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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
March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number:
0-13358
Capital City Bank Group, Inc.
(Exact name of Registrant as specified in its charter)
Florida
59-2273542
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
217 North Monroe Street
,
Tallahassee
,
Florida
32301
(Address of principal executive office)
(Zip Code)
(
850
)
402-7821
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par value $0.01
CCBG
Nasdaq Stock Market
, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[X] No [
]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Yes [
X
] No [
]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting company, or
an emerging growth company.
See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth
company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any
new or revised financial accounting standards pursuant to Section 13(a) of The Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
[
]
No
[X]
At April 29, 2021,
16,851,878
shares of the Registrant's Common Stock, $.01 par value, were outstanding.
2
CAPITAL CITY BANK
GROUP,
INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2021
TABLE OF CONTENTS
PART I –
Financial Information
Page
Item 1.
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition – March 31, 2021 and December 31, 2020
4
Consolidated Statements of Income – Three Months Ended March 31, 2021 and 2020
5
Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2021 and 2020
6
Consolidated Statements of Changes in Shareowners’ Equity – Three Months Ended March 31, 2021 and 2020
7
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2021 and 2020
8
Notes to Consolidated Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
45
Item 4.
Controls and Procedures
45
PART II –
Other Information
Item 1.
Legal Proceedings
45
Item 1A.
Risk Factors
45
Item 3.
Defaults Upon
Senior Securities
45
Item 4.
Mine Safety Disclosure
45
Item 5.
Other Information
45
Item 6.
Exhibits
46
Signatures
47
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, 2020
(the “2020 Form 10
-K”):
(a) “Introductory Note”
in Part I,
Item 1. “Business”;
(b) “Risk Factors”
in Part I,
Item 1A, as
updated in our
subsequent quarterly reports
filed on Form 10-Q; and (c) “Introduction”
in “Management’s Discussion and
Analysis of Financial Condition and Results
of Operations,” in
Part II, Item 7, as well as:
●
the magnitude and duration of the ongoing COVID-19 pandemic and its impact on the global and local economies
and financial market
conditions and our business, results of operations and financial condition, including the impact of our participation
in government
programs related to COVID-19;
●
our ability to successfully manage credit risk, interest rate risk, liquidity risk, and other risks inherent to our industry;
●
legislative or regulatory changes;
●
changes in monetary and fiscal policies of the U.S. Government;
●
inflation, interest rate, market and monetary fluctuations;
●
the effects of security breaches and computer viruses that may affect our computer
systems or fraud related to debit card products;
●
the accuracy of our financial statement estimates and assumptions, including the estimates used for our loan
loss reserve, deferred tax
asset valuation and pension plan;
●
changes in accounting principles, policies, practices or guidelines;
●
the frequency and magnitude of foreclosure of our loans;
●
the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry
concentrations;
●
the strength of the United States economy in general and the strength of the local economies in which we
conduct operations;
●
our ability to declare and pay dividends, the payment of which is subject to our capital requirements;
●
changes in the securities and real estate markets;
●
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 and the potential effects of
higher interest rates on our loan origination volumes;
●
the effect of corporate restructuring, acquisitions or dispositions, including the actual
restructuring and other related charges and the
failure to achieve the expected gains, revenue growth or expense savings from such corporate restructuring,
acquisitions or dispositions;
●
the effects of natural disasters, harsh weather conditions (including hurricanes), widespread
health emergencies, military conflict,
terrorism, 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;
●
changes in consumer spending and saving habits;
●
growth and profitability of our noninterest income;
●
the limited trading activity of our common stock;
●
the concentration of ownership of our common stock;
●
anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;
●
other risks described from time to time in our filings with the Securities and Exchange Commission; and
●
our ability to manage the risks involved in the foregoing.
However, other factors besides those listed in
Item 1A Risk Factors
or discussed in this Form 10-Q also could adversely affect our results,
and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.
Any forward-looking
statements made by us or on our behalf speak only as of the date they are made.
We do not undertake to update
any forward-looking
statement, except as required by applicable law.
4
PART
I.
FINANCIAL INFORMATION
Item 1.
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
(Unaudited)
March 31,
December 31,
(Dollars in Thousands)
2021
2020
ASSETS
Cash and Due From Banks
$
73,973
$
67,919
Funds Sold
851,910
860,630
Total Cash and Cash
Equivalents
925,883
928,549
Investment Securities, Available
for Sale, at fair value
406,245
324,870
Investment Securities, Held to Maturity (fair value of $
204,158
and $
175,175
)
199,109
169,939
Total Investment
Securities
605,354
494,809
Loans Held For Sale, at fair value
82,081
114,039
Loans Held for Investment
2,057,727
2,006,426
Allowance for Credit Losses
(22,026)
(23,816)
Loans Held for Investment, Net
2,035,701
1,982,610
Premises and Equipment, Net
86,370
86,791
Goodwill
89,095
89,095
Other Real Estate Owned
110
808
Other Assets
105,290
101,370
Total Assets
$
3,929,884
$
3,798,071
LIABILITIES
Deposits:
Noninterest Bearing Deposits
$
1,473,891
$
1,328,809
Interest Bearing Deposits
1,884,217
1,888,751
Total Deposits
3,358,108
3,217,560
Short-Term
Borrowings
55,687
79,654
Subordinated Notes Payable
52,887
52,887
Other Long-Term
Borrowings
1,829
3,057
Other Liabilities
109,487
102,076
Total Liabilities
3,577,998
3,455,234
Temporary Equity
27,460
22,000
SHAREOWNERS’ EQUITY
Preferred Stock, $
0.01
par value;
3,000,000
shares authorized;
no
shares issued and outstanding
-
-
Common Stock, $
0.01
par value;
90,000,000
shares authorized;
16,851,878
and
16,790,573
shares issued and outstanding at March 31, 2021 and December
31, 2020, respectively
169
168
Additional Paid-In Capital
32,804
32,283
Retained Earnings
335,324
332,528
Accumulated Other Comprehensive Loss, net of tax
(43,871)
(44,142)
Total Shareowners’
Equity
324,426
320,837
Total Liabilities, Temporary
Equity, and Shareowners' Equity
$
3,929,884
$
3,798,071
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 March 31,
(Dollars in Thousands, Except Per Share
Data)
2021
2020
INTEREST INCOME
Loans, including Fees
$
23,350
$
23,593
Investment Securities:
Taxable Securities
1,863
2,996
Tax Exempt Securities
20
19
Funds Sold
213
757
Total Interest Income
25,446
27,365
INTEREST EXPENSE
Deposits
208
939
Short-Term
Borrowings
412
132
Subordinated Notes Payable
307
471
Other Long-Term
Borrowings
21
50
Total Interest Expense
948
1,592
NET INTEREST INCOME
24,498
25,773
Provision for Credit Losses
(982)
4,990
Net Interest Income After Provision For Credit Losses
25,480
20,783
NONINTEREST INCOME
Deposit Fees
4,271
5,015
Bank Card Fees
3,618
3,051
Wealth Management
Fees
3,090
2,604
Mortgage Banking Revenues
17,125
3,253
Other
1,722
1,555
Total Noninterest
Income
29,826
15,478
NONINTEREST EXPENSE
Compensation
26,064
19,736
Occupancy, Net
5,967
4,979
Other Real Estate Owned, Net
(118)
(798)
Other
8,563
7,052
Total Noninterest
Expense
40,476
30,969
INCOME BEFORE INCOME TAXES
14,830
5,292
Income Tax Expense
2,787
1,282
NET INCOME
12,043
4,010
Pre-Tax Income
Attributable to Noncontrolling Interests
(2,537)
277
NET INCOME ATTRIBUTABLE
TO COMMON SHAREOWNERS
$
9,506
$
4,287
BASIC NET INCOME PER SHARE
$
0.56
$
0.25
DILUTED NET INCOME PER SHARE
$
0.56
$
0.25
Average Basic Shares
Outstanding
16,838
16,808
Average Diluted
Shares Outstanding
16,862
16,842
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
(Unaudited)
Three Months Ended
March 31,
(Dollars in Thousands)
2021
2020
NET INCOME
$
9,506
$
4,287
Other comprehensive income, before
tax:
Investment Securities:
Change in net unrealized gain (loss) on securities available
for sale
(1,952)
3,547
Derivative:
Change in net unrealized gain on effective cash
flow derivative
2,125
-
Benefit Plans:
Reclassification adjustment for service cost
24
-
Actuarial gain
166
-
Total Benefit Plans
190
-
Other comprehensive income, before
tax
363
3,547
Deferred tax expense related to other comprehensive
income
92
899
Other comprehensive income, net of tax
271
2,648
TOTAL COMPREHENSIVE
INCOME
$
9,777
$
6,935
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
Other
Additional
Comprehensive
Shares
Common
Paid-In
Retained
(Loss) Income,
(Dollars In Thousands, Except Share
Data)
Outstanding
Stock
Capital
Earnings
Net of Taxes
Total
Balance, January 1, 2021
16,790,573
$
168
$
32,283
$
332,528
$
(44,142)
$
320,837
Net Income
-
-
-
9,506
-
9,506
Reclassification to Temporary
Equity
(1)
-
-
-
(4,182)
-
(4,182)
Other Comprehensive Income, net of tax
-
-
-
-
271
271
Cash Dividends ($
0.15
00 per share)
-
-
-
(2,528)
-
(2,528)
Stock Based Compensation
-
-
219
-
-
219
Stock Compensation Plan Transactions,
net
61,305
1
302
-
-
303
Balance, March 31, 2021
16,851,878
$
169
$
32,804
$
335,324
$
(43,871)
$
324,426
Balance, January 1, 2020
16,771,544
$
168
$
32,092
$
322,937
$
(28,181)
$
327,016
Adoption of ASC 326
-
-
-
(3,095)
-
(3,095)
Net Income
-
-
-
4,287
-
4,287
Other Comprehensive Income, net of tax
-
-
-
-
2,648
2,648
Cash Dividends ($
0.14
00 per share)
-
-
-
(2,357)
-
(2,357)
Repurchase of Common Stock
(33,074)
(1)
(707)
-
-
(708)
Stock Based Compensation
-
-
291
-
-
291
Stock Compensation Plan Transactio
ns, net
73,311
1
424
-
-
425
Balance, March 31, 2020
16,811,781
$
168
$
32,100
$
321,772
$
(25,533)
$
328,507
(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
(Unaudited)
Three Months Ended March 31,
(Dollars in Thousands)
2021
2020
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income
$
9,506
$
4,287
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Credit Losses
(982)
4,990
Depreciation
1,942
1,623
Amortization of Premiums, Discounts and Fees, net
2,428
1,643
Originations of Loans Held-for-Sale
(470,248)
(150,840)
Proceeds From Sales of Loans Held-for-Sale
519,331
80,781
Net Gain From Sales of Loans Held-for-Sale
(17,125)
(3,030)
Net Additions for Capitalized Mortgage Servicing Rights
119
-
Change in Valuation
Provision for Mortgage Servicing Rights
(250)
-
Stock Compensation
219
291
Net Tax Benefit From
Stock-Based Compensation
(4)
(84)
Deferred Income Taxes
(378)
(511)
Net Change in Operating Leases
(41)
192
Net Gain on Sales and Write-Downs of
Other Real Estate Owned
(202)
(931)
Net Increase in Other Assets
(1,370)
(20,255)
Net Increase in Other Liabilities
7,935
26,646
Net Cash Provided By (Used In) Operating Activities
50,880
(55,198)
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(54,382)
(32,250)
Payments, Maturities, and Calls
24,629
19,370
Securities Available
for Sale:
Purchases
(133,628)
(26,795)
Payments, Maturities, and Calls
49,349
50,347
Purchases of Loans Held for Investment
(23,686)
(2,756)
Net Increase in Loans Held for Investment
(29,437)
(22,191)
Net Cash Paid for Brand Acquisition
-
(2,405)
Proceeds From Sales of Other Real Estate Owned
1,084
1,155
Purchases of Premises and Equipment
(1,592)
(4,773)
Noncontrolling Interest Contributions
1,259
-
Net Cash Used In Investing Activities
(166,404)
(20,298)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits
140,548
(99,869)
Net (Decrease) Increase in Short-Term
Borrowings
(24,181)
70,018
Repayment of Other Long-Term
Borrowings
(1,014)
(524)
Dividends Paid
(2,528)
(2,357)
Payments to Repurchase Common Stock
-
(708)
Issuance of Common Stock Under Purchase Plans
33
125
Net Cash Provided By (Used In) Financing Activities
112,858
(33,315)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(2,666)
(108,811)
Cash and Cash Equivalents at Beginning of Period
928,549
378,423
Cash and Cash Equivalents at End of Period
$
925,883
$
269,612
Supplemental Cash Flow Disclosures:
Interest Paid
$
1,009
$
1,562
Noncash Investing and Financing Activities:
Loans Transferred to Other Real Estate Owned
$
184
$
734
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 footnotes required
by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included.
The consolidated statement of financial condition at
December 31, 2020 has been derived from the audited
consolidated financial
statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles
for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto
included in the Company’s
annual report on Form 10-K for the year ended December
31, 2020.
Accounting Standards Updates
ASU 2020-04, "Reference Rate Reform
(Topic
848).
ASU 2020-04 provides optional expedients and exceptions for applying
GAAP
to loan and lease agreements, derivative contracts, and
other transactions affected by the anticipated transition
away from LIBOR
toward new interest rate benchmarks. For transactions
that are modified because of reference rate reform and that meet certain
scope
guidance (i) modifications of loan agreements should
be accounted for by prospectively adjusting the effective
interest rate and the
modification will be considered "minor" so that any existing
unamortized origination fees/costs would carry forward and
continue to
be amortized and (ii) modifications of lease agreements
should be accounted for as a continuation of the existing
agreement with no
reassessments of the lease classification and the discount
rate or re-measurements of lease payments that otherwise would be required
for modifications not accounted for as separate
contracts. ASU 2020-04 also provides numerous optional expedients
for derivative
accounting.
ASU 2020-04 is effective March 12, 2020 through
December 31, 2022.
An entity may elect to apply ASU 2020-04 for
contract modifications as of January 1, 2020, or prospectively
from a date within an interim period that includes or is subsequent
to
March 12, 2020, up to the date that the financial statements
are available to be issued.
