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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, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number:
0-13358
Capital City Bank Group, Inc.
(Exact name of Registrant as specified in its charter)
Florida
59-2273542
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
217 North Monroe Street
,
Tallahassee
,
Florida
32301
(Address of principal executive office)
(Zip Code)
(
850
)
402-7821
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par value $0.01
CCBG
Nasdaq Stock Market
, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[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 May 2, 2022,
16,947,627
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 THREE MONTHS ENDED MARCH 31, 2022
TABLE OF CONTENTS
PART I –
Financial Information
Page
Item 1.
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition – March 31, 2022 and December 31, 2021
4
Consolidated Statements of Income – Three Months Ended March 31, 2022 and 2021
5
Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2022 and 2021
6
Consolidated Statements of Changes in Shareowners’ Equity – Three Months Ended March 31, 2022 and 2021
7
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2022 and 2021
8
Notes to Consolidated Financial Statements
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
45
Item 4.
Controls and Procedures
45
PART II –
Other Information
Item 1.
Legal Proceedings
45
Item 1A.
Risk Factors
45
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 3.
Defaults Upon Senior Securities
45
Item 4.
Mine Safety Disclosure
45
Item 5.
Other Information
45
Item 6.
Exhibits
46
Signatures
47
3
INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations,
estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of
which are beyond our control.
The words “may,” “could,” “should,” “would,” “believe,”
“anticipate,” “estimate,” “expect,” “intend,” “plan,”
“target,” “goal,” and similar expressions are intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and uncertainties.
Our actual future results may differ materially from
those set forth in our forward-looking statements.
Our ability to
achieve our financial objectives
could be adversely affected
by the factors discussed
in detail in Part
I, Item 2. “Management’s
Discussion and
Analysis of Financial
Condition and
Results of Operations”
and Part II,
Item 1A. “Risk
Factors” in this
Quarterly Report
on
Form 10-Q and
the following sections
of our Annual
Report on Form
10-K for the
year ended December
31, 2021
(the “2021 Form
10-K”):
(a) “Introductory
Note” in
Part I,
Item 1.
“Business”; (b)
“Risk Factors”
in Part
I, Item
1A, as
updated in
our subsequent
quarterly reports
filed on Form 10-Q; and (c)
“Introduction” in “Management’s
Discussion and Analysis of Financial
Condition and Results of Operations,” in
Part II, Item 7, as well as:
●
our ability to successfully manage credit risk, interest rate risk, liquidity risk, and other risks inherent to our industry;
●
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 allowance for credit losses,
deferred tax asset valuation and pension plan;
●
changes in accounting principles, policies, practices or guidelines;
●
the frequency and magnitude of foreclosure of our loans;
●
the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
●
the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
●
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 magnitude and duration of the ongoing COVID-19 pandemic and its impact on the global economy and financial market conditions
and our business;
●
the effects of natural disasters, harsh weather conditions (including hurricanes), widespread health emergencies,
military conflict,
terrorism, civil unrest or other geopolitical events;
●
our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where
we operate;
●
climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could
significantly impact our business;
●
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, Except Par Value)
2022
2021
ASSETS
Cash and Due From Banks
$
77,963
$
65,313
Federal Funds Sold and Interest Bearing Deposits
790,465
970,041
Total Cash and Cash Equivalents
868,428
1,035,354
Investment Securities, Available
for Sale, at fair value (amortized cost of $
655,927
and $
660,732
)
624,361
654,611
Investment Securities, Held to Maturity (fair value of $
501,277
and $
339,699
)
518,678
339,601
Equity Securities
855
861
Total Investment
Securities
1,143,894
995,073
Loans Held For Sale, at fair value
50,815
52,532
Loans Held for Investment
1,985,509
1,931,465
Allowance for Credit Losses
(20,756)
(21,606)
Loans Held for Investment, Net
1,964,753
1,909,859
Premises and Equipment, Net
82,518
83,412
Goodwill and Other Intangibles
93,213
93,253
Other Real Estate Owned
17
17
Other Assets
106,407
94,349
Total Assets
$
4,310,045
$
4,263,849
LIABILITIES
Deposits:
Noninterest Bearing Deposits
$
1,704,329
$
1,668,912
Interest Bearing Deposits
2,061,178
2,043,950
Total Deposits
3,765,507
3,712,862
Short-Term
Borrowings
30,865
34,557
Subordinated Notes Payable
52,887
52,887
Other Long-Term
Borrowings
806
884
Other Liabilities
77,323
67,735
Total Liabilities
3,927,388
3,868,925
Temporary Equity
10,512
11,758
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;
16,947,602
and
16,892,060
shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
169
169
Additional Paid-In Capital
35,188
34,423
Retained Earnings
370,531
364,788
Accumulated Other Comprehensive Loss, net of tax
(33,743)
(16,214)
Total Shareowners’
Equity
372,145
383,166
Total Liabilities, Temporary
Equity, and Shareowners' Equity
$
4,310,045
4,263,849
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
5
CAPITAL CITY BANK
GROUP,
INC.
CONSOLIDATED STATEMENTS
OF INCOME
(Unaudited)
Three Months Ended March 31,
(Dollars in Thousands, Except Per Share
Data)
2022
2021
INTEREST INCOME
Loans, including Fees
$
22,133
$
23,350
Investment Securities:
Taxable Securities
2,890
1,863
Tax Exempt Securities
6
20
Federal Funds Sold and Interest Bearing Deposits
409
213
Total Interest Income
25,438
25,446
INTEREST EXPENSE
Deposits
224
208
Short-Term
Borrowings
192
412
Subordinated Notes Payable
317
307
Other Long-Term
Borrowings
9
21
Total Interest Expense
742
948
NET INTEREST INCOME
24,696
24,498
Provision for Credit Losses
-
(982)
Net Interest Income After Provision For Credit Losses
24,696
25,480
NONINTEREST INCOME
Deposit Fees
5,191
4,271
Bank Card Fees
3,763
3,618
Wealth Management
Fees
6,070
3,090
Mortgage Banking Revenues
8,946
17,125
Other
1,848
1,722
Total Noninterest
Income
25,818
29,826
NONINTEREST EXPENSE
Compensation
24,856
26,064
Occupancy, Net
6,093
5,967
Other Real Estate Owned, Net
25
(118)
Pension Settlement
209
-
Other
8,050
8,563
Total Noninterest
Expense
39,233
40,476
INCOME BEFORE INCOME TAXES
11,281
14,830
Income Tax Expense
2,235
2,787
NET INCOME
$
9,046
$
12,043
Income Attributable to Noncontrolling Interests
(591)
(2,537)
NET INCOME ATTRIBUTABLE
TO COMMON SHAREOWNERS
$
8,455
$
9,506
BASIC NET INCOME PER SHARE
$
0.50
$
0.56
DILUTED NET INCOME PER SHARE
$
0.50
$
0.56
Average Basic Shares
Outstanding
16,931
16,838
Average Diluted
Shares Outstanding
16,946
16,862
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)
2022
2021
NET INCOME ATTRIBUTABLE
TO COMMON SHAREOWNERS
$
8,455
$
9,506
Other comprehensive (loss) income, before
tax:
Investment Securities:
Change in net unrealized (loss) gain on securities available for sale
(25,445)
(1,952)
Derivative:
Change in net unrealized gain on effective cash flow
derivative
1,836
2,125
Benefit Plans:
Reclassification adjustment for service cost
-
24
Actuarial gain
-
166
Pension Settlement
209
-
Total Benefit Plans
209
190
Other comprehensive (loss) income, before
tax
(23,400)
363
Deferred tax (benefit) expense related to other comprehensive income
(5,871)
92
Other comprehensive (loss) income, net of tax
(17,529)
271
TOTAL COMPREHENSIVE
(LOSS) INCOME
$
(9,074)
$
9,777
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, 2022
16,892,060
$
169
$
34,423
$
364,788
$
(16,214)
$
383,166
Net Income Attributable to Common Shareowners
-
-
-
8,455
-
8,455
Other Comprehensive Loss, net of tax
-
-
-
-
(17,529)
(17,529)
Cash Dividends ($
0.1600
per share)
-
-
-
(2,712)
-
(2,712)
Stock Based Compensation
-
-
245
-
-
245
Stock Compensation Plan Transactions, net
55,542
-
520
-
-
520
Balance, March 31, 2022
16,947,602
$
169
$
35,188
$
370,531
$
(33,743)
$
372,145
Balance, January 1, 2021
16,790,573
$
168
$
32,283
$
332,528
$
(44,142)
$
320,837
Net Income Attributable to Common Shareowners
-
-
-
9,506
-
9,506
Reclassification to Temporary Equity
(1)
-
-
-
(4,182)
-
(4,182)
Other Comprehensive Income, net of tax
-
-
-
-
271
271
Cash Dividends ($
0.1500
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
(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)
2022
2021
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Income Attributable to Common Shareowners
$
8,455
$
9,506
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Provision for Credit Losses
-
(982)
Depreciation
1,907
1,942
Amortization of Premiums, Discounts and Fees, net
2,907
2,428
Amortization of Intangible Asset
40
-
Pension Plan Settlement Charge
209
-
Originations of Loans Held-for-Sale
(246,887)
(470,248)
Proceeds From Sales of Loans Held-for-Sale
257,550
519,331
Mortgage Banking Revenues
(8,946)
(17,125)
Net Additions for Capitalized Mortgage Servicing Rights
227
119
Change in Valuation
Provision for Mortgage Servicing Rights
-
(250)
Stock Compensation
245
219
Net Tax Benefit From Stock-Based
Compensation
(19)
(4)
Deferred Income Taxes
(6,167)
(378)
Net Change in Operating Leases
(27)
(41)
Net Gain on Sales and Write-Downs of Other Real Estate Owned
-
(202)
Net Decrease (Increase) in Other Assets
1,441
(1,370)
Net Increase in Other Liabilities
7,036
7,935
Net Cash Provided By Operating Activities
17,971
50,880
CASH FLOWS FROM INVESTING ACTIVITIES
Securities Held to Maturity:
Purchases
(194,448)
(54,382)
Payments, Maturities, and Calls
14,441
24,629
Securities Available for
Sale:
Purchases
(25,139)
(133,628)
Proceeds from Sale or Securities
3,365
-
Payments, Maturities, and Calls
24,824
49,349
Purchases of Loans Held for Investment
(26,713)
(23,686)
Net Increase in Loans Held for Investment
(28,405)
(29,437)
Proceeds From Sales of Other Real Estate Owned
-
1,084
Purchases of Premises and Equipment
(1,013)
(1,592)
Noncontrolling Interest Contributions
1,838
1,259
Net Cash Used In Investing Activities
(231,250)
(166,404)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits
52,645
140,548
Net Decrease in Short-Term
Borrowings
(3,692)
(24,181)
Repayment of Other Long-Term
Borrowings
(78)
(1,014)
Dividends Paid
(2,712)
(2,528)
Issuance of Common Stock Under Purchase Plans
190
33
Net Cash Provided By Financing Activities
46,353
112,858
NET DECREASE IN CASH AND CASH EQUIVALENTS
(166,926)
(2,666)
Cash and Cash Equivalents at Beginning of Period
1,035,354
928,549
Cash and Cash Equivalents at End of Period
$
868,428
925,883
Supplemental Cash Flow Disclosures:
Interest Paid
$
715
1,009
Income Taxes Paid
$
20
-
Noncash Investing and Financing Activities:
Loans Transferred to Other Real Estate Owned
$
-
$
184
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
9
CAPITAL CITY BANK
GROUP,
INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 –
BUSINESS AND BASIS OF PRESENTATION
Nature of Operations
.
