CAPITAL CITY BANK GROUP INC - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
June 30, 2022
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
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
☒
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
At August 1, 2022,
16,959,280
2
CAPITAL CITY BANK GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2022
TABLE OF CONTENTS
PART I – Financial Information
Page
Item 1.
Consolidated Statements of Financial Condition – June 30, 2022 and December 31, 2021
4
Consolidated Statements of Income – Three and Six Months Ended June 30, 2022 and 2021
5
Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2022 and 2021
6
Consolidated Statements of Changes in Shareowners’ Equity – Three and Six Months Ended June 30, 2022 and 2021
7
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2022 and 2021
8
Notes to Consolidated Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
46
Item 4.
Controls and Procedures
46
PART II – Other Information
Item 1.
Legal Proceedings
46
Item 1A.
Risk Factors
46
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3.
Defaults Upon Senior Securities
46
Item 4.
Mine Safety Disclosure
46
Item 5.
Other Information
46
Item 6.
Exhibits
47
Signatures
48
3
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, 2021 (the “2021 Form 10-K”):
(a) “Introductory Note” in Part I, Item 1. “Business” (b) “Risk Factors” in Part I, Item 1A, as updated in our subsequent quarterly reports
filed on Form 10-Q; and (c) “Introduction” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in
Part II, Item 7, as well as:
●
our ability to successfully manage credit risk, interest rate risk, liquidity risk, and other risks inherent to our industry;
●
the impact of legislative or regulatory changes on our business;
●
changes in monetary and fiscal policies of the U.S. Government;
●
the impact of inflation, interest rate, market and monetary fluctuations on our loan origination volumes and deposit portfolio;
●
changes in consumer spending and saving habits;
●
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 allowance for credit losses,
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;
●
climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could
significantly impact our business;
●
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;
●
structural changes in the markets for origination, sale and servicing of residential mortgages;
●
uncertainty in the pricing of residential mortgage loans that we sell, as well as competition for the mortgage servicing rights related to
these loans and related interest rate risk or price risk resulting from retaining mortgage servicing rights;
●
the magnitude and duration of the ongoing COVID-19 pandemic and its impact on the global economy and financial market conditions
and our business;
●
the effects of natural disasters, harsh weather conditions (including hurricanes), widespread health emergencies, military conflict,
terrorism, civil unrest 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;
●
growth and profitability of our noninterest income;
●
the limited trading activity of our common stock;
●
the concentration of ownership of our common stock;
●
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
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.
4
PART I.
FINANCIAL INFORMATION
Item 1.
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30,
December 31,
(Dollars in Thousands, Except Par Value)
2022
2021
ASSETS
Cash and Due From Banks
$
91,209
$
65,313
Federal Funds Sold and Interest Bearing Deposits
603,315
970,041
Total Cash and Cash Equivalents
694,524
1,035,354
Investment Securities, Available for Sale, at fair value (amortized cost of $
643,679
660,732
)
601,405
654,611
Investment Securities, Held to Maturity (fair value of $
498,963
339,699
)
528,258
339,601
Equity Securities
900
861
Total Investment Securities
1,130,563
995,073
Loans Held For Sale, at fair value
48,708
52,532
Loans Held for Investment
2,213,653
1,931,465
Allowance for Credit Losses
(21,281)
(21,606)
Loans Held for Investment, Net
2,192,372
1,909,859
Premises and Equipment, Net
82,932
83,412
Goodwill and Other Intangibles
93,173
93,253
Other Real Estate Owned
90
17
Other Assets
111,935
94,349
Total Assets
$
4,354,297
$
4,263,849
LIABILITIES
Deposits:
Noninterest Bearing Deposits
$
1,724,671
$
1,668,912
Interest Bearing Deposits
2,061,587
2,043,950
Total Deposits
3,786,258
3,712,862
Short-Term Borrowings
39,463
34,557
Subordinated Notes Payable
52,887
52,887
Other Long-Term Borrowings
612
884
Other Liabilities
93,319
67,735
Total Liabilities
3,972,539
3,868,925
Temporary Equity
10,083
11,758
SHAREOWNERS’ EQUITY
Preferred Stock, $
0.01
3,000,000
no
-
-
Common Stock, $
0.01
90,000,000
16,959,280
16,892,060
170
169
Additional Paid-In Capital
35,738
34,423
Retained Earnings
376,532
364,788
Accumulated Other Comprehensive Loss, net of tax
(40,765)
(16,214)
Total Shareowners’ Equity
371,675
383,166
Total Liabilities, Temporary Equity, and Shareowners' Equity
$
4,354,297
4,263,849
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Six Months Ended
(Dollars in Thousands, Except Per Share Data)
2022
2021
2022
2021
INTEREST INCOME
Loans, including Fees
$
24,072
$
24,582
$
46,205
$
47,932
Investment Securities:
Taxable
3,833
2,036
6,723
3,899
Tax Exempt
7
18
13
38
Funds Sold
1,408
200
1,817
413
Total Interest Income
29,320
26,836
54,758
52,282
INTEREST EXPENSE
Deposits
266
208
490
416
Short-Term Borrowings
343
324
535
736
Subordinated Notes Payable
370
308
687
615
Other Long-Term Borrowings
8
16
17
37
Total Interest Expense
987
856
1,729
1,804
NET INTEREST INCOME
28,333
25,980
53,029
50,478
Provision for Credit Losses
1,542
(571)
1,542
(1,553)
Net Interest Income After Provision For Credit Losses
26,791
26,551
51,487
52,031
NONINTEREST INCOME
Deposit Fees
5,447
4,236
10,638
8,507
Bank Card Fees
4,034
3,998
7,797
7,616
Wealth Management Fees
4,403
3,274
10,473
6,364
Mortgage Banking Revenues
9,065
13,217
18,011
30,342
Other
1,954
1,748
3,802
3,470
Total Noninterest Income
24,903
26,473
50,721
56,299
NONINTEREST EXPENSE
Compensation
25,383
25,378
50,239
51,442
Occupancy, Net
6,075
5,973
12,168
11,940
Other Real Estate Owned, Net
(29)
(270)
(4)
(388)
Pension Settlement
169
2,000
378
2,000
Other
8,900
9,042
16,950
17,605
Total Noninterest Expense
40,498
42,123
79,731
82,599
INCOME BEFORE INCOME TAXES
11,196
10,901
22,477
25,731
Income Tax Expense
2,177
2,059
4,412
4,846
NET INCOME
9,019
8,842
18,065
20,885
Income Attributable to Noncontrolling Interests
(306)
(1,415)
(897)
(3,952)
NET INCOME ATTRIBUTABLE TO COMMON SHAREOWNERS
$
8,713
$
7,427
$
17,168
$
16,933
BASIC NET INCOME PER SHARE
$
0.51
$
0.44
$
1.01
$
1.00
DILUTED NET INCOME PER SHARE
$
0.51
$
0.44
$
1.01
$
1.00
Average Common Basic Shares Outstanding
16,949
16,858
16,940
16,848
Average Common Diluted Shares Outstanding
16,971
16,885
16,958
16,874
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
Six Months Ended
June 30,
June 30,
(Dollars in Thousands)
2022
2021
2022
2021
NET INCOME ATTRIBUTABLE TO COMMON SHAREOWNERS
$
8,713
$
7,427
$
17,168
$
16,933
Other comprehensive (loss) income, before tax:
Investment Securities:
Change in net unrealized gain/loss on securities available for sale
(10,714)
(481)
(36,158)
(2,434)
Derivative:
Change in net unrealized gain on effective cash flow derivative
1,161
(919)
2,997
1,206
Benefit Plans:
Reclassification adjustment for service cost
-
-
-
24
Actuarial gain
-
-
-
166
Defined benefit plan settlement
169
2,000
378
2,000
Total Benefit Plans
169
2,000
378
2,190
Other comprehensive (loss) income, before tax
(9,384)
600
(32,783)
962
Deferred tax (benefit) expense related to other comprehensive income
(2,362)
152
(8,232)
243
Other comprehensive (loss) income, net of tax
(7,022)
448
(24,551)
719
TOTAL COMPREHENSIVE INCOME (LOSS)
$
1,691
$
7,875
$
(7,383)
$
17,652
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
7
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Unaudited)
Accumulated
Additional
Comprehensiv
Shares
Common
Paid-In
Retained
(Loss) Income,
(Dollars In Thousands, Except Share Data)
Outstanding
Stock
Capital
Earnings
Net of Taxes
Total
Balance, April 1, 2022
16,947,602
$
169
$
35,188
$
370,531
$
(33,743)
$
372,145
Net Income Attributable to Common Shareowners
-
-
-
8,713
-
8,713
Other Comprehensive Loss, net of tax
-
-
-
-
(7,022)
(7,022)
Cash Dividends ($
0.1600
-
-
-
(2,712)
-
(2,712)
Stock Based Compensation
-
-
244
-
-
244
Stock Compensation Plan Transactions, net
11,678
1
306
-
-
307
Balance, June 30, 2022
16,959,280
$
170
$
35,738
$
376,532
$
(40,765)
$
371,675
Balance, April 1, 2021
16,851,878
$
169
$
32,804
$
335,324
$
(43,871)
$
324,426
Net Income Attributable to Common Shareowners
-
-
-
7,427
-
7,427
Reclassification to Temporary Equity
(1)
-
-
-
5,353
-
5,353
Other Comprehensive Income, net of tax
-
-
-
-
448
448
Cash Dividends ($
0.1500
-
-
-
(2,530)
-
(2,530)
Stock Based Compensation
-
-
219
-
-
219
Stock Compensation Plan Transactions, net
22,401
-
537
-
-
537
Balance, June 30, 2021
16,874,279
$
169
$
33,560
$
345,574
$
(43,423)
$
335,880
Balance, January 1, 2022
16,892,060
$
169
$
34,423
$
364,788
$
(16,214)
$
383,166
Net Income Attributable to Common Shareowners
-
-
-
17,168
-
17,168
Other Comprehensive Loss, net of tax
-
-
-
-
(24,551)
(24,551)
Cash Dividends ($
0.3200
-
-
-
(5,424)
-
(5,424)
Stock Based Compensation
-
-
489
-
-
489
Stock Compensation Plan Transactions, net
67,220
1
826
-
-
827
Balance, June 30, 2022
16,959,280
$
170
$
35,738
$
376,532
$
(40,765)
$
371,675
Balance, January 1, 2021
16,790,573
$
168
$
32,283
$
332,528
$
(44,142)
$
320,837
Net Income Attributable to Common Shareowners
-
-
-
16,933
-
16,933
Reclassification to Temporary Equity
(1)
-
-
-
1,171
-
1,171
Other Comprehensive Income, net of tax
-
-
-
-
719
719
Cash Dividends ($
0.3000
-
-
-
(5,058)
-
(5,058)
Stock Based Compensation
-
-
438
-
-
438
Stock Compensation Plan Transactions, net
83,706
1
839
-
-
840
Balance, June 30, 2021
16,874,279
$
169
$
33,560
$
345,574
$
(43,423)
$
335,880
(1)
Adjustment to redemption value for non-controlling interest in Capital City Home Loans.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
8
CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Dollars in Thousands)
2022
2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income Attributable to Common Shareowners
$
17,168
$
16,933
Adjustments to Reconcile Net Income to
1,542
(1,553)
3,802
3,782
5,545
5,946
80
40
378
2,000
(573,239)
(877,613)
595,074
941,173
(18,011)
(30,342)
1,358
(8)
-
(250)
489
438
(19)
(4)
(8,879)
(469)
(72)
(81)
(26)
(507)
845
(9,789)
22,040
2,472
Net Cash Provided By Operating Activities
48,075
52,168
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
(218,548)
(201,308)
28,111
44,238
Securities Available for Sale:
(37,044)
(255,379)
3,365
-
47,413
94,911
Purchases of Loans Held for Investment
(174,779)
(70,043)
Net (Increase) Decrease in Loans Held for Investment
(109,806)
64,708
Proceeds From Sales of Other Real Estate Owned
30
1,121
Purchases of Premises and Equipment
(3,322)
(3,215)
Noncontrolling Interest Contributions
2,573
3,464
Net Cash Used In Investing Activities
(462,007)
(325,985)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
73,396
229,361
Net Increase (Decrease) in Short-Term Borrowings
4,784
(32,668)
Repayment of Other Long-Term Borrowings
(150)
(1,123)
Dividends Paid
(5,424)
(5,058)
Issuance of Common Stock Under Purchase Plans
496
570
Net Cash Provided By Financing Activities
73,102
191,082
NET DECREASE IN CASH AND CASH EQUIVALENTS
(340,830)
(82,735)
Cash and Cash Equivalents at Beginning of Period
1,035,354
928,549
Cash and Cash Equivalents at End of Period
$
694,524
845,814
Supplemental Cash Flow Disclosures:
$
1,617
1,877
$
3,765
9,369
Noncash Investing and Financing Activities:
$
77
$
998
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
9
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 notes 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, 2021 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and notes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2021.