Once elected for a Topic
or an Industry
Subtopic within the Codification, the amendments in this
ASU must be applied prospectively for all eligible contract
modifications for
that Topic or Industry
Subtopic.
It is anticipated this ASU will simplify any modifications executed
between the selected start date
(yet to be determined) and December 31, 2022 that are
directly related to LIBOR transition by allowing prospective
recognition of the
continuation of the contract, rather than extinguishment of
the old contract resulting in writing off unamortized
fees/costs.
Further,
ASU 2021-01, “Reference Rate Reform
(Topic
848): Scope,”
clarifies that certain optional expedients and exceptions
in ASC 848 for
contract modifications and hedge accounting apply
to derivatives that are affected by the discounting
transition. ASU 2021-01 also
amends the expedients and exceptions in ASC 848 to
capture the incremental consequences of the scope clarification and
to tailor the
existing guidance to derivative instruments.
The Company is evaluating the impact of this ASU and has not
yet determined if this
ASU will have material effects on the Company’s
business operations and consolidated financial statements.
10
NOTE 2 –
INVESTMENT SECURITIES
Investment Portfolio Composition
. The following table summarizes the amortized cost and related
market value of investment
securities available-for-sale and securities held
-to-maturity and the corresponding amounts of gross unrealized
gains and losses.
March 31, 2021
December 31, 2020
Amortized
Unrealized
Unrealized
Market
Amortized
Unrealized
Unrealized
Market
Cost
Gains
Losses
Value
Cost
Gain
Losses
Value
Available for
Sale
U.S. Government Treasury
$
173,029
$
551
$
464
$
173,116
$
103,547
$
972
$
-
$
104,519
U.S. Government Agency
220,018
2,096
584
221,530
205,972
2,743
184
208,531
States and Political Subdivisions
4,244
73
9
4,308
3,543
89
-
3,632
Mortgage-Backed Securities
440
56
-
496
456
59
-
515
Equity Securities
(1)
6,795
-
-
6,795
7,673
-
-
7,673
Total
$
404,526
$
2,776
$
1,057
$
406,245
$
321,191
$
3,863
$
184
$
324,870
Held to Maturity
U.S. Government Treasury
$
-
$
-
$
-
$
-
$
5,001
$
13
$
-
$
5,014
Mortgage-Backed Securities
199,109
5,358
309
204,158
164,938
5,223
-
170,161
Total
$
199,109
$
5,358
$
309
$
204,158
$
169,939
$
5,236
$
-
$
175,175
Total Investment
Securities
$
603,635
$
8,134
$
1,366
$
610,403
$
491,130
$
9,099
$
184
$
500,045
(1)
Includes Federal Home Loan Bank and Federal Reserve Bank
stock, recorded
at cost of $
2.0
million and $
4.8
million,
respectively,
at March 31, 2021 and includes
Federal Home Loan Bank and Federal Reserve Bank stock recorded
at cost of $
2.9
million and $
4.8
million, respectively,
at December 31, 2020.
Securities with an amortized cost of $
351.1
million and $
308.2
million at March 31, 2021 and December 31, 2020, respectively,
were
pledged to secure public deposits and for other purposes.
The Bank, as a member of the Federal Home Loan Bank
of Atlanta (“FHLB”), is required to own capital stock in the FHLB based
generally upon the balances of residential and commercial
real estate loans and FHLB advances.
FHLB stock, which is included in
equity securities, is pledged to secure FHLB advances.
No ready market exists for this stock, and it has no
quoted
market value;
however, redemption of this stock
has historically been at par value.
As a member of the Federal Reserve Bank of Atlanta,
the Bank is required to maintain stock in the Federal Reserve Bank of
Atlanta
based on a specified ratio relative to the Bank’s
capital.
Federal Reserve Bank stock is carried at cost.
Maturity Distribution
.
At March 31, 2021,
the Company's investment securities had the following maturity
distribution based on
contractual maturity.
Expected maturities may differ from contractual maturities
because borrowers may have the right to call or
prepay obligations.
Mortgage-backed securities and certain amortizing U.S. government
agency securities are shown separately
because they are not due at a certain maturity date.
Available for
Sale
Held to Maturity
(Dollars in Thousands)
Amortized Cost
Market Value
Amortized Cost
Market Value
Due in one year or less
$
77,464
$
77,741
$
-
$
-
Due after one year through five years
138,352
137,981
-
-
Due after five year through ten years
989
989
-
-
Mortgage-Backed Securities
440
496
199,109
204,158
U.S. Government Agency
180,486
182,243
-
-
Equity Securities
6,795
6,795
-
-
Total
$
404,526
$
406,245
$
199,109
$
204,158
11
Unrealized Losses on Investment Securities.
The following table summarizes the available for sale investment
securities with
unrealized losses aggregated by major security type
and length of time in a continuous unrealized loss position:
Less Than
Greater Than
12 Months
12 Months
Total
Market
Unrealized
Market
Unrealized
Market
Unrealized
(Dollars in Thousands)
Value
Losses
Value
Losses
Value
Losses
March 31, 2021
Available for
Sale
U.S. Government Treasury
$
65,577
$
464
$
-
$
-
$
65,577
$
464
U.S. Government Agency
63,630
554
4,778
30
68,408
584
States and Political Subdivisions
744
9
-
-
744
9
Total
129,951
1,027
4,778
30
134,729
1,057
Held to Maturity
Mortgage-Backed Securities
20,550
309
-
-
20,550
309
Total
$
20,550
$
309
$
-
$
-
$
20,550
$
309
December 31, 2020
Available for
Sale
U.S. Government Agency
$
28,266
$
156
$
4,670
$
28
$
32,936
$
184
Total
$
28,266
$
156
$
4,670
$
28
$
32,936
$
184
At March 31, 2021, there were
89
positions (combined AFS and HTM) with unrealized losses totaling $
1.4
million.
87
these positions
were U.S. government agency securities issued by U.S. government
sponsored entities.
The remaining
two
were municipal securities.
Because the declines in the market value of these securities
were attributable to changes in interest rates and not
credit quality, and
because the Company had the ability and intent to hold
these investments until there is a recovery in fair value, which may
be at
maturity, the
Company did
no
t record any allowance for credit losses on any investment
securities at March 31, 2021.
Additionally,
no
ne of the securities held by the Company were past due or
in nonaccrual status at March 31, 2021.
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
securities portfolio via credit ratings which are updated
on a quarterly basis.
On a quarterly basis, municipal securities in an
unrealized loss position are evaluated to determine if
the loss is attributable to credit related factors and if an allowance
for credit loss
is needed.
12
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)
March 31, 2021
December 31, 2020
Commercial, Financial and Agricultural
$
413,819
$
393,930
Real Estate – Construction
138,104
135,831
Real Estate – Commercial Mortgage
669,158
648,393
Real Estate – Residential
(1)
365,931
352,543
Real Estate – Home Equity
202,099
205,479
Consumer
(2)
268,616
270,250
Loans HFI, Net of Unearned Income
$
2,057,727
$
2,006,426
(1)
Includes loans in process with outstanding
balances of $
8.3
million and $
10.9
million at March 31, 2021 and December
31, 2020,
respectively.
(2)
Includes overdraft balances of $
0.9
million and $
0.7
million at March 31, 2021 and December 31,
2020, respectively.
Net deferred fees, which include premiums on purchased
loans, included in loans were $
1.6
million at March 31, 2021 and $
0.1
million at December 31, 2020.
Accrued interest receivable on loans which is excluded
from amortized cost totaled $
7.2
million at March 31, 2021 and $
6.9
million at
December 31, 2020, 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 Purchases
.
The Company will periodically purchase newly originated 1-4
family real estate secured adjustable rate loans from
Capital City Home Loans, a related party.
Loan purchases from CCHL totaled $
22.2
million for the three month period ended March
31, 2021, and were not credit impaired.
Allowance for Credit Losses
.
The allowance for credit losses is calculated in accordance
with the current expected credit loss model,
ASC 326 (“CECL”),
which was adopted on January 1, 2020.
The allowance 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
– Business and Basis of Presentation/Significant Accounting
Policies in the
Company’s 2020 Form
10-K.
13
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
March 31, 2021
Beginning Balance
$
2,204
$
2,479
$
7,029
$
5,440
$
3,111
$
3,553
$
23,816
Provision for Credit Losses
(314)
(225)
(718)
(305)
(655)
(95)
(2,312)
Charge-Offs
(69)
-
-
(6)
(5)
(1,056)
(1,136)
Recoveries
136
-
645
75
124
678
1,658
Net Recoveries
67
-
645
69
119
(378)
522
Ending Balance
$
1,957
$
2,254
$
6,956
$
5,204
$
2,575
$
3,080
$
22,026
Three Months Ended
March 31, 2020
Beginning Balance
$
1,675
$
370
$
3,416
$
3,128
$
2,224
$
3,092
$
13,905
Impact of Adopting ASC 326
488
302
1,458
1,243
374
(596)
3,269
Provision for Credit Losses
406
567
774
1,704
101
1,438
4,990
Charge-Offs
(362)
-
(11)
(110)
(31)
(1,566)
(2,080)
Recoveries
40
-
191
40
33
695
999
Net Charge-Offs
(322)
-
180
(70)
2
(871)
(1,081)
Ending Balance
$
2,247
$
1,239
$
5,828
$
6,005
$
2,701
$
3,063
$
21,083
For the first three months ended March 31, 2021, the allowance
decreased by $
1.8
million and reflected a negative provision of $
2.3
million and net loan recoveries of $
0.5
million.
The negative provision was attributable to improving economic
conditions, primarily
a lower rate of unemployment and its potential effect
on rates of default.
Three unemployment rate forecast scenarios were utilized to
estimate probability of default and were weighted based
on management’s estimate
of probability.
The mitigating impact of the
unprecedented fiscal stimulus, including direct payments
to individuals, increased unemployment benefits, as well as various
government sponsored loan programs, was also considered.
See Note 8 – Commitments and Contingencies for information
on the
allowance for off-balance sheet credit commitments.
14
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
March 31, 2021
Commercial, Financial and Agricultural
$
55
$
58
$
-
$
113
$
413,556
$
150
$
413,819
Real Estate – Construction
565
-
-
565
137,360
179
138,104
Real Estate – Commercial Mortgage
183
-
-
183
667,719
1,256
669,158
Real Estate – Residential
289
226
-
515
362,266
3,150
365,931
Real Estate – Home Equity
355
-
-
355
201,282
462
202,099
Consumer
712
179
-
891
267,560
165
268,616
Total
$
2,159
$
463
$
-
$
2,622
$
2,049,743
$
5,362
$
2,057,727
December 31, 2020
Commercial, Financial and Agricultural
$
194
$
124
$
-
$
318
$
393,451
$
161
$
393,930
Real Estate – Construction
-
717
-
717
134,935
179
135,831
Real Estate – Commercial Mortgage
293
-
-
293
646,688
1,412
648,393
Real Estate – Residential
375
530
-
905
348,508
3,130
352,543
Real Estate – Home Equity
325
138
-
463
204,321
695
205,479
Consumer
1,556
342
-
1,898
268,058
294
270,250
Total
$
2,743
$
1,851
$
-
$
4,594
$
1,995,961
$
5,871
$
2,006,426
Nonaccrual Loans
.
Loans are generally placed on nonaccrual status if principal or
interest payments become 90 days past due and/or
management deems
the collectability of the principal and/or interest to be doubtful.
Loans are returned to accrual status when the
principal and interest amounts contractually due are brought
current or when future payments are reasonably assured.
The following table presents the amortized cost basis of loans in
nonaccrual status and loans past due over 90 days and
still on accrual
by class of loans.
March 31,
2021
December 31, 2020
Nonaccrual
Nonaccrual
Nonaccrual
Nonaccrual
With
With No
90 + Days
With
With No
90 + Days
(Dollars in Thousands)
ACL
ACL
Still Accruing
ACL
ACL
Still Accruing
Commercial, Financial and Agricultural
$
150
$
-
$
-
$
161
$
-
$
-
Real Estate – Construction
179
-
-
179
-
-
Real Estate – Commercial Mortgage
199
1,057
-
337
1,075
-
Real Estate – Residential
1,641
1,509
-
1,617
1,513
-
Real Estate – Home Equity
462
-
-
695
-
-
Consumer
165
-
-
294
-
-
Total Nonaccrual
Loans
$
2,796
$
2,566
$
-
$
3,283
$
2,588
$
-
15
Collateral Dependent Loans.
The following table presents the amortized cost basis of collateral-dependent
loans.
March 31, 2021
December 31, 2020
Real Estate
Non Real Estate
Real Estate
Non Real Estate
(Dollars in Thousands)
Secured
Secured
Secured
Secured
Commercial, Financial and Agricultural
$
-
$
-
$
-
$
-
Real Estate – Commercial Mortgage
1,113
-
3,900
-
Real Estate – Residential
2,537
-
3,022
-
Real Estate – Home Equity
299
-
219
-
Consumer
-
29
-
29
Total Collateral Dependent
Loans
$
3,949
$
29
$
7,141
$
29
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 March 31, 2021 and December 31, 2020, the Company
had $
1.2
million
and $
1.6
million, respectively, in 1-4
family residential real estate loans for which formal foreclosure
proceedings were in process.
Troubled
Debt Restructurings (“TDRs”)
.
TDRs are loans in which the borrower is experiencing
financial difficulty and the Company
has granted an economic concession to the borrower
that it would not otherwise consider.
In these instances, as part of a work-out
alternative, the Company will make concessions including
the extension of the loan term, a principal moratorium, a
reduction in the
interest rate, or a combination thereof.
The impact of the TDR modifications and defaults are factored
into the allowance for credit
losses on a loan-by-loan basis as all TDRs are, by definition,
impaired loans.
Thus, specific reserves are established based upon the
results of either a discounted cash flow analysis or the
underlying collateral value, if the loan is deemed to
be collateral dependent.
A
TDR classification can be removed if the borrower’s
financial condition improves such that the borrower is no
longer in financial
difficulty,
the loan has not had any forgiveness of principal or interest,
and the loan is subsequently refinanced or restructured at
market terms and qualifies as a new loan.
At March 31, 2021, the Company had $
14.3
million in TDRs, of which $
13.6
million were performing in accordance with the
modified terms.
At December 31, 2020 the Company had $
14.3
million in TDRs, of which $
13.9
million were performing in
accordance with modified terms.