Capital City Bank Group, Inc. (“CCBG” or the “Company”) provides a full range of
banking and banking-
related services to individual and corporate clients through its subsidiary,
Capital City Bank, with banking offices located in Florida,
Georgia, and Alabama.
The Company is subject to competition from other financial institutions, is subject
to regulation by certain
government agencies and undergoes periodic examinations
by those regulatory authorities.
Basis of Presentation
.
The consolidated financial statements in this Quarterly Report on Form
10-Q include the accounts of CCBG
and its wholly owned subsidiary,
Capital City Bank (“CCB” or the “Bank”).
All material inter-company transactions and accounts
have been eliminated.
Certain previously reported amounts have been reclassified to conform to the current year’s
presentation.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X.
Accordingly,
they do not include all of the information and notes required by generally accepted
accounting principles for complete financial
statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included.
The Consolidated Statement of Financial Condition at December
31, 2021 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and notes
required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the consolidated financial statements and
notes thereto included in the
Company’s annual report
on Form 10-K for the year ended December 31, 2021.
Acquisition.
On
April 30, 2021
, a newly formed subsidiary of CCBG, Capital City Strategic Wealth,
LLC (“CCSW”) acquired
substantially all of the assets of Strategic Wealth
Group, LLC and certain related businesses (“SWG”), including
advisory, service,
and insurance carrier agreements, and the assignment of all related revenues
thereof.
Under the terms of the purchase agreement,
SWG principles became officers of CCSW and will continue
the operation of their
five
offices in South Georgia offering wealth
management services and comprehensive risk management
and asset protection services for individuals and businesses.
CCBG paid
$
4.5
million in cash consideration and recorded goodwill of $
2.8
million and a customer relationship intangible asset of $
1.6
million.
Accounting Standards Updates
Accounting Standards Update (“ASU”)
2022-02, “Financial Instruments – Credit Losses (Topic
326)
.
In March 2022, the Financial
Accounting Standards Board ("FASB")
issued ASU 2022-02, "Financial Instruments – Credit Losses (Topic
326), Troubled Debt
Restructurings and Vintage
Disclosures". ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings
("TDRs")
in ASC 310-40, "Receivables - Troubled Debt
Restructurings by Creditors" for entities that have adopted the current expected credit
loss model introduced by ASU 2016-13, “Financial Instruments –
Credit Losses (Topic 326):
Measurement of Credit Losses on
Financial Instruments”.
ASU 2022-02 also requires that public business entities disclose current
-period gross charge-offs by year of
origination for financing receivables and net investments in leases within the
scope of Subtopic 326-20, "Financial Instruments—
Credit Losses—Measured at Amortized Cost".
ASU 2022-02 is effective for the Company for fiscal years beginning
after December
15, 2022, including interim periods within those fiscal years, with early
adoption permitted. The Company is evaluating the effect
that
ASU 2022-02 will have on its consolidated financial statements and
related disclosures.
10
NOTE 2 –
INVESTMENT SECURITIES
Investment Portfolio Composition
. The following table summarizes the amortized cost and related fair value
securities available-for-sale and securities held-to-maturity and the corresponding
amounts of gross
Available for
Sale
Amortized
Unrealized
Unrealized
Allowance for
Fair
(Dollars in Thousands)
Cost
Gains
Losses
Credit Losses
Value
March 31, 2022
U.S. Government Treasury
$
190,049
$
15
$
10,051
$
-
$
180,013
U.S. Government Agency
232,067
547
8,179
-
224,435
States and Political Subdivisions
47,107
11
3,753
(15)
43,350
Mortgage-Backed Securities
(1)
91,169
15
5,121
-
86,063
Corporate Debt Securities
88,208
4
5,018
(21)
83,173
Other Securities
(2)
7,327
-
-
-
7,327
Total
$
655,927
$
592
$
32,122
$
(36)
$
624,361
December 31, 2021
U.S. Government Treasury
$
190,409
$
65
$
2,606
$
-
$
187,868
U.S. Government Agency
238,490
1,229
2,141
-
237,578
States and Political Subdivisions
47,762
44
811
(15)
46,980
Mortgage-Backed Securities
(1)
89,440
27
598
-
88,869
Corporate Debt Securities
87,537
10
1,304
(21)
86,222
Other Securities
(2)
7,094
-
-
-
7,094
Total
$
660,732
$
1,375
$
7,460
$
(36)
$
654,611
Held to Maturity
Amortized
Unrealized
Unrealized
Fair
(Dollars in Thousands)
Cost
Gains
Losses
Value
March 31, 2022
U.S. Government Treasury
$
289,237
$
10
$
9,355
$
279,892
Mortgage-Backed Securities
(1)
229,441
414
8,470
221,385
Total
$
518,678
$
424
$
17,825
$
501,277
December 31, 2021
U.S. Government Treasury
$
115,499
$
-
$
1,622
$
113,877
Mortgage-Backed Securities
(1)
224,102
2,819
1,099
225,822
Total
$
339,601
$
2,819
$
2,721
$
339,699
(1)
Comprised of residential mortgage-backed
securities
(2)
Includes Federal Home Loan Bank and Federal Reserve Bank stock, recorded
at cost of $
2.3
million and $
5.1
million,
respectively,
at March 31, 2022 and $
2.0
million and $
5.1
million, respectively,
at December 31, 2021.
At March 31, 2022, the investment portfolio had $
0.9
million in equity securities. These securities do not have a readily determinable
fair value and were not credit impaired.
Securities with an amortized cost of $
453.3
million and $
463.8
million at March 31, 2022 and December 31, 2021, 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
other securities,
is pledged to secure FHLB advances.
No ready market exists for this stock, and it has no quoted fair value; however,
redemption of this stock has historically been at par value.
As a member of the Federal Reserve Bank of Atlanta, the Bank is required to maintain
stock in the Federal Reserve Bank of Atlanta
based on a specified ratio relative to the Bank’s
capital.
Federal Reserve Bank stock is carried at cost.
11
Investment Sales.
There were sales of investment securities totaling $
3.4
million for the three months ended March 31, 2022. There
were no significant sales of investment securities for the three months ended
December 31, 2021 and March 31, 2021.
Maturity Distribution
.
At March 31, 2022, the Company's investment securities had the following
maturity distribution based on
contractual maturity.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or
prepay obligations.
Mortgage-backed securities and certain amortizing U.S. government
agency securities are shown separately
because they are not due at a certain maturity date.
Available for
Sale
Held to Maturity
(Dollars in Thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Due in one year or less
$
36,321
$
34,519
$
-
$
-
Due after one year through five years
306,432
290,613
289,237
279,892
Due after five year through ten years
62,103
56,445
-
-
Mortgage-Backed Securities
91,169
86,063
229,441
221,385
U.S. Government Agency
152,575
149,394
-
-
Equity Securities
7,327
7,327
-
-
Total
$
655,927
$
624,361
$
518,678
$
501,277
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
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
(Dollars in Thousands)
Value
Losses
Value
Losses
Value
Losses
March 31, 2022
Available for
Sale
U.S. Government Treasury
$
117,369
$
6,723
$
57,638
$
3,328
$
175,007
$
10,051
U.S. Government Agency
122,572
5,952
43,637
2,227
166,209
8,179
States and Political Subdivisions
42,181
3,719
444
34
42,625
3,753
Mortgage-Backed Securities
85,848
5,121
-
-
85,848
5,121
Corporate Debt Securities
79,718
5,018
-
-
79,718
5,018
Total
447,688
26,533
101,719
5,589
549,407
32,122
Held to Maturity
U.S. Government Treasury
261,362
9,355
-
-
261,362
9,355
Mortgage-Backed Securities
166,472
7,633
10,496
837
176,968
8,470
Total
$
427,834
$
16,988
$
10,496
$
837
$
438,330
$
17,825
December 31, 2021
Available for
Sale
U.S. Government Treasury
$
172,206
$
2,606
$
-
$
-
$
172,206
$
2,606
U.S. Government Agency
127,484
1,786
17,986
355
145,470
2,141
States and Political Subdivisions
42,122
811
-
-
42,122
811
Mortgage-Backed Securities
81,832
598
-
-
81,832
598
Corporate Debt Securities
69,354
1,304
-
-
69,354
1,304
Total
$
492,998
$
7,105
$
17,986
$
355
$
510,984
$
7,460
Held to Maturity
U.S. Government Treasury
113,877
1,622
-
-
113,877
1,622
Mortgage-Backed Securities
115,015
1,099
-
-
115,015
1,099
Total
$
228,892
$
2,721
$
-
$
-
$
228,892
$
2,721
12
At March 31, 2022, there were
673
positions (combined Available-for-Sale
and Held-to-Maturity) with unrealized losses totaling
$
49.9
million.
553
of these positions were U.S. government agency securities issued by U.S. government
sponsored entities.
Municipal securities totaled
48
positions.
The remaining
72
positions were corporate debt and asset backed securities.
These
investment securities had allowance for credit losses totaling less than $
0.1
million at March 31, 2022.
The declines in the fair values
of these securities were attributable to changes in interest rates and not credit quality.
Credit Quality Indicators
The Company monitors the credit quality of its investment securities through
various risk management procedures, including the
monitoring of credit ratings.
A majority of the debt securities in the Company’s
investment portfolio were issued by a U.S.
government entity or agency and are either explicitly or implicitly guaranteed
by the U.S. government.
The Company believes the
long history of no credit losses on these securities indicates that the expectation
of nonpayment of the amortized cost basis is zero,
even if the U.S. government were to technically default.
Further, certain municipal securities held by the Company
have been pre-
refunded and secured by government guaranteed treasuries.
Therefore, for the aforementioned securities, the Company does not
assess or record expected credit losses due to the zero loss assumption.
The Company monitors the credit quality of its municipal and
corporate securities portfolio via credit ratings
which are updated on a quarterly basis.
On a quarterly basis, municipal and corporate
securities in an unrealized loss position are evaluated to determine if the
loss is attributable to credit
related factors and if an allowance
for credit loss is needed.
13
NOTE 3 – LOANS HELD FOR INVESTMENT AND ALLOWANCE
FOR CREDIT LOSSES
Loan Portfolio Composition
.
The composition of the held for investment (“HFI”) loan portfolio was as follows:
(Dollars in Thousands)
March 31, 2022
December 31, 2021
Commercial, Financial and Agricultural
$
230,213
$
223,086
Real Estate – Construction
174,293
174,394
Real Estate – Commercial Mortgage
669,110
663,550
Real Estate – Residential
(1)
374,712
360,021
Real Estate – Home Equity
188,174
187,821
Consumer
(2)
349,007
322,593
Loans Held For Investment, Net of Unearned Income
$
1,985,509
$
1,931,465
(1)
Includes loans in process balances of $
6.7
million and $
13.6
million at March 31, 2022 and December 31, 2021,
respectively.
(2)
Includes overdraft balances of $
1.2
million and $
1.1
million at March 31, 2022 and December 31, 2021,
respectively.