Acquisition.
April 30, 2021
, a newly formed subsidiary of CCBG, Capital City Strategic Wealth, LLC (“CCSW”) acquired
substantially all of the assets of Strategic Wealth Group, LLC and certain related businesses (“SWG”), including advisory, service,
and insurance carrier agreements, and the assignment of all related revenues thereof. Under the terms of the purchase agreement,
SWG principles became officers of CCSW and will continue the operation of their
five
management services and comprehensive risk management and asset protection services for individuals and businesses.
CCBG paid
$
4.5
2.8
1.6
Accounting Standards Updates
Accounting Standards Update (“ASU”) 2022-02, “Financial Instruments – Credit Losses (Topic 326)
. In March 2022, the Financial
Accounting Standards Board issued ASU 2022-02, "Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings
and Vintage Disclosures". ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in Accounting
Standards Codification (“ASC”) 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the
current expected credit loss model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments”. ASU 2022-02 also requires that public business entities disclose current-period gross
charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20,
"Financial Instruments—Credit Losses—Measured at Amortized Cost". ASU 2022-02 is effective for the Company for fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company
is evaluating the effect that ASU 2022-02 will have on its consolidated financial statements and related disclosures.
10
NOTE 2 –
INVESTMENT SECURITIES
Investment Portfolio Composition
. The following table summarizes the amortized cost and related fair value of investment
securities available-for-sale and securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses.
Available for Sale
Amortized
Unrealized
Unrealized
Allowance for
Fair
(Dollars in Thousands)
Cost
Gains
Losses
Credit Losses
Value
June 30, 2022
U.S. Government Treasury
$
189,686
$
-
$
11,791
$
-
$
177,895
U.S. Government Agency
219,936
336
9,588
-
210,684
States and Political Subdivisions
47,626
9
5,269
(9)
42,357
Mortgage-Backed Securities
(1)
86,168
8
8,355
-
77,821
Corporate Debt Securities
92,936
-
7,593
(22)
85,321
Other Securities
(2)
7,327
-
-
-
7,327
Total
$
643,679
$
353
$
42,596
$
(31)
$
601,405
December 31, 2021
U.S. Government Treasury
$
190,409
$
65
$
2,606
$
-
$
187,868
U.S. Government Agency
238,490
1,229
2,141
-
237,578
States and Political Subdivisions
47,762
44
811
(15)
46,980
Mortgage-Backed Securities
(1)
89,440
27
598
-
88,869
Corporate Debt Securities
87,537
10
1,304
(21)
86,222
Other Securities
(2)
7,094
-
-
-
7,094
Total
$
660,732
$
1,375
$
7,460
$
(36)
$
654,611
Held to Maturity
Amortized
Unrealized
Unrealized
Fair
(Dollars in Thousands)
Cost
Gains
Losses
Value
June 30, 2022
U.S. Government Treasury
$
303,379
$
-
$
13,671
$
289,708
Mortgage-Backed Securities
(1)
224,879
66
15,690
209,255
Total
$
528,258
$
66
$
29,361
$
498,963
December 31, 2021
U.S. Government Treasury
$
115,499
$
-
$
1,622
$
113,877
Mortgage-Backed Securities
(1)
224,102
2,819
1,099
225,822
Total
$
339,601
$
2,819
$
2,721
$
339,699
(1)
(2)
Includes Federal Home Loan Bank and Federal Reserve Bank stock, recorded at cost of $
2.3
5.1
respectively, at June 30, 2022 and $
2.0
5.1
At June 30, 2022, the investment portfolio had $
0.9
fair value and were not credit impaired.
Securities with an amortized cost of $
375.2
463.8
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
other securities, is pledged to secure FHLB advances. No ready market exists for this stock, and it has no quoted fair 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.
11
Investment Sales.
There were no significant sales of investment securities for the three or six months ended June 30, 2022 or June 30,
2021.
Maturity Distribution
. At June 30, 2022, 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
Fair Value
Amortized Cost
Fair Value
Due in one year or less
$
34,031
$
31,933
$
-
$
-
Due after one year through five years
316,240
296,327
303,379
289,708
Due after five year through ten years
59,474
51,323
-
-
Mortgage-Backed Securities
86,168
77,821
224,879
209,255
U.S. Government Agency
140,439
136,674
-
-
Equity Securities
7,327
7,327
-
-
Total
$
643,679
$
601,405
$
528,258
$
498,963
12
Unrealized Losses on Investment Securities.
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
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in Thousands)
Value
Losses
Value
Losses
Value
Losses
June 30, 2022
Available for Sale
U.S. Government Treasury
$
115,930
$
7,757
$
61,965
$
4,034
$
177,895
$
11,791
U.S. Government Agency
129,675
7,137
43,349
2,451
173,024
9,588
States and Political Subdivisions
40,323
5,229
437
40
40,760
5,269
Mortgage-Backed Securities
73,829
7,909
3,801
446
77,630
8,355
Corporate Debt Securities
82,151
7,285
3,192
308
85,343
7,593
Total
441,908
35,317
112,744
7,279
554,652
42,596
Held to Maturity
U.S. Government Treasury
284,789
13,375
4,919
296
289,708
13,671
Mortgage-Backed Securities
195,328
14,395
9,659
1,295
204,987
15,690
Total
$
480,117
$
27,770
$
14,578
$
1,591
$
494,695
$
29,361
December 31, 2021
Available for Sale
U.S. Government Treasury
$
172,206
$
2,606
$
-
$
-
$
172,206
$
2,606
U.S. Government Agency
127,484
1,786
17,986
355
145,470
2,141
States and Political Subdivisions
42,122
811
-
-
42,122
811
Mortgage-Backed Securities
81,832
598
-
-
81,832
598
Corporate Debt Securities
69,354
1,304
-
-
69,354
1,304
Total
$
492,998
$
7,105
$
17,986
$
355
$
510,984
$
7,460
Held to Maturity
U.S. Government Treasury
113,877
1,622
-
-
113,877
1,622
Mortgage-Backed Securities
115,015
1,099
-
-
115,015
1,099
Total
$
228,892
$
2,721
$
-
$
-
$
228,892
$
2,721
At June 30, 2022, there were
833
72.0
Investment Securities in the Notes to Consolidated Financial Statements for detail by category).
87
Treasury bonds and carry the full faith and credit of the U.S. Government.
621
government sponsored entities. We believe the long history of no credit losses on government securities indicates that the expectation
of nonpayment of the amortized cost basis is zero. The remaining
125
credit component. At June 30, 2022, all CMO, MBS, SBA, U.S. Agency, and U.S. Treasury bonds held were AAA rated. At June 30,
2022, corporate debt securities had an allowance for credit losses of $
22,000
9,000
.
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 believes 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 and
corporate securities portfolio via credit ratings which are updated on a quarterly basis. On a quarterly basis, municipal and corporate
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.
13
NOTE 3 – LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES
Loan Portfolio Composition
. The composition of the held for investment (“HFI”) loan portfolio was as follows:
(Dollars in Thousands)
June 30, 2022
December 31, 2021
Commercial, Financial and Agricultural
$
247,902
$
223,086
Real Estate – Construction
225,664
174,394
Real Estate – Commercial Mortgage
699,093
663,550
Real Estate – Residential
(1)
484,975
360,021
Real Estate – Home Equity
194,658
187,821
Consumer
(2)
361,361
322,593
Loans Held For Investment, Net of Unearned Income
$
2,213,653
$
1,931,465
(1)
Includes loans in process balances of $
7.2
13.6
(2)
Includes overdraft balances of $
1.5
1.1
Net deferred loan costs, which include premiums on purchased loans, included in loans were $
7.0
3.9
million at December 31, 2021.
Accrued interest receivable on loans which is excluded from amortized cost totaled $
6.3
5.3
December 31, 2021, 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 of Atlanta and has pledged a blanket floating lien on all
consumer loans, commercial loans, and construction loans to support available borrowing capacity at the Federal Reserve Bank of
Atlanta.
Loan Purchase and Sales
. The Company will periodically purchase newly originated 1-4 family real estate secured adjustable rate
loans from Capital City Home Loans (“CCHL”), a related party. Residential loan purchases from CCHL totaled $
158.8
$
51.1
Company acquired commercial real estate loans that were not credit impaired from a third party bank totaling $
15.0
17.4
million for the three months ended June 30, 2022 and June 30, 2021, respectively.
14
Allowance for Credit Losses
. The 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 allowance methodology is discussed further in Note 1 – Significant Accounting
Policies in the Company’s 2021 Form 10-K.
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.
Commercial,
Real Estate
Financial,
Real Estate
Commercial
Real Estate
Real Estate
(Dollars in Thousands)
Agricultural
Construction
Mortgage
Residential
Home Equity
Consumer
Total
Three Months Ended
June 30, 2022
Beginning Balance
$
2,122
$
2,596
$
5,392
$
4,470
$
1,916
$
4,260
$
20,756
Provision for Credit Losses
564
542
(396)
1,060
(223)
123
1,670
Charge-Offs
(1,104)
-
-
-
-
(1,193)
(2,297)
Recoveries
59
-
56
115
67
855
1,152
Net (Charge-Offs) Recoveries
(1,045)
-
56
115
67
(338)
(1,145)
Ending Balance
$
1,641
$
3,138
$
5,052
$
5,645
$
1,760
$
4,045
$
21,281
Six Months Ended
June 30, 2022
Beginning Balance
$
2,191
$
3,302
$
5,810
$
4,129
$
2,296
$
3,878
$
21,606
Provision for Credit Losses
403
(172)
(577)
1,374
(628)
1,191
1,591
Charge-Offs
(1,177)
-
(266)
-
(33)
(2,595)
(4,071)
Recoveries
224
8
85
142
125
1,571
2,155
Net (Charge-Offs) Recoveries
(953)
8
(181)
142
92
(1,024)
(1,916)
Ending Balance
$
1,641
$
3,138
$
5,052
$
5,645
$
1,760
$
4,045
$
21,281
Three Months Ended
June 30, 2021
Beginning Balance
$
1,957
$
2,254
$
6,956
$
5,204
$
2,575
$
3,080
$
22,026
Provision for Credit Losses
(56)
505
587
(1,030)
(114)
(76)
(184)
Charge-Offs
(32)
-
-
(65)
(74)
(670)
(841)
Recoveries
103
-
26
244
70
731
1,174
Net Charge-Offs
71
-
26
179
(4)
61
333
Ending Balance
$
1,972
$
2,759
$
7,569
$
4,353
$
2,457
$
3,065
$
22,175
Six Months Ended
June 30, 2021
Beginning Balance
$
2,204
$
2,479
$
7,029
$
5,440
$
3,111
$
3,553
$
23,816
Provision for Credit Losses
(370)
280
(131)
(1,335)
(769)
(171)
(2,496)
Charge-Offs
(101)
-
-
(71)
(79)
(1,726)
(1,977)
Recoveries
239
-
671
319
194
1,409
2,832
Net Charge-Offs
138
-
671
248
115
(317)
855
Ending Balance
$
1,972
$
2,759
$
7,569
$
4,353
$
2,457
$
3,065
$
22,175
For the six months ended June 30, 2022, the allowance for HFI loans decreased by $
0.3
$
1.6
1.9
losses that have not materialized to the extent projected partially offset by growth in reserves for strong new loan origination volume.
For the six months ended June 30, 2021, the allowance decreased $
1.6
2.5
loan recoveries of $
0.9
unemployment and its potential effect on rates of default, and strong net loan recoveries totaling $
0.9
scenarios are utilized to estimate probability of default and are weighted based on management’s estimate of probability. See Note 8 –
Commitments and Contingencies for information on the allowance for off-balance sheet credit commitments.
15
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
Nonaccrual
Total
(Dollars in Thousands)
DPD
DPD
DPD
Past Due
Current
Loans
Loans
June 30, 2022
Commercial, Financial and Agricultural
$
166
$
27
$
-
$
193
$
247,638
$
71
$
247,902
Real Estate – Construction
-
-
-
-
225,664
-
225,664
Real Estate – Commercial Mortgage
358
-
-
358
698,305
430
699,093
Real Estate – Residential
236
-
-
236
483,064
1,675
484,975
Real Estate – Home Equity
225
-
-
225
193,700
733
194,658
Consumer
1,906
636
-
2,542
358,587
232
361,361
Total
$
2,891
$
663
$
-
$
3,554
$
2,206,958
$
3,141
$
2,213,653
December 31, 2021
Commercial, Financial and Agricultural
$
100
$
23
$
-
$
123
$
222,873
$
90
$
223,086
Real Estate – Construction
-
-
-
-
174,394
-
174,394
Real Estate – Commercial Mortgage
151
-
-
151
662,795
604
663,550
Real Estate – Residential
365
151
-
516
357,408
2,097
360,021
Real Estate – Home Equity
210
-
-
210
186,292
1,319
187,821
Consumer
1,964
636
-
2,600
319,781
212
322,593
Total
$
2,790
$
810
$
-
$
3,600
$
1,923,543
$
4,322
$
1,931,465
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.