For TDRs, the Company estimated $
0.7
million and $
0.6
million of credit loss reserves at March 31,
2021 and December 31, 2020, respectively.
The modifications made to TDRs involved either an
extension of the loan term, a principal moratorium, a reduction in the interest
rate,
or a combination thereof.
For the three months ended March 31, 2021, there were
two
loans modified with a recorded investment of
$
0.4
million.
For the three months ended March 31, 2020, there was
one
loan modified with a recorded investment of $
0.2
million.
For the three month period ended March 31, 2021 there
were
no
loans classified as TDRs, for which there was a payment default
and
the loans were modified within the 12 months prior to default.
For the three month period ended March 31, 2020,
there were
two
loans totaling $
0.1
million that were 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, underwritin
g
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.
16
Commercial, Financial, and Agricultural – Loans in
this category are primarily made based on identified cash flows of the borrower
with consideration given to underlying collateral and
personal or other guarantees.
Lending policy establishes debt service coverage
ratio limits that require a borrower’s cash flow
to be sufficient to cover principal and interest payments on
all new and existing debt.
The majority of these loans are secured by the assets being
financed or other business assets such as accounts receivable, inventory,
or
equipment.
Collateral values are determined based upon third party appraisals and
evaluations.
Loan to value ratios at origination are
governed by established policy guidelines.
Real Estate Construction – Loans in this category
consist of short-term construction loans, revolving and non-revolving credit
lines
and construction/permanent loans made to individuals
and investors to finance the acquisition, development, construction
or
rehabilitation of real property.
These loans are primarily made based on identifie
d
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 portfolio consists of indirect and
direct automobile loans.
Lending policy
establishes maximum debt to income ratios, minimum
credit scores, and includes guidelines for verification of applicants’ income
and
receipt of credit reports.
Credit Quality Indicators
.
As part of the ongoing monitoring of the Company’s
loan portfolio quality,
management categorizes loans
into risk categories based on relevant information about
the ability of borrowers to service their debt such as: current financial
information, historical payment performance, credit documentation,
and current economic and market trends, among other
factors.
Risk ratings are assigned to each loan and revised as needed through
established monitoring procedures for individual loan
relationships over a predetermined amount and review
of smaller balance homogenous loan pools.
The Company uses the definitions
noted below for categorizing and managing its criticized
loans.
Loans categorized as “Pass” do not meet the criteria set forth
below
and are not considered criticized.
Special Mention – Loans in this category are presently
protected from loss, but weaknesses are apparent which, if
not corrected, could
cause future problems.
Loans in this category may not meet required underwriting
criteria and have no mitigating factors.
More than
the ordinary amount of attention is warranted for these loans.
Substandard – Loans in this category exhibit well-defined
weaknesses that would typically bring normal repayment into
jeopardy.
These loans are no longer adequately protected due
to well-defined weaknesses that affect the repayment
capacity of the
borrower.
The possibility of loss is much more evident and above average
supervision is required for these loans.
17
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.
The following table summarizes gross loans held for
investment at March 31, 2021 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)
2021
2020
2019
2018
2017
Prior
Loans
Total
Commercial, Financial,
Agriculture:
Pass
$
77,066
$
188,688
$
41,681
$
32,674
$
12,792
$
21,622
$
38,528
$
413,051
Special Mention
-
-
189
39
4
55
-
287
Substandard
-
12
-
285
38
88
58
481
Total
$
77,066
$
188,700
$
41,870
$
32,998
$
12,834
$
21,765
$
38,586
$
413,819
Real Estate -
Construction:
Pass
$
13,786
$
80,577
$
29,221
$
6,301
$
1,570
$
-
$
3,451
$
134,906
Special Mention
643
-
2,376
-
-
-
-
3,019
Substandard
-
-
179
-
-
-
-
179
Total
$
14,429
$
80,577
$
31,776
$
6,301
$
1,570
$
-
$
3,451
$
138,104
Real Estate -
Commercial Mortgage:
Pass
$
35,435
$
158,436
$
100,143
$
115,971
$
69,848
$
111,707
$
24,321
$
615,861
Special Mention
-
4,161
6,040
14,296
4,618
13,143
397
42,655
Substandard
1,604
589
3,597
87
1,829
2,936
-
10,642
Total
$
37,039
$
163,186
$
109,780
$
130,354
$
76,295
$
127,786
$
24,718
$
669,158
Real Estate - Residential:
Pass
$
42,559
$
92,152
$
58,624
$
39,575
$
37,006
$
78,360
$
6,290
$
354,566
Special Mention
-
139
23
124
173
535
-
994
Substandard
133
1,402
2,653
1,603
1,341
3,239
-
10,371
Total
$
42,692
$
93,693
$
61,300
$
41,302
$
38,520
$
82,134
$
6,290
$
365,931
Real Estate - Home
Equity:
Performing
$
39
$
62
$
358
$
238
$
767
$
2,247
$
197,926
$
201,637
Nonperforming
-
-
-
-
-
-
462
462
Total
$
39
$
62
$
358
$
238
$
767
$
2,247
$
198,388
$
202,099
Consumer:
Performing
$
30,721
$
97,423
$
61,532
$
44,126
$
20,292
$
9,502
$
4,855
$
268,451
Nonperforming
-
55
61
5
12
32
-
165
Total
$
30,721
$
97,478
$
61,593
$
44,131
$
20,304
$
9,534
$
4,855
$
268,616
18
NOTE 4 – MORTGAGE BANKING ACTIVITIES
The Company’s mortgage
banking activities at its subsidiary Capital City Homes Loans (“CCHL”) 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.
For the first quarter of 2020, information provided below reflects
CCHL activities for the period March 1, 2020 to March
31, 2020 and CCB legacy residential real estate activities
for the period
January 1, 2020 to March 1, 2020.
All quarterly information subsequent to the quarter ended March 31,
2020 includes CCHL activity.
Residential Mortgage Loan Production
The Company originates, markets, and services conventional
and government-sponsored residential mortgage
loans.
Generally,
conforming fixed rate residential mortgage loans are held
for sale in the secondary market and non-conforming and
adjustable-rate
residential mortgage loans may be held for investment.
The volume of residential mortgage loans originated for
sale and secondary
market prices are the primary drivers of origination revenue.
Residential mortgage loan commitments are generally outstanding
for 30 to 90 days, which represents the typical period from
commitment to originate a residential mortgage loan to
when the closed loan is sold to an investor.
Residential mortgage loan
commitments are subject to both credit and price risk.
Credit risk is managed through underwriting policies and
procedures, including
collateral requirements, which are generally accepted
by the secondary loan markets.
Price risk is primarily related to interest rate
fluctuations and is partially managed through forward
sales of residential mortgage-backed securities (primarily to-be announced
securities, or TBAs) or mandatory delivery commitments
with investors.
The unpaid principal balance of residential mortgage loans
held for sale, notional amounts of derivative contracts
related to residential
mortgage loan commitments and forward contract sales and
their related fair values are set- forth below.
March 31, 2021
December 31, 2020
Unpaid Principal
Unpaid Principal
(Dollars in Thousands)
Balance/Notional
Fair Value
Balance/Notional
Fair Value
Residential Mortgage Loans Held for Sale
$
79,903
$
82,081
$
109,831
$
114,039
Residential Mortgage Loan Commitments ("IRLCs")
(1)
144,155
2,982
147,494
4,825
Forward Sales Contracts
(2)
137,500
1,356
158,500
(907)
$
86,419
$
117,957
(1)
Recorded in other assets at fair value
(2)
Recorded at fair value in other assets at March
31, 2021 and other liabilities at December 31, 2020
Residential mortgage loans held for sale that were
90 days or more outstanding or on nonaccrual totaled $
0.4
million at March 31,
2021 and $
0.6
million at December 31, 2020.
Mortgage banking revenue was as follows:
Three Months Ended March 31,
(Dollars in Thousands)
2021
2020
Net realized gains on sales of mortgage loans
$
14,424
$
3,407
Net change in unrealized gain on mortgage loans held
for sale
(2,031)
738
Net change in the fair value of mortgage loan commitments
(IRLCs)
(1,843)
1,655
Net change in the fair value of forward sales contracts
2,263
(1,394)
Pair-Offs on net settlement of forward
sales contracts
3,310
(1,376)
Mortgage servicing rights additions
187
-
Net origination fees
815
223
Total mortgage
banking revenues
$
17,125
$
3,253
19
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)
March 31, 2021
December 31, 2020
Number of residential mortgage loans serviced for others
1,800
1,796
Outstanding principal balance of residential mortgage
loans serviced for others
$
454,382
$
456,135
Weighted average
interest rate
3.62%
3.64%
Remaining contractual term (in months)
320
321
Conforming conventional loans serviced by the Company
are sold to FNMA on a non-recourse basis, whereby foreclosure
losses are
generally the responsibility of FNMA and not the Company.
The government loans serviced by the Company are
secured through
GNMA, whereby the Company is insured against loss by
the Federal Housing Administration or partially guaranteed against loss by
the Veterans
Administration.
At March 31, 2021, the servicing portfolio balance
consisted of the following loan types: FNMA (
63
%),
GNMA (
11
%), and private investor (
26
%).
FNMA and private investor loans are structured as actual/actual
payment remittance.
The Company had $
2.9
million and $
4.9
million in delinquent residential mortgage loans currently
in GNMA pools serviced by the
Company at March 31, 2021 and December 31, 2020,
respectively.
The right to repurchase these loans and the corresponding
liability
has been recorded in other assets and other liabilities, respectively,
in the Consolidated Statements of Financial Condition.
For the
three months ended March 31, 2021, the Company
repurchased $
1.5
million of GNMA delinquent or defaulted mortgage loans with
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 March 31,
(Dollars in Thousands)
2021
2020
Beginning balance
$
3,452
$
910
Additions due to loans sold with servicing retained
187
25
Deletions and amortization
(306)
(25)
Valuation
allowance reversal
250
-
Ending balance
$
3,583
$
910
The Company did
no
t record any permanent impairment losses on mortgage servicing
rights for the three month periods ended March
31, 2021 and March 31, 2020.
The key unobservable inputs used in determining the
fair value of the Company’s mortgage
servicing rights were as follows:
March 31, 2021
December 31, 2020
Minimum
Maximum
Minimum
Maximum
Discount rates
11.00%
15.00%
11.00%
15.00%
Annual prepayment speeds
9.60%
24.96%
13.08%
23.64%
Cost of servicing (per loan)
$
90
$
110
$
90
$
110
Changes in residential mortgage interest rates directly
affect the prepayment speeds used in valuing the Company’s
mortgage
servicing rights.
A separate third party model is used to estimate prepayment speeds
based on interest rates, housing turnover rates,
estimated loan curtailment, anticipated defaults, and other relevant
factors.
The weighted average
annual prepayment speed was
14.16
% at March 31, 2021 and
17.10
% at December 31, 2020.
20
Warehouse
Line Borrowings
The Company has the following warehouse lines of
credit and master repurchase agreements with various financial institutions
at
March 31, 2021.
Amounts
(Dollars in Thousands)
Outstanding
$
25
million warehouse line of credit agreement expiring
October 2021
.
Interest is at LIBOR plus
2.25%
, with a
floor rate of
3.50%
.
A cash pledge deposit of $
0.1
million is required by the lender.
$
7,788
$
50
million master repurchase agreement without defined expiration.
Interest is at the LIBOR plus
2.24%
to
3.00%
, with a floor rate of
3.25%
.
A cash pledge deposit of $
0.5
million is required by the lender.
27,622
$
50
million warehouse line of credit agreement expiring in
September 2021
.
Interest is at the LIBOR plus
2.75%
, with a floor rate of
3.25%
.
13,403
Total Warehouse
Borrowings
$
48,813
Warehouse
line borrowings are classified as short-term borrowings.
At March 31, 2021, the Company had mortgage loans held for
sale pledged as collateral under the above warehouse lines
of credit and master repurchase agreements.
The above agreements also
contain covenants which include certain financial requirements,
including maintenance of minimum tangible net worth,
minimum
liquid assets, maximum debt to net worth ratio and positive
net income, as defined in the agreements.
The Company was in
compliance with all significant debt covenants at March
31, 2021.
The Company intends to renew the warehouse lines of
credit and master repurchase agreements when they mature
.
The Company has extended a $
50
million warehouse line of credit to CCHL, a
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 March 31,
2021 was $
29.7
million.
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
million at March 31, 2021 were designed as a cash flow hedge
for subordinated
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
.
Notional
Fair
Balance Sheet
Weighted Average
(Dollars in Thousands)
Amount
Value
Location
Maturity (Years)
March 31, 2021
Interest rate swaps related to subordinated debt
$
30,000
$
2,699
Other Assets
9.3
December 31, 2020
Interest rate swaps related to subordinated debt
$
30,000
$
574
Other Assets
9.5
21
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 month period ended March
31, 2021.
Amount of Gain
Amount of Gain
(Loss) Recognized
(Loss) Reclassified
(Dollars in Thousands)
in AOCI
Category
from AOCI to Income
Three months ended March 31, 2021
$
1,587
Interest Expense
$
(33)
The Company estimates there will be approximately
$
0.1
million reclassified as an increase to interest expense within
the next 12
months.
The Company had a collateral liability of $
2.6
million and $
0.5
million at March 31, 2021 and December 31, 2020, respectively.
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.
Operating lease ROU assets represent the Company’s
right to use an underlying asset during the lease term
and operating lease
liabilities represent the Company’s
obligation to make lease payments arising from the lease.
ROU assets and operating lease
liabilities are recognized at lease commencement based
on the present value of the remaining lease payments using a
discount rate that
represents the Company’s
incremental borrowing rate at the lease commencement
date.
Operating lease expense, which is comprised
of amortization of the ROU asset and the implicit interest accreted
on the operating lease liability,
is recognized on a straight-line basis
over the lease term, and is recorded in occupancy expense
in the consolidated statements of income.
The Company’s operating
leases primarily relate to banking offices with remaining
lease terms from
1
to
45
years.
The Company’s
leases are not complex and do not contain residual value
guarantees, variable lease payments, or significant assumptions
or judgments
made in applying the requirements of Topic
842.
Operating leases with an initial term of 12 months or less are not recorded on the
balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
At March 31, 2021, the operating
lease ROU assets and liabilities were $
11.8
million and $
12.6
million, respectively.
