 31, 2019.  The increase reflected the addition of residential mortgage warehouse borrowings related to the Brand acquisition.  Amounts available under warehouse lines to fund the timing difference between residential real estate loan closings and investor funding totaled $125 million and had a balance of $73 million at March 31, 2020.  Additional detail on these borrowings is provided in Note 4 – Mortgage Banking Activities in the Consolidated Financial Statements.

 

At March 31, 2020, fixed rate credit advances from the FHLB totaled $4.7 million in outstanding debt consisting of eight notes. During the first three months of 2020, the Bank made FHLB advance payments totaling approximately $0.7 million, which included an advance of $0.3 million that matured.  No advances 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.

  

CAPITAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our capital ratios are presented below.  At March 31, 2020, our regulatory capital ratios exceeded the threshold to be designated

as “well-capitalized” under the Basel III capital standards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

March 31,

(Dollars in Thousands)

 

2020

 

2019

 

2019

Shareowner's Equity

 

$

328,507

 

 

$

327,016

 

 

$

308,986

 

Leverage Ratio

 

 

10.81

%

 

 

11.25

%

 

 

10.53

%

Tier 1 Capital Ratio

 

 

16.12

 

 

 

17.16

 

 

 

16.34

 

Total Risk Based Capital Ratio

 

 

17.19

 

 

 

17.90

 

 

 

17.09

 

Common Equity Tier 1 Capital Ratio

 

 

13.55

 

 

 

14.47

 

 

 

13.62

 

Tangible Common Equity Ratio(1)

 

 

7.98

%

 

 

8.06

%

 

 

7.56

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Non-GAAP financial measure.  See non-GAAP reconciliation on page 35.

 

Shareowners’ equity was $328.5 million at March 31, 2020 compared to $327.0 million at December 31, 2019 and $309.0 million at March 31, 2019.  For the first three months of 2020, shareowners’ equity was positively impacted by net income of $4.3 million, a $2.6 million increase in the unrealized gain on investment securities, net adjustments totaling $0.5 million related to transactions under our stock compensation plans, and stock compensation accretion of $0.3 million.  Shareowners’ equity was reduced by a $3.1 million (net of tax) adjustment to retained earnings for the adoption of ASC 326 (“CECL”), common stock dividend of $2.4 million ($0.14 per share) and shares repurchases of $0.7 million (33,074 shares).

 

At March 31, 2020, our common stock had a book value of $19.46 per diluted share compared to $19.40 at December 31, 2019 and $18.35 at March 31, 2019.  Book value is impacted by the net after-tax unrealized gains and losses on investment securities.  At March 31, 2020, the net gain was $3.5 million compared to a $0.9 million net gain at December 31, 2019 and a $1.1 million net loss at March 31, 2019.  Book value is also impacted by the recording of our unfunded pension liability through other comprehensive income in accordance with Accounting Standards Codification Topic 715.  At March 31, 2020, the net pension liability reflected in other comprehensive loss was $29.0 million compared to $29.0 million at December 31, 2019 and $26.8 million at March 31, 2019.        

 

48 


 

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.  For the first three months of 2020, we repurchased 33,074 shares at an average price of $21.36 per share under the plan.  During 2019, we purchased 77,000 shares at an average price of $23.40.   

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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 March 31, 2020, we had $583.9 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.

 

Certain agreements provide that the commitments are unconditionally cancellable by the bank and for those agreements no allowance for credit losses has been recorded.  We have recorded an allowance for credit losses on loan commitments that are not unconditionally cancellable by the bank, included in other liabilities on the consolidated statements of financial condition of $1.0 million at March 31, 2020.

 

CRITICAL ACCOUNTING POLICIES

 

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2019 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 credit 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 2019 Form 10-K.

 

As discussed in Note 1 – Business and Basis of Presentation/Significant Accounting Policies, our policies related to the allowance for credit losses changed on January 1, 2020 in connection with the adoption of ASC 326.  The amount of the allowance for credit losses represents management's best estimate of current expected credit losses considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument.  Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts.  While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors.  While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.  