June 30, 2022
December 31, 2021
Nonaccrual
Nonaccrual
Nonaccrual
Nonaccrual
With No
With
90 + Days
With No
With
90 + Days
(Dollars in Thousands)
ACL
ACL
Still Accruing
ACL
ACL
Still Accruing
Commercial, Financial and Agricultural
$
-
$
71
$
-
$
67
$
23
$
-
Real Estate – Construction
-
-
-
-
-
-
Real Estate – Commercial Mortgage
-
430
-
-
604
-
Real Estate – Residential
1,508
167
-
928
1,169
-
Real Estate – Home Equity
-
733
-
463
856
-
Consumer
-
232
-
-
212
-
Total Nonaccrual Loans
$
1,508
$
1,633
$
-
$
1,458
$
2,864
$
-
16
Collateral Dependent Loans.
The following table presents the amortized cost basis of collateral-dependent loans.
June 30, 2022
December 31, 2021
Real Estate
Non Real Estate
Real Estate
Non Real Estate
(Dollars in Thousands)
Secured
Secured
Secured
Secured
Commercial, Financial and Agricultural
$
-
$
-
$
-
$
67
Real Estate – Construction
-
-
-
-
Real Estate – Commercial Mortgage
-
-
455
-
Real Estate – Residential
697
-
1,645
-
Real Estate – Home Equity
598
-
649
-
Consumer
-
-
-
-
Total Collateral Dependent Loans
$
1,295
$
-
$
2,749
$
67
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.
Residential Real Estate Loans In Process of Foreclosure
. At June 30, 2022 and December 31, 2021, the Company had $
0.8
and $
0.9
Troubled Debt Restructurings (“TDRs”).
6.7
accordance with the modified terms. At December 31, 2021, the Company had $
8.0
7.6
performing in accordance with modified terms. For TDRs, the Company estimated $
0.3
2022 and December 31, 2021.
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 and six months ended June 30, 2022, there were
no
months ended June 30, 2021, there was
one
0.1
three
recorded investment of $
0.6
no
loans classified as TDRs, for which there was a payment default and the loans were modified within the 12 months prior to default.
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.
17
Real Estate Construction – Loans in this category consist of short-term construction loans, revolving and non-revolving credit lines
and construction/permanent loans made to individuals and investors to finance the acquisition, development, construction or
rehabilitation of real property. These loans are primarily made based on identified cash flows of the borrower or project and generally
secured by the property being financed, including 1-4 family residential properties and commercial properties that are either owner-
occupied or investment in nature. These properties may include either vacant or improved property. Construction loans are generally
based upon estimates of costs and value associated with the completed project. Collateral values are determined based upon third
party appraisals and evaluations. Loan to value ratios at origination are governed by established policy guidelines. The disbursement
of funds for construction loans is made in relation to the progress of the project and as such these loans are closely monitored by on-
site inspections.
Real Estate Commercial Mortgage – Loans in this category consists of commercial mortgage loans secured by property that is either
owner-occupied or investment in nature. These loans are primarily made based on identified cash flows of the borrower or project
with consideration given to underlying real estate collateral and personal guarantees. Lending policy establishes debt service
coverage ratios and loan to value ratios specific to the property type. Collateral values are determined based upon third party
appraisals and evaluations.
Real Estate Residential – Residential mortgage loans held in the Company’s loan portfolio are made to borrowers that demonstrate the
ability to make scheduled payments with full consideration to underwriting factors such as current income, employment status, current
assets, and other financial resources, credit history, and the value of the collateral. Collateral consists of mortgage liens on 1-4 family
residential properties. Collateral values are determined based upon third party appraisals and evaluations. The Company does not
originate sub-prime loans.
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 category consists of direct and indirect 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.
18
The following table summarizes gross loans held for investment at June 30, 2022 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)
2022
2021
2020
2019
2018
Prior
Loans
Total
Commercial, Financial,
Agriculture:
Pass
$
49,887
$
54,079
$
25,439
$
21,041
$
15,004
$
15,218
$
66,828
$
247,496
Special Mention
-
-
-
9
-
23
117
149
Substandard
-
-
8
-
122
127
-
257
Total
$
49,887
$
54,079
$
25,447
$
21,050
$
15,126
$
15,368
$
66,945
$
247,902
Real Estate -
Construction:
Pass
$
57,643
$
107,385
$
48,432
$
8,482
$
-
$
126
$
2,905
$
224,973
Special Mention
-
-
691
-
-
-
-
691
Total
$
57,643
$
107,385
$
49,123
$
8,482
$
-
$
126
$
2,905
$
225,664
Real Estate -
Commercial Mortgage:
Pass
$
124,927
$
155,769
$
116,218
$
66,400
$
67,022
$
119,767
$
25,115
$
675,218
Special Mention
224
1,133
235
1,740
742
6,862
1,493
12,429
Substandard
7,510
1,788
402
631
-
1,047
68
11,446
Total
$
132,661
$
158,690
$
116,855
$
68,771
$
67,764
$
127,676
$
26,676
$
699,093
Real Estate - Residential:
Pass
$
183,113
$
106,587
$
51,210
$
31,925
$
22,142
$
74,104
$
7,508
$
476,589
Special Mention
59
-
130
17
59
562
-
827
Substandard
119
1,076
976
935
895
3,558
-
7,559
Total
$
183,291
$
107,663
$
52,316
$
32,877
$
23,096
$
78,224
$
7,508
$
484,975
Real Estate - Home
Equity:
Performing
$
29
$
133
$
13
$
299
$
154
$
2,101
$
191,196
$
193,925
Nonperforming
-
-
-
16
-
-
717
733
Total
$
29
$
133
$
13
$
315
$
154
$
2,101
$
191,913
$
194,658
Consumer:
Performing
$
112,549
$
139,965
$
48,931
$
28,715
$
18,005
$
7,544
$
5,420
$
361,129
Nonperforming
22
56
56
47
38
13
-
232
Total
$
112,571
$
140,021
$
48,987
$
28,762
$
18,043
$
7,557
$
5,420
$
361,361
19
NOTE 4 – MORTGAGE BANKING ACTIVITIES
The Company’s mortgage banking activities 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.
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.
June 30, 2022
December 31, 2021
Unpaid Principal
Unpaid Principal
(Dollars in Thousands)
Balance/Notional
Fair Value
Balance/Notional
Fair Value
Residential Mortgage Loans Held for Sale
$
47,805
$
48,708
$
50,733
$
52,532
Residential Mortgage Loan Commitments ("IRLCs")
(1)
62,201
934
51,883
1,258
Forward Sales Contracts
(2)
31,500
(45)
48,000
(7)
$
49,597
$
53,783
(1)
Recorded in other assets at fair value
(2)
Recorded in other assets and other liabilities at fair value at June 30, 2022 and December 31, 2021, respectively
The Company had
no
2022, and loans held for sale that were 30-69 days outstanding totaled $
0.2
Mortgage banking revenue was as follows:
Three Months Ended June 30,
Six Months Ended June
(Dollars in Thousands)
2022
2021
2022
2021
Net realized gains on sales of mortgage loans
$
4,800
$
13,534
$
9,935
$
27,958
Net change in unrealized gain on mortgage loans held for sale
79
532
(895)
(1,499)
Net change in the fair value of mortgage loan commitments
(183)
(458)
(324)
(2,301)
Net change in the fair value of forward sales contracts
(896)
(1,446)
(38)
817
Pair-Offs on net settlement of forward sales contracts
1,954
(476)
4,209
2,835
Mortgage servicing rights additions
1,457
453
2,088
640
Net origination fees
1,854
1,078
3,036
1,892
Total mortgage banking revenues
$
9,065
$
13,217
$
18,011
$
30,342
20
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.
The following represents a summary of mortgage servicing rights.
(Dollars in Thousands)
June 30, 2022
December 31, 2021
Number of residential mortgage loans serviced for others
2,555
2,106
Outstanding principal balance of residential mortgage loans serviced for others
$
703,537
$
532,967
Weighted average interest rate
3.70%
3.59%
Remaining contractual term (in months)
323
317
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 June 30, 2022, the servicing portfolio balance consisted of the following loan types: FNMA (
50
%),
GNMA (
7
%), and private investor (
43
%). FNMA and private investor loans are structured as actual/actual payment remittance.
The Company had $
0.4
2.0
Company at June 30, 2022 and December 31, 2021, respectively. The right to repurchase these loans and the corresponding liability
has been recorded in other assets and other liabilities, respectively, in the Consolidated Statement of Financial Condition. For the
three and six months ended June 30, 2022, the Company repurchased $
0.6
1.0
currently in GNMA pools. For the three and six months ended June 30, 2021, the Company repurchased $
0.7
2.2
million, respectively, in delinquent residential loans in GNMA pools. When delinquent residential loans are repurchased, the
Company has the intention to modify their terms and include the loans in new GNMA pools.
Activity in the capitalized mortgage servicing rights was as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(Dollars in Thousands)
2022
2021
2022
2021
Beginning balance
$
4,001
$
3,583
$
3,774
$
3,452
Additions due to loans sold with servicing retained
1,457
453
2,088
640
Deletions and amortization
(372)
(326)
(776)
(632)
Valuation allowance reversal
-
-
-
250
Ending balance
$
5,086
$
3,710
$
5,086
$
3,710
The Company did
no
t record any permanent impairment losses on mortgage servicing rights for the three months ended June 30, 2022
and June 30, 2021.
The key unobservable inputs used in determining the fair value of the Company’s mortgage servicing rights were as follows:
June 30, 2022
December 31, 2021
Minimum
Maximum
Minimum
Maximum
Discount rates
9.00%
11.00%
11.00%
15.00%
Annual prepayment speeds
9.46%
11.54%
11.98%
23.79%
Cost of servicing (per loan)
$
65
$
138
$
60
$
73
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. The weighted average annual prepayment speed was
10.48
% at June 30, 2022 and
15.85
% at December 31, 2021.
21
Warehouse Line Borrowings
The Company has the following warehouse lines of credit and master repurchase agreements with various financial institutions at June
30, 2022.
Amounts
(Dollars in Thousands)
Outstanding
$
75
1.00%
to plus
1.00%
, with a floor rate of
3.25%
. A cash pledge deposit of $
0.5
12,657
$
75
November 2022
. Interest is at the SOFR plus
2.25%
, to
3.25%
.
22,333
Total Warehouse Borrowings
$
34,990
Warehouse line borrowings are classified as short-term borrowings. At December 31, 2021, warehouse line borrowings totaled $
29.0
million. At June 30, 2022, the Company had residential mortgage loans held for sale and construction loans held for investment
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, and maximum debt to net worth ratio, as defined in the agreements. The Company was in compliance with all significant debt
covenants at June 30, 2022.
The Company has extended a $
50
51
% owned subsidiary entity. Balances and
transactions under this line of credit are eliminated in the Company’s consolidated financial statements and thus not included in the
total short term borrowings noted on the Consolidated Statement of Financial Condition. The balance of this line of credit at June 30,
2022 and December 31, 2021 was $
13.3
14.8
NOTE 5 – DERIVATIVES
The Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the
receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s
derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or
expected cash receipts and its known or expected cash payments principally related to the Company’s subordinated debt.
Cash Flow Hedges of Interest Rate Risk
Interest rate swaps with notional amounts totaling $
30
debt. Under the swap arrangement, the Company will pay a fixed interest rate of
2.50
% and receive a variable interest rate based on
three-month LIBOR plus a weighted average margin of
1.83
%.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in
accumulated other comprehensive income (“AOCI”) and subsequently reclassified into interest expense in the same period(s) during
which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives
will be reclassified to interest expense as interest payments are made on the Company’s variable-rate subordinated debt.
The following table reflects the cash flow hedges included in the consolidated statements of financial condition
.
Statement of Financial
Notional
Fair
Weighted Average
(Dollars in Thousands)
Condition Location
Amount
Value
June 30, 2022
Interest rate swaps related to subordinated debt
Other Assets
$
30,000
$
5,046
8.0
December 31, 2021
Interest rate swaps related to subordinated debt
Other Assets
$
30,000
$
2,050
8.5
22
The following table presents the net gains (losses) recorded in AOCI and the consolidated statements of income related to the cash
flow derivative instruments (interest rate swaps related to subordinated debt) for the three and six months ended June 30, 2022 and
June 30, 2021.