The Company does not have any finance leases 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
March 31,
(Dollars in Thousands)
2021
2020
Operating lease expense
$
344
$
156
Short-term lease expense
140
79
Total lease expense
$
484
$
235
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
385
$
160
Right-of-use assets obtained in exchange for new operating lease liabilities
75
5,092
Weighted average
remaining lease term — operating leases (in years)
25.5
15.4
Weighted average
discount rate — operating leases
2.1%
2.4%
22
The table below summarizes the maturity of remaining
lease liabilities:
(Dollars in Thousands)
March 31, 2021
2021
$
1,158
2022
1,389
2023
995
2024
945
2025
771
2026 and thereafter
11,132
Total
$
16,390
Less: Interest
(3,837)
Present Value
of Lease liability
$
12,553
At March 31, 2021, the Company had additional operating
lease payments for
two
banking offices that have not yet commenced
totaling $
4.8
million based on the initial contract term of
15 years
.
Payments for the banking offices are expected to commence after
the construction period ends, which is expected to occur during the second quarter of 2022 and the third quarter of 2022.
A related party is the lessor in an operating lease with
the Company.
The Company’s minimum
payment is $
0.2
million annually
through 2024, for an aggregate remaining obligation of
$
0.7
million at March 31, 2021.
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 March 31,
(Dollars in Thousands)
2021
2020
Service Cost
$
1,743
$
1,457
Interest Cost
1,221
1,411
Expected Return on Plan Assets
(2,787)
(2,748)
Prior Service Cost Amortization
4
4
Net Loss Amortization
1,691
1,011
Special Termination
Charge
-
61
Net Periodic Benefit Cost
$
1,872
$
1,196
Discount Rate Used for Benefit Cost
2.88%
3.53%
Long-term Rate of Return on Assets
6.75%
7.00%
The components of the net periodic benefit cost for the Company's
SERP plans were as follows:
Three Months Ended March 31,
(Dollars in Thousands)
2021
2020
Service Cost
$
9
$
-
Interest Cost
$
59
$
72
Prior Service Cost Amortization
19
-
Net Loss Amortization
198
247
Net Periodic Benefit Cost
$
285
$
319
Discount Rate Used for Benefit Cost
2.38%
3.16%
23
The service cost component of net periodic benefit cost is reflected
in compensation expense in the accompanying statements of
income.
The other components of net periodic cost are included in “other”
within the noninterest expense category in the statements
of income.
NOTE 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:
March 31, 2021
December 31, 2020
(Dollars in Thousands)
Fixed
Variable
Total
Fixed
Variable
Total
Commitments to Extend Credit
(1)
$
170,898
$
599,387
$
770,285
$
160,372
$
596,572
$
756,944
Standby Letters of Credit
6,711
-
6,711
6,550
-
6,550
Total
$
177,609
$
599,387
$
776,996
$
166,922
$
596,572
$
763,494
(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 March 31,
(Dollars in Thousands)
2021
2020
Beginning Balance
$
1,644
$
157
Impact of Adoption of ASC 326
-
876
Provision for Credit Losses
1,330
-
Ending Balance
$
2,974
$
1,033
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.
24
Indemnification Obligation
.
The Company is a member of the Visa
U.S.A. network.
Visa U.S.A member banks
are required to
indemnify the Visa U.S.A.
network for potential future settlement of certain litigation
(the “Covered Litigation”) that relates to several
antitrust lawsuits challenging the practices of Visa
and MasterCard International.
In 2008, the Company,
as a member of the Visa
U.S.A. network, obtained Class B shares of Visa,
Inc. upon its initial public offering.
Since its initial public offering, Visa,
Inc. has
funded a litigation reserve for the Covered Litigation resulting
in a reduction in the Class B shares held by the Company.
During the
first quarter of 2011, the Company
sold its remaining Class B shares.
Associated with this sale, the Company entered into a
swap
contract with the purchaser of the shares that requires
a payment to the counterparty in the event that Visa,
Inc. makes subsequent
revisions to the conversion ratio for its Class B shares.
Fixed charges included in the swap liability are payable
quarterly until the litigation reserve is fully liquidated
and at which time the
aforementioned swap contract will be terminated.
Quarterly fixed payments approximate $
200,000
.
Conversion ratio payments and
ongoing fixed quarterly charges are reflected
in earnings in the period incurred.
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 comparing them to prices obtained from an independent
third-party
source.
Loans Held for Sale
.
The fair value of residential mortgage loans held for sale based
on Level 2 inputs is determined, when possible,
using either quoted secondary-market prices or investor commitments.
If no such quoted price exists, the fair value is determined
using quoted prices for a similar asset or assets, adjusted for
the specific attributes of that loan, which would be used
by other market
participants.
The Company has elected the fair value option accounting for its held
for sale loans.
Mortgage Banking Derivative Instruments.
The fair values of interest rate lock commitments (“IRLCs”) are derived
by valuation
models incorporating market pricing for instruments with
similar characteristics, commonly referred to as best execution
pricing, or
investor commitment prices for best effort
IRLCs 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.
25
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.
A summary of fair values for assets and liabilities consisted
of the following:
Level 1
Level 2
Level 3
Total
Fair
(Dollars in Thousands)
Inputs
Inputs
Inputs
Value
March 31, 2021
ASSETS:
Securities Available
for Sale:
U.S. Government Treasury
$
173,116
$
-
$
-
$
173,116
U.S. Government Agency
-
221,530
-
221,530
States and Political Subdivisions
-
4,308
-
4,308
Mortgage-Backed Securities
-
496
-
496
Equity Securities
(1)
-
6,795
-
6,795
Loans Held for Sale
-
82,081
-
82,081
Interest Rate Swap Derivative
-
2,699
-
2,699
Mortgage Banking Hedge Derivative
-
1,356
-
1,356
Mortgage Banking IRLC Derivative
-
-
2,982
2,982
Mortgage Servicing Rights
-
-
4,019
4,019
December 31, 2020
ASSETS:
Securities Available
for Sale:
U.S. Government Treasury
$
104,519
$
-
$
-
$
104,519
U.S. Government Agency
-
208,531
-
208,531
States and Political Subdivisions
-
3,632
-
3,632
Mortgage-Backed Securities
-
515
-
515
Equity Securities
(1)
-
7,673
-
7,673
Loans Held for Sale
-
114,039
-
114,039
Interest Rate Swap Derivative
-
574
-
574
Mortgage Banking IRLC Derivative
-
-
4,825
4,825
LIABILITIES:
Mortgage Banking Hedge Derivative
-
907
-
907
(1)
Not readily marketable securities - reflected
in other assets.
Mortgage Banking Activities
.
The Company had Level 3 issuances and transfers of
$
15.4
million and $
10.5
million, respectively,
for
the three month period ending March 31, 2021 and Level 3
issuances and transfers of $
1.2
million and $
1.8
million, respectively,
for
the three month period ending March 31, 2020 related to
mortgage banking activities.
Issuances are valued based on the change in fair
value of the underlying mortgage loan from inception
of the IRLC to the balance sheet 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.
26
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 $
4.0
million with a valuation allowance of $
0.1
million at March 31, 2021
and $
7.1
million and $
0.1
million, respectively,
at December 31, 2020.
Other Real Estate Owned
.
During the first three months of 2021,
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 March 31, 2021, there was
no
valuation allowance for loan servicing rights.
Assets and Liabilities Disclosed at Fair Value
The Company is required to disclose the estimated fair value
of financial instruments, both assets and liabilities, for which
it is
practical to estimate fair value and the following
is a description of valuation methodologies used for those assets and liabilities.
Cash and Short-Term
Investments.
The carrying amount of cash and short-term investments is used
to approximate fair value, given
the short time frame to maturity and as such assets do
not present unanticipated credit concerns.
Securities Held to Maturity
.
Securities held to maturity are valued in accordance
with the methodology previously noted in this
footnote under the caption “Assets and Liabilities Measured
at Fair Value
on a Recurring Basis – Securities Available
for Sale”.
Loans.
The loan portfolio is segregated into categories and the fair value
of each loan category is calculated using present value
techniques based upon projected cash flows, estimated
discount rates, and incorporates a liquidity discount to meet
the objective of
“exit price” valuation.
Deposits.
The fair value of Noninterest Bearing Deposits, NOW Accounts,
Money Market Accounts and Savings Accounts are the
amounts payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit is estimated using
present
value techniques and rates currently offered
for deposits of similar remaining maturities.
Subordinated Notes Payable.
The fair value of each note is calculated using present
value techniques, based upon projected cash
flows and estimated discount rates as well as rates being offered
for similar obligations.
Short-Term
and Long-Term
Borrowings.
The fair value of each note is calculated using present value
techniques, based upon
projected cash flows and estimated discount rates as well as rates
being offered for similar debt.
27
A summary of estimated fair values of significant
financial instruments consisted of the following:
March 31, 2021
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
73,973
$
73,973
$
-
$
-
Short-Term
Investments
851,910
851,910
-
-
Investment Securities, Available
for Sale
406,245
173,116
233,129
-
Investment Securities, Held to Maturity
199,109
-
204,158
-
Equity Securities
(1)
3,588
-
3,588
-
Loans Held for Sale
82,081
-
82,081
-
Interest Rate Swap Derivative
2,699
-
2,699
-
Mortgage Banking Hedge Derivative
1,356
-
1,356
-
Mortgage Banking IRLC Derivative
2,982
-
-
2,982
Mortgage Servicing Rights
3,583
-
-
4,019
Loans, Net of Allowance for Credit Losses
2,035,701
-
-
2,036,010
LIABILITIES:
Deposits
$
3,358,108
$
-
$
3,358,015
$
-
Short-Term
Borrowings
55,687
-
55,687
-
Subordinated Notes Payable
52,887
-
43,038
-
Long-Term Borrowings
1,829
-
1,927
-
December 31, 2020
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
67,919
$
67,919
$
-
$
-
Short-Term
Investments
860,630
860,630
-
-
Investment Securities, Available
for Sale
324,870
104,519
220,351
-
Investment Securities, Held to Maturity
169,939
5,014
170,161
-
Loans Held for Sale
114,039
-
114,039
-
Equity Securities
(1)
3,589
-
3,589
-
Interest Rate Swap Derivative
574
-
574
-
Mortgage Banking IRLC Derivative
4,825
-
-
4,825
Mortgage Servicing Rights
3,452
-
-
3,451
Loans, Net of Allowance for Credit Losses
1,982,610
-
-
1,990,740
LIABILITIES:
Deposits
$
3,217,560
$
-
$
3,217,615
$
-
Short-Term
Borrowings
79,654
-
79,654
-
Subordinated Notes Payable
52,887
-
43,449
-
Long-Term Borrowings
3,057
-
3,174
-
Mortgage Banking Hedge Derivative
907
-
907
-
(1)
Not readily marketable securities - reflected
in other assets.
All non-financial instruments are excluded from the
above table.
The disclosures also do not include goodwill.
Accordingly, the
aggregate fair value amounts presented do not represent
the underlying value of the Company.
28
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)
for Sale
Swap
Plans
Loss
Balance as of January 1, 2021
$
2,700
$
428
$
(47,270)
$
(44,142)
Other comprehensive income during the period
(1,458)
1,587
142
271
Balance as of March 31, 2021
$
1,242
$
2,015
$
(47,128)
$
(43,871)
Balance as of January 1, 2020
$
864
$
-
$
(29,045)
$
(28,181)
Other comprehensive income during the period
2,648
-
-
2,648
Balance as of March 31, 2020
$
3,512
$
-
$
(29,045)
$
(25,533)
29
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 2021 compares with prior
years.
Throughout this section, Capital City Bank Group,
Inc., and subsidiaries, collectively,
is referred to as "CCBG," "Company,"
"we,"
"us," or "our."
CAUTION CONCERNING FORWARD
-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A
section, contains "forward-looking statements" within the
meaning of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements
about our
beliefs, plans, objectives, goals, expectations, estimates and
intentions that are subject to significant risks and uncertainties
and are
subject to change based on various factors, many of which
are beyond our control.
The words "may,"
"could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend,"
"plan," "target," "goal," and similar expressions are intended
to identify
forward-looking statements.
All forward-looking statements, by their nature, are subject
to risks and uncertainties.
Our actual future results may differ materially
from those set forth in our forward-looking statements.
Please see the Introductory Note and
Item 1A. Risk Factors
of our 2020
Report on Form 10-K, as updated in our subsequent quarterly
reports filed on Form 10-Q, and in our other filings made
from time to
time with the SEC after the date of this report.
However, other factors besides those
listed in our Quarterly Report or in our Annual Report also
could adversely affect our results,
and you should not consider any such list of factors to
be a complete set of all potential risks or uncertainties.
Any forward-looking
statements made by us or on our behalf speak only as of the
date they are made.
We do not undertake
to update any forward-looking
statement, except as required by applicable law.
BUSINESS OVERVIEW
We are a financial
holding company headquartered in Tallahassee,
Florida, and we are the parent of our wholly owned subsidiary,
Capital City Bank (the "Bank" or "CCB").
The Bank offers a broad array of products and
services through a total of 57 full-service
offices located in Florida, Georgia,
and Alabama.
The Bank offers commercial and retail banking services,
as well as trust and asset
management, and retail securities brokerage.
We offer
residential mortgage banking services through Capital City Home
Loans.
Our profitability,
like most financial institutions, is dependent to a large
extent upon net interest income, which is the difference
between the interest and fees received on earning assets, such
as loans and securities, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings.
Results of operations are also affected by the provision for
credit losses, noninterest
income such as deposit fees, wealth management fees, mortgage
banking
fees and bank card fees, and operating expenses such as
salaries and employee benefits, occupancy,
and other operating expenses, including income taxes.
A detailed discussion regarding the economic conditions
in our markets and our long-term strategic objectives is included as part
of
the MD&A section of our 2020 Form 10-K.
Strategic Alliance
.
On March 1, 2020, CCB completed its acquisition of a 51% membership
interest in Brand Mortgage Group, LLC
(“Brand”) which is now operated as a Capital City Home Loans
(“CCHL”).
CCHL was consolidated into CCBG’s
financial
statements effective March 1, 2020.
See Note 1 – Business Combination in the 2020 Form 10-K
in the Consolidated Financial
Statements.