 

49 


 

TABLE I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE BALANCES & INTEREST RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 2020

 

 

December 31, 2019

 

 

March 31, 2019

 

Average

 

 

 

 

Average

 

Average

 

 

 

 

Average

 

 

Average

 

 

 

 

Average

(Dollars in Thousands)

Balances

 

Interest

 

Rate

 

Balances

 

Interest

 

Rate

 

 

Balances

 

Interest

 

Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, Net of Unearned Income(1)(2)

1,882,703

 

23,692

 

5.06

%

 

1,846,190

 

23,958

 

5.15

%

 

1,780,406

 

22,718

 

5.18

%

Taxable Securities(2)

 

629,512

 

 

2,995

 

1.91

 

 

 

610,046

 

 

3,186

 

2.08

 

 

 

618,127

 

 

3,387

 

2.20

 

Tax-Exempt Securities

 

5,293

 

 

25

 

1.86

 

 

 

10,327

 

 

43

 

1.67

 

 

 

40,575

 

 

158

 

1.56

 

Funds Sold

 

234,372

 

 

757

 

1.30

 

 

 

228,137

 

 

945

 

1.64

 

 

 

265,694

 

 

1,593

 

2.43

 

Total Earning Assets

 

2,751,880

 

 

27,469

 

4.01

%

 

 

2,694,700

 

 

28,132

 

4.14

%

 

 

2,704,802

 

 

27,856

 

4.17

%

Cash & Due From Banks

 

56,958

 

 

 

 

 

 

 

 

53,174

 

 

 

 

 

 

 

 

53,848

 

 

 

 

 

 

Allowance For Loan Losses

 

(14,389)

 

 

 

 

 

 

 

 

(14,759)

 

 

 

 

 

 

 

 

(14,347)

 

 

 

 

 

 

Other Assets

 

244,339

 

 

 

 

 

 

 

 

249,089

 

 

 

 

 

 

 

 

252,208

 

 

 

 

 

 

TOTAL ASSETS

3,038,788

 

 

 

 

 

 

 

2,982,204

 

 

 

 

 

 

 

2,996,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW Accounts

808,811

 

725

 

0.36

%

 

755,625

 

889

 

0.47

%

 

884,277

 

1,755

 

0.80

%

Money Market Accounts

 

212,211

 

 

117

 

0.22

 

 

 

227,479

 

 

170

 

0.30

 

 

 

239,516

 

 

247

 

0.42

 

Savings Accounts

 

379,237

 

 

46

 

0.05

 

 

 

372,518

 

 

46

 

0.05

 

 

 

364,783

 

 

44

 

0.05

 

Other Time Deposits

 

105,542

 

 

51

 

0.19

 

 

 

108,407

 

 

52

 

0.19

 

 

 

118,839

 

 

53

 

0.18

 

Total Interest Bearing Deposits

 

1,505,801

 

 

939

 

0.25

 

 

 

1,464,029

 

 

1,157

 

0.31

 

 

 

1,607,415

 

 

2,099

 

0.53

 

Short-Term Borrowings

 

32,915

 

 

132

 

1.61

 

 

 

7,448

 

 

16

 

0.87

 

 

 

11,378

 

 

35

 

1.26

 

Subordinated Notes Payable

 

52,887

 

 

471

 

3.52

 

 

 

52,887

 

 

525

 

3.88

 

 

 

52,887

 

 

608

 

4.60

 

Other Long-Term Borrowings

 

6,312

 

 

50

 

3.21

 

 

 

6,723

 

 

56

 

3.33

 

 

 

8,199

 

 

72

 

3.55

 

Total Interest Bearing Liabilities

 

1,597,915

 

 

1,592

 

0.40

%

 

 

1,531,087

 

 

1,754

 

0.45

%

 

 

1,679,879

 

 

2,814

 