Amount of Gain
Amount of Gain
(Loss) Recognized
(Loss) Reclassified
(Dollars in Thousands)
Category
in AOCI
from AOCI to Income
Three months ended June 30, 2022
Interest expense
$
867
$
26
Three months ended June 30, 2021
Interest expense
(686)
(37)
Six months ended June 30, 2022
Interest expense
$
2,237
$
(2)
Six months ended June 30, 2021
Interest expense
900
(70)
The Company estimates there will be approximately $
0.7
months.
The Company had a collateral liability of $
5.3
2.0
NOTE 6 – 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.
The Company’s operating leases primarily relate to banking offices with remaining lease terms from
1
43
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
Consolidated Statement of Financial Condition and the related lease expense is recognized on a straight-line basis over the lease term.
At June 30, 2022, the operating lease ROU assets and liabilities were $
11.9
12.5
2021, ROU assets and liabilities were $
11.5
12.2
or any significant lessor agreements.
The table below summarizes our lease expense and other information related to the Company’s operating leases.
Three Months Ended
Six Months Ended
June 30,
June 30,
(Dollars in Thousands)
2022
2021
2022
2021
Operating lease expense
$
391
$
362
$
775
$
706
Short-term lease expense
159
170
337
310
Total lease expense
$
550
$
532
$
1,112
$
1,016
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
435
$
402
$
864
$
786
Right-of-use assets obtained in exchange for new operating lease liabilities
600
440
1,192
515
Weighted average remaining lease term — operating leases (in years)
24.5
25.1
24.5
25.1
Weighted average discount rate — operating leases
2.2%
2.0%
2.2%
2.0%
23
The table below summarizes the maturity of remaining lease liabilities:
(Dollars in Thousands)
June 30, 2022
2022
$
1,717
2023
1,715
2024
1,470
2025
1,249
2026
1,122
2027 and thereafter
11,731
Total
$
19,004
Less: Interest
(6,503)
Present Value of Lease liability
$
12,501
At June 30, 2022, the Company had three additional operating lease obligations for banking offices (to be constructed) that have not
yet commenced. These leases have payments totaling $
9.3
15 years
.
Payments for the
banking offices are expected to commence after the construction periods end, which are each expected to occur during the fourth
quarter of 2022 and the first quarter of 2023.
A related party is the lessor in an operating lease with the Company. The Company’s minimum payment is $
0.2
through 2024, for an aggregate remaining obligation of $
0.5
NOTE 7 - 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”) and a Supplemental Executive Retirement Plan II (“SERP II”) 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 SERP II was adopted by the Company’s Board on May 21, 2020 and covers certain executive officers that
were not covered by the SERP.
The components of the net periodic benefit cost for the Company's qualified benefit pension plan were as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(Dollars in Thousands)
2022
2021
2022
2021
Service Cost
$
1,572
$
1,743
$
3,145
$
3,486
Interest Cost
1,166
1,221
2,333
2,442
Expected Return on Plan Assets
(2,675)
(2,787)
(5,351)
(5,574)
Prior Service Cost Amortization
4
4
8
8
Net Loss Amortization
428
1,691
857
3,382
Pension Settlement
169
2,000
378
2,000
Net Periodic Benefit Cost
$
664
$
3,872
$
1,370
$
5,744
Discount Rate
3.11%
2.88%
3.11%
2.88%
Long-term Rate of Return on Assets
6.75%
6.75%
6.75%
6.75%
The components of the net periodic benefit cost for the Company's SERP and SERP II were as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(Dollars in Thousands)
2022
2021
2022
2021
Service Cost
$
8
$
9
$
16
$
18
Interest Cost
79
61
158
120
Prior Service Cost Amortization
69
69
138
88
Net Loss Amortization
180
243
360
441
Net Periodic Benefit Cost
$
336
$
382
$
672
$
667
Discount Rate
2.80%
2.38%
2.80%
2.38%
24
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 8 - COMMITMENTS AND CONTINGENCIES
Lending Commitments
. The Company is a party to financial instruments with off-balance sheet risks in the normal course of business
to meet the financing needs of its clients. These financial instruments consist of commitments to extend credit and standby letters of
credit.
The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by
the contractual amount of those instruments. The Company uses the same credit policies in establishing commitments and issuing
letters of credit as it does for on-balance sheet instruments. The amounts associated with the Company’s off-balance sheet
obligations were as follows:
June 30, 2022
December 31, 2021
(Dollars in Thousands)
Fixed
Variable
Total
Fixed
Variable
Total
Commitments to Extend Credit
$
215,601
$
515,886
$
731,487
$
217,531
$
505,897
$
723,428
Standby Letters of Credit
6,196
-
6,196
5,205
-
5,205
Total
$
221,797
$
515,886
$
737,683
$
222,736
$
505,897
$
728,633
(1)
Commitments include unfunded loans, revolving lines of credit, and off-balance sheet residential loan commitments.
Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third
party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. In
general, management does not anticipate any material losses as a result of participating in these types of transactions. However, any
potential losses arising from such transactions are reserved for in the same manner as management reserves for its other credit
facilities.
For both on- and off-balance sheet financial instruments, the Company requires collateral to support such instruments when it is
deemed necessary. The Company evaluates each client’s creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies, but may
include deposits held in financial institutions; U.S. Treasury securities; other marketable securities; real estate; accounts receivable;
property, plant and equipment; and inventory.
The allowance for credit losses for off-balance sheet credit commitments that are not unconditionally cancellable by the bank is
adjusted as a provision for credit loss expense and is recorded in other liabilities. The following table shows the activity in the
allowance.
Three Months Ended June 30,
Six Months Ended June 30,
(Dollars in Thousands)
2022
2021
2022
2021
Beginning Balance
$
2,976
$
2,974
$
2,897
$
1,644
Provision for Credit Losses
(123)
(387)
(44)
943
Ending Balance
$
2,853
$
2,587
$
2,853
$
2,587
Other Commitments.
In the normal course of business, the Company enters into lease commitments which are classified as operating
leases. See Note 6 – Leases for additional information on the maturity of the Company’s operating lease commitments. Furthermore,
the Company has an outstanding commitment of up to $
1.0
technology solutions for community banks. At June 30, 2022, the Company had contributed $
0.2
the Company had contributed $
0.1
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.
25
Indemnification Obligation
. The Company is a member of the Visa U.S.A. network. Visa U.S.A member banks are required to
indemnify the Visa U.S.A. network for potential future settlement of certain litigation (the “Covered Litigation”) that relates to several
antitrust lawsuits challenging the practices of Visa and MasterCard International. In 2008, the Company, as a member of the Visa
U.S.A. network, obtained Class B shares of Visa, Inc. upon its initial public offering. Since its initial public offering, Visa, Inc. has
funded a litigation reserve for the Covered Litigation resulting in a reduction in the Class B shares held by the Company. During the
first quarter of 2011, the Company sold its remaining Class B shares. Associated with this sale, the Company entered into a swap
contract with the purchaser of the shares that requires a payment to the counterparty in the event that Visa, Inc. makes subsequent
revisions to the conversion ratio for its Class B shares. In the second quarter of 2022, Visa, Inc. funded the litigation reserve and the
share conversion ratio was reduced and a $
0.2
quarterly charges are reflected in earnings in the period incurred. 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 $
0.2
NOTE 9 – FAIR VALUE MEASUREMENTS
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly
transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or
liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income
approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the
assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs. The fair value hierarchy is as follows:
●
Level 1 Inputs -
Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the
ability to access at the measurement date
.
●
Level 2 Inputs -
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from, or
corroborated, by market data by correlation or other means
.
●
Level 3 Inputs -
Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own
assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Securities Available for Sale.
U.S. Treasury securities are reported at fair value utilizing Level 1 inputs. Other securities classified as
available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements
from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, credit information and the bond’s terms
and conditions, among other things.
In general, the Company does not purchase securities that have a complicated structure. The Company’s entire portfolio consists of
traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or
general obligation or revenue-based municipal bonds. Pricing for such instruments is easily obtained. At least annually, the Company
will validate prices supplied by the independent pricing service by compari ng 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 which 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.
26
Interest Rate Swap.
The Company’s derivative positions are classified as Level 2 within the fair value hierarchy and are valued using
models generally accepted in the financial services industry and that use actively quoted or observable market input values from
external market data providers. The fair value derivatives are determined using discounted cash flow models.
Fair Value Swap
. The Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares. The
valuation represents the amount due and payable to the counterparty based upon the revised share conversion rate, if any, during the
period. At June 30, 2022, there was $
0.2
0.1
A summary of fair values for assets and liabilities consisted of the following:
Level 1
Level 2
Level 3
Total Fair
(Dollars in Thousands)
Inputs
Inputs
Inputs
Value
June 30, 2022
ASSETS:
Securities Available for Sale:
U.S. Government Treasury
$
177,895
$
-
$
-
$
177,895
U.S. Government Agency
-
210,684
-
210,684
States and Political Subdivisions
-
42,357
-
42,357
Mortgage-Backed Securities
-
77,821
-
77,821
Corporate Debt Securities
-
85,321
-
85,321
Other Securities
-
7,327
-
7,327
Loans Held for Sale
-
48,708
-
48,708
Interest Rate Swap Derivative
-
5,046
-
5,046
Mortgage Banking IRLC Derivative
-
-
934
934
Mortgage Servicing Rights
-
-
9,336
9,336
LIABILITIES:
Mortgage Banking Hedge Derivative
$
-
$
45
$
-
$
45
December 31, 2021
ASSETS:
Securities Available for Sale:
U.S. Government Treasury
$
187,868
$
-
$
-
$
187,868
U.S. Government Agency
-
237,578
-
237,578
States and Political Subdivisions
-
46,980
-
46,980
Mortgage-Backed Securities
-
88,869
-
88,869
Corporate Debt Securities
-
86,222
-
86,222
Other Securities
-
7,094
-
7,094
Loans Held for Sale
-
52,532
-
52,532
Interest Rate Swap Derivative
-
2,050
-
2,050
Mortgage Banking IRLC Derivative
-
-
1,258
1,258
Mortgage Servicing Rights
-
-
4,718
4,718
LIABILITIES:
Mortgage Banking Hedge Derivative
$
-
$
7
$
-
$
7
27
Mortgage Banking Activities
. The Company had Level 3 issuances and transfers related to mortgage banking activities of $
7.7
and $
16.8
27.4
19.3
months ended June 30, 2021. Issuances are valued based on the change in fair value of the underlying mortgage loan from inception
of the IRLC to the Consolidated Statement of Financial Condition date, adjusted for pull-through rates 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. Collateral dependent 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 $
1.3
0.1
30, 2022 and $
2.8
0.2
Other Real Estate Owned
. During the first six months of 2022, certain foreclosed assets, upon initial recognition, were measured and
reported at fair value through a charge-off to the allowance for credit 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.
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 each of June 30, 2022 and December 31, 2021, there was
no
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 the
caption “Assets and Liabilities Measured at Fair Value on a Recurring Basis – Securities Available for Sale”.
Loans.
techniques based upon projected cash flows and estimated discount rates. Pursuant to the adoption of ASU 2016-01,
Recognition and
Measurement of Financial Assets and Financial Liabilities
, the values reported reflect the incorporation of a liquidity discount to meet
the objective of “exit price” valuation.
Deposits.
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.
flows and estimated discount rates as well as rates being offered for similar obligations.
Short-Term and Long-Term Borrowings.
projected cash flows and estimated discount rates as well as rates being offered for similar debt.
28
A summary of estimated fair values of significant financial instruments consisted of the following:
June 30, 2022
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
91,209
$
91,209
$
-
$
-
Short-Term Investments
603,315
603,315
-
-
Investment Securities, Available for Sale
601,405
177,895
423,510
-
Investment Securities, Held to Maturity
528,258
289,708
209,255
-
Equity Securities
(1)
900
-
900
-
Loans Held for Sale
48,708
-
48,708
-
Other Equity Securities
(2)
2,848
-
2,848
-
Interest Rate Swap Derivative
5,046
-
5,046
-
Mortgage Servicing Rights
5,086
-
-
9,336
Mortgage Banking IRLC Derivative
934
-
-
934
Loans, Net of Allowance for Credit Losses
2,192,372
-
-
2,127,117
LIABILITIES:
Deposits
$
3,786,258
$
-
$
3,335,175
$
-
Short-Term Borrowings
39,463
-
39,462
-
Subordinated Notes Payable
52,887
-
46,121
-
Long-Term Borrowings
612
-
627
-
Mortgage Banking Hedge Derivative
45
-
45
-
December 31, 2021
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
65,313
$
65,313
$
-
$
-
Short-Term Investments
970,041
970,041
-
-
Investment Securities, Available for Sale
654,611
187,868
466,743
-
Investment Securities, Held to Maturity
339,601
113,877
225,822
-
Equity Securities
(1)
861
-
861
-
Loans Held for Sale
52,532
-
52,532
-
Other Equity Securities
(2)
2,848
-
2,848
-
Interest Rate Swap Derivative
2,050
-
2,050
-
Mortgage Servicing Rights
3,774
-
-
4,718
Mortgage Banking IRLC Derivative
1,258
-
-
1,258
Loans, Net of Allowance for Credit Losses
1,909,859
-
-
1,903,640
LIABILITIES:
Deposits
$
3,712,862
$
-
$
3,713,478
$
-
Short-Term Borrowings
34,557
-
34,557
-
Subordinated Notes Payable
52,887
-
42,609
-
Long-Term Borrowings
884
-
938
-
Mortgage Banking Hedge Derivative
7
-
7
-
(1)
Not readily marketable securities - reflected in other assets.