30
RESPONSE TO COVID-19 PANDEMIC
The global and local responses to the COVID-19 pandemic
have shown significant progress, and our clients and
associates continue
to
adjust to the changing conditions presented by the
pandemic. However, the pandemic
has adversely impacted a broad range of
industries in which the Company’s
customers operate and could still impair their ability to
fulfill their financial obligations to the
Company.
In addition, although our associates have generally been
available and working during the pandemic, COVID-19 has the
potential to create widespread business continuity issues for
the Company.
Congress, the President, and the Federal Reserve have
taken several actions designed to cushion the economic fallout.
The
Coronavirus Aid, Relief and Economic Security (“CARES”) Act
was signed into law at the end of March 2020 as a $2 trillion
legislative package.
The goal of the CARES Act was to curb the economic downturn
through various measures, including direct
financial aid to American families and economic
stimulus to significantly impacted industry sectors through programs
like the
Paycheck Protection Program ("PPP") and Main Street Lending
Program (“MSLP”).
During December 2020, many provisions of the
CARES Act were extended through the end of 2021.
In addition to the general impact of COVID-19, certain provisions
of the
CARES Act as well as other recent legislative and regulatory
relief efforts have had a material impact on
the Company’s 2020 and
2021 operations and could continue to impact operations going
forward.
The Company’s business is dependent
upon the willingness and ability of its associates and clients to
conduct banking and other
financial transactions.
While it appears that epidemiological and macroeconomic
conditions are trending in a positive direction at
March 31, 2021, if case counts trend higher in our
markets,
the Company could experience further adverse effects
on its business,
financial condition, results of operations and cash
flows.
While it is not possible to know the full universe or extent that the impact
of
COVID-19, and any potential resulting measures to curtail its spread,
will have on the Company’s
future operations, we discuss
potential impacts on our financial performance in
more detail throughout parts of the MD&A section.
To protect the
health of our
clients and associates and comply with applicable government
directives, we have modified our business practices as noted
below.
COVID-19 Update
●
We continue
to closely follow COVID-19 case count trends in our markets and adjust
our operations as needed to respond
to the changing conditions presented by the COVID-19 pandemic.
●
All of our banking offices are open for business, but
continue to be subject to national guidelines
and local safety
ordinances that are designed to protect our clients and associates.
●
To limit building
capacity, we continue
to utilize flexible in-office and remote working arrangements
for non-retail
associates.
●
In support of social distancing measures, we encourage
clients to use our enhanced digital access options for banking
products and access to sales associates.
NON-GAAP FINANCIAL MEASURES
We present a
tangible common equity ratio and a tangible book value per
diluted share that, in each case, reduces shareowners’ equity
and total assets by the amount of goodwill resulting
from merger and acquisition activity.
We believe these
measures
are useful to
investors because it allows investors to more easily compare
our capital adequacy to other companies in the industry
,
although the
manner in which we calculate non-GAAP financial
measures may differ from that of other companies reporting
non-GAAP measures
with similar names.
The GAAP to non-GAAP reconciliation for each quarter presented
on page 31 is provided below.
2021
2020
2019
(Dollars in Thousands, except per share data)
First
Fourth
Third
Second
First
Fourth
Third
Second
Shareowners' Equity (GAAP)
$
324,426
$
320,837
$
339,425
$
335,057
$
328,507
$
327,016
$
321,562
$
314,595
Less: Goodwill (GAAP)
89,095
89,095
89,095
89,095
89,275
84,811
84,811
84,811
Tangible Shareowners' Equity (non
-GAAP)
A
235,331
231,742
250,330
245,962
239,232
242,205
236,751
229,784
Total Assets (GAAP)
3,929,884
3,798,071
3,587,041
3,499,524
3,086,523
3,088,953
2,934,513
3,017,654
Less: Goodwill (GAAP)
89,095
89,095
89,095
89,095
89,275
84,811
84,811
84,811
Tangible Assets (non-GAAP)
B
$
3,840,789
$
3,708,976
$
3,497,946
$
3,410,429
$
2,997,248
$
3,004,142
$
2,849,702
$
2,932,843
Tangible Common Equity Ratio
(non-GAAP)
A/B
6.13%
6.25%
7.16%
7.21%
7.98%
8.06%
8.31%
7.83%
Actual Diluted Shares Outstanding (GAAP)
C
16,875,719
16,844,997
16,800,563
16,821,743
16,845,462
16,855,161
16,797,241
16,773,449
Diluted Tangible Book Value
(non-GAAP)
A/C
13.94
13.76
14.90
14.62
14.20
14.37
14.09
13.70
31
SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
(Dollars in Thousands, Except
2021
2020
2019
Per Share Data)
First
Fourth
Third
Second
First
Fourth
Third
Second
Summary of Operations
:
Interest Income
$
25,446
$
26,154
$
26,166
$
26,512
$
27,365
$
28,008
$
28,441
$
28,665
Interest Expense
948
1,181
1,044
1,054
1,592
1,754
2,244
2,681
Net Interest Income
24,498
24,973
25,122
25,458
25,773
26,254
26,197
25,984
Provision for Credit Losses
(982)
1,342
1,308
2,005
4,990
(162)
776
646
Net Interest Income After
Provision for Credit Losses
25,480
23,631
23,814
23,453
20,783
26,416
25,421
25,338
Noninterest Income
29,826
30,523
34,965
30,199
15,478
13,828
13,903
12,770
Noninterest Expense
40,476
41,348
40,342
37,303
30,969
29,142
27,873
28,396
Income
Before
Income Taxes
14,830
12,806
18,437
16,349
5,292
11,102
11,451
9,712
Income Tax Expense
2,787
2,833
3,165
2,950
1,282
2,537
2,970
2,387
(Income) Loss Attributable to NCI
(2,537)
(2,227)
(4,875)
(4,253)
277
-
-
-
Net Income Attributable to CCBG
9,506
7,746
10,397
9,146
4,287
8,565
8,481
7,325
Net Interest Income (FTE)
$
24,607
$
25,082
$
25,233
$
25,564
$
25,877
$
26,378
$
26,333
$
26,116
Per Common Share
:
Net Income Basic
$
0.56
$
0.46
$
0.62
$
0.55
$
0.25
$
0.51
$
0.51
$
0.44
Net Income Diluted
0.56
0.46
0.62
0.55
0.25
0.51
0.50
0.44
Cash Dividends Declared
0.15
0.15
0.14
0.14
0.14
0.13
0.13
0.11
Diluted Book Value
19.22
19.05
20.20
19.92
19.50
19.40
19.14
18.76
Diluted Tangible Book Value
(1)
13.94
13.76
14.90
14.62
14.20
14.37
14.09
13.70
Market Price:
High
28.98
26.35
21.71
23.99
30.62
30.95
28.00
25.00
Low
21.42
18.14
17.55
16.16
15.61
25.75
23.70
21.57
Close
26.02
24.58
18.79
20.95
20.12
30.50
27.45
24.85
Selected Average Balances
:
Loans Held for Investment
$
2,044,363
$
1,993,470
$
2,005,178
$
1,982,960
$
1,847,780
$
1,834,085
$
1,824,685
$
1,814,401
Earning Assets
3,497,929
3,337,409
3,223,838
3,016,772
2,751,880
2,694,700
2,670,081
2,719,217
Total Assets
3,821,521
3,652,436
3,539,332
3,329,226
3,038,788
2,982,204
2,959,310
3,010,662
Deposits
3,239,508
3,066,136
2,971,277
2,783,453
2,552,690
2,524,951
2,495,755
2,565,431
Shareowners’ Equity
326,330
343,674
340,073
333,515
331,891
326,904
320,273
313,599
Common Equivalent Average Shares:
Basic
16,838
16,763
16,771
16,797
16,808
16,750
16,747
16,791
Diluted
16,862
16,817
16,810
16,839
16,842
16,834
16,795
16,818
Performance Ratios:
Return on Average Assets
1.01
%
0.84
%
1.17
%
1.10
%
0.57
%
1.14
%
1.14
%
0.98
%
Return on Average Equity
11.81
8.97
12.16
11.03
5.20
10.39
10.51
9.37
Net Interest Margin (FTE)
2.85
3.00
3.12
3.41
3.78
3.89
3.92
3.85
Noninterest Income as % of
Operating Revenue
54.90
55.00
58.19
54.26
37.52
34.50
34.67
32.95
Efficiency Ratio
74.36
74.36
67.01
66.90
74.89
72.48
69.27
73.02
Asset Quality:
Allowance for Credit Losses ("ACL")
$
22,026
$
23,816
$
23,137
$
22,457
$
21,083
$
13,905
$
14,319
$
14,593
ACL to Loans HFI
1.07
%
1.19
%
1.16
%
1.11
%
1.13
%
0.75
%
0.78
%
0.79
%
Nonperforming Assets (“NPAs”)
5,472
6,679
6,732
8,025
6,337
5,425
5,454
6,632
NPAs to Total
Assets
0.14
0.18
0.19
0.23
0.21
0.18
0.19
0.22
NPAs to Loans HFI plus OREO
0.27
0.33
0.34
0.40
0.34
0.29
0.30
0.36
ACL to Non-Performing Loans
410.78
405.66
420.30
322.37
432.61
310.99
290.55
259.55
Net Charge-Offs to Average
Loans HFI
(0.10)
0.09
0.11
0.05
0.23
0.05
0.23
0.04
Capital Ratios:
Tier 1 Capital
16.08
%
16.19
%
16.77
%
16.59
%
16.12
%
17.16
%
16.83
%
16.36
%
Total Capital
17.20
17.30
17.88
17.60
17.19
17.90
17.59
17.13
Common Equity Tier 1
13.63
13.71
14.20
14.01
13.55
14.47
14.13
13.67
Leverage
8.97
9.33
9.64
10.12
10.81
11.25
11.09
10.64
Tangible Common Equity
(1)
6.13
6.25
7.16
7.21
7.98
8.06
8.31
7.83
(1)
Non-GAAP financial measure.
See non-GAAP reconciliation on page 30.
32
FINANCIAL OVERVIEW
Results of Operations
Performance Summary
.
Net income was $9.5 million, or $0.56 per diluted share,
for the first quarter of 2021 compared to net income
of $7.7 million, or $0.46 per diluted share, for the fourth
quarter of 2020 and net income of $4.3 million,
or $0.25 per diluted share,
for
the first quarter of 2020.
Net Interest Income
.
Taxable equivalent
net interest income for the first quarter of 2021 was $24.6
million compared to $25.1 million
for the fourth quarter of 2020 and $25.9 million for the
first quarter of 2020.
The decrease compared to both prior periods reflected
lower rates earned
on investment securities and variable/adjustable rate loans.
The year-over-year decline also reflected lower rates on
overnight funds.
Partially offsetting these declines were higher volumes
of earning assets, including lower yielding loans from
the
SBA Paycheck Protection Program (“SBA PPP”) and overnight
funds.
Provision and Allowance for Credit
Losses.
For the first quarter of 2021, we recorded a negative provision
of $1.0 million compared
to provision expense of $1.3 million for the fourth
quarter of 2020 and $5.0 million for the first quarter of
2020.
The negative
provision for the first quarter of 2021 generally reflected
improving economic conditions and a lower level of expected
losses related
to COVID-19.
Further, we recognized net loan recoveries
of $0.5 million in the first quarter of 2021.
Noninterest Income
.
Noninterest income for the first quarter of 2021 totaled $29.8
million, a decrease of $0.7 million, or 2.3%, from
the fourth quarter of 2020 and a $14.3 million, or 92.7%,
increase over the first quarter of 2020.
The decrease from the fourth quarter
of 2020 was due to a seasonal decline in mortgage
banking revenues.
The increase over the first quarter of 2020 was also attributable
to higher mortgage banking revenues due to the strategic
alliance with CCHL.
Noninterest Expense
.
Noninterest expense for the first quarter of 2021 totaled $40.5
million, a decrease of $0.9 million, or 2.1%, from
the fourth quarter of 2020 and a $9.5 million, or 30.78%,
increase over the first quarter of 2020.
The decrease from the fourth quarter
of 2020 was primarily attributable to lower compensation
expense and other real estate owned (“OREO”) expense.
The increase
compared to the first quarter of 2020 reflected expenses added
by the CCHL acquisition as Core CCBG’s
expenses remained flat.
Financial Condition
Earning Assets
.
Average
earning assets were $3.498 billion for the first quarter of 2021,
an increase of $160.5 million, or 4.8%
over
the fourth quarter of 2020, and an increase of $746.0 million,
or 27.1% over the first quarter of 2020.
The increase over both prior
periods was primarily driven by higher deposit balances,
which funded growth in both overnight funds sold and SBA PPP loans.
Deposit balances increased as a result of strong core deposit
growth, in addition to funding retained at the bank from
SBA PPP loans,
and various other stimulus programs.
Loans
.
Average loans held
for investment (“HFI”) increased $50.9 million, or
2.6%, over the fourth quarter of 2020 and $196.6
million, or 10.6%, over the first quarter of 2020.
Period end balances increased $51.3 million, or 2.6%, over the fourth
quarter of
2020 and $195.3 million, or 10.5%, over the first quarter
of 2020.
In the first quarter of 2021, we originated an additional round
of
SBA PPP loans totaling $65.4 million.
Excluding SBA PPP loans, average and period end loans increased
$23 million and $36
million, respectively,
over the fourth quarter of 2020.
Credit Quality
.
Nonaccrual loans totaled $5.4 million (0.26% of HFI loans)
at March 31, 2021
compared to $5.9 million (0.29%
of
HFI loans) at December 31, 2020 and $4.9 million (0.26%
of HFI loans) at March 31, 2020.
Classified loans totaled $20.6 million,
$17.6
million, and $16.5 million at the same respective periods.
We continue
to closely monitor borrowers and loan portfolio
segments impacted by the pandemic.
Approximately $328 million of the $333 million in loans that received
COVID-19 loan
extension have resumed making regularly scheduled payments
and we have experienced nominal problem loan migration
within that
pool of loans.
Deposits
.
Average total
deposits increased $173.4 million, or 5.7%, over the fourth
quarter of 2020,
and $686.8 million, or 26.9%,
over the first quarter of 2020.
Period end deposit balances grew $140.5 million and
$812.5 million over the fourth quarter of 2020 and
first quarter of 2020,
respectively, indicating
strong growth in core deposit balances.