Net deferred loan costs, which include premiums on purchased loans,
included in loans were $
4.4
million at March 31, 2022 and $
3.9
million at December 31, 2021.
Accrued interest receivable on loans which is excluded from amortized
cost totaled $
5.8
million at March 31, 2022 and $
5.3
million at
December 31, 2021, and is reported separately in Other Assets.
The Company has pledged a blanket floating lien on all 1-4 family residential mortgage
loans, commercial real estate mortgage loans,
and home equity loans to support available borrowing capacity at the FHLB of
Atlanta and has pledged a blanket floating lien on all
consumer loans, commercial loans, and construction loans to support available
borrowing capacity at the Federal Reserve Bank of
Atlanta.
Loan Purchase and Sales
.
The Company will periodically purchase newly originated 1-4 family real
estate secured adjustable rate
loans from Capital City Home Loans (“CCHL”), a related party.
Residential loan purchases from CCHL totaled $
26.3
million and
$
22.2
million for the three months ended March 31, 2022 and March 31, 2021, respectively,
and were not credit impaired.
Allowance for Credit Losses
.
The methodology for estimating the amount of credit losses reported in
the allowance for credit losses
(“ACL”) has two basic components: first, an asset-specific component
involving loans that do not share risk characteristics and the
measurement of expected credit losses for such individual loans; and second,
a pooled component for expected credit losses for pools
of loans that share similar risk characteristics.
This allowance methodology is discussed further in Note 1 – Significant
Accounting
Policies in the Company’s 2021 Form
10-K.
14
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, 2022
Beginning Balance
$
2,191
$
3,302
$
5,810
$
4,129
$
2,296
$
3,878
$
21,606
Provision for Credit Losses
(161)
(714)
(181)
314
(405)
1,068
(79)
Charge-Offs
(73)
-
(266)
-
(33)
(1,402)
(1,774)
Recoveries
165
8
29
27
58
716
1,003
Net (Charge-Offs) Recoveries
92
8
(237)
27
25
(686)
(771)
Ending Balance
$
2,122
$
2,596
$
5,392
$
4,470
$
1,916
$
4,260
$
20,756
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 (Charge-Offs) Recoveries
67
-
645
69
119
(378)
522
Ending Balance
$
1,957
$
2,254
$
6,956
$
5,204
$
2,575
$
3,080
$
22,026
For the three months ended March 31, 2022, the allowance decreased
by $
0.9
million and reflected a provision benefit of $
0.1
million
and net loan charge-offs of $
0.8
million. For the three months ended March 31, 2021, the allowance decreased
$
1.8
million which
reflected a provision benefit of $
2.3
million and net loan recoveries of $
0.5
million.
The provision benefit for the three months ended
March 31, 2022 and March 31, 2021 reflected improvement in the
forecasted level 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.
See Note 8 – Commitments and Contingencies for information on the allowance for
off-
balance sheet credit commitments.
15
Loan Portfolio Aging.
A loan is defined as a past due loan when one full payment is past due or a contractual maturity
is over 30 days
past due (“DPD”).
The following table presents the aging of the amortized cost basis in accruing
past due loans by class of loans.
30-59
60-89
90 +
Total
Total
Nonaccrual
Total
(Dollars in Thousands)
DPD
DPD
DPD
Past Due
Current
Loans
Loans
March 31, 2022
Commercial, Financial and Agricultural
$
205
$
79
$
-
$
284
$
229,898
$
31
$
230,213
Real Estate – Construction
-
-
-
-
174,293
-
174,293
Real Estate – Commercial Mortgage
502
-
-
502
668,186
422
669,110
Real Estate – Residential
474
29
-
503
373,005
1,204
374,712
Real Estate – Home Equity
47
-
-
47
187,283
844
188,174
Consumer
1,152
632
-
1,784
346,996
227
349,007
Total
$
2,380
$
740
$
-
$
3,120
$
1,979,661
$
2,728
$
1,985,509
December 31, 2021
Commercial, Financial and Agricultural
$
100
$
23
$
-
$
123
$
222,873
$
90
$
223,086
Real Estate – Construction
-
-
-
-
174,394
-
174,394
Real Estate – Commercial Mortgage
151
-
-
151
662,795
604
663,550
Real Estate – Residential
365
151
-
516
357,408
2,097
360,021
Real Estate – Home Equity
210
-
-
210
186,292
1,319
187,821
Consumer
1,964
636
-
2,600
319,781
212
322,593
Total
$
2,790
$
810
$
-
$
3,600
$
1,923,543
$
4,322
$
1,931,465
Nonaccrual Loans
.
Loans are generally placed on nonaccrual status if principal or interest payments
become 90 days past due and/or
management deems the collectability of the principal and/or interest to
be doubtful.
Loans are returned to accrual status when the
principal and interest amounts contractually due are brought current
or when future payments are reasonably assured.
The following table presents the amortized cost basis of loans in nonaccrual
status and loans past due over 90 days and still on accrual
by class of loans.
March 31, 2022
December 31, 2021
Nonaccrual
Nonaccrual
Nonaccrual
Nonaccrual
With No
With
90 + Days
With No
With
90 + Days
(Dollars in Thousands)
ACL
ACL
Still Accruing
ACL
ACL
Still Accruing
Commercial, Financial and Agricultural
$
-
$
31
$
-
$
67
$
23
$
-
Real Estate – Construction
-
-
-
-
-
-
Real Estate – Commercial Mortgage
-
422
-
-
604
-
Real Estate – Residential
728
476
-
928
1,169
-
Real Estate – Home Equity
-
844
-
463
856
-
Consumer
-
227
-
-
212
-
Total Nonaccrual
Loans
$
728
$
2,000
$
-
$
1,458
$
2,864
$
-
16
Collateral Dependent Loans.
The following table presents the amortized cost basis of collateral-dependent
loans.
March 31, 2022
December 31, 2021
Real Estate
Non Real Estate
Real Estate
Non Real Estate
(Dollars in Thousands)
Secured
Secured
Secured
Secured
Commercial, Financial and Agricultural
$
-
$
-
$
-
$
67
Real Estate – Construction
-
-
-
-
Real Estate – Commercial Mortgage
-
-
455
-
Real Estate – Residential
855
-
1,645
-
Real Estate – Home Equity
601
-
649
-
Consumer
-
-
-
-
Total Collateral Dependent
Loans
$
1,456
$
-
$
2,749
$
67
A loan is collateral dependent when the borrower is experiencing financial
difficulty and repayment of the loan is dependent on
the
sale or operation of the underlying collateral.
The Bank’s collateral dependent
loan portfolio is comprised primarily of real estate secured loans, collateralized
by either residential
or commercial collateral types.
The loans are carried at fair value based on current values determined by
either independent appraisals
or internal evaluations, adjusted for selling costs or other amounts to be deducted
when estimating expected net sales proceeds.
Residential Real Estate Loans In Process of Foreclosure
.
At March 31, 2022 and December 31, 2021, the Company had $
0.9
million
and $
0.9
million, respectively, in 1-4 family
residential real estate loans for which formal foreclosure proceedings were in process.
Troubled
Debt Restructurings (“TDRs”).
At March 31, 2022, the Company had $
7.5
million in TDRs, of which $
7.3
million were
performing in accordance with the modified terms.
At December 31, 2021 the Company had $
8.0
million in TDRs, of which $
7.6
million were performing in accordance with modified terms.
For TDRs, the Company estimated $
0.3
million and $
0.3
million of
credit loss reserves at March 31, 2022 and December 31, 2021, 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, 2022 there were
no
loans modified.
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,
2022 and 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.
Credit Risk Management
.
The Company has adopted comprehensive lending policies, underwriting standards and
loan review
procedures designed to maximize loan income within an acceptable
level of risk.
Management and the Board of Directors review and
approve these policies and procedures on a regular basis (at least annually).
Reporting systems are used to monitor loan originations, loan quality,
concentrations of credit, loan delinquencies and nonperforming
loans and potential problem loans.
Management and the Credit Risk Oversight Committee periodically
review our lines of business to
monitor asset quality trends and the appropriateness of credit policies.
In addition, total borrower exposure limits are established and
concentration risk is monitored.
As part of this process, the overall composition of the portfolio is reviewed to gauge
diversification
of risk, client concentrations, industry group, loan type, geographic
area, or other relevant classifications of loans.
Specific segments
of the loan portfolio are monitored and reported to the Board on a quarterly
basis and have strategic plans in place to supplement
Board approved credit policies governing exposure limits and underwriting
standards.
Detailed below are the types of loans within
the Company’s loan portfolio
and risk characteristics unique to each.
Commercial, Financial, and Agricultural – Loans in this category
are primarily made based on identified cash flows of the borrower
with consideration given to underlying collateral and personal or
other guarantees.
Lending policy establishes debt service coverage
ratio limits that require a borrower’s cash flow to be sufficient
to cover principal and interest payments on all new and existing debt.
The majority of these loans are secured by the assets being financed or other business
assets such as accounts receivable, inventory,
or
equipment.
Collateral values are determined based upon third party appraisals and evaluations.
Loan to value ratios at origination are
governed by established policy guidelines.
17
Real Estate Construction – Loans in this category consist of short-term
construction loans, revolving and non-revolving credit lines
and construction/permanent loans made to individuals and investors to
finance the acquisition, development, construction or
rehabilitation of real property.
These loans are primarily made based on identified cash flows of the borrower
or project and generally
secured by the property being financed, including 1-4 family residential
properties and commercial properties that are either owner-
occupied or investment in nature.
These properties may include either vacant or improved property.
Construction loans are generally
based upon estimates of costs and value associated with the completed
project.
Collateral values are determined based upon third
party appraisals and evaluations.
Loan to value ratios at origination are governed by established policy
guidelines.
The disbursement
of funds for construction loans is made in relation to the progress of the project
and as such these loans are closely monitored by on-
site inspections.
Real Estate Commercial Mortgage – Loans in this category consists of commercial
mortgage loans secured by property that is either
owner-occupied or investment in nature.
These loans are primarily made based on identified cash flows of the borrower or
project
with consideration given to underlying real estate collateral and
personal guarantees.
Lending policy establishes debt service
coverage ratios and loan to value ratios specific to the property type.
Collateral values are determined based upon third party
appraisals and evaluations.
Real Estate Residential – Residential mortgage loans held in the Company’s
loan portfolio are made to borrowers that demonstrate the
ability to make scheduled payments with full consideration to underwriting
factors such as current income, employment status, current
assets, and other financial resources, credit history,
and the value of the collateral.
Collateral consists of mortgage liens on 1-4 family
residential
properties.
Collateral values are determined based upon third party appraisals and evaluations.
The Company does not
originate sub-prime loans.
Real Estate Home Equity – Home equity loans and lines are made to qualified individuals
for legitimate purposes generally secured
by senior or junior mortgage liens on owner-occupied
1-4 family homes or vacation homes.
Borrower qualifications include
favorable credit history combined
with supportive income and debt ratio requirements and combined loan to value ratios
within
established policy guidelines.
Collateral values are determined based upon third party appraisals and evaluations.
Consumer Loans – This loan portfolio includes personal installment loans,
direct and indirect automobile financing, and overdraft
lines of credit.
The majority of the consumer loan category consists of direct and indirect automobile
loans.
Lending policy
establishes maximum debt to income ratios, minimum credit scores, and
includes guidelines for verification of applicants’ income and
receipt of credit reports.
Credit Quality Indicators
.