(2)
Accounted for under the equity method – 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.
29
NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The amounts allocated to accumulated other comprehensive income (loss) are presented in the table below.
Accumulated
Securities
Other
Available
Interest Rate
Retirement
Comprehensive
(Dollars in Thousands)
Swap
Plans
Balance as of January 1, 2022
$
(4,588)
$
1,530
$
(13,156)
$
(16,214)
Other comprehensive (loss) income during the period
(27,071)
2,237
283
(24,551)
Balance as of June 30, 2022
$
(31,659)
$
3,767
$
(12,873)
$
(40,765)
Balance as of January 1, 2021
$
2,700
$
428
$
(47,270)
$
(44,142)
Other comprehensive (loss) income during the period
(1,816)
900
1,635
719
Balance as of June 30, 2021
$
884
$
1,328
$
(45,635)
$
(43,423)
NOTE 11 – SUBSEQUENT EVENT
Subsequent to June 30, 2022 and effective August 1, 2022, a total of
33
value of $
168.4
159.0
(“HTM”) classification. These securities had a net unrealized loss of $
9.4
transfer date. The net unrealized loss at the date of transfer will remain in accumulated other comprehensive income (“AOCI”) and be
amortized into net interest income over the remaining life of the securities. The amortization of amounts retained in AOCI will offset
the effect on net interest income of the accretion of the discount resulting from transferring securities at fair value.
30
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 2022 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," "vision," "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
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"). We offer a broad array of products and services through a total of 57 full-service offices
located in Florida, Georgia, and Alabama. We provide a full range of banking services, including traditional deposit and credit
services, mortgage banking, asset management, trust, merchant services, bankcards, securities brokerage services and financial
advisory services, including life insurance products, risk management and asset protection services.
Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference
between the interest and fees received on interest 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, operating
expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest
income such as mortgage banking revenues, wealth management fees, deposit fees, and bank card fees.
We have included a detailed discussion of the economic conditions in our markets and our long-term strategic objectives as part of the
MD&A section of our 2021 Form 10-K.
Acquisitions
On April 30, 2021, a newly formed subsidiary of CCBG, Capital City Strategic Wealth, LLC (“CCSW”), completed its acquisition of
substantially all of the assets of Strategic Wealth Group, LLC and certain related businesses (“SWG”). CCSW was consolidated into
CCBG’s financial statements effective May 1, 2021. A detailed discussion regarding the acquisition of Capital City Strategic Wealth,
LLC is included as part of the MD&A section of our 2021 Form 10-K.
NON-GAAP FINANCIAL MEASURES
We present a tangible common equity ratio and a tangible book value per diluted share that, in each case, removes the effect of
goodwill and other intangibles that resulted 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. The generally accepted
accounting principles (“GAAP”) to non-GAAP reconciliation for each quarter presented is provided below.
31
2022
2021
(Dollars in Thousands, except per share data)
Second
First
Fourth
Third
Second
First
Shareowners' Equity (GAAP)
$
371,675
$
372,145
$
383,166
$
348,868
$
335,880
$
324,426
Less: Goodwill and Other Intangibles (GAAP)
93,173
93,213
93,253
93,293
93,333
89,095
Tangible Shareowners' Equity (non-GAAP)
A
278,502
278,932
289,913
255,575
242,547
235,331
Total Assets (GAAP)
4,354,297
4,310,045
4,263,849
4,048,733
4,011,459
3,929,884
Less: Goodwill and Other Intangibles (GAAP)
93,173
93,213
93,253
93,293
93,333
89,095
Tangible Assets (non-GAAP)
B
$
4,261,124
$
4,216,832
$
4,170,596
$
3,955,440
$
3,918,126
$
3,840,789
Tangible Common Equity Ratio (non-GAAP)
A/B
6.54%
6.61%
6.95%
6.46%
6.19%
6.13%
Actual Diluted Shares Outstanding (GAAP)
C
16,981,614
16,962,362
16,935,389
16,911,715
16,901,375
16,875,719
Tangible Book Value per Diluted Share (non-GAAP)
A/C
16.40
16.44
17.12
15.11
14.35
13.94
32
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, Except
2022
2021
Per Share Data)
Second
First
Fourth
Third
Second
First
Summary of Operations
:
Interest Income
$
29,320
$
25,438
$
25,549
$
28,520
$
26,836
$
25,446
Interest Expense
987
742
838
848
856
948
Net Interest Income
28,333
24,696
24,711
27,672
25,980
24,498
Provision for Credit Losses
1,542
-
-
-
(571)
(982)
Net Interest Income After
26,791
24,696
24,711
27,672
26,551
25,480
Noninterest Income
24,903
25,818
24,672
26,574
26,473
29,826
Noninterest Expense
40,498
39,233
40,207
39,702
42,123
40,476
Income Before Income Taxes
11,196
11,281
9,176
14,544
10,901
14,830
Income Tax Expense
2,177
2,235
2,040
2,949
2,059
2,787
Income Attributable to NCI
(306)
(591)
(764)
(1,504)
(1,415)
(2,537)
Net Income Attributable to CCBG
8,713
8,455
6,372
10,091
7,427
9,506
Net Interest Income (FTE)
28,409
24,774
24,790
27,750
26,064
24,606
Per Common Share
:
Net Income Basic
$
0.51
$
0.50
$
0.38
$
0.60
$
0.44
$
0.56
Net Income Diluted
0.51
0.50
0.38
0.60
0.44
0.56
Cash Dividends Declared
0.16
0.16
0.16
0.16
0.15
0.15
Diluted Book Value
21.89
21.94
22.63
20.63
19.87
19.22
Diluted Tangible Book Value
(1)
16.40
16.44
17.12
15.11
14.35
13.94
Market Price:
28.55
28.88
29.00
26.10
27.39
28.98
24.43
25.96
24.77
22.02
24.55
21.42
27.89
26.36
26.40
24.74
25.79
26.02
Selected Average Balances
:
Loans Held for Investment
$
2,084,679
$
1,963,578
$
1,948,324
$
1,974,132
$
2,036,781
$
2,044,363
Earning Assets
3,974,221
3,938,824
3,791,313
3,693,123
3,623,910
3,497,929
Total Assets
4,321,388
4,266,775
4,127,937
4,026,613
3,956,349
3,821,521
Deposits
3,765,329
3,714,062
3,549,145
3,447,688
3,387,352
3,239,508
Shareowners’ Equity
373,365
383,956
350,140
341,460
329,040
326,330
Common Equivalent Average Shares:
16,949
16,931
16,880
16,875
16,858
16,838
16,971
16,946
16,923
16,909
16,885
16,862
Performance Ratios:
Return on Average Assets
0.81
%
0.80
%
0.61
%
0.99
%
0.75
%
1.01
%
Return on Average Equity
9.36
8.93
7.22
11.72
9.05
11.81
Net Interest Margin (FTE)
2.87
2.55
2.60
2.98
2.89
2.85
Noninterest Income as % of
46.78
51.11
49.96
48.99
50.47
54.90
Efficiency Ratio
75.96
77.55
81.29
73.09
80.18
74.36
Asset Quality:
Allowance for Credit Losses ("ACL")
$
21,281
$
20,756
21,606
$
21,500
$
22,175
$
22,026
ACL to Loans HFI
0.96
%
1.05
%
1.12
%
1.11
%
1.10
%
1.07
%
Nonperforming Assets (“NPAs”)
3,231
2,745
4,339
3,218
6,302
5,472
NPAs to Total Assets
0.07
0.06
0.10
0.08
0.16
0.14
NPAs to Loans HFI plus OREO
0.15
0.14
0.22
0.17
0.31
0.27
ACL to Non-Performing Loans
677.57
760.83
499.93
710.39
433.93
410.78
Net Charge-Offs to Average Loans HFI
0.22
0.16
0.02
0.03
(0.07)
(0.10)
Capital Ratios:
Tier 1 Capital
15.13
%
15.98
%
16.14
%
15.69
%
15.44
%
16.08
%
Total Capital
16.07
16.98
17.15
16.70
16.48
17.20
Common Equity Tier 1
13.07
13.77
13.86
13.45
13.14
13.63
Leverage
8.77
8.78
8.95
9.05
8.84
8.97
Tangible Common Equity
(1)
6.54
6.61
6.95
6.46
6.19
6.13
(1)
Non-GAAP financial measure. See non-GAAP reconciliation on page 31.
33
FINANCIAL OVERVIEW
Results of Operations
Performance Summary.
Net income attributable to common shareowners of $8.7 million, or $0.51 per diluted share, for the second
quarter of 2022 compared to net income of $8.5 million, or $0.50 per diluted share, for the first quarter of 2022, and $7.4 million, or
$0.44 per diluted share, for the second quarter of 2021.
For the first six months of 2022, net income attributable to common
shareowners totaled $17.2 million, or $1.01 per diluted share, compared to net income of $16.9 million, or $1.00 per diluted share, for
the same period of 2021.
Net Interest Income.
Tax-equivalent net interest income for the second quarter of 2022 totaled $28.4 million, compared to $24.8
million for the first quarter of 2022, and $26.1 million for the second quarter of 2021. For the first six months of 2022, tax-equivalent
net interest income totaled $53.2 million compared to $50.7 million for the same period of 2021. Compared to the referenced prior
periods, the increase reflected higher interest rates, strong loan growth, and higher investment balances.
Provision and Allowance for Credit Losses.
We recorded a provision for credit losses of $1.5 million for the second quarter of 2022
compared to no provision in the first quarter of 2022 and a provision benefit of $0.6 million for the second quarter of 2021. For the
first six months of 2022, the provision was $1.5 million compared to a benefit of $1.6 million for the same period of 2021. The higher
level of provision compared to all prior periods was primarily attributable to strong loan growth. The loan loss provision in 2021 was
also favorably impacted by strong net loan recoveries. We discuss the allowance for credit losses further below.
Noninterest Income.
Noninterest income for the second quarter of 2022 totaled $24.9 million compared to $25.8 million for the first
quarter of 2022 and $26.5 million for the second quarter of 2021. The $0.9 million decrease from the first quarter of 2022 was
primarily attributable to lower wealth management fees of $1.7 million, which reflected lower insurance revenues at CCSW of $1.9
million that were partially offset by higher retail brokerage fees of $0.3 million. For the first six months of 2022, noninterest income
totaled $50.7 million compared to $56.3 million for the same period of 2021 with the $5.6 million decrease largely driven by lower
mortgage banking fees of $12.3 million, partially offset by higher deposit fees of $2.1 million and wealth management fees of $4.1
million (insurance commissions of $3.4 million and retail brokerage fees of $0.7 million). We discuss noninterest income in further
detail below.
Noninterest Expense.
Noninterest expense for the second quarter of 2022 totaled $40.5 million compared to $39.2 million for the first
quarter of 2022 and $42.1 million for the second quarter of 2021. The $1.3 million increase over the first quarter of 2022 was driven
by a $0.9 million increase in other expense and higher compensation of $0.5 million. For the first six months of 2022, noninterest
expense totaled $79.7 million compared to $82.6 million for the same period of 2021 with the $2.9 million decrease primarily
attributable to lower pension settlement expense of $1.6 million and lower compensation expense of $1.2 million, primarily lower
commissions at CCHL. We discuss noninterest expense in further detail below.
Financial Condition
Earning Assets.
Average earning assets totaled $3.974 billion for the second quarter of 2022, an increase of $35.4 million, or 0.9%,
over the first quarter of 2022, and an increase of $182.9 million, or 4.8%, over the fourth quarter of 2021. The increase over both
prior periods was primarily driven by higher deposits which funded loan growth. The mix of earnings assets continues to improve
driven by strong loan growth and further deployment of liquidity into the investment portfolio which has increased $135 million in
2022.