Over the past twelve months, multiple
government stimulus programs have been implemented,
including the CARES Act and the American Rescue Plan Act, which
are
responsible for a portion of this growth.
Capital
.
At March 31, 2021, we were well-capitalized with a total risk-based
capital ratio of 17.20%
and a tangible common equity
ratio (a non-GAAP financial measure) of 6.13% compared
to 17.30% and 6.25%, respectively,
at December 31, 2020 and 17.19% and
7.98%, respectively,
at March 31, 2020.
At March 31, 2021, all of our regulatory capital ratios exceeded
the threshold to be well-
capitalized under the Basel III capital standards.
33
RESULTS
OF OPERATIONS
Net Income
For the first quarter of 2021, we realized net income of
$9.5 million, or $0.56 per diluted share, compared to
net income of $7.7
million, or $0.46 per diluted share, for the fourth quarter
of 2020, and $4.3 million, or $0.25 per diluted share, for the first quarter
of
2020.
Compared to the fourth quarter of 2020, the $2.0 million
increase in operating profit was attributable to a $2.3
million decrease in the
provision for credit losses and lower noninterest expense
of $0.9 million, partially offset by a $0.7 million
decrease in noninterest
income and lower net interest income of $0.5 million.
Compared to the first quarter of 2020, the $9.5 million
increase in operating profit was attributable to a $14.3 million
increase in
noninterest income and a lower provision for credit losses of
$6.0 million, partially offset by higher noninterest
expense of $9.5 million
and lower net interest income of $1.3 million.
This comparison reflects the acquisition of a 51% membership
interest in, and
consolidation of, CCHL on March 1, 2020.
A condensed earnings summary of each major component
of our financial performance is provided below:
Three Months Ended
(Dollars in Thousands, except per share data)
March 31, 2021
December 31, 2020
March 31, 2020
Interest Income
$
25,446
$
26,154
$
27,365
Taxable Equivalent Adjustments
109
109
104
Total Interest Income (FTE)
25,555
26,263
27,469
Interest Expense
948
1,181
1,592
Net Interest Income (FTE)
24,607
25,082
25,877
Provision for Credit Losses
(982)
1,342
4,990
Taxable Equivalent Adjustments
109
109
104
Net Interest Income After Provision for Credit Losses
25,480
23,631
20,783
Noninterest Income
29,826
30,523
15,478
Noninterest Expense
40,476
41,348
30,969
Income Before Income Taxes
14,830
12,806
5,292
Income Tax Expense
2,787
2,833
1,282
Pre-Tax (Income) Loss
Attributable to Noncontrolling Interests
(2,537)
(2,227)
277
Net Income Attributable to Common Shareowners
$
9,506
$
7,746
$
4,287
Basic Net Income Per Share
$
0.56
$
0.46
$
0.25
Diluted Net Income Per Share
$
0.56
$
0.46
$
0.25
Net Interest Income
Net interest income represents our single largest
source of earnings and is equal to interest income and fees
generated by earning
assets less interest expense paid on interest bearing liabilities.
This information is provided on a "taxable equivalent" basis to
reflect
the tax-exempt status of income earned on certain loans
and state and local government debt obligations.
We provide an analysis of
our net interest income including average yields and rates
in Table I on page 44.
Tax-equivalent
net interest income for the first quarter of 2021 was $24.6 million
compared to $25.1 million for the fourth quarter of
2020 and $25.9 million for the first quarter of 2020.
The decrease compared to both prior periods reflected lower
rates earned on
investment securities and variable/adjustable rate loans.
The year-over-year decline also reflected lower rates on overnight
funds.
Partially offsetting these declines were higher volumes
of earning assets, including lower yielding SBA PPP loans and
overnight
funds.
Our net interest margin for the first quarter
of 2021 was 2.85%, a decrease of 15 basis points from
the fourth quarter of 2020 and a
decline of 93 basis points from the first quarter of 2020.
The decreases were primarily attributable to significant growth in
overnight
funds which reduced our margin.
Our net interest margin for the first quarter of 2021
,
excluding the impact of overnight funds in
excess of $200 million, was 3.45%.
We anticipate
margin improvement from these levels as a portion
of our overnight funds are
deployed into various strategies under consideration.
34
The federal funds target rate has remained
in the range of 0.00%-0.25% since March 2020 when the Fed
reduced its overnight rate by
150 basis points, and as a result we continue to experience
lower repricing of our variable/adjustable rate earning assets and
investment securities. Interest and fee income related
to the SBA PPP (See Loans below) will partially offset
the effect of lower rates.
Our overall cost of funds remained low during
the first quarter of 2021 at 0.11%, a decrease
of three basis points compared to the
fourth quarter of 2020, primarily due to a reduction in
short-term borrowings.
Due to highly competitive fixed-rate loan pricing in our
markets, we continue to review our loan pricing and make adjustments
where
we believe
appropriate and prudent.
Provision for Credit Losses
We recorded
a negative provision for credit losses of $1.0 million (consisting
of a negative $2.3 million for HFI loans, partially offset
by a $1.3 million expense for unfunded loan commitments)
for the first quarter of 2021 compared to provision expense
of $1.3 million
for the fourth quarter of 2020 and $5.0 million for the
first quarter of 2020.
The negative provision for the first quarter of 2021
generally reflected improving economic conditions and
a lower level of expected losses related to COVID-19.
Further, we recognized
net loan recoveries of $0.5 million in the first quarter
of 2021.
We discuss the allowance
for credit losses and COVID-19 exposure
further below.
Charge-off activity for the respective
periods is set forth below:
Three Months Ended
(Dollars in Thousands, except per share data)
March 31, 2021
December 31, 2020
March 31, 2020
CHARGE-OFFS
Commercial, Financial and Agricultural
$
69
$
104
$
362
Real Estate - Construction
-
-
-
Real Estate - Commercial Mortgage
-
-
11
Real Estate - Residential
6
38
110
Real Estate - Home Equity
5
10
31
Consumer
(1)
1,056
1,232
1,566
Total Charge
-offs
$
1,136
$
1,384
$
2,080
RECOVERIES
Commercial, Financial and Agricultural
$
136
$
64
$
40
Real Estate - Construction
-
50
-
Real Estate - Commercial Mortgage
645
27
191
Real Estate - Residential
75
153
40
Real Estate - Home Equity
124
40
33
Consumer
(1)
678
564
695
Total Recoveries
$
1,658
$
898
$
999
Net Charge-offs (Recoveries)
$
(522)
$
486
$
1,081
Net Charge-offs (Recoveries) (Annualized)
to Average Loans HFI
(0.10)
%
0.09
%
0.23
%
(1)
Includes overdrafts.
Noninterest Income
Noninterest income for the first quarter of 2021 totaled
$29.8 million compared to $30.5 million for the fourth
quarter of 2020 and
$15.5 million for the first quarter of 2020.
The decrease from the fourth quarter of 2020 was due to lower mortgage
banking revenues
of $0.6 million and deposit fees of $0.4 million, partially
offset by higher bank card fees of $0.2 million and
other income of $0.1
million.
Compared to the first quarter of 2020, the $14.3 million increase
reflected higher mortgage banking revenues of $13.9
million, wealth management fees of $0.5 million,
and bank card fees of $0.6 million, partially offset by
lower deposit fees of $0.7
million.
35
Noninterest income represented 54.9% of operating revenues
(net interest income plus noninterest income) for the first quarter
of 2021
compared to 55.0% for the fourth quarter of 2020 and
37.5% for the first quarter of 2020.
The 51% ownership acquisition of CCHL and consolidation
into CCBG’s financial statements
occurred on March 1, 2020.
The table
below reflects the major components of noninterest income
for both Core CCBG and CCHL to help facilitate a better understanding
of
the period over period comparison.
Three Months Ended
Mar 31, 2021
Dec 31, 2020
Mar 31, 2020
(Dollars in thousands)
Core
CCBG
CCHL
Core
CCBG
CCHL
Core
CCBG
CCHL
Deposit Fees
$
4,271
-
$
4,713
$
-
$
5,015
$
-
Bank Card Fees
3,618
-
3,462
-
3,051
-
Wealth Management Fees
3,090
-
3,069
-
2,604
-
Mortgage Banking Revenues
279
16,846
302
17,409
1,138
2,115
Other
1,296
426
1,205
363
1,459
96
Total Noninterest Income
$
12,554
$
17,272
$
12,751
$
17,772
$
13,267
$
2,211
Significant components of noninterest income are
discussed in more detail below.
Deposit Fees
.
Deposit fees for the first quarter of 2021 totaled $4.3 million,
a decrease of $0.4 million, or 9.4%, from the fourth
quarter of 2020 and $0.7 million,
or 14.8%, from the first quarter of 2020.
The decrease from both prior periods was attributable to
lower overdraft fees and reflected lower utilization
of our overdraft services,
which we believe is primarily attributable to government
stimulus.
Bank Card Fees
.
Bank card fees for the first quarter of 2021 totaled $3.6
million, an increase of $0.2 million, or 4.5%, over the fourth
quarter of 2020 and $0.6
million, or 18.6%, over the first quarter of 2020.
Compared to both prior periods, the improvement reflected
higher card activity driven by increased consumer spending
,
which we believe is reflective of the economic recovery
and additional
government stimulus.
Wealth
Management Fees
.
Wealth management
fees, which include both trust fees (i.e., managed accounts
and trusts/estates)
and
retail brokerage fees (i.e., investment, insurance products,
and retirement accounts), totaled $3.1 million for the
first quarter of 2021,
comparable to the fourth quarter of 2020 and an increase
of $0.5
million, or 18.7%, over the first quarter of 2020.
The increase over
the first quarter of 2020 reflected higher assets under management
and higher trading activity.
At March 31, 2021, total assets under
management were approximately $2.088 billion compared
to $1.979 billion at December 31, 2020 and $1.561 billion at March
31,
2020.
Mortgage Banking Revenues
.
Mortgage banking revenues totaled $17.1 million for the
first quarter of 2021, a decrease of $0.6
million, or 3.3%, from the fourth quarter of 2020
and an increase of $13.9 million, or 426.4% over the first quarter
of 2020.
The
decrease from the fourth quarter of 2020 reflected
a seasonal decline in production.
The increase over the first quarter of 2020 was
attributable to the strategic alliance with CCHL that began
on March 1, 2020.
Noninterest Expense
Noninterest expense for the first quarter of 2021 totaled
$40.5 million compared to $41.3 million for the fourth
quarter of 2020 and
$31.0 million for the first quarter of 2020.
The decrease from the fourth quarter of 2020 was primarily attributable
to lower
compensation expense of $0.6 million and other real estate owned
(“OREO”) expense of $0.7 million, partially offset
by higher other
expense of $0.5 million.
Compared to the first quarter of 2020, the $9.5 million
increase reflected expenses added by the CCHL
acquisition as Core CCBG’s expenses
remained flat.
36
The 51% ownership acquisition of CCHL and consolidation
into CCBG’s financial statements
occurred on March 1, 2020.
The table
below reflects the major components of noninterest expense
for both Core CCBG and CCHL to help facilitate a better
understanding
of the year over year comparison.
Three Months Ended
Mar 31, 2021
Dec 31, 2020
Mar 31, 2020
(Dollars in thousands)
Core
CCBG
CCHL
Core
CCBG
CCHL
Core
CCBG
CCHL
Salaries
$
12,171
10,276
$
12,384
$
10,398
$
13,488
$
2,242
Associate Benefits
3,396
221
3,740
200
3,957
49
Total Compensation
15,567
10,497
16,124
10,598
17,445
2,291
Premises
2,372
387
2,340
397
2,249
134
Equipment
2,734
474
2,716
523
2,499
97
Total Occupancy
5,106
861
5,056
920
4,748
231
Legal Fees
553
5
315
31
468
-
Professional Fees
1,167
163
1,078
154
1,055
66
Processing Services
1,545
-
1,299
-
1,557
-
Advertising
442
307
505
286
461
123
Travel and Entertainment
99
44
110
70
242
75
Printing and Supplies
176
48
172
30
187
13
Telephone
668
87
636
111
577
33
Postage
171
54
173
39
175
11
Insurance - Other
501
-
457
-
296
-
Other Real Estate Owned, Net
(118)
-
570
(4)
(798)
-
Miscellaneous
2,140
393
1,584
1,034
1,577
136
Total Other Expense
7,344
1,101
6,899
1,751
5,797
457
Total Noninterest Expense
$
28,017
$
12,459
$
28,079
$
13,269
$
27,990
$
2,979
Significant components of noninterest expense are
discussed in more detail below.
Compensation
.
Compensation expense totaled $26.1 million for the first quarter
of 2021, a decrease of $0.7 million, or 2.5%, from the
fourth quarter of 2020 and an increase of $6.3 million,
or 32.1%, over the first quarter of 2020.
The decrease from the fourth quarter
of 2020 was due to lower salary expense at Core CCBG (primarily
realized loan cost which is a credit offset to expense)
and lower
associate benefit expense (associate insurance).
The increase over the first quarter of 2020 reflects the addition
of expenses for a full
quarter from CCHL.
Occupancy.
Occupancy expense (including premises and equipment) totaled
$6.0 million for the first quarter of 2021, comparable to
the fourth quarter of 2020 and an increase of $1.0 million,
or 19.9%, over the first quarter of 2020.
Compared to the first quarter of
2020, the increase reflected expenses added from
the CCHL integration,
primarily lease expense for loan production offices.
Higher
expense for maintenance and repairs at Core CCBG also contributed,
but to a lesser extent.
Other
.
Other noninterest expense totaled $8.4 million for the first quarter
of 2021, a decrease of $0.2 million, or 2.4%, from the
fourth
quarter of 2020 and an increase of $2.2 million, or 35
.0%, over the first quarter of 2020.
The increase over the first quarter of 2020
reflected the addition of CCHL expenses and higher
OREO expense at Core CCBG driven by a $1.0 million gain
from the sale of a
banking office in the first quarter of 2020.
Our operating efficiency ratio (expressed
as noninterest expense as a percent of the sum of taxable-equivale
nt net interest income plus
noninterest income) was 74.36% for the first quarter
of 2021 compared to 74.36%
for the fourth quarter of 2020 and 74.89% for the
first quarter of 2020.