As part of the ongoing monitoring of the Company’s
loan portfolio quality, management
categorizes loans
into risk categories based on relevant information about the ability of borrowers
to service their debt such as: current financial
information, historical payment performance, credit documentation,
and current economic and market trends, among other
factors.
Risk ratings are assigned to each loan and revised as needed through established monitoring
procedures for individual loan
relationships over a predetermined amount and review of smaller balance homogenous
loan pools.
The Company uses the definitions
noted below for categorizing and managing its criticized loans.
Loans categorized as “Pass” do not meet the criteria set forth below
and are not considered criticized.
Special Mention – Loans in this category are presently protected from loss, but
weaknesses are apparent which, if not corrected, could
cause future problems.
Loans in this category may not meet required underwriting criteria and
have no mitigating factors.
More than
the ordinary amount of attention is warranted for these loans.
Substandard – Loans in this category exhibit well-defined weaknesses that would
typically bring normal repayment into jeopardy.
These loans are no longer adequately protected due to well-defined
weaknesses that affect the repayment capacity of the
borrower.
The possibility of loss is much more evident and above average supervision is required
for these loans.
Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized
as Substandard, with the characteristic that
the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
Performing/Nonperforming – Loans within certain homogenous
loan pools (home equity and consumer) are not individually reviewed,
but are monitored for credit quality via the aging status of the loan and by payment
activity.
The performing or nonperforming status
is updated on an on-going basis dependent upon improvement
and deterioration in credit quality.
18
The following table summarizes gross loans held for investment at
March 31, 2022
by years of origination and internally assigned
credit risk ratings (refer to Credit Risk Management section for detail on risk rating
system).
Term
Loans by Origination Year
Revolving
(Dollars in Thousands)
2022
2021
2020
2019
2018
Prior
Loans
Total
Commercial, Financial,
Agriculture:
Pass
$
22,526
$
60,369
$
27,910
$
26,368
$
18,565
$
18,863
$
54,707
$
229,308
Special Mention
-
100
187
268
16
24
-
595
Substandard
-
-
58
-
184
68
-
310
Total
$
22,526
$
60,469
$
28,155
$
26,636
$
18,765
$
18,955
$
54,707
$
230,213
Real Estate -
Construction:
Pass
$
11,641
$
109,459
$
42,522
$
8,684
$
-
$
129
$
1,858
$
174,293
Total
$
11,641
$
109,459
$
42,522
$
8,684
$
-
$
129
$
1,858
$
174,293
Real Estate -
Commercial Mortgage:
Pass
$
50,302
$
165,574
$
123,213
$
73,444
$
73,824
$
131,407
$
26,092
$
643,856
Special Mention
-
-
410
1,750
2,615
5,761
1,250
11,786
Substandard
-
10,055
405
640
-
2,298
70
13,468
Total
$
50,302
$
175,629
$
124,028
$
75,834
$
76,439
$
139,466
$
27,412
$
669,110
Real Estate - Residential:
Pass
$
46,698
$
117,058
$
55,670
$
34,111
$
23,957
$
81,162
$
6,255
$
364,911
Special Mention
61
-
132
18
60
570
1,348
2,189
Substandard
74
576
1,007
1,085
971
3,899
-
7,612
Total
$
46,833
$
117,634
$
56,809
$
35,214
$
24,988
$
85,631
$
7,603
$
374,712
Real Estate - Home
Equity:
Performing
$
-
$
146
$
13
$
255
$
130
$
2,191
$
184,595
$
187,330
Nonperforming
-
-
-
17
-
-
827
844
Total
$
-
$
146
$
13
$
272
$
130
$
2,191
$
185,422
$
188,174
Consumer:
Performing
$
61,883
$
159,135
$
56,232
$
33,402
$
22,026
$
10,370
$
5,731
$
348,779
Nonperforming
-
58
59
22
58
31
-
228
Total
$
61,883
$
159,193
$
56,291
$
33,424
$
22,084
$
10,401
$
5,731
$
349,007
19
NOTE 4 – MORTGAGE BANKING ACTIVITIES
The Company’s mortgage
banking activities at its subsidiary,
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.
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, 2022
December 31, 2021
Unpaid Principal
Unpaid Principal
(Dollars in Thousands)
Balance/Notional
Fair Value
Balance/Notional
Fair Value
Residential Mortgage Loans Held for Sale
$
49,991
$
50,815
$
50,733
$
52,532
Residential Mortgage Loan Commitments ("IRLCs")
(1)
99,399
1,117
51,883
1,258
Forward Sales Contracts
(2)
55,000
850
48,000
(7)
$
52,782
$
53,783
(1)
Recorded in other assets at fair value
(2)
Recorded in other assets and other liabilities at fair value
at March 31, 2022 and December 31, 2021, respectively
The Company had
no
residential mortgage loans held for sale that were 90 days or more outstanding or on
nonaccrual at March 31,
2022, and loans held for sale that were 30-69 days outstanding totaled $
0.2
million at December 31, 2021.
Mortgage banking revenue was as follows:
Three Months Ended March 31,
(Dollars in Thousands)
2022
2021
Net realized gains on sales of mortgage loans
$
5,136
$
14,424
Net change in unrealized gain on mortgage loans held for sale
(975)
(2,031)
Net change in the fair value of mortgage loan commitments (IRLCs)
(141)
(1,843)
Net change in the fair value of forward sales contracts
857
2,263
Pair-Offs on net settlement of forward sales contracts
2,255
3,310
Mortgage servicing rights additions
632
187
Net origination fees
1,182
815
Total mortgage banking
revenues
$
8,946
$
17,125
20
Residential Mortgage Servicing
The Company may retain the right to service residential mortgage loans
sold.
The unpaid principal balance of loans serviced for
others is the primary driver of servicing revenue.
The following represents a summary of mortgage servicing rights.
(Dollars in Thousands)
March 31, 2022
December 31, 2021
Number of residential mortgage loans serviced for others
2,224
2,106
Outstanding principal balance of residential mortgage loans serviced
for others
$
577,297
$
532,967
Weighted average
interest rate
3.62%
3.59%
Remaining contractual term (in months)
317
317
Conforming conventional loans serviced by the Company are sold to FNMA on
a non-recourse basis, whereby foreclosure losses are
generally the responsibility of FNMA and not the Company.
The government loans serviced by the Company are secured through
GNMA, whereby the Company is insured against loss by the Federal Housing
Administration or partially guaranteed against loss by
the Veterans
Administration.
At March 31, 2022, the servicing portfolio balance consisted of the
following loan types: FNMA (
60
%),
GNMA (
8
%), and private investor (
32
%).
FNMA and private investor loans are structured as actual/actual payment remittance.
The Company had $
1.3
million and $
2.0
million in delinquent residential mortgage loans currently in GNMA pools
serviced by the
Company at March 31, 2022 and December 31, 2021, respectively.
The right to repurchase these loans and the corresponding liability
has been recorded in other assets and other liabilities, respectively,
in the Consolidated Statement of Financial Condition.
For the
three months ended March 31, 2022, the Company repurchased $
0.4
million in delinquent residential loans currently in GNMA pools.
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)
2022
2021
Beginning balance
$
3,774
$
3,452
Additions due to loans sold with servicing retained
632
187
Deletions and amortization
(405)
(306)
Valuation
allowance reversal
-
250
Ending balance
$
4,001
$
3,583
The Company did
no
t record any permanent impairment losses on mortgage servicing rights for the
three months ended March 31,
2022 and March 31, 2021.
The key unobservable inputs used in determining the fair value of the Company’s
mortgage servicing rights were as follows:
March 31, 2022
December 31, 2021
Minimum
Maximum
Minimum
Maximum
Discount rates
10.00%
15.00%
11.00%
15.00%
Annual prepayment speeds
7.12%
19.55%
11.98%
23.79%
Cost of servicing (per loan)
$
60
$
73
$
60
$
73
Changes in residential mortgage interest rates directly affect
the prepayment speeds used in valuing the Company’s
mortgage
servicing rights.
A separate third party model is used to estimate prepayment speeds based on interest rates, housing
turnover rates,
estimated loan curtailment, anticipated defaults, and other relevant factors.
The weighted average annual prepayment speed was
10.56
% at March 31, 2022 and
15.85
% at December 31, 2021.
21
Warehouse
Line Borrowings
The Company has the following warehouse lines of credit and master repurchase
agreements with various financial institutions at
March 31, 2022.
Amounts
(Dollars in Thousands)
Outstanding
$
75
million master repurchase agreement without defined expiration.
Interest is at the Prime rate minus
1.00%
to plus
1.00%
, with a floor rate of
3.25%
.
A cash pledge deposit of $
0.5
million is required by the lender.
6,705
$
75
million warehouse line of credit agreement expiring in
November 2022
.
Interest is at the SOFR plus
2.25%
, to
3.25%
.
19,191
Total Warehouse
Borrowings
$
25,896
Warehouse
line borrowings are classified as short-term borrowings.
At December 31, 2021, warehouse line borrowings totaled $
29.0
million. At March 31, 2022, the Company had residential mortgage
loans held for sale and construction loans held for investment
pledged as collateral under the above warehouse lines of credit and master repurchase
agreements.
The above agreements also contain
covenants which include certain financial requirements, including
maintenance of minimum tangible net worth, minimum liquid
assets, and maximum debt to net worth ratio, as defined in the agreements.
The Company was in compliance with all significant debt
covenants at March 31, 2022.
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
December 31, 2021 and March 31, 2022 was $
14.8
and $
15.3
million, respectively.
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, 2022 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
.
Statement of Financial
Notional
Fair
Weighted Average
(Dollars in Thousands)
Condition Location
Amount
Value
Maturity (Years)
March 31, 2022
Interest rate swaps related to subordinated debt
Other Assets
$
30,000
$
3,886
8.3
December 31, 2021
Interest rate swaps related to subordinated debt
Other Assets
$
30,000
$
2,050
8.5
22
The following table presents the net gains (losses) recorded in AOCI and the
consolidated statements of income related to the cash
flow derivative instruments (interest rate swaps related to subordinated
debt) for the three months ended March 31, 2022.
Amount of Gain
Amount of Gain
(Loss) Recognized
(Loss) Reclassified
(Dollars in Thousands)
Category
in AOCI
from AOCI to Income
Three months ended March 31, 2022
Interest expense
$
1,370
$
(28)
Three months ended March 31, 2021
Interest expense
$
1,587
(33)
The Company estimates there will be approximately $
0.1
million reclassified as an increase to interest income within the next 12
months.
The Company had a collateral liability of $
4.0
million and $
2.0
million at March 31, 2022 and December 31, 2021, 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.
The Company’s operating
leases primarily relate to banking offices with remaining lease terms
from
1
to
44
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
Consolidated Statement of Financial Condition and the related lease expense is recognized on a straight-line basis over the lease term.