Loans
. Average loans held for investment (“HFI”) increased $121.1 million, or 6.2%, over the first quarter of 2022 and increased
$136.4 million, or 7.0%, over the fourth quarter of 2021. The growth in 2022 has been broad based with increases realized in all loan
categories, more significantly, residential mortgage, residential construction, and consumer (indirect auto) with strong growth in
commercial mortgage in the second quarter. During 2022, we have purchased a higher level of residential mortgage loans from CCHL
driven by higher demand for portfolio/adjustable rate product.
Credit Quality
. Overall credit quality remains strong. Nonperforming assets (nonaccrual loans and other real estate) totaled $3.2
million at June 30, 2022 compared to $2.8 million at March 31, 2022 and $4.3 million at December 31, 2021. At June 30, 2022,
nonperforming assets as a percentage of total assets totaled 0.07% compared to 0.06% at March 31, 2022 and 0.10% at December 31,
2021. Nonaccrual loans totaled $3.1 million at June 30, 2022, a $0.4 million decrease from March 31, 2022 and a $1.2 million
decrease from December 31, 2021.
Deposits
. Average total deposits were $3.765 billion for the second quarter of 2022, an increase of $51.3 million, or 1.4%, over the
first quarter of 2022 and $216.2 million, or 6.1%, over the fourth quarter of 2021. Growth over the first quarter of 2022 was primarily
attributable to an increase in noninterest bearing accounts and savings accounts, partially offset by a decline in seasonal public fund
deposits. Compared to the fourth quarter 2021, strong growth occurred in our noninterest bearing deposits, NOW accounts, and
savings account balances.
34
Capital
. At June 30, 2022, we were well-capitalized with a total risk-based capital ratio of 16.07% and a tangible common equity
ratio (a non-GAAP financial measure) of 6.54% compared to 16.98% and 6.61%, respectively at March 31, 2022 and 17.15% and
6.95%, respectively, at December 31, 2021. At June 30, 2022, all of our regulatory capital ratios exceeded the threshold to be well-
capitalized under the Basel III capital standards.
RESULTS OF OPERATIONS
The following table provides a condensed summary of our results of operations - a discussion of the various components are discussed
in further detail below.
Three Months Ended
Six Months Ended
June 30,
March 31,
June 30,
June 30,
June 30,
(Dollars in Thousands, except per share data)
2022
2022
2021
2022
2021
Interest Income
$
29,320
$
25,438
$
26,836
$
54,758
$
52,282
Taxable Equivalent Adjustments
76
78
84
154
193
Total Interest Income (FTE)
29,396
25,516
26,920
54,912
52,475
Interest Expense
987
742
856
1,729
1,804
Net Interest Income (FTE)
28,409
24,774
26,064
53,183
50,671
Provision for Credit Losses
1,542
-
(571)
1,542
(1,553)
Taxable Equivalent Adjustments
76
78
84
154
193
Net Interest Income After Provision for Credit Losses
26,791
24,696
26,551
51,487
52,031
Noninterest Income
24,903
25,818
26,473
50,721
56,299
Noninterest Expense
40,498
39,233
42,123
79,731
82,599
Income Before Income Taxes
11,196
11,281
10,901
22,477
25,731
Income Tax Expense
2,177
2,235
2,059
4,412
4,846
Pre-Tax Income Attributable to Noncontrolling Interest
(306)
(591)
(1,415)
(897)
(3,952)
Net Income Attributable to Common Shareowners
$
8,713
$
8,455
$
7,427
$
17,168
$
16,933
Basic Net Income Per Share
$
0.51
$
0.50
$
0.44
$
1.01
$
1.00
Diluted Net Income Per Share
$
0.51
$
0.50
$
0.44
$
1.01
$
1.00
Net Interest Income
Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning
assets less interest expense paid on interest bearing liabilities. This information is provided on a "taxable equivalent" basis to reflect
the tax-exempt status of income earned on certain loans and state and local government debt obligations. We provide an analysis of
our net interest income including average yields and rates in Table I on page 45.
Tax-equivalent net interest income for the second quarter of 2022 totaled $28.4 million, compared to $24.8 million for the first quarter
of 2022, and $26.1 million for the second quarter of 2021. For the first six months of 2022, tax-equivalent net interest income totaled
$53.2 million compared to $50.7 million for the same period of 2021. Compared to the referenced prior periods, the increase reflected
higher interest rates, strong loan growth, and higher investment balances.
Our net interest margin for the second quarter of 2022 was 2.87%, an increase of 32 basis points over the first quarter of 2022
primarily attributable to higher interest rates and an overall improved earning asset mix. For the month of June 2022, our net interest
margin was 3.05%. Excluding the impact of overnight funds in excess of $200 million, our net interest margin for the second quarter
of 2022 was 3.24%. Compared to the three and six month periods of 2021, the net interest margin decreased two and 16 basis points,
respectively, primarily due to growth in earning assets (driven by higher deposit balances), which drove net interest income dollars
higher, but negatively impacted the margin percentage.
Provision for Credit Losses
We recorded a provision for credit losses of $1.5 million for the second quarter of 2022 compared to no provision in the first quarter
of 2022 and a provision benefit of $0.6 million for the second quarter of 2021. For the first six months of 2022, the provision was
$1.5 million compared to a benefit of $1.6 million for the same period of 2021. The higher level of provision compared to all prior
periods was primarily attributable to strong loan growth. The loan loss provision in 2021 was also favorably impacted by strong net
loan recoveries. We discuss the allowance for credit losses further below. For more information on charge-offs and recoveries, see
Note 3 – Loans Held for Investment and Allowance for Credit Losses.
35
Noninterest Income
Noninterest income for the second quarter of 2022 totaled $24.9 million compared to $25.8 million for the first quarter of 2022 and
$26.5 million for the second quarter of 2021. The $0.9 million decrease from the first quarter of 2022 was primarily attributable to
lower wealth management fees of $1.7 million (primarily lower insurance revenues at CCSW) that was partially offset by higher
combined deposit and bank card fees of $0.5 million and mortgage banking revenues of $0.1 million. Compared to the second quarter
of 2021, the $1.6 million decrease was primarily attributable to lower mortgage banking revenues of $4.2 million that were partially
offset by higher deposit fees of $1.2 million and wealth management fees of $1.1 million (insurance revenues of $0.7 million and
retail brokerage fees of $0.4 million). For the first six months of 2022, noninterest income totaled $50.7 million compared to $56.3
million for the same period of 2021 with the $5.6 million decrease largely driven by lower mortgage banking fees of $12.3 million
partially offset by higher deposit fees of $2.1 million and wealth management fees of $4.1 million (insurance revenues of $3.4 million
and retail brokerage fees of $0.7 million). Lower mortgage banking revenues for 2022 reflected lower production volume driven by
higher interest rates as well as overall tightening of secondary market loan sale margins. Further, the higher level of wealth
management fees over both prior year periods reflected higher insurance revenues at CCSW (acquired in May 2021). For 2022,
CCHL contributed $0.6 million ($0.03 per diluted share) to earnings versus $2.5 million ($0.14 per diluted share) in 2021 which has
largely been offset by a $1.2 million ($0.07 per diluted share) contribution to earnings by CCSW.
Noninterest income represented 46.8% of operating revenues (net interest income plus noninterest income) in the second quarter of
2022 compared to 51.1% in the first quarter of 2022 and 50.5% in the second quarter of 2021. For the first six months of 2022,
noninterest income represented 48.9% of operating revenues compared to 52.7% for the same period of 2021.
The table below reflects the major components of noninterest income.
Six Months Ended
June 30,
March 31,
June 30,
June 30,
June 30,
(Dollars in Thousands)
2022
2022
2021
2022
2021
Deposit Fees
$
5,447
$
5,191
$
4,236
$
10,638
$
8,507
Bank Card Fees
4,034
3,763
3,998
7,797
7,616
Wealth Management Fees
4,403
6,070
3,274
10,473
6,364
Mortgage Banking Revenues
9,065
8,946
13,217
18,011
30,342
Other
1,954
1,848
1,748
3,802
3,470
Total Noninterest Income
$
24,903
$
25,818
$
26,473
$
50,721
$
56,299
Significant components of noninterest income are discussed in more detail below.
Mortgage Banking Revenues.
Mortgage banking revenues totaled $9.1 million for the second quarter of 2022 compared to $8.9
million for the first quarter of 2022 and $13.2 million for the second quarter of 2021. For the six months of 2022, revenues totaled
$18.0 million compared to $30.3 million for the same period of 2021. Lower mortgage banking revenues for 2022 reflected a
reduction in refinancing activity, and to a lesser degree lower purchase mortgage originations, primarily driven by higher interest
rates. In addition, gain on sale margins have been pressured due to a lower level of both governmental loan product originations and
mandatory delivery loan sales (both of which provide a higher gain percentage). Strong best efforts (portfolio product) origination
volume and continued stability in our construction/permanent loan program have partially offset the slowdown in secondary market
originations.
Deposit Fees
. Deposit fees for the second quarter of 2022 totaled $5.4 million, an increase of $0.3 million, or 4.9%, over the first
quarter of 2022, and an increase of $1.2 million, or 28.6%, over the second quarter of 2021. For the first six months of 2022, deposit
fees totaled $10.6 million, an increase of $2.1 million, or 25.0%, over the same period of 2021. Compared to first quarter of 2022, the
increase reflected higher overdraft fees. The increase over both prior year periods was attributable to higher monthly service charge
fees and overdraft fees. The conversion of our remaining free checking accounts to a monthly maintenance fee account type drove the
increase in service charge fees. The increase in overdraft fees was driven by higher utilization of our overdraft service which is closely
correlated (inversely) with the consumer savings rate which has declined noticeably since it spiked in 2020/2021 due to the high level
of governmental stimulus during the pandemic.
Bank Card Fees
. Bank card fees for the second quarter of 2022 totaled $4.0 million, a $0.3 million, or 7.2%, increase over the first
quarter of 2022, and comparable to the second quarter of 2021. For the first six months of 2022, bank card fees totaled $7.8 million,
an increase of $0.2 million, or 2.4%, over the same period of 2021. The increase over the prior year periods was primarily attributable
to growth in checking accounts.
36
Wealth Management Fees
. Wealth management fees include trust fees through Capital City Trust (i.e., managed accounts and
trusts/estates), retail brokerage fees through Capital City Investments (i.e., investment , insurance products, and retirement accounts),
and financial advisory fees through Capital City Strategic Wealth (i.e., including the sale of life insurance, risk management and asset
protection services). Wealth management fees for the second quarter of 2022 totaled $4.4 million, a $1.7 million, or 27.5%, decrease
from the first quarter of 2022, which reflected lower insurance revenues of $1.9 million and trust fees of $0.1 million partially offset
by higher retail brokerage fees of $0.3 million. The decrease in insurance revenues was due to a very strong first quarter and reflected
the closing of several very large insurance policy sales. Compared to the second quarter of 2021, the $1.1 million, or 34.5%, increase
reflected higher insurance revenues of $0.7 million and retail brokerage fees of $0.4 million. For the first six months of 2022, wealth
management fees increased $4.1 million, or 64.6%, due to higher insurance revenues of $3.4 million and retail brokerage fees of $0.7
million. The higher level of insurance revenues reflected the acquisition of Capital City Strategic Wealth in May 2021. At June 30,
2022, total assets under management were approximately $2.201 billion compared to $2.329 billion at March 31, 2022 and $2.324
billion at December 31, 2021.
37
Noninterest Expense
Noninterest expense for the second quarter of 2022 totaled $40.5 million compared to $39.2 million for the first quarter of 2022 and
$42.1 million for the second quarter of 2021. The $1.3 million increase over the first quarter of 2022 was driven by a $0.9 million
increase in other expense and higher compensation of $0.5 million. Higher expense for advertising ($0.2 million), processing ($0.1
million) and travel/entertainment ($0.1 million) drove the increase in other expense. Additionally, other expense reflects a $0.2
million expense for our VISA share swap agreement that is triggered when VISA funds their merchant litigation reserve which
happens infrequently. The $0.5 million increase in compensation was driven by higher salary expense of $0.8 million (CCHL
commissions, annual merit, and staffing additions in new markets) that was partially offset by lower associate benefit expense of $0.3
million. Compared to the second quarter of 2021, the $1.6 million decrease was primarily attributable to lower pension settlement
expense of $1.8 million. For the first six months of 2022, noninterest expense totaled $79.7 million compared to $82.6 million for the
same period of 2021 with the $2.9 million decrease primarily attributable to lower pension settlement expense of $1.6 million and
lower compensation expense of $1.2 million. The decrease in compensation expense reflected lower salary expense of $1.4 million
partially offset by higher associate benefit expense of $0.2 million. Lower performance based compensation (commissions/incentives)
at CCHL partially offset by higher performance based compensation at CCSW and lower realized loan cost (credit offset by salary
expense) at the Bank drove the variance in salary expense. We expect additional pension settlement expense for the remainder of
2022 based on our current estimate of lump sum pension pay-outs to retirees.