0.68

%

Noninterest Bearing Deposits

 

1,046,889

 

 

 

 

 

 

 

 

1,060,922

 

 

 

 

 

 

 

 

957,300

 

 

 

 

 

 

Other Liabilities

 

59,587

 

 

 

 

 

 

 

 

63,291

 

 

 

 

 

 

 

 

52,070

 

 

 

 

 

 

TOTAL LIABILITIES

 

2,704,391

 

 

 

 

 

 

 

 

2,655,300

 

 

 

 

 

 

 

 

2,689,249

 

 

 

 

 

 

Temporary Equity

 

2,506

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL SHAREOWNERS’ EQUITY

 

331,891

 

 

 

 

 

 

 

 

326,904

 

 

 

 

 

 

 

 

307,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

3,038,788

 

 

 

 

 

 

 

2,982,204

 

 

 

 

 

 

 

2,996,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Spread

 

 

 

 

 

 

3.61

%

 

 

 

 

 

 

 

3.69

%

 

 

 

 

 

 

 

3.49

%

Net Interest Income

 

 

 

25,877

 

 

 

 

 

 

 

26,378

 

 

 

 

 

 

 

25,042

 

 

 

Net Interest Margin(3)

 

 

 

 

 

 

3.78

%

 

 

 

 

 

 

 

3.89

%

 

 

 

 

 

 

 

3.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Average Balances include nonaccrual loans. 

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

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50 


 

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, 2019.

 

Item 4.           CONTROLS AND PROCEDURES

 

At March 31, 2020, 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, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report these disclosure controls and procedures were effective.

 

The Company acquired a controlling equity interest in the outstanding membership interests of Brand Mortgage Group, LLC (“Brand”) on March 1, 2020. As such, the scope of our management’s evaluation of the effectiveness of its disclosure controls and procedures did not include Brand’s internal controls over financial reporting at March 31, 2020.  Brand’s total and net assets each represented approximately 3% of the Company's total and net assets at March 31, 2020, and approximately 5% and 7% of the Company's total revenue and net income, respectively, for the three months ended March 31, 2020.  This exclusion is consistent with the SEC Staff's guidance that an assessment of a recently acquired business may be omitted from the scope of the Company's assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition.

 

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).  During the quarter ended on March 31, 2020, other than the above, 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 2019 Form 10-K, as supplemented below and updated in our subsequent quarterly reports. The risks described in our 2019 Form 10-K and our subsequent quarterly reports 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.

 

COVID-19, the Effects of Global Actions Taken to Contain its Spread, and its Economic and Societal Impact Could Adversely Impact Our Business, Results of Operations and Financial Condition.

 

The COVID-19 pandemic has caused a significant global economic downturn which has adversely affected, and is expected to continue to adversely affect, our business and results of operations. The COVID-19 pandemic’s future impacts on the U.S. and the global economies and on our business, results of operations and financial condition remain uncertain.

 

The COVID-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter in place orders, and limitations on business activity, including closures. These measures are, among other things, severely restricting global economic activity, which is disrupting global supply chains, lowering asset valuations, significantly increasing unemployment and underemployment levels, decreasing liquidity in markets for certain securities and causing significant volatility and disruptions in the financial, energy and commodity markets. These measures have also negatively impacted, and could continue to negatively impact, businesses, market participants, our counterparties and customers, and the U.S. and global economies for a prolonged period of time.

 

51 


 

Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services; protracted periods of lower interest rates; increased noninterest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs. Our provision for credit losses and net charge-offs could also be impacted by continued volatility in the energy and commodity markets. Additionally, our liquidity and/or regulatory capital could be adversely impacted by customers’ withdrawal of deposits, volatility and disruptions in the capital and credit markets, volatility in foreign exchange rates and continued customer draws on lines of credit and potential downgrades to our credit ratings. If we become unable to successfully operate our business from remote locations including, for example, failure of our internal or external information technology infrastructure, increased rates of employee illness, or governmental restrictions placed on our employees or operations, this could also have an adverse effect on our business continuity status and result in disruption to our business. To the extent the COVID-19 pandemic continues to adversely affect the U.S. and global economies and adversely affects our business, results of operations or financial condition, it may also have the effect of increasing the likelihood and/or magnitude of other risks described in the section captioned “Risk Factors” in our 2019 Form 10-K or risks described in our other filings with the Securities and Exchange Commission.