At March 31, 2022, the operating lease ROU assets and liabilities were $
11.7
million and $
12.3
million, respectively. At December
31, 2021, ROU assets and liabilities were $
11.5
million and $
12.2
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)
2022
2021
Operating lease expense
$
384
$
344
Short-term lease expense
179
140
Total lease expense
$
563
$
484
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
429
$
385
Right-of-use assets obtained in exchange for new operating lease liabilities
592
75
Weighted average
remaining lease term — operating leases (in years)
24.9
25.5
Weighted average
discount rate — operating leases
2.0%
2.1%
The table below summarizes the maturity of remaining lease liabilities:
(Dollars in Thousands)
March 31, 2022
2022
$
1,581
2023
1,190
2024
1,120
2025
977
2026
875
2027 and thereafter
10,341
Total
$
16,084
Less: Interest
(3,773)
Present Value
of Lease liability
$
12,311
23
At March 31, 2022, the Company had four additional operating lease obligations
for banking offices (to be constructed) that have not
yet commenced. Three of the leases have payments totaling $
9.3
million based on the initial contract terms of
15 years
, and the fourth
lease has payments totaling $
1.4
million based on the initial contract term of
10 years
.
Payments for the banking offices are expected
to commence after the construction periods end, which are each expected to occur during the fourth quarter of 2022 and the first
quarter of 2023.
A related party is the lessor in an operating lease with the Company.
The Company’s minimum payment
is $
0.2
million annually
through 2024, for an aggregate remaining obligation of $
0.5
million at March 31, 2022.
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)
2022
2021
Service Cost
$
1,572
$
1,743
Interest Cost
1,166
1,221
Expected Return on Plan Assets
(2,675)
(2,787)
Prior Service Cost Amortization
4
4
Net Loss Amortization
428
1,691
Pension Settlement
209
-
Net Periodic Benefit Cost
$
704
$
1,872
Discount Rate Used for Benefit Cost
3.11%
2.88%
Long-term Rate of Return on Assets
6.75%
6.75%
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)
2022
2021
Service Cost
$
8
$
9
Interest Cost
79
59
Prior Service Cost Amortization
69
19
Net Loss Amortization
180
198
Net Periodic Benefit Cost
$
336
$
285
Discount Rate Used for Benefit Cost
2.80%
2.38%
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.
24
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, 2022
December 31, 2021
(Dollars in Thousands)
Fixed
Variable
Total
Fixed
Variable
Total
Commitments to Extend Credit
(1)
$
200,236
$
563,634
$
763,870
$
217,531
$
505,897
$
723,428
Standby Letters of Credit
5,020
-
5,020
5,205
-
5,205
Total
$
205,256
$
563,634
$
768,890
$
222,736
$
505,897
$
728,633
(1)
Commitments include unfunded loans, revolving
lines of credit, and off-balance sheet residential
loan commitments.
Commitments to extend credit are agreements to lend to a client so long as there is no violation of
any condition established in the
contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee.
Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a client to a third
party.
The credit risk involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities. In
general, management does not anticipate any material losses as a result
of participating in these types of transactions.
However, any
potential losses arising from such transactions are reserved for in the same manner
as management reserves for its other credit
facilities.
For both on- and off-balance sheet financial instruments, the Company
requires collateral to support such instruments when it is
deemed necessary.
The Company evaluates each client’s
creditworthiness on a case-by-case basis.
The amount of collateral
obtained upon extension of credit is based on management’s
credit evaluation of the counterparty.
Collateral held varies, but may
include deposits held in financial institutions; U.S. Treasury
securities; other marketable securities; real estate; accounts receivable;
property, plant and
equipment; and inventory.
The allowance for credit losses for off-balance sheet credit commitments
that are not unconditionally cancellable by the bank is
adjusted as a provision for credit loss expense and is recorded in other liabilities.
The following table shows the activity in the
allowance.
Three Months Ended March 31,
(Dollars in Thousands)
2022
2021
Beginning Balance
$
2,897
$
1,644
Provision for Credit Losses
79
1,330
Ending Balance
$
2,976
$
2,974
Other Commitments.
In the normal course of business, the Company enters into lease commitments
which are classified as operating
leases. See Note 6 – Leases for additional information on the maturity of the
Company’s operating lease commitments.
Furthermore,
the Company has an outstanding commitment of up to $
1.0
million in a bank tech venture capital fund focused on finding and funding
technology solutions for community banks. At March 31, 2022 and at December
31, 2021, the Company had contributed $
0.1
million
of the commitment.
Contingencies
.
The Company is a party to lawsuits and claims arising out of the normal course of business.
In management's opinion,
there are no known pending claims or litigation, the outcome of which would,
individually or in the aggregate, have a material effect
on the consolidated results of operations, financial position, or cash flows
of the Company.
25
Indemnification Obligation
.
The Company is a member of the Visa U.S.A. network.
Visa U.S.A member banks are
required to
indemnify the Visa U.S.A.
network for potential future settlement of certain litigation (the “Covered Litigation”)
that relates to several
antitrust lawsuits challenging the practices of Visa
and MasterCard International.
In 2008, the Company, as a member
of the Visa
U.S.A. network, obtained Class B shares of Visa,
Inc. upon its initial public offering.
Since its initial public offering, Visa,
Inc. has
funded a litigation reserve for the Covered Litigation resulting in a reduction
in the Class B shares held by the Company.
During the
first quarter of 2011, the Company sold its remaining
Class B shares.
Associated with this sale, the Company entered into a swap
contract with the purchaser of the shares that requires a payment to the
counterparty in the event that Visa, Inc. makes
subsequent
revisions to the conversion ratio for its Class B shares.
Fixed charges included in the swap liability are payable
quarterly until the
litigation reserve is fully liquidated and at which time the aforementioned
swap contract will be terminated.
Quarterly fixed payments
approximate $
0.2
million.
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. Treasur
y
obligations, federal agency bullet or mortgage pass-through securities,
or
general obligation or revenue-based municipal bonds.
Pricing for such instruments is easily obtained.
At least annually,
the Company
will validate prices supplied by the independent pricing service by compari
ng them to prices obtained from an independent third-party
source.
Loans Held for Sale
.
The fair value of residential mortgage loans held for sale based on Level 2 inputs is determined,
when possible,
using either quoted secondary-market prices or investor commitments.
If no such quoted price exists, the fair value is determined
using quoted prices for a similar asset or assets, adjusted for the specific attributes of
that loan, which would be used by other market
participants.
The Company has elected the fair value option accounting for its held for sale loans.
Mortgage Banking Derivative Instruments.
The fair values of interest rate lock commitments (“IRLCs”) are derived by valuation
models incorporating market pricing for instruments with similar characteristics,
commonly referred to as best execution pricing, or
investor commitment prices for best effort IRLCs which have
unobservable inputs, such as an estimate of the fair value of the
servicing rights expected to be recorded upon sale of the loans, net estimated costs to
originate the loans, and the pull-through rate,
and are therefore classified as Level 3 within the fair value hierarchy.
The fair value of forward sale commitments is based on
observable market pricing for similar instruments and are therefore
classified as Level 2 within the fair value hierarchy.
26
Interest Rate Swap.
The Company’s derivative positions
are classified as level 2 within the fair value hierarchy and are valued
using
models generally accepted in the financial services industry and
that use actively quoted or observable market input values from
external market data providers.
The fair value derivatives are determined using discounted cash flow models.
Fair Value
Swap
.
The Company entered into a stand-alone derivative contract with the purchaser of
its Visa Class B shares.
The
valuation represents the amount due and payable to the counterparty based upon
the revised share conversion rate, if any,
during the
period. At March 31, 2022,
no
amount was payable. At December 31, 2021, there was a $
0.1
million payable.
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, 2022
ASSETS:
Securities Available for
Sale:
U.S. Government Treasury
$
180,013
$
-
$
-
$
180,013
U.S. Government Agency
-
224,435
-
224,435
States and Political Subdivisions
-
43,350
-
43,350
Mortgage-Backed Securities
-
86,063
-
86,063
Corporate Debt Securities
-
83,173
-
83,173
Other Securities
-
7,327
-
7,327
Loans Held for Sale
-
50,815
-
50,815
Interest Rate Swap Derivative
-
3,886
-
3,886
Mortgage Banking Hedge Derivative
-
850
-
850
Mortgage Banking IRLC Derivative
-
-
1,117
1,117
Mortgage Servicing Rights
-
-
7,177
7,177
December 31, 2021
ASSETS:
Securities Available for
Sale:
U.S. Government Treasury
$
187,868
$
-
$
-
$
187,868
U.S. Government Agency
-
237,578
-
237,578
States and Political Subdivisions
-
46,980
-
46,980
Mortgage-Backed Securities
-
88,869
-
88,869
Corporate Debt Securities
-
86,222
-
86,222
Other Securities
-
7,094
-
7,094
Loans Held for Sale
-
52,532
-
52,532
Interest Rate Swap Derivative
-
2,050
-
2,050
Mortgage Banking IRLC Derivative
-
-
1,258
1,258
Mortgage Servicing Rights
-
-
4,718
4,718
LIABILITIES:
Mortgage Banking Hedge Derivative
$
-
$
7
$
-
$
7
Mortgage Banking Activities
.
The Company had Level 3 issuances and transfers related to mortgage
banking activities of $
4.3
million
and $
13.6
million, respectively, for the
three months ended March 31, 2022 and $
15.4
million and $
10.5
million, respectively, for the
three months ended March 31, 2021.
Issuances are valued based on the change in fair value of the underlying mortgage
loan from
inception of the IRLC to the Consolidated Statement of Financial Condition
date, adjusted for pull-through rates and costs to originate.
IRLCs transferred out of Level 3 represent IRLCs that were funded and moved
to mortgage loans held for sale, at fair value.
Assets Measured at Fair Value
on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis (i.e., the
assets are not measured at fair value on an ongoing basis
but are subject to fair value adjustments in certain circumstances).
An example would be assets exhibiting evidence of impairment.
The following is a description of valuation methodologies used for assets measured
on a non-recurring basis.
27
Collateral Dependent Loans
.
Impairment for collateral dependent loans is measured using the fair
value of the collateral less selling
costs.
The fair value of collateral is determined by an independent valuation
or professional appraisal in conformance with banking
regulations.
Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market,
and the judgment and
estimation involved in the real estate appraisal process.
Collateral dependent loans are reviewed and evaluated on at least a quarterly
basis for additional impairment and adjusted accordingly.
Valuation
techniques are consistent with those techniques applied in prior
periods.
Collateral-dependent loans had a carrying value of $
1.5
million with a valuation allowance of $
0.1
million at March 31, 2022
and $
2.8
million and $
0.2
million, respectively,
at December 31, 2021.
Other Real Estate Owned
.
During the first three months of 2022, certain foreclosed assets, upon initial recognition,
were measured
and reported at fair value through a charge-off
to the allowance for credit losses based on the fair value of the foreclosed asset less
estimated cost to sell.
The fair value of the foreclosed asset is determined by an independent valuation
or professional appraisal in
conformance with banking regulations.
On an ongoing basis, we obtain updated appraisals on foreclosed assets and realize valuation
adjustments as necessary.
The fair value of foreclosed assets is estimated using Level 3 inputs due to the judgment
and estimation
involved in the real estate valuation process.
Mortgage Servicing Rights
.
Residential mortgage loan servicing rights are evaluated for impairment
at each reporting period based
upon the fair value of the rights as compared to the carrying amount.
Fair value is determined by a third party valuation model using
estimated prepayment speeds of the underlying mortgage loans serviced and
stratifications based on the risk characteristics of the
underlying loans (predominantly loan type and note interest rate).
The fair value is estimated using Level 3 inputs, including a
discount rate, weighted average prepayment speed, and the cost of loan
servicing.
Further detail on the key inputs utilized are
provided in Note 4 – Mortgage Banking Activities.