To date, the impact of inflation and higher prices on our cost structure has not been significant. While operating in a very tight labor
market, we have mitigated the impact of salary pressures by not replacing certain positions that became vacant. Further, we have
realized higher than historical increases in certain premises and processing contracts reflective of inflationary pressures. We will
continue to focus on opportunities to re-negotiate or replace vendors at periodic renewals.
The table below reflects the major components of noninterest expense.
Six Months Ended
June 30,
March 31,
June 30,
June 30,
June 30,
(Dollars in Thousands)
2022
2022
2021
2022
2021
Salaries
$
21,461
20,664
21,117
42,125
43,564
Associate Benefits
3,922
4,192
4,261
8,114
7,878
Total Compensation
25,383
24,856
25,378
50,239
51,442
Premises
2,734
2,759
2,714
5,493
5,473
Equipment
3,341
3,334
3,259
6,675
6,467
Total Occupancy
6,075
6,093
5,973
12,168
11,940
Legal Fees
316
349
321
665
879
Professional Fees
1,406
1,332
1,406
2,738
2,736
Processing Services
1,752
1,637
1,794
3,389
3,339
Advertising
980
773
631
1,753
1,381
Telephone
703
728
754
1,431
1,508
Insurance - Other
593
510
545
1,103
1,046
Other Real Estate Owned, net
(29)
25
(270)
(4)
(388)
Pension Settlement
169
209
2,000
378
2,000
Miscellaneous
3,150
2,721
3,591
5,871
6,716
Total Other
9,040
8,284
10,772
17,324
19,217
Total Noninterest Expense
$
40,498
39,233
42,123
79,731
82,599
38
Significant components of noninterest expense are discussed in more detail below.
Compensation
. Compensation expense totaled $25.4 million for the second quarter of 2022 compared to $24.9 million for the first
quarter of 2022 and $25.4 million for the second quarter of 2021. Compared to the first quarter of 2022, the $0.5 million increase
reflected higher salary expense of $0.8 million partially offset by lower associate benefit expense of $0.3 million. The increase in
salary expense was attributable to higher performance based compensation (CCHL commissions), annual merit raises, and staffing
additions in new markets. Lower associate insurance and associate appreciation event related expenses drove the decline in other
associate benefits expense. Compared to the second quarter of 2021, higher salary expense of $0.3 million (lower CCHL performance
compensation of $1.3 million and base salaries of $0.2 million less higher CCSW performance compensation of $0.8 million and core
bank base salaries of $0.5 million) was offset by lower associate benefit expense of $0.3 million (associate insurance and stock based
compensation). For the first six months of 2022, compensation expense totaled $50.2 million compared to $51.4 million for the same
period of 2021 with the $1.2 million decrease attributable to lower salary expense of $1.4 million partially offset by higher associate
benefit expense of $0.2 million. The decrease in salary expense was primarily attributable to lower performance based compensation
(commissions/incentives) of $4.5 million at CCHL partially offset by higher performance based compensation at CCSW of $1.6
million and lower realized loan cost of $1.1 million (credit offset by salary expense) at the Bank and overtime of $0.3 million (related
to the second round of the Paycheck Protection Program in 2021) . The increase in other associate benefit expense was driven by
higher associate insurance expense as we released self –insurance reserves in 2021.
Occupancy
. Occupancy expense totaled $6.1 million for the second quarter of 2022, comparable to the first quarter of 2022, and $6.0
million for the second quarter of 2021. For the first six months of 2022, occupancy expense totaled $12.2 million compared to $11.9
million for the same period of 2021. The increase over both prior year periods was primarily related to software additions for certain
risk management and strategic initiatives.
Other
. Other expense totaled $9.0 million for the second quarter of 2022 compared to $8.3 million for the first quarter of 2022 and
$10.8 million for the second quarter of 2021. Compared to the first quarter of 2022, the $0.7 million increase was driven by higher
expense for advertising expense ($0.2 million), processing ($0.1 million), and travel/entertainment ($0.2 million). In addition, other
expense reflects a $0.2 million expense for our VISA share swap agreement that is triggered when VISA funds their merchant
litigation reserve which happens infrequently. Compared to the second quarter of 2021, the $1.7 million decrease was primarily due
to lower pension settlement expense of $1.8 million. For the first six months of 2022, other expense totaled $17.3 million compared to
$19.2 million for the same period of 2021 with the $1.9 million decrease driven by lower pension settlement expense of $1.6 million
and legal fees of $0.2 million. Additionally, we realized higher other real estate expense of $0.4 million and advertising expense of
$0.4 million that were offset by lower miscellaneous expense of $0.8 million. The variance in miscellaneous expense was primarily
attributable to lower expense for our base pension plan service cost of $2.4 million that was partially offset by higher expense for
travel/entertainment of $0.3 million, mortgage servicing right (“MSR”) amortization of $0.1 million, other losses of $0.2 million, and
miscellaneous of $0.3 million, the reversal of $0.3 million in MSR valuation reserve in 2021, and other variable expenses totaling $0.2
million related to loan production.
Our operating efficiency ratio (expressed as noninterest expense as a percentage of the sum of taxable-equivalent net interest income
plus noninterest income) was 75.96% for the second quarter of 2022 compared to 77.55% for the first quarter of 2022 and 80.18% for
the second quarter of 2021. For the first six months of 2022, this ratio was 76.73% compared to 77.22% for the same period of 2021.
Income Taxes
We realized income tax expense of $2.2 million (effective rate of 19.4%) for the second quarter of 2022 comparable to the first quarter
of 2022 and $2.1 million (effective rate of 18.9%) for the second quarter of 2021. For the first six months of 2022, we realized
income tax expense of $4.4 million (effective rate of 19.6%) compared to $4.8 million (effective rate of 18.8%) for the same period of
2021. For the second quarter of 2022, we realized a favorable discrete tax item for $0.3 million related to state of Florida tax refunds.
Absent discrete items, we expect our annual effective tax rate to approximate 20-21% in 2022.
FINANCIAL CONDITION
Average earning assets totaled $3.974 billion for the second quarter of 2022, an increase of $35.4 million, or 0.9%, over the first
quarter of 2022, and an increase of $182.9 million, or 4.8%, over the fourth quarter of 2021. The increase over both prior periods was
primarily driven by higher deposit balances (see below –
Deposits
). The mix of earning assets continues to improve driven by strong
loan growth and further deployment of liquidity into the investment portfolio which has increased $135 million in 2022.
39
Investment Securities
Average investment s increased $85.6 million, or 8.1% over the first quarter of 2022 and increased $153.7 million, or 15.5%, over the
fourth quarter of 2021. Our investment portfolio represented 28.8% of our average earning assets for the second quarter of 2022
compared to 26.9% for the first quarter of 2022 and 26.1% for the fourth quarter of 2021. For the remainder of 2022, we will continue
to monitor our overall liquidity position and, dependent on market conditions, look for opportunities to reinvest proceeds and/or
purchase additional securities that align with our overall investment strategy.
The investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and
asset/liability management. Two types of classifications are approved for investment securities which are Available -for-Sale (“AFS”)
and Held-to-Maturity (“HTM”). During the second quarter of 2022, we purchased securities under both the AFS and HTM
designations. At June 30, 2022, $601.4 million, or 53.2%, of our investment portfolio was classified as AFS, and $528.3 million, or
46.8%, classified as HTM. The average maturity of our total portfolio at June 30, 2022 was 3.51 years compared to 3.63 years at
March 31, 2022 and 3.63 years at December 31, 2021.
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 maint ain a trading portfolio.
At June 30, 2022, there were 833 positions (combined AFS and HTM) with unrealized losses totaling $72.0 million (see Note 2 –
Investment Securities in the Notes to Consolidated Financial Statements for detail by category). 87 of these positions are U.S.
Treasury bonds and carry the full faith and credit of the U.S. Government. 621 are U.S. government agency securities issued by U.S.
government sponsored entities. We believe the long history of no credit losses on government securities indicates that the expectation
of nonpayment of the amortized cost basis is zero. The remaining 125 positions (Municipal securities and corporate bonds) have a
credit component. At June 30, 2022, all CMO, MBS, SBA, U.S. Agency, and U.S. Treasury bonds held were AAA rated. At June 30,
2022, corporate debt securities had an allowance for credit losses of $22,000 and municipal securities had an allowance of $9,000.
Loans HFI
Average loans held for investment (“HFI”) increased $121.1 million, or 6.2%, over the first quarter of 2022 and increased $136.4
million, or 7.0%, over the fourth quarter of 2021. Period end loans increased $228.1 million, or 11.5%, over the first quarter of 2022
and $282.2 million, or 14.6%, over the fourth quarter of 2022. The growth in 2022 has been broad based with increases realized in all
loan categories, more significantly, residential mortgage, residential construction, and consumer (indirect auto) with strong growth in
commercial mortgage in the second quarter. The increase in residential mortgage reflected a higher level of loan purchases (second
quarter - $132 million, first quarter - $26 million) from CCHL driven by higher demand for portfolio/adjustable rate product. In
addition, the increase in commercial mortgage reflected a loan pool purchase (7 loans for $15 million).
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 adjustments as necessary.
Credit Quality
Overall credit quality remains strong. Nonperforming assets (nonaccrual loans and other real estate) totaled $3.2 million at June 30,
2022 compared to $2.8 million at March 31, 2022 and $4.3 million at December 31, 2021. At June 30, 2022, nonperforming assets as
a percentage of total assets totaled 0.07% compared to 0.06% at March 31, 2022 and 0.10% at December 31, 2021. Nonaccrual loans
totaled $3.1 million at June 30, 2022, a $0.4 million increase over March 31, 2022 and a $1.2 million decrease from December 31,
2021. Further, classified loans decreased $2.7 million from the first quarter of 2022 to $19.6 million.
40
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 uncollectability 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.
At June 30, 2022, the allowance for credit losses for HFI loans totaled $21.3 million compared to $20.8 million at March 31, 2022 and
$21.6 million at December 31, 2021. Activity within the allowance is detailed in Note 3 to the consolidated financial statements. The
$0.5 million increase in the allowance for the second quarter was driven by strong new loan origination volume that was partially
offset by the release of reserves held for pandemic related losses that have not materialized to the extent projected. Further, net
charge-offs increased $0.4 million to $1.1 million for the second quarter and reflected one large commercial charge -off for $0.8
million related to a work-out resolved during the quarter. At June 30, 2022, the allowance represented 0.96% of HFI loans and
provided coverage of 678% of nonperforming loans compared to 1.05% and 761%, respectively, at March 31, 2022, and 1.12% and
500%, respectively, at December 31, 2021.
At June 30, 2022, the allowance for credit losses for unfunded commitments totaled $2.9 compared to $3.0 million at March 31, 2022
and $2.9 million at December 31, 2021. The allowance for unfunded commitments is recorded in other liabilities.
Deposits
Average total deposits were $3.765 billion for the second quarter of 2022, an increase of $51.3 million, or 1.4%, over the first quarter
of 2022 and $216.2 million, or 6.1%, over the fourth quarter of 2021. Compared to the first quarter of 2022, the increase reflected
higher noninterest bearing and savings balances, partially offset by a decline in seasonal public fund balances. Compared to the fourth
quarter of 2021, strong growth occurred in our noninterest bearing deposits, NOW accounts, and savings account balances. Over the
past few years, we have experienced strong core deposit growth, in addition to growth related to multiple government stimulus
programs in response to the Covid-19 pandemic, such as those under the CARES Act and the American Rescue Plan Act. Given these
increases, the potential exists for our deposit levels to be volatile for the remainder of 2022 due to the uncertain timing of the outflows
of the stimulus related balances, in addition to the frequency and degree to which the Federal Open Market Committee (FOMC) raises
the overnight funds rate. It is anticipated that liquidity levels will remain strong given our current level of overnight funds. The Bank
continues to strategically consider ways to safely deploy a portion of this liquidity.
We monitor deposit rates on an ongoing basis and adjust, if necessary, as a prudent pricing discipline remains the key to managing our
mix of deposits.
MARKET RISK AND INTEREST RATE SENSITIVITY
Market Risk and Interest Rate Sensitivity
Overview.
Market risk arises from changes in interest rates, exchange rates, commodity prices, and equity prices. We have risk
management policies designed to monitor and limit exposure to market risk and we do not participate in activities that give rise to
significant market risk involving exchange rates, commodity prices, or equity prices. In asset and liability management activities, our
policies are 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 reprice on a different basis than interest-earning assets. When
interest-bearing liabilities mature or reprice 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 reprice more
quickly than interest-bearing liabilities, falling market 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.