 

In response to the economic and market conditions resulting from the COVID-19 pandemic, governments and regulatory authorities, including central banks, have acted to provide fiscal and monetary stimulus packages and programs to support national and global economies. In the U.S., the Federal Reserve has, among other things: lowered the federal funds rate and the interest rate on the Federal Reserve’s discount window; implemented programs to promote liquidity in certain securities markets, including money markets, repurchase agreements, commercial paper, corporate debt securities, U.S. Treasury securities, and agency mortgage-backed securities; clarified supervisory expectations regarding loan modifications due to COVID-19 related non-payment; announced a program for lending directly to U.S. businesses; and clarified expectations for certain bank regulations related to counterparty credit risk and the current expected credit loss accounting standard. In addition, four economic stimulus packages have been enacted, including the Paycheck Protection Program and Health Care Enhancement Act, the $2 trillion Coronavirus Aid, Relief, and Economic Security Act, the Families First Coronavirus Response Act, and the Coronavirus Preparedness and Response Supplemental Appropriations Act. Similar actions have been taken or enacted by governments and central banks outside the U.S. However, there can be no assurance that these measures will stimulate the global economy or avert continued recessionary conditions in markets or local economies in which we conduct operations. Our participation in and execution of these and other measures taken by governments and regulatory authorities could result in reputational harm and within the industry has resulted in, and may continue to result in, litigation, including class actions, or regulatory and government actions and proceedings. Actions of this nature may result in judgments, settlements, penalties, and fines adverse to us.

 

We continue to closely monitor the COVID-19 pandemic and related risks as they evolve globally as well as in the U.S. and our local markets. The magnitude and duration of the current outbreak of COVID-19, the likelihood of further outbreaks of COVID-19, future actions taken by governmental authorities and/or other third parties in response to the COVID-19 pandemic, and its future direct and indirect effects on the U.S. and global economies and our business and results of operation are highly uncertain. The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.

 

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

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table contains information about all purchases made by, or on behalf of, us and any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act.

 

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Total number of

 

Maximum Number of

 

Total number

 

Average

 

shares purchased as

 

shares that may yet be

 

of shares

 

price paid

 

part of our share

 

purchased under our share

Period

purchased

 

per share

 

repurchase program(1)

 

repurchase program

 

 

 

 

 

 

 

 

January 1, 2020 to

 

 

 

 

 

 

 

January 31, 2020

-

 

-

 

-

 

673,000

 

 

 

 

 

 

 

 

February 1, 2020 to

 

 

 

 

 

 

 

February 29, 2020

-

 

-

 

-

 

673,000

 

 

 

 

 

 

 

 

March 1, 2020 to

 

 

 

 

 

 

 

March 31, 2020

33,074

 

$21.36

 

33,074

 

639,926

 

 

 

 

 

 

 

 

Total

33,074

 

$21.36

 

33,074

 

639,926

 

(1)

This balance represents the number of shares that were repurchased during the first quarter of 2020 through the Capital City Bank Group, Inc. Share Repurchase Program (the “Program”), which was approved on January 31, 2019 for a five-year period, under which we were originally authorized to repurchase up to 750,000 shares of our common stock.  The Program is flexible and shares are acquired from the public markets and other sources using free cash flow.  No shares are repurchased outside of the Program.   

 

Item 3.           Defaults Upon Senior Securities

None.

 

Item 4.           Mine Safety Disclosure

Not Applicable.  

 

Item 5.           Other Information

None.  

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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 

 

                                                                                                                                                                                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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: May 8, 2020

 

 

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