At March 31, 2022, there was
no
valuation allowance for loan servicing rights
compared to $
0.3
million valuation allowance at December 31, 2021.
Assets and Liabilities Disclosed at Fair Value
The Company is required to disclose the estimated fair value of financial instruments,
both assets and liabilities, for which it is
practical to estimate fair value and the following is a description of valuation
methodologies used for those assets and liabilities.
Cash and Short-Term
Investments.
The carrying amount of cash and short-term investments is used to approximate
fair value, given
the short time frame to maturity and as such assets do not present unanticipated
credit concerns.
Securities Held to Maturity
.
Securities held to maturity are valued in accordance with the methodology previously
noted in the
caption “Assets and Liabilities Measured at Fair Value
on a Recurring Basis – Securities Available
for Sale”.
Loans.
The loan portfolio is segregated into categories and the fair value of each loan category is calculated
using present value
techniques based upon projected cash flows and estimated discount
rates.
Pursuant to the adoption of ASU 2016-01,
Recognition and
Measurement of Financial Assets and Financial
Liabilities
, the values reported reflect the incorporation of a liquidity discount to meet
the objective of “exit price” valuation.
Deposits.
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.
28
A summary of estimated fair values of significant financial instruments consisted
of the following:
March 31, 2022
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
77,963
$
77,963
$
-
$
-
Short-Term Investments
790,465
790,465
-
-
Investment Securities, Available
for Sale
624,361
180,013
444,348
-
Investment Securities, Held to Maturity
518,678
279,892
221,385
-
Equity Securities
(1)
855
-
855
-
Loans Held for Sale
50,815
-
50,815
-
Other Equity Securities
(2)
2,898
-
2,898
-
Interest Rate Swap Derivative
3,886
-
3,886
-
Mortgage Banking Hedge Derivative
850
-
850
-
Mortgage Servicing Rights
4,001
-
-
7,177
Mortgage Banking IRLC Derivative
1,117
-
-
1,117
Loans, Net of Allowance for Credit Losses
1,964,753
-
-
1,934,570
LIABILITIES:
Deposits
$
3,765,507
$
-
$
3,417,626
$
-
Short-Term
Borrowings
30,865
-
30,865
-
Subordinated Notes Payable
52,887
-
45,336
-
Long-Term Borrowings
806
-
834
-
December 31, 2021
Carrying
Level 1
Level 2
Level 3
(Dollars in Thousands)
Value
Inputs
Inputs
Inputs
ASSETS:
Cash
$
65,313
$
65,313
$
-
$
-
Short-Term Investments
970,041
970,041
-
-
Investment Securities, Available
for Sale
654,611
187,868
466,743
-
Investment Securities, Held to Maturity
339,601
113,877
225,822
-
Equity Securities
(1)
861
-
861
-
Loans Held for Sale
52,532
-
52,532
-
Other Equity Securities
(2)
2,848
-
2,848
-
Interest Rate Swap Derivative
2,050
-
2,050
-
Mortgage Servicing Rights
3,774
-
-
4,718
Mortgage Banking IRLC Derivative
1,258
-
-
1,258
Loans, Net of Allowance for Credit Losses
1,909,859
-
-
1,903,640
LIABILITIES:
Deposits
$
3,712,862
$
-
$
3,713,478
$
-
Short-Term
Borrowings
34,557
-
34,557
-
Subordinated Notes Payable
52,887
-
42,609
-
Long-Term Borrowings
884
-
938
-
Mortgage Banking Hedge Derivative
7
-
7
-
(1)
Not readily marketable securities - reflected
in other assets.
(2)
Accounted for under the equity method – not readily
marketable securities – reflected in other assets.
All non-financial instruments are excluded from the above table.
The disclosures also do not include goodwill.
Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
29
NOTE 10 – ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
The amounts allocated to accumulated other comprehensive income
(loss) are presented in the table below.
Accumulated
Securities
Other
Available
Interest Rate
Retirement
Comprehensive
(Dollars in Thousands)
for Sale
Swap
Plans
(Loss) Income
Balance as of January 1, 2022
$
(4,588)
$
1,530
$
(13,156)
$
(16,214)
Other comprehensive (loss) income during the period
(19,055)
1,370
156
(17,529)
Balance as of March 31, 2022
$
(23,643)
$
2,900
$
(13,000)
$
(33,743)
Balance as of January 1, 2021
$
2,700
$
428
$
(47,270)
$
(44,142)
Other comprehensive (loss) income during the period
(1,458)
1,587
142
271
Balance as of March 31, 2021
$
1,242
$
2,015
$
(47,128)
$
(43,871)
30
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
Management’s discussion
and analysis ("MD&A") provides supplemental information, which sets forth
the major factors that have
affected our financial condition and results of operations
and should be read in conjunction with the Consolidated Financial
Statements and related notes.
The following information should provide a better understanding of
the major factors and trends that
affect our earnings performance and financial condition,
and how our performance during 2022 compares with prior years.
Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively,
is referred to as "CCBG," "Company,"
"we,"
"us," or "our."
CAUTION CONCERNING FORWARD
-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A section, contains
"forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, among others, statements about
our
beliefs, plans, objectives, goals, expectations, estimates and intentions that are
subject to significant risks and uncertainties and are
subject to change based on various factors, many of which are beyond
our control.
The words "may," "could,"
"should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan," "target,"
"vision," "goal," and similar expressions are intended to
identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and uncertainties.
Our actual future results may differ materially
from those set forth in our forward-looking statements.
Please see the Introductory Note and
Item 1A. Risk Factors
of our 2021
Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form
10-Q, and in our other filings made from time to
time with the SEC after the date of this report.
However, other factors besides those listed in our
Quarterly Report or in our Annual Report also could adversely affect
our results,
and you should not consider any such list of factors to be a complete set of all potential risks or
uncertainties.
Any forward-looking
statements made by us or on our behalf speak only as of the date they are made.
We do not undertake to
update any forward-looking
statement, except as required by applicable law.
BUSINESS OVERVIEW
We are a financial
holding company headquartered in Tallahassee,
Florida, and we are the parent of our wholly owned subsidiary,
Capital City Bank (the "Bank" or "CCB").
We offer
a broad array of products and services through a total of 57 full-service offices
located in Florida, Georgia, and Alabama.
We provide a full range of
banking services, including traditional deposit and credit
services, mortgage banking, asset management, trust, merchant services, bankcards,
securities brokerage services and financial
advisory services, including life insurance products,
risk management and asset protection services.
Our profitability, like
most financial institutions, is dependent to a large extent upon net
interest income, which is the difference
between the interest and fees received on interest earning assets, such as loans and
securities, and the interest paid on interest-bearing
liabilities, principally deposits and borrowings.
Results of operations are also affected by the provision for credit losses, operating
expenses such as salaries and employee benefits, occupancy and other
operating expenses including income taxes, and noninterest
income such as mortgage banking revenues, wealth management fees,
deposit fees, and bank card fees.
We have included
a detailed discussion of the economic conditions in our markets and our long-term strategic
objectives as part of the
MD&A section of our 2021 Form 10-K.
Acquisitions
On April 30, 2021, a newly formed subsidiary of CCBG, Capital City Strategic
Wealth, LLC
(“CCSW”), completed its acquisition of
substantially all of the assets of Strategic Wealth
Group, LLC and certain related businesses (“SWG”).
CCSW was consolidated into
CCBG’s financial statements
effective May 1, 2021.
A detailed discussion regarding the acquisition of Capital City Strategic Wealth,
LLC is included as part of the MD&A section of our 2021 Form 10-K.
NON-GAAP FINANCIAL MEASURES
We present a tangible
common equity ratio and a tangible book value per diluted share that, in each case, removes the
effect of
goodwill and other intangibles that resulted from merger
and acquisition activity. We
believe these measures are useful to investors
because it allows investors to more easily compare our capital adequacy to
other companies in the industry.
The generally accepted
accounting principles (“GAAP”) to non-GAAP reconciliation for
each quarter presented is provided below.
31
2022
2021
(Dollars in Thousands, except per share data)
First
Fourth
Third
Second
First
Shareowners' Equity (GAAP)
$
372,145
$
383,166
$
348,868
$
335,880
$
324,426
Less: Goodwill and Other Intangibles (GAAP)
93,213
93,253
93,293
93,333
89,095
Tangible Shareowners' Equity (non-GAAP)
A
278,932
289,913
255,575
242,547
235,331
Total Assets (GAAP)
4,310,045
4,263,849
4,048,733
4,011,459
3,929,884
Less: Goodwill and Other Intangibles (GAAP)
93,213
93,253
93,293
93,333
89,095
Tangible Assets (non-GAAP)
B
$
4,216,832
$
4,170,596
$
3,955,440
$
3,918,126
$
3,840,789
Tangible Common
Equity Ratio (non-GAAP)
A/B
6.61%
6.95%
6.46%
6.19%
6.13%
Actual Diluted Shares Outstanding (GAAP)
C
16,962,362
16,935,389
16,911,715
16,901,375
16,875,719
Tangible Book Value
per Diluted Share (non-GAAP)
A/C
16.44
17.12
15.11
14.35
13.94
32
SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
(Dollars in Thousands, Except
2022
2021
Per Share Data)
First
Fourth
Third
Second
First
Summary of Operations
:
Interest Income
$
25,438
$
25,549
$
28,520
$
26,836
$
25,446
Interest Expense
742
838
848
856
948
Net Interest Income
24,696
24,711
27,672
25,980
24,498
Provision for Credit Losses
-
-
-
(571)
(982)
Net Interest Income After
Provision for Credit Losses
24,696
24,711
27,672
26,551
25,480
Noninterest Income
25,818
24,672
26,574
26,473
29,826
Noninterest Expense
39,233
40,207
39,702
42,123
40,476
Income
Before
Income Taxes
11,281
9,176
14,544
10,901
14,830
Income Tax Expense
2,235
2,040
2,949
2,059
2,787
Income Attributable to NCI
(591)
(764)
(1,504)
(1,415)
(2,537)
Net Income Attributable to CCBG
8,455
6,372
10,091
7,427
9,506
Net Interest Income (FTE)
24,774
24,790
27,750
26,064
24,606
Per Common Share
:
Net Income Basic
$
0.50
$
0.38
$
0.60
$
0.44
$
0.56
Net Income Diluted
0.50
0.38
0.60
0.44
0.56
Cash Dividends Declared
0.16
0.16
0.16
0.15
0.15
Diluted Book Value
21.94
22.63
20.63
19.87
19.22
Diluted Tangible Book Value
(1)
16.44
17.12
15.11
14.35
13.94
Market Price:
High
28.88
29.00
26.10
27.39
28.98
Low
25.96
24.77
22.02
24.55
21.42
Close
26.36
26.40
24.74
25.79
26.02
Selected Average Balances
:
Loans Held for Investment
$
1,963,578
$
1,948,324
$
1,974,132
$
2,036,781
$
2,044,363
Earning Assets
3,938,824
3,791,313
3,693,123
3,623,910
3,497,929
Total Assets
4,266,775
4,127,937
4,026,613
3,956,349
3,821,521
Deposits
3,714,062
3,549,145
3,447,688
3,387,352
3,239,508
Shareowners’ Equity
383,956
350,140
341,460
329,040
326,330
Common Equivalent Average Shares:
Basic
16,931
16,880
16,875
16,858
16,838
Diluted
16,946
16,923
16,909
16,885
16,862
Performance Ratios:
Return on Average Assets
0.80
%
0.61
%
0.99
%
0.75
%
1.01
Return on Average Equity
8.93
7.22
11.72
9.05
11.81
Net Interest Margin (FTE)
2.55
2.60
2.98
2.89
2.85
Noninterest Income as % of
Operating Revenue
51.11
49.96
48.99
50.47
54.90
Efficiency Ratio
77.55
81.29
73.09
80.18
74.36
Asset Quality:
Allowance for Credit Losses ("ACL")
$
20,756
$
21,606
$
21,500
$
22,175
$
22,026
ACL to Loans HFI
1.05
%
1.12
%
1.11
%
1.10
%
1.07
Nonperforming Assets (“NPAs”)
2,745
4,339
3,218
6,302
5,472
NPAs to Total
Assets
0.06
0.10
0.08
0.16
0.14
NPAs to Loans HFI plus OREO
0.14
0.22
0.17
0.31
0.27
ACL to Non-Performing Loans
760.83
499.93
710.39
433.93
410.78
Net Charge-Offs to Average
Loans HFI
0.16
0.02
0.03
(0.07)
(0.10)
Capital Ratios:
Tier 1 Capital
15.98
%
16.14
%
15.69
%
15.44
%
16.08
Total Capital
16.98
17.15
16.70
16.48
17.20
Common Equity Tier 1
13.77
13.86
13.45
13.14
13.63
Leverage
8.78
8.95
9.05
8.84
8.97
Tangible Common Equity
(1)
6.61
6.95
6.46
6.19
6.13
(1)
Non-GAAP financial measure.