Income Taxes
We realized income
tax expense of $2.8 million (effective rate of 19%)
for the first quarter of 2021 compared to $2.8 million
(effective rate of 22%) for the fourth quarter
of 2020 and $1.3 million (effective rate of 24%) for the
first quarter of 2020.
Tax
expense for the fourth quarter of 2020 was unfavorably
impacted by a $0.3 million discrete tax expense.
Compared to the first quarter
of 2020, the decrease in our effective tax rate
was attributable to converting CCHL to a partnership for tax
purposes in the second
quarter of 2020.
Absent discrete items, we expect our annual effective tax
rate to approximate 18%-19% in 2021.
37
FINANCIAL CONDITION
Average earning
assets were $3.498 billion for the first quarter of 2021, an
increase of $160.5 million, or 4.8%, over the fourth quarter
of 2020, and an increase of $746.0 million, or 27.1%,
over the first quarter of 2020.
The increase over both prior periods was
primarily driven by higher deposit balances, which funded
growth in both overnight funds sold and SBA PPP loans.
Deposit balances
increased as a result of strong core deposit growth,
in addition to funding retained at the bank from SBA PPP loans, and
various other
stimulus programs.
Investment Securities
In the first quarter of 2021, our average investment
portfolio increased $14.9 million, or 2.9%, over the fourth
quarter of 2020 and
decreased $102.1 million, or 16.1%, from the
first quarter of 2020.
Securities in our investment portfolio represented 15.2% of our
average earning assets for the first quarter of 2021
compared to 15.5% for the fourth quarter of 2020, and 23.1% for the
first quarter of
2020.
For the remainder of 2021, we will continue to monitor the
interest rate environment and look for opportunities to purchase
additional investment securities that align with the overall
investment strategy of the Company.
The investment portfolio is a significant component of
our operations and, as such, it functions as a key element
of liquidity and
asset/liability management.
Two types of classifications
are approved for investment securities which are Available
-for-Sale (“AFS”)
and Held-to-Maturity (“HTM”).
During the first quarter of 2021, we purchased securities under
the AFS designation.
At March 31,
2021,
$406.2 million, or 67.1%, of our investment portfolio was classified as AFS,
and $199.1 million, or 32.9%, classified as HTM.
The average maturity of our total portfolio at March
31, 2021 was 2.78 years compared to 2.09 years and 2.20 years
at December 31,
2020
and March 31, 2020, respectively.
We determine
the classification of a security at the time of acquisition based
on how the purchase will affect our asset/liability strategy
and future business plans and opportunities.
We consider
multiple factors in determining classification, including
regulatory capital
requirements, volatility in earnings or other comprehensive
income, and liquidity needs.
Securities in the AFS portfolio are recorded
at fair value with unrealized gains and losses associated with
these securities recorded net of tax, in
the accumulated other
comprehensive income component of shareowners’ equity.
HTM securities are acquired or owned with the intent
of holding them to
maturity.
HTM investments are measured at amortized cost.
We do not
trade, nor do we presently intend to begin trading investment
securities for the purpose of recognizing gains and therefore
we do not maintain a trading portfolio.
At March 31, 2021,
there were 89 positions (combined AFS and HTM) with unrealized
losses totaling $1.4 million at March 31, 2021.
GNMA mortgage-backed securities, US Treasuries,
and SBA securities carry the full faith and credit
guarantee of the US
Government, and are 0% risk-weighted assets for regulatory
purposes. The municipal bond positions are either pre
-refunded with
government securities, or are AAA rated. None of these
positions with unrealized losses are considered impaired, and
all are expected
to mature at par.
Further, we believe the long history of
no credit losses on these securities indicates that the expectation
of
nonpayment of the amortized cost basis is zero.
Loans HFI
Average loans
HFI increased $50.9 million, or 2.6%, over the fourth quarter of 2020
and increased $196.6 million, or 10.6%, over the
first quarter of 2020.
Compared to the fourth quarter of 2020, average loan balances
increased across all loan types except
institutional and consumer, which
declined slightly.
Compared to the first quarter of 2020, average loan balances increased
across all
loan types except institutional, consumer,
and HELOCs.
Period-end HFI loans increased $51.3 million, or 2.6%, over
the fourth
quarter of 2020 and increased $195.3 million, or 10.5%,
over the first quarter of 2020.
In the first quarter of 2021, we originated an additional
round of SBA PPP loans totaling $65.4 million (reflected in the
commercial
loan category) which averaged $23.7 million for the quarter.
Approximately $256 million in SBA PPP loans have been made
since
the inception of this program.
Through the first quarter of 2021, approximately $47
million in SBA PPP loans have been forgiven and
paid-off ($36 million in the first quarter of 2021
and $11 million in the fourth quarter of 2020).
Forgiveness applications are expected
to remain strong over the next three months for SBA PPP loans
funded in 2020, and then over the course of 2021 for the
SBA PPP
loans funded in 2021.
SBA PPP loan fee income totaled approximately $1.3 million
for the first quarter of 2021.
At March 31, 2021
we had $5.0 million (net) in deferred SBA PPP loan fees.
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.
38
Credit Quality
Nonperforming assets (nonaccrual loans and OREO) totaled
$5.5 million at March 31, 2021, a $1.2 million decrease
from December
31, 2020 and a $0.9 million decrease from March 31, 2020
.
Nonaccrual loans totaled $5.4 million at March 31, 2021,
a $0.5 million
decrease from December 31, 2020 and a $0.5 million increase
over March 31, 2020.
The balance of OREO totaled $0.1 million at
March 31, 2021, a decrease of $0.7 million and $1.4
million from December 31, 2020 and March 31, 2020,
respectively.
(Dollars in Thousands)
March 31, 2021
December 31, 2020
March
31, 2020
Nonaccruing Loans:
Commercial, Financial and Agricultural
$
150
$
161
$
358
Real Estate - Construction
179
179
-
Real Estate - Commercial Mortgage
1,256
1,412
1,332
Real Estate - Residential
3,150
3,130
2,213
Real Estate - Home Equity
462
695
692
Consumer
165
294
279
Total Nonaccruing
Loans (“NALs”)
(1)
$
5,362
$
5,871
$
4,874
Other Real Estate Owned
110
808
1,463
Total Nonperforming
Assets (“NPAs”)
$
5,472
$
6,679
$
6,337
Past Due Loans 30 – 89 Days
$
2,622
$
4,594
$
5,077
Performing Troubled Debt Restructurings
13,597
13,887
15,934
Nonaccruing Loans/Loans HFI
0.26
%
0.29
%
0.26
%
Nonperforming Assets/Total
Assets
0.14
0.18
0.21
Nonperforming Assets/Loans HFI Plus OREO
0.27
0.33
0.34
Allowance/Nonaccruing Loans
410.78
405.66
432.61
(1)
Nonaccrual TDRs totaling $0.7 million, $0.5 million, and
$1.0 million are included in NALs for March
31, 2021, December 31,
2020 and March 31, 2020, respectively.
COVID-19 Exposure
We continue
to monitor our loan portfolio for segments that continue to be
affected by the pandemic.
To assist our clients, we have
extended loans totaling $333 million of which 75% were
for commercial borrowers and 25% were for consumer
borrowers.
Approximately $328 million, or 98%, of the loan balances associated
with these borrowers have resumed making regularly
scheduled
payments of which loan balances totaling $2.9 million
were over 30 days delinquent and an additional $0.6 million was
on nonaccrual
status at March 31, 2021.
Of the $5 million that remains on extension, no loans were
classified at March 31, 2021.
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.
39
At March 31, 2021, the allowance for credit losses for
loans HFI totaled $22.0 million compared to $23.8 million
at December 31,
2020 and $21.1 million at March 31, 2020.
Activity within the allowance is detailed in Note 3 to the consolidated
financial
statements.
The $1.8 million net decrease in the allowance for the
first quarter of 2021 reflected net loan recoveries totaling
$0.5
million and the release of $2.3 million in reserves
which reflected lower expected loan losses related to COVID-19.
At March 31,
2021, the allowance represented 1.07% of loans HFI and
provided coverage of 411% of nonperforming
loans compared to 1.19% and
406%, respectively,
at December 31, 2020 and 1.13% and 433%, respectively,
at March 31, 2020.
At March 31, 2021, excluding SBA
PPP loans (100% government guaranteed), the
allowance represented 1.19% of loans HFI compared to 1.30%
at December 31, 2020.
At March 31, 2021, the allowance for credit losses for
unfunded commitments totaled $3.0 million compared to $1.6 million
at
December 31, 2020 and $1.0 million at March 31,
2020.
The allowance for unfunded commitments is recorded in other liabilities.
Deposits
Average total
deposits were $3.240 billion for the first quarter of 2021, an
increase of $173.4 million, or 5.7%, over the fourth quarter
of 2020 and $686.8 million, or 26.9%, over the first quarter
of 2020.
Over the past twelve months, multiple government stimulus
programs have been implemented, including the CARES Act
and the American Rescue Plan Act, which are responsible for
a portion
of this growth. Given these large increases, the
potential exists for our deposit levels to be volatile throughout 2021
due to the
uncertain timing of the outflows of the stimulus related balances
and the economic recovery.
It is anticipated that current liquidity
levels will remain robust due to our strong overnight funds
sold position.
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 management arises from changes in interest rates,
exchange rates, commodity prices, and equity prices.
We
have risk management policies to monitor and limit exposure
to interest rate risk and do not participate in activities that
give rise to
significant market risk involving exchange rates, commodity
prices, or equity prices. Our risk management policies are
primarily
designed to minimize structural interest rate risk.
Interest Rate Risk Management.
Our net income is largely dependent on net interest
income.
Net interest income is susceptible to
interest rate risk to the degree that interest-bearing
liabilities mature or re-price on a different basis than interest
-earning assets.
When
interest-bearing liabilities mature or re-price more quickly
than interest-earning assets in a given period, a significant increase
in
market rates of interest could adversely affect
net interest income.
Similarly, when interest-earning
assets mature or re-price more
quickly than interest-bearing liabilities, falling interest rates could
result in a decrease in net interest income.
Net interest income is
also affected by changes in the portion of
interest-earning assets that are funded by interest-bearing liabilities rather
than by other
sources of funds, such as noninterest-bearing deposits and
shareowners’ equity.
We have established
a comprehensive interest rate risk management policy,
which is administered by management’s
Asset/Liability
Management Committee (“ALCO”).
The policy establishes risk limits, which are quantitative measures
of the percentage change in
net interest income (a measure of net interest income at
risk) and the fair value of equity capital (a measure of economic
value of
equity (“EVE”) at risk) resulting from a hypothetical change
in interest rates for maturities from one day to 30 years.
We measure the
potential adverse impacts that changing interest rates may
have on our short-term earnings, long-term value, and
liquidity by
employing simulation analysis through the use of
computer modeling.
The simulation model is designed to capture optionality
factors
such as call features and interest rate caps and floors imbedded
in investment and loan portfolio contracts.
As with any method of
analyzing interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology that
we use.
When
interest rates change, actual movements in different
categories of interest-earning assets and interest-bearing liabilities, loan
prepayments, and withdrawals of time and other deposits, may
deviate significantly from the assumptions that we use in our
modeling.
Finally, the methodology
does not measure or reflect the impact that higher rates may
have on variable and adjustable-rate loan
clients’ ability to service their debts, or the impact of rate
changes on demand for loan and deposit products.
We prepare
a current base case and several alternative simulations at least once
per quarter and present the analysis to ALCO, with the
risk metrics also reported to the Board of Directors.
In addition, more frequent forecasts may be produced when
interest rates are
particularly uncertain or when other business conditions
so dictate.
40
Our interest rate risk management goal is to maintain expected
changes in our net interest income and capital levels due
to fluctuations
in market interest rates within acceptable limits.
Management attempts to achieve this goal by balancing,
within policy limits, the
volume of variable-rate liabilities with a similar volume
of variable-rate assets, by keeping the average maturity of fixed-rate
asset and
liability contracts reasonably matched, by maintaining
our core deposits as a significant component of our total funding
sources and by
adjusting rates to market conditions on a continuing basis.
We test our balance
sheet using varying interest rate shock scenarios to analyze our interest
rate risk. Average
interest rates are
shocked by plus or minus 100, 200, 300, and 400 basis
points (“bp”), although we may elect not to use particular
scenarios that we
determined are impractical in a current rate environment.
It is management’s goal
to structure the balance sheet so that net interest
earnings at risk over 12-month and 24-month periods,
and the economic value of equity at risk, do not exceed policy guidelines
at the
various interest rate shock levels.
We augment
our interest rate shock analysis with alternative external
interest rate scenarios on a quarterly basis.
These alternative
interest rate scenarios may include non-parallel rate ramps.
Analysis
.
Measures of net interest income at risk produced by simulation
analysis are indicators of an institution’s
short-term
performance in alternative rate environments.
These measures are typically based upon a relatively brief
period and do not necessarily
indicate the long-term prospects or economic value
of the institution.
ESTIMATED CHANGES
IN NET INTEREST INCOME
(1)
Percentage Change (12-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
Policy Limit
-15.0%
-12.5%
-10.0%
-7.5%
-7.5%
March 31, 2021
40.6%
30.0%
19.4%
9.3%
-4.0%
December 31, 2020
39.0%
28.7%
18.7%
9.0%
-3.0%
Percentage Change (24-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
Policy Limit
-17.5%
-15.0%
-12.5%
-10.0%
-10.0%
March 31, 2021
53.0%
37.0%
21.2%
6.2%
-14.2%
December 31, 2020
54.2%
38.3%
22.6%
7.6%
-10.9%
The Net Interest Income at Risk position indicates
that in the short-term, all rising rate environments will positively
impact the net
interest margin of the Company,
while a declining rate environment of 100bp will have a
negative impact on the net interest margin.
Compared to the prior quarter-end, the 12-month
Net Interest Income at Risk position became more favorable in
all rising rate
scenarios, and was slightly less favorable in the falling
rate scenario due to the higher level of nonmaturity deposits, and
our limited
ability to lower deposit rates relative to the decline
in the market. Compared to the prior quarter-end, the 24-month
Net Interest
Income at Risk position became slightly less favorable
in all rate scenarios primarily due to the lower amount
of SBA PPP loan fees in
year two compared to year one.