41
We have established what we believe to be a comprehensive interest rate risk management policy, which is administered by
management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits of risk, 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 captures
optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with
any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by
us. 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 assumptions used in the model. Finally, the
methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients’ ability to service their
debts, or the impact of rate changes on demand for loan and deposit products.
The statement of financial condition is subject to testing for interest rate shock possibilities to indicate the inherent interest rate risk.
We prepare a current base case and several alternative interest rate simulations (-200, -100,+100, +200, +300, and +400 basis points
(bp)), at least once per quarter, and report the analysis to ALCO, our Market Risk Oversight Committee (“MROC”), our Enterprise
Risk Oversight Committee (“EROC”) and the Board of Directors. (The -200bp rate scenario was reintroduced into the model
beginning in the second quarter of 2022 due to the higher interest rate environment) . We augment our interest rate shock analysis with
alternative interest rate scenarios on a quarterly basis that may include ramps, parallel shifts, and a flattening or steepening of the yield
curve (non-parallel shift). In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when
other business conditions so dictate.
Our goal is to structure the statement of financial condition 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 attempt to
achieve this goal by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets,
by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by managing the mix of our core
deposits, and by adjusting our rates to market conditions on a continuing basis.
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
-200 bp
Policy Limit
-15.0%
-12.5%
-10.0%
-7.5%
-7.5%
-10.0%
June 30, 2022
19.3%
14.5%
9.6%
4.9%
-10.3%
-17.6%
March 31, 2022
27.0%
20.1%
13.2%
6.4%
-7.4%
n/a
Percentage Change (24-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
Policy Limit
-17.5%
-15.0%
-12.5%
-10.0%
-10.0%
-12.5%
June 30, 2022
39.3%
30.3%
21.3%
12.6%
-11.5%
-22.6%
March 31, 2022
46.8%
35.3%
23.9%
12.8%
-9.9%
n/a
The Net Interest Income (“NII”) at Risk position indicates that in the short-term, all rising rate environments will positively impact the
net interest margin of the Company, while declining rate environments will have a negative impact on the net interest margin. These
metrics became less favorable in all rate scenarios compared to the prior quarter as the NII base increased due to higher rates and now
has more room to fall. The percent change over both a 12-month and 24-month shock are outside of policy in a rates down 100 bps
and down 200 bps scenario due to our limited ability to lower our deposit rates relative to the decline in market rate.
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 by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these
discounted values of the assets and liabilities is the economic value of equity, which in theory approximates the fair value of our net
assets.
42
ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY
(1)
Changes in Interest Rates
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
Policy Limit
-30.0%
-25.0%
-20.0%
-15.0%
-15.0%
-20.0%
June 30, 2022
14.4%
11.7%
8.3%
4.7%
-11.7%
-25.4%
March 31, 2022
20.2%
16.2%
11.5%
6.3%
-14.7%
n/a
EVE Ratio (policy minimum 5.0%)
19.7%
18.9%
18.0%
17.1%
13.9%
11.6%
(1) Down 300, and 400 bp rate scenarios have been excluded due to the current interest rate environment. A down 200 bp rate
scenario was added in the second quarter of 2022.
At June 30, 2022, the economic value of equity was favorable in all rising rate environments and unfavorable in the falling rate
environments. Compared to the first quarter of 2022, EVE metrics became less favorable in a rising rate environment primarily due to
the use of cash to fund loan growth and became more favorable in the rates down scenario as loan growth extended our asset duration.
EVE is currently in compliance with policy in all rate scenarios as the EVE ratio in each rate scenario exceeds 5.0%.
As the interest rate environment and the dynamics of the economy continue to change, additional simulations will be analyzed to
address not only the changing rate environment, but also the change in mix of our financial assets and liabilities, measured over
multiple years, to help assess the risk to the Company.
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, which take into account the marketability of assets, the sources and stability of
funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on
accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our client deposits, supplemented
by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, federal funds purchased and
FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are
sufficient to meet our future operating capital and funding requirements.
At June 30, 2022, we had the ability to generate $1.589 billion in additional liquidity through all of our available resources (this
excludes $603 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 June 30, 2022, 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 primarily consists of debt issued by the U.S. Treasury, U.S.
governmental and federal agencies, municipal governments, corporate bonds, and asset-backed securities. The weighted average life
of the portfolio was approximately 3.51 years at June 30, 2022, and the available for sale portfolio had a net unrealized pre-tax loss of
$42.2 million.
We maintained an average net overnight funds (deposits with banks plus FED funds sold less FED funds purchased) sold position of
$691.9 million in the second quarter of 2022 compared to $873.1 million in the first quarter of 2022 and $789.1 million in the fourth
quarter of 2021. The decrease compared to both prior period was primarily due to growth in both the loan and investment portfolios.
We expect our capital expenditures will be approximately $8.0 million over the next 12 months, which will primarily consist of
construction of new offices, 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.
43
Borrowings
Average short term borrowings totaled $31.8 million for the second quarter of 2022 compared to $32.4 million for the first quarter of
2022 and $46.4 million for the fourth quarter of 2021. The variance compared to both prior periods was primarily attributable to lower
warehouse borrowing needs to support CCHL’s loans held for sale. Additional detail on these borrowings is provided in Note 4 –
Mortgage Banking Activities in the Consolidated Financial Statements.
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 continue to evaluate the impact of the expected
discontinuation of LIBOR on our two junior subordinated deferrable interest notes.
During the second quarter of 2020, we entered into a derivative cash flow hedge of our interest rate risk related to our subordinated
debt. The notional amount of the derivative is $30 million ($10 million of the CCBG Capital Trust I borrowing and $20 million of the
CCBG Capital Trust II borrowing). The interest rate swap agreement requires CCBG to pay fixed and receive variable (Libor plus
spread) and has an average all-in fixed rate of 2.50% for 10 years. Additional detail on the interest rate swap agreement is provided in
Note 5 – Derivatives in the Consolidated Financial Statements.
Capital
Our capital ratios are presented in the Selected Quarterly Financial Data table on page 32. At June 30, 2022, our regulatory capital
ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards.
Shareowners’ equity was $371.7 million at June 30, 2022 compared to $372.1 million at March 31, 2022 and $383.2 million at
December 31, 2021. For the first six months of 2022, shareowners’ equity was positively impacted by net income attributable to
common shareowners of $17.2 million, a $2.2 million increase in the fair value of the interest rate swap related to subordinated debt,
net adjustments totaling $0.8 million related to transactions under our stock compensation plans, stock compensation accretion of $0.5
million, and a $0.3 million decrease in the accumulated other comprehensive loss for our pension plan. Shareowners’ equity was
reduced by common stock dividends of $5.4 million ($0.32 per share) and a $27.1 million increase in the unrealized loss on
investment securities.
At June 30, 2022, our common stock had a book value of $21.89 per diluted share compared to $21.94 at March 31, 2022 and $22.63
at December 31, 2021. Book value is impacted by the net after-tax unrealized gains and losses on AFS investment securities. At June
30, 2022, the net loss was $31.7 million compared to a net loss of $23.6 million at March 31, 2022 and $4.6 million at December 31,
2021. 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 June 30, 2022, the net pension liability reflected in other
comprehensive loss was $12.9 million compared to $13.0 million at March 31, 2022 and $13.2 million at December 31, 2021. This
liability is re-measured annually on December 31
st
used in calculating the liability are discussed in our 2021 Form 10-K “Critical Accounting Policies” and include the weighted average
discount rate used to measure the present value of the pension liability, the weighted average expected long-term rate of return on
pension plan assets, and the assumed rate of annual compensation increases, all of which will vary when re-measured. The discount
rate assumption used to calculate the pension liability is subject to long-term corporate bond rates at December 31
st
. The estimated
impact to the pension liability based on a 25-basis point increase or decrease in long-term corporate bond rates used to discount the
pension obligation would decrease or increase the pension liability by approximately $4.6 million (after-tax) using the balances from
the December 31, 2021 measurement date.
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.
44
At June 30, 2022, we had $731.5 million in commitments to extend credit and $6.2 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, which is included in other liabilities on the consolidated statements of financial condition and
totaled $2.9 million at June 30, 2022.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2021 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 2021 Form 10-K.
45
TABLE I
AVERAGE BALANCES & INTEREST RATES
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
2022
2021
Average
Average
Average
Average
Average
Average
Average
Average
(Dollars in Thousands)
Balances
Interest
Rate
Balances
Interest
Rate
Balances
Interest
Rate
Balances
Interest
Rate
Assets:
Loans Held for Sale
$
52,860
$
711
5.39
%
$
77,101
$
566
2.94
%
$
47,959
$
1,108
4.66
%
$
91,591
$
1,536
3.38
%
Loans Held for Investment
(1)(2)
2,084,679
23,433
4.51
2,036,781
24,095
4.74
2,024,463
45,244
4.51
2,040,551
46,578
4.71
Taxable Securities
1,142,269
3,834
1.34
687,882
2,036
1.18
1,099,739
6,723
1.22
608,801
3,899
1.28
Tax-Exempt Securities
(2)
2,488
10
1.73
3,530
23
2.58
2,449
20
1.67
3,686
48
2.60
Funds Sold
691,925
1,408
0.82
818,616
200
0.10
782,011
1,817
0.47
816,638
414
0.10
Total Earning Assets
3,974,221
29,396
2.97
%
3,623,910
26,920
2.98
%
3,956,621
54,912
2.80
%
3,561,267
52,475
2.97
%
Cash & Due From Banks
79,730
74,076
77,007
71,541
Allowance For Credit Losses
(20,984)
(22,794)
(21,318)
(23,457)
Other Assets
288,421
281,157
281,922
279,956
TOTAL ASSETS
$
4,321,388
$
3,956,349
$
4,294,232
$
3,889,307
Liabilities:
NOW Accounts
$
1,033,190
$
120
0.05
%
$
966,649
$
74
0.03
%
$
1,056,419
$
206
0.04
%
$
976,031
$
150
0.03
%
Money Market Accounts
286,210
36
0.05
272,138
33
0.05
285,810
69
0.05
270,990
66
0.05
Savings Accounts
628,472
77
0.05
529,844
64
0.05
613,996
149
0.05
511,152
124
0.05
Other Time Deposits
95,132
33
0.14
102,995
37
0.15
96,088
66
0.14
102,544
76
0.15
Total Interest Bearing Deposits
2,043,004
266
0.05
1,871,626
208
0.04
2,052,313
490
0.05
1,860,717
416
0.05
Short-Term Borrowings
31,782
343
4.33
51,152
324
2.54
32,066
535
3.36
59,049
736
2.51
Subordinated Notes Payable
52,887
370
2.76
52,887
308
2.30
52,887
687
2.58
52,887
615
2.31
Other Long-Term Borrowings
722
8
4.54
1,762
16
3.38
777
17
4.51
2,246
37
3.26
Total Interest Bearing Liabilities
2,128,395
987
0.19
%
1,977,427
856
0.17
%
2,138,043
1,729
0.16
%
1,974,899
1,804
0.18
%
Noninterest Bearing Deposits
1,722,325
1,515,726
1,687,524
1,453,121
Other Liabilities
87,207
107,801
79,728
109,417
TOTAL LIABILITIES
3,937,927
3,600,954
3,905,295
3,537,437
Temporary Equity
10,096
26,355
10,306
24,178
TOTAL SHAREOWNERS’ EQUITY
373,365
329,040
378,631
327,692
TOTAL LIABILITIES, TEMPORARY
AND SHAREOWNERS’ EQUITY
$
4,321,388
$
3,956,349
$
4,294,232
$
3,889,307
Interest Rate Spread
2.78
%
2.81
%
2.64
%
2.79
%
Net Interest Income
$
28,409
$
26,064
$
53,183
$
50,671
Net Interest Margin
(3)
2.87
%
2.89
%
2.71
%
2.87
%
(1)
Average Balances include net loan fees, discounts and premiums and nonaccrual loans. Interest income includes loans fees of $0.4 million and $1.9 million for the three month periods ended June 30, 2022 and
(2)
Interest income includes the effects of taxable equivalent adjustments using a 21% Federal tax rate.
(3)
Taxable equivalent net interest income divided by average earning assets.
46
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, 2021.
Item 4. CONTROLS AND PROCEDURES
At June 30, 2022, 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.
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 June 30, 2022, 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 2021 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2021 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not Applicable.
Item 5. Other Information
None.
47
Item 6. Exhibits
(A) Exhibits
31.1
31.2
32.1
32.2
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
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
48
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.
/s/ J. Kimbrough Davis
J. Kimbrough Davis
Executive Vice President and Chief Financial Officer
(Mr. Davis is the Principal Financial Officer and has
been duly authorized to sign on behalf of the Registrant)
Date: August 4, 2022