See non-GAAP reconciliation on page 31.
33
FINANCIAL OVERVIEW
Results of Operations
Performance Summary
.
Net income attributable to common shareowners of $8.5 million, or
$0.50 per diluted share, for the first
quarter of 2022 compared to net income of $6.4 million, or $0.38 per diluted share,
for the fourth quarter of 2021, and $9.5 million, or
$0.56 per diluted share, for the first quarter of 2021.
Net Interest Income
.
Tax-equivalent net
interest income for the first quarter of 2022 totaled $24.8 million, comparable
to the fourth
quarter of 2021, and $24.6 million for the first quarter of 2021.
Compared to the fourth quarter of 2021, higher rates on overnight
funds and growth in the investment portfolio was offset
by two less calendar days during the quarter.
Compared to the first quarter of
2021, interest income grew as a result of our larger investment portfolio,
in addition to a reduction in interest expense, partially offset
by lower loan fees.
Provision and Allowance for Credit
Losses.
We did not
record a provision for credit losses for the first quarter of 2022 or
the fourth
quarter of 2021 and recorded a negative provision of $1.0 million for
the first quarter of 2021.
The lack of provision for the first
quarter of 2022 reflected continued strong credit quality and slight improvement
in the forecasted level of unemployment.
Noninterest Income
.
Noninterest income for the first quarter of 2022 totaled $25.8 million, an increase
of $1.1 million, or 4.5%, over
the fourth quarter of 2021 and a decrease of $4.0 million, or 13.4%, from
the first quarter of 2021.
The increase over the fourth
quarter of 2021 was due to higher wealth management fees, primarily
insurance revenues.
The decline from the first quarter 2021 was
driven by lower mortgage banking revenues (largely
attributable to lower loan refinancing activity and a lower gain on
sale margin)
that were partially offset by higher activity based fees
(deposit and bank card).
Noninterest Expense
.
Noninterest expense for the first quarter of 2022 totaled $39.2 million, a decrease of $1.0
million, or 2.4%, from
the fourth quarter of 2021 and a $1.3 million, or 3.1%, decrease from
the first quarter of 2021.
The decrease from the fourth quarter of
2021 was primarily attributable to a decrease in other miscellaneous expense,
primarily pension expense.
The decrease from the first
quarter of 2021 was driven by lower mortgage banking commissions and
pension expense. These favorable variances were partially
offset by higher insurance commissions, associate benefits,
other real estate and miscellaneous expenses.
Financial Condition
Earning Assets.
Average earning assets totaled
$3.939 billion for the first quarter of 2022, an increase of $147.5 million,
or 3.9%,
over the fourth quarter of 2021, and an increase of $440.9 million, or
12.6%, over the first quarter of 2021.
The increase over the
fourth quarter of 2021 was primarily attributable to seasonal growth
in our public fund deposits. The increase compared to the first
quarter of 2021 was primarily driven by higher deposit balances.
Loans
.
Average loans held for investment
(“HFI”) increased $15.3 million, or 0.8%, over the fourth quarter of 2021
and decreased
$80.8 million, or 4.0%, from the first quarter of 2021. Excluding small business
(“SBA PPP”) loans, average loans HFI increased
$18.8 million compared to the fourth quarter of 2021, and increased $115.9
million compared to the first quarter of 2021.
New loan
production strengthened in the latter part of the first quarter of 2022 resulting
in period end loan growth of $54 million over the fourth
quarter of 2021.
Credit Quality
.
Overall credit quality is strong and continues to improve.
Nonaccrual loans totaled $2.7 million at March 31, 2022, a
$1.6
million decrease from December 31, 2021 and a $2.7 million decrease from March 31, 2021.
At March 31, 2022 and December
31, 2021, nonaccrual loans as a percentage of total loans was 0.13% and 0.21%,
respectively. Classified loans increased
$4.4 million
over the fourth quarter of 2021 and reflected one loan relationship that
is in the loan workout process and has been reserved for at
March 31, 2022.
Deposits
.
Average total
deposits were $3.714 billion for the first quarter of 2022, an increase of $164.9 million,
or 4.6%, over the
fourth quarter of 2021 and $474.6 million, or 14.6%, over the first quarter
of 2021.
Growth over the fourth quarter of 2021 was
primarily attributable to an increase in seasonal public fund deposits. Various
government stimulus programs contributed to the year
over year increase.
Capital
.
At March 31, 2022, we were well-capitalized with a total risk-based capital
ratio of 16.98% and a tangible common equity
ratio (a non-GAAP financial measure) of 6.61% compared to 17.15%
and 6.95%, respectively,
at December 31, 2021 and 17.20% and
6.13%, respectively, at March
31, 2021.
At March 31, 2022, all of our regulatory capital ratios exceeded the threshold to be well-
capitalized under the Basel III capital standards.
34
RESULTS
OF OPERATIONS
Net Income
For the first quarter of 2022, we realized net income attributable to common
shareowners of $8.5 million, or $0.50 per diluted share,
compared to net income of $6.4 million, or $0.38 per diluted share, for the fourth quarter
of 2021, and $9.5 million, or $0.56 per
diluted share, for the first quarter of 2021.
For the first quarter of 2022, we realized income before income taxes of
$11.3 million compared to $9.2 million for
the fourth quarter
of 2021 and $14.8 million for the first quarter of 2021. Compared to
the fourth quarter of 2021, the $2.1 million increase was
attributable to a $1.1
million increase in noninterest income and lower noninterest expense of
$1.0 million. Compared to the first
quarter of 2021, the $3.5 million decrease in income before income taxes
was attributable to a $4.0 million decrease in noninterest
income and a $1.0 million increase in the provision for credit losses that was partially offset
by lower noninterest expense of $1.3
million and higher net interest income of $0.2 million.
A condensed earnings summary of each major component of our financial
performance is provided below:
Three Months Ended
(Dollars in Thousands, except per share data)
March 31, 2022
December 31, 2021
March 31, 2021
Interest Income
$
25,438
$
25,549
$
25,446
Taxable Equivalent Adjustments
78
79
108
Total Interest Income (FTE)
25,516
25,628
25,554
Interest Expense
742
838
948
Net Interest Income (FTE)
24,774
24,790
24,606
Provision for Credit Losses
-
-
(982)
Taxable Equivalent Adjustments
78
79
108
Net Interest Income After Provision for Credit Losses
24,696
24,711
25,480
Noninterest Income
25,818
24,672
29,826
Noninterest Expense
39,233
40,207
40,476
Income Before Income Taxes
11,281
9,176
14,830
Income Tax Expense
2,235
2,040
2,787
Income Attributable to Noncontrolling Interests
(591)
(764)
(2,537)
Net Income Attributable to Common Shareowners
$
8,455
$
6,372
$
9,506
Basic Net Income Per Share
$
0.50
$
0.38
$
0.56
Diluted Net Income Per Share
$
0.50
$
0.38
$
0.56
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 2022 totaled $24.8 million, comparable to the fourth
quarter of 2021, and
$24.6 million for the first quarter of 2021.
Compared to the fourth quarter of 2021, higher rates on overnight funds and growth
in the
investment portfolio was offset by two less calendar days during
the quarter.
Compared to the first quarter of 2021, interest income
grew as a result of our larger investment portfolio and a reduction
in interest expense, partially offset by lower loan fees.
Our net interest margin for the first quarter of 2022 was 2.55%, a decrease
of five basis points from the fourth quarter of 2021 and a
decrease of 30 basis points from the first quarter of 2021.
Compared to both prior periods, the decrease was primarily attributable to
growth in earning assets (driven by deposit inflows), which negatively
impacted our margin percentage. Our net interest margin
for
the first quarter of 2022, excluding the impact of overnight funds
in excess of $200 million, was 3.11%.
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.
35
Provision for Credit Losses
We did not
record a provision for credit losses for the first quarter of 2022 or the fourth quarter of 2021
and recorded a provision
benefit of $1.0 million for the first quarter of 2021.
The lack of provision for the first quarter of 2022 reflected continued strong
credit
quality and slight improvement in the forecasted level of unemployment.
The provision benefit for the first quarter of 2021 generally
reflected improving economic conditions and a lower level of expected
losses related to COVID-19.
We discuss the allowance
for
credit losses further below.
Noninterest Income
Noninterest income for the first quarter of 2022 totaled $25.8 million compared
to $24.7 million for the fourth quarter of 2021 and
$29.8 million for the first quarter of 2021.
The increase over the fourth quarter of 2021 was primarily attributable to higher wealth
management fees of $2.1 million that were partially offset by
lower mortgage banking revenues of $0.9 million.
The increase in
wealth management fees was attributable to higher insurance commission
revenues. Lower loan production and a slightly lower gain
on sale margin drove the decline in mortgage banking
revenues. Compared to the first quarter of 2021, the decline was due to lower
mortgage banking revenues attributable to lower loan production (primarily
refinancing activity) and a lower gain on sale margin.
Noninterest income represented 51.1% of operating revenues (net interest
income plus noninterest income) for the first quarter of 2022
compared to 50.0% for the fourth quarter of 2021 and 54.9% for the first quarter of 2021.
The table below reflects the major components of noninterest income to help
facilitate a better understanding of the period over period
comparison.
Three Months Ended
(Dollars in Thousands)
March 31, 2022
December 31, 2021
March 31, 2021
Deposit Fees
$
5,191
$
5,300
$
4,271
Bank Card Fees
3,763
3,872
3,618
Wealth Management
Fees
6,070
3,922
3,090
Mortgage Banking Revenues
8,946
9,800
17,125
Other
1,848
1,778
1,722
Total
Noninterest Income
$
25,818
$
24,672
$
29,826
Significant components of noninterest income are discussed in more
detail below.