All measures of Net Interest Income at Risk in rising rate
environments are within our prescribed policy limits over the next 12
-month
and 24-month periods. We
are out of compliance in the down 100bp scenario for the 24-month
period due to our limited ability to
lower our deposit rates relative to the decline in market rates.
The measures of equity value at risk indicate our ongoing
economic value by considering the effects of changes
in interest rates on all
of our cash flows, and discounting the cash flows to estimate the
present value of assets and liabilities.
The difference between the
aggregated discounted values of the assets and liabilities is the
economic value of equity,
which, in theory,
approximates the fair value
of our net assets.
41
ESTIMATED CHANGES
IN ECONOMIC VALUE
OF EQUITY
(1)
Changes in Interest Rates
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
Policy Limit
-30.0%
-25.0%
-20.0%
-15.0%
-15.0%
March 31, 2021
166.7%
132.0%
93.3%
50.0%
-54.0%
March 31, 2021 (Alternate Scenario)
(2)
115.9%
87.8%
56.5%
22.1%
-3.1%
December 31, 2020
160.9%
127.5%
89.9%
48.4%
-90.4%
(1) Down 200, 300, and 400 bp scenarios have been
excluded due to the low interest rate environment.
(2)
For the rates down 100 bp scenario,
the high negative percentage change
is due to a negative value assigned to our nonmaturity
deposits.
Since we believe our nonmaturity deposits are
highly valued core franchise deposits, we run
an alternate EVE
calculation which caps the projected
value of our nonmaturity deposits at their book value.
At March 31, 2021,
the economic value of equity results are favorable in all
rising rate environments and are within prescribed
tolerance levels, but are out of policy in the down 100
bp EVE scenario. EVE output in the down 100bp scenario is extreme
given the
historically low rate environment, in conjunction with
the high overnight funds sold balance.
Management is monitoring the EVE
analysis in light of the economic recovery and evaluating
various strategies.
As management believes there is more permanency to
recent deposit growth, we are planning to invest an additional
$500 million in the investment portfolio, which will lessen
the bank’s
asset sensitivity.
In an alternate EVE scenario where the value of our nonmaturity
deposits are capped at their book value, we are
within policy guidelines.
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 changing balance sheet mix, 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 March 31, 2021,
we had the ability to generate $1.262 billion in additional liquidity
through all of our available resources (this
excludes $852 million in overnight funds sold).
In addition to the primary borrowing outlets mentioned
above, we also have the
ability to generate liquidity by borrowing from the Federal
Reserve Discount Window and through
brokered deposits.
We recognize
the importance of maintaining liquidity and have developed
a Contingent Liquidity Plan, which addresses various
liquidity stress
levels and our response and action based on the level
of severity.
We periodically
test our credit facilities for access to the funds, but
also understand that as the severity of the liquidity level
increases that certain credit facilities may no longer be available.
We conduct
a liquidity stress test on a quarterly basis based on
events that could potentially occur at the Bank and report results to ALCO,
our
Market Risk Oversight Committee, Risk Oversight Committee,
and the Board of Directors.
At March 31, 2021,
we believe the
liquidity available to us was sufficient to meet
our on-going needs and execute our business strategy.
We view our
investment portfolio primarily as a source of liquidity and have
the option to pledge the portfolio as collateral for
borrowings or deposits, and/or sell selected securities.
The portfolio consists of debt issued by the
U.S. Treasury,
U.S. governmental
and federal agencies, and municipal governments.
The weighted average life of the portfolio was approximately 2.78
years at March
31, 2021,
and the available for sale portfolio had a net unrealized pre
-tax gain of $1.7 million.
Our average overnight funds position (defined deposits with banks
plus Fed funds sold less Fed funds purchased) was $814.6
million
during the first quarter of 2021 compared to an average
net overnight funds sold position of $705.1 million in the fourth quarter
of
2020 and $234.4 million in the first quarter of 2020.
The increase compared to both prior periods was driven by
deposit inflows
related to pandemic related stimulus programs and growth
in our core deposits (see
Deposits
).
42
We expect
our capital expenditures will be approximately $7.0 million over
the next 12 months, which will primarily consist of office
remodeling, office equipment/furniture, and technology
purchases.
Management expects that these capital expenditures will be
funded with existing resources without impairing our
ability to meet our on-going obligations.
Borrowings
At March 31, 2021,
average short term borrowings totaled $67.0 million compared
to $95.3 million at December 31,
2020 and $32.9
million at March 31, 2020.
The variance over both prior periods was attributable to the
fluctuation of residential mortgage warehouse
borrowings at CCHL.
Additional detail on these borrowings is provided in Note
4 – Mortgage Banking Activities in the Consolidated
Financial Statements.
At March 31, 2021,
fixed rate credit advances from the FHLB totaled $1.9
million in outstanding debt consisting of five notes. During
the first three months of 2021, the Bank made FHLB advance payments
totaling approximately $0.3 million,
which included one
advance that paid off, and another that matured.
We did not obtain
any new FHLB advances during this period. The FHLB notes are
collateralized by a blanket floating lien on all of our 1-4
family residential mortgage loans, commercial real estate mortgage
loans, and
home equity mortgage loans.
We have issued
two junior subordinated deferrable interest notes to our
wholly owned Delaware statutory trusts.
The first note for
$30.9 million was issued to CCBG Capital Trust
I in November 2004,
of which $10 million was retired in April 2016.
The second
note for $32.0 million was issued to CCBG Capital Trust
II in May 2005.
The interest payment for the CCBG Capital Trust
I
borrowing is due quarterly and adjusts quarterly to a
variable rate of three-month LIBOR plus a margin of
1.90%.
This note matures
on December 31, 2034.
The interest payment for the CCBG Capital Trust II
borrowing is due quarterly and adjusts quarterly to a
variable rate of three-month LIBOR plus a margin
of 1.80%.
This note matures on June 15, 2035.
The proceeds from these
borrowings were used to partially fund acquisitions.
Under the terms of each junior subordinated deferrable interest note, in
the event
of default or if we elect to defer interest on the
note, we may not, with certain exceptions, declare or pay
dividends or make
distributions on our capital stock or purchase or acquire
any of our capital stock.
We are in the process of
evaluating the impact of the
expected discontinuation of LIBOR 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 31.
At March 31, 2021, our regulatory capital
ratios exceeded the threshold to be designated as “well-capita
lized” under the Basel III capital standards.
Shareowners’ equity was $324.4 million at March
31, 2021 compared to $320.8 million at December 31, 2020
and $328.5 million at
March 31, 2020.
During the first quarter of 2021, shareowners’ equity was positively
impacted by net income of $9.5 million, a $1.6
million increase in fair value of the interest rate swap
related to subordinated debt, net adjustments totaling $0.3
million related to
transactions under our stock compensation plans, stock
compensation accretion of $0.2 million, and a $0.1 million
decrease in the
accumulated other comprehensive loss for our pension
plan.
Shareowners’ equity was reduced by a common stock dividend
of $2.5
million ($0.15 per share), reclassification of $4.2 million
to temporary equity to increase the redemption value of the
non-controlling
interest in CCHL, and a $1.4 million decrease in the
unrealized gain on investment
securities.
At March 31, 2021, our common stock had a book value
of $19.22 per diluted share compared to $19.05 at
December 31, 2020 and
$19.50 at March 31, 2020.
Book value is impacted by the net after-tax unrealized gains and losses on
AFS investment securities.
At
March 31, 2021, the net gain was $1.7 million compared
to a $3.7 million net gain at December 31, 2020 and a $3.5 million
net gain at
March 31, 2020.
Book value is also impacted by the recording of our unfunded pension
liability through other comprehensive income
in accordance with Accounting Standards Codification Topic
715.
At March 31, 2021, the net pension liability reflected in other
comprehensive loss was $47.1 million compared to
$47.3 million at December 31, 2020 and $29.0 million at March
31, 2020.
This
liability is re-measured annually on December 31
st
based on an actuarial calculation of our pension liability.
Significant assumptions
used in calculating the liability are discussed in our
2020 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 $6.6 million (after-tax) using the balances
from
the December 31, 2020 measurement date.
43
OFF-BALANCE SHEET ARRANGEMENTS
We are a party
to financial instruments with off-balance sheet risks in the
normal course of business to meet the financing needs of our
clients.
At March 31, 2021,
we had $770.3 million in commitments to extend credit and $6.7
million in standby letters of credit.
Commitments to extend credit are agreements to lend
to a client so long as there is no violation of any condition established in
the
contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Since
many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by
us to guarantee the performance
of a client to a third party.
We use the same
credit policies in establishing commitments and issuing letters of
credit as we do for on-
balance sheet instruments.
If commitments arising from these financial instruments
continue to require funding at historical levels, management does no
t
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 $3.0 million at March 31, 2021.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note
1 to the Consolidated Financial Statements included in our
2020 Form 10-K.
The preparation of our Consolidated Financial Statement
s
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 2020 Form 10-K.
44
TABLE I
AVERAGE
BALANCES & INTEREST RATES
Three Months Ended
March 31, 2021
December 31, 2020
March 31, 2020
Average
Average
Average
Average
Average
Average
(Dollars in Thousands)
Balances
Interest
Rate
Balances
Interest
Rate
Balances
Interest
Rate
Assets:
Loans Held for Sale
$
106,242
$
970
3.70
%
$
121,052
$
878
3.85
%
$
34,923
$
210
2.64
%
Loans Held for Investment
(1)(2)
2,044,363
22,483
4.46
1,993,470
23,103
4.55
1,847,780
23,482
5.11
Taxable Securities
528,842
1,863
1.41
513,277
2,072
1.61
629,512
2,995
1.91
Tax-Exempt Securities
(2)
3,844
25
2.61
4,485
30
2.71
5,293
25
1.86
Funds Sold
814,638
214
0.11
705,125
180
0.10
234,372
757
1.30
Total Earning Assets
3,497,929
25,555
2.96
%
3,337,409
26,263
3.14
%
2,751,880
27,469
4.01
%
Cash & Due From Banks
68,978
73,968
56,958
Allowance For Loan Losses
(24,128)
(23,725)
(14,389)
Other Assets
278,742
264,784
244,339
TOTAL ASSETS
$
3,821,521
$
3,652,436
$
3,038,788
Liabilities:
NOW Accounts
$
985,517
$
76
0.03
%
$
879,564
$
66
0.03
%
$
808,811
$
725
0.36
%
Money Market Accounts
269,829
33
0.05
261,543
34
0.05
212,211
117
0.22
Savings Accounts
492,252
60
0.05
466,116
57
0.05
379,237
46
0.05
Other Time Deposits
102,089
39
0.15
102,809
44
0.17
105,542
51
0.19
Total Interest Bearing Deposits
1,849,687
208
0.05
1,710,032
201
0.05
1,505,801
939
0.25
Short-Term Borrowings
67,033
412
2.49
95,280
639
2.67
32,915
132
1.61
Subordinated Notes Payable
52,887
307
2.32
52,887
311
2.30
52,887
471
3.52
Other Long-Term Borrowings
2,736
21
3.18
3,700
30
3.18
6,312
50
3.21
Total Interest Bearing Liabilities
1,972,343
948
0.19
%
1,861,899
1,181
0.25
%
1,597,915
1,592
0.40
%
Noninterest Bearing Deposits
1,389,821
1,356,104
1,046,889
Other Liabilities
111,050
74,605
59,587
TOTAL LIABILITIES
3,473,214
3,292,608
2,704,391
Temporary Equity
21,977
16,154
2,506
TOTAL SHAREOWNERS’ EQUITY
326,330
343,674
331,891
TOTAL LIABILITIES, TEMPORARY
AND SHAREOWNERS’ EQUITY
$
3,821,521
$
3,652,436
$
3,038,788
Interest Rate Spread
2.77
%
2.88
%
3.61
%
Net Interest Income
$
24,607
$
25,082
$
25,877
Net Interest Margin
(3)
2.85
%
3.00
%
3.78
%
(1)
Average Balances include net loan fees, discounts and premiums and nonaccrual loans.
Interest income includes loan fees of $1.2 million, $1.1 million
and $0.2 million for
the three months ended March 31, 2021, December 31, 2020 and
March 31, 2020, respectively.
(2)
Interest income includes the effects of taxable equivalent adjustments using
a 21% tax rate.
(3)
Taxable equivalent net interest income divided by average earnings assets.
45
Item 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See “Market Risk and Interest Rate Sensitivity” in Management’s
Discussion and Analysis of Financial Condition and
Results of
Operations, above, which is incorporated herein by reference.
Management has determined that no additional disclosures
are
necessary to assess changes in information about market
risk that have occurred since December 31, 2020.
Item 4. CONTROLS
AND PROCEDURES
At March 31, 2021, 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 March 31, 2021,
other than the above, there have been no significant changes
in our internal control over financial reporting during
our most recently
completed fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial
reporting.
PART
II. OTHER
INFORMATION
Item 1. Legal
Proceedings
We are party
to lawsuits arising out of the normal course of business.
In management's opinion, there is no known pending
litigation,
the outcome of which would, individually or in the aggregate,
have a material effect on our consolidated results
of operations,
financial position, or cash flows.
Item 1A. Risk
Factors
In addition to the other information set forth in this Quarterly
Report, you should carefully consider the factors discussed in
Part I,
Item 1A. “Risk Factors” in our 2020 Form 10-K, as updated
in our subsequent quarterly reports. The risks described
in our 2020 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.
46
Item 6. Exhibits
(A) Exhibits
31.1
Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc.,
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2
Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group,
Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1
Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc.,
Pursuant to 18 U.S.C. Section 1350.
32.2
Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group,
Inc., Pursuant to 18 U.S.C. Section 1350.
101.SCH XBRL Taxonomy
Extension Schema Document
101.CAL XBRL
Taxonomy
Extension Calculation Linkbase Document
101.LAB XBRL
Taxonomy
Extension Label Linkbase Document
101.PRE XBRL
Taxonomy
Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy
Extension Definition Linkbase Document
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed
on its
behalf by the undersigned Chief Financial Officer
hereunto duly authorized.
CAPITAL CITY BANK
GROUP,
INC.
(Registrant)
/s/ J. Kimbrough Davis
J. Kimbrough Davis
Executive Vice President
and Chief Financial Officer
(Mr. Davis is the Principal
Financial Officer and has
been duly authorized to sign on behalf of the Registrant)
Date: April 30,
2021