Deposit Fees
.
Deposit fees for the first quarter of 2022 totaled $5.2 million, a decrease of $0.1
million, or 2.1%, from the fourth
quarter of 2021 and an increase of $0.9 million, or 21.5%, over the first quarter of
2021.
The decline from the fourth quarter of 2021
reflects two less days of processing.
The increase over the first quarter of 2021 reflected higher account
maintenance fees attributable
to the third quarter 2021 conversion of the remaining free checking accounts
to monthly maintenance fee account types.
Bank Card Fees
.
Bank card fees for the first quarter of 2022 totaled $3.8 million, a decrease of $0.1
million, or 2.8%, from the fourth
quarter of 2021 and an increase of $0.2 million, or 4.0%, over the first quarter
of 2021.
The decline from the fourth quarter of 2021
reflects two less days of processing.
The increase over the first quarter of 2021 was primarily attributable
to growth in checking
accounts.
Wealth
Management Fees
.
Wealth management fees,
which include both trust fees (i.e., managed accounts and trusts/estates), retail
brokerage fees (i.e., investment,
insurance products, and retirement accounts), and insurance commission
revenues,
totaled $6.1
million for the first quarter of 2022, an increase of $2.1 million or 54.8%, over the
fourth quarter of 2021 and an increase of $3.0
million, or 96.5%, over the first quarter of 2021.
Insurance commission revenues was the primary driver of the increase over
both
prior periods.
Higher retail brokerage fees also contributed to the increase over the first quarter of 2021.
At March 31, 2022, total
assets under management were approximately $2.329 billion compared
to $2.324 billion at December 31, 2021 and $2.088 billion at
March 31, 2021.
36
Mortgage Banking Revenues
.
Mortgage banking revenues totaled $8.9 million for the first quarter of
2022, a decrease of $0.9 million,
or 8.7%, from the fourth quarter of 2021 and a decrease of $8.2 million, or 47.
8% from the first quarter of 2021.
The decrease from
the fourth quarter of 2021 reflected lower loan production and a slightly lower gain on
sale margin.
Compared to the first quarter of
2021, the decline was due to lower loan production (largely
refinancing activity),
and a lower gain on sale margin.
We provide a
detailed overview of our mortgage banking operation, including
a detailed break-down of mortgage banking revenues, mortgage
servicing activity,
and warehouse funding within Note 4 - Mortgage Banking Activities in the Notes to
Consolidated Financial
Statements.
Production volume totaled $247 million for the first quarter of 2022,
$294 million for the fourth quarter of 2021,
and
$463 million for the first quarter of 2021.
Refinancing activity represented 21% of loan production for the first quarter of 2022,
24%
for the fourth quarter of 2021, and 40% for the first quarter of 2021.
CCHL contributed approximately $0.4 million to CCBG
consolidated earnings in the first quarter of 2022 compared to $0.5 million in the fourth
quarter of 2021, and $1.6 million in the first
quarter of 2021.
Noninterest Expense
Noninterest expense for the first quarter of 2022 totaled $39.2 million compared
to $40.2 million for the fourth quarter of 2021 and
$40.5 million for the first quarter of 2021.
The decrease from the fourth quarter of 2021 was primarily attributable
to lower other
expense of $1.2 million which included a $1.6 million decrease in pension
expense (reflected in miscellaneous expense).
Salary
expense increased $0.1 million and reflected higher variable commission
expense (higher insurance of $0.7 million partially offset by
lower mortgage banking of $0.6 million).
Compared to the first quarter of 2021, the decrease was primarily attributable
to lower
salary expense of $1.8 million, primarily lower variable commission expense
(lower mortgage banking of $2.6 million partially offset
by higher insurance of $0.8 million).
Associate benefits expense increased by $0.6 million and reflected higher
insurance expense
attributable to utilization of self-insurance reserves in 2021.
Pension expense declined by $1.0 million, but was substantially offset
by
higher expenses for other real estate and other miscellaneous.
The decrease in pension expense in 2022 generally reflected a higher
discount rate used in 2022 for determining plan liabilities and
strong asset returns in 2021.
The table below reflects the major components of noninterest expense to
help facilitate a better understanding of the year over year
comparison.
The table below reflects the major components of noninterest expense.
Three Months Ended
(Dollars in Thousands)
March 31, 2022
December 31, 2021
March 31, 2021
Salaries
$
20,664
$
20,587
$
22,447
Associate Benefits
4,192
4,196
3,617
Total Compensation
24,856
24,783
26,064
Premises
2,759
2,671
2,759
Equipment
3,334
3,289
3,208
Total Occupancy
6,093
5,960
5,967
Legal Fees
349
280
558
Professional Fees
1,332
1,438
1,330
Processing Services
1,637
1,455
1,545
Advertising
773
658
749
Telephone
728
736
755
Insurance - Other
510
541
501
Other Real Estate Owned, net
25
26
(118)
Pension Settlement
209
572
-
Miscellaneous
2,721
3,758
3,125
Total Other
8,284
9,464
8,445
Total
Noninterest Expense
$
39,233
$
40,207
$
40,476
Significant components of noninterest expense are discussed in
more detail below.
37
Compensation
.
Compensation expense totaled $24.9 million for the first quarter of 2022, an increase
of $0.1 million, or less than
1.0%, over the fourth quarter of 2021 and a decrease of $1.2 million,
or 4.6%, from the first quarter of 2021.
Compared to the fourth
quarter of 2021, the $0.1 million increase in salary expense was primarily
attributable to higher commission expense of $0.7 million
related to higher insurance revenues that was partially offset
by lower commission expense of $0.6 million related to lower mortgage
banking revenues.
Compared to the first quarter of 2021, the decrease reflected lower salary expense
of $1.8 million partially offset
by higher associate benefit expense of $0.6 million.
The decline in salary expense reflected lower commission expense of $2.6
million related to mortgage banking revenues partially offset
by higher commission expense of $0.9 million related to insurance
revenues.
The increase in associate benefits expense was attributable to higher associate insurance expense
–
for the first quarter of
2021
we did not recognize expense due to the utilization of reserves related to our self-insured
plan.
Occupancy.
Occupancy expense (including premises and equipment) totaled $6.1
million for the first quarter of 2022, an increase of
$0.1 million or 2.2% over the fourth quarter of 2021 and an increase
of $0.1 million, or 2.1%, over the first quarter of 2021.
The
increase over both prior periods was primarily related to
software additions related to certain risk management and strategic initiatives.
Other
.
Other noninterest expense totaled $8.3 million for the first quarter of
2022, a decrease of $1.2 million, or 12.5%, from the
fourth quarter of 2021 and a decrease of $0.2 million, or 1.9%, from
the first quarter of 2021.
The decrease from the fourth quarter of
2021 was primarily attributable to lower miscellaneous expense (pension
expense of $1.6 million partially offset by a higher level of
other loss expense of $0.2 million).
Compared to the first quarter of 2021, the decrease was primarily driven by lower
miscellaneous
expense (pension expense of $0.9 million partially offset by
higher other losses of $0.2 million, higher MSR amortization of $0.1
million, hiring expense of $0.1 million, and a $0.3 million favorable
MSR valuation reserve adjustment in the first quarter of 2021).
The lower level of pension expense in 2022 generally reflected a higher
discount rate in 2022 for determining plan liabilities and
strong asset returns in 2021.
Our operating efficiency ratio (expressed as noninterest
expense as a percent of the sum of taxable-equivalent net interest income plus
noninterest income) was 77.55% for the first quarter of 2022 compared
to 81.29% for the fourth quarter of 2021 and 74.36% for the
first quarter of 2021.
Income Taxes
We realized income
tax expense of $2.2 million (effective rate of 20%) for the first quarter of
2022 compared to $2.0 million
(effective rate of 22%) for the fourth quarter of 2021
and $2.8 million (effective rate of 19%) for the first quarter of 2021.
Tax
expense for the fourth quarter of 2021 was unfavorably impacted by discrete
tax expense of $0.1 million. Absent discrete items, we
expect our annual effective tax rate to approximate 19%
-20% in 2022.
FINANCIAL CONDITION
Average earning
assets totaled $3.939 billion for the first quarter of 2022, an increase of $147.5 million, or
3.9%, over the fourth
quarter of 2021, and an increase of $440.9 million, or 12.6%, over
the first quarter of 2021.
The increase over the fourth quarter of
2021 was primarily attributable to seasonal growth in our public fund deposits. The
increase compared to the first quarter of 2021 was
primarily driven by higher deposit balances (see below
– Deposits).
Investment Securities
Average investment
s
increased $68.1 million, or 6.9%, over the fourth quarter of 2021 and increased $526.5
million, or 98.8%, over
the first quarter of 2021.
Our investment portfolio represented 26.9% of our average earning assets for the first
quarter of 2022
compared to 26.1% for the fourth quarter of 2021, and 15.2% for the first
quarter of 2021.
During the first quarter of 2022, we
initiated buy programs
to add to our investment portfolio as part of our overall Statement of Financial
Condition management,
which
were completed by the end of the first quarter 2022.
For the remainder of 2022, we will continue to monitor our overall liquidity
position and, dependent on market conditions, look for opportunities to
reinvest proceeds and/or purchase additional securities that
align with our overall investment strategy.
The investment portfolio is a significant component of our operations and, as such,
it functions as a key element of liquidity and
asset/liability management.
Two types of classifications are approved
for investment securities which are Available
-for-Sale (“AFS”)
and Held-to-Maturity (“HTM”).
During the first quarter of 2022, we purchased securities under
both the AFS and HTM designations.
At March 31, 2022, $624.4 million, or 54.6%, of our investment portfolio
was classified as AFS, and $518.7 million, or 45.3%,
classified as HTM.
The average maturity of our total portfolio at March 31, 2022
was 3.63 years compared to 3.63 years and 2.78
years at December 31, 2021 and March 31, 2021, respectively.
38
We determine
the classification of a security at the time of acquisition based on how the purchase will affect
our asset/liability strategy
and future business plans and opportunities.
We consider multiple
factors in determining classification, including regulatory
capital
requirements, volatility in earnings or other comprehensive income,
and liquidity needs.
Securities in the AFS portfolio are recorded
at fair value with unrealized gains and losses associated with these securities recorded
net of tax, in the accumulated other
comprehensive income component of shareowners’ equity.
HTM securities are acquired or owned with the intent of holding
them to
maturity.
HTM investments are measured at amortized cost.
We do not
trade, nor do we presently intend to begin trading investment
securities for the purpose of recognizing gains and therefore we do not maint
ain a trading portfolio.
At March 31, 2022, there were 673 positions (combined AFS and HTM)
with unrealized losses totaling $49.9 million.
Of these 673
positions, 501 of these positions carry the full faith and credit of the U.S.
Government (US Treasuries, SBA securities, and
GNMA
pools) and are 0% risk-weighted assets for regulatory purposes. There were
52 U.S. government agency securities issued by U.S.
government sponsored entities and carry the implicit guarantee of the
U.S. Government. We
believe the long history of no credit
losses on government securities indicates that the expectation of nonpayment
of the amortized cost basis is zero.
The remaining 120
positions (municipal securities, corporate bonds, and asset backed securities)
have a credit component.
At March 31, 2022, all CMO,
MBS, SBA, US Agencies, and Treasury
bonds held were AAA rated. Corporate debt securities had an allowance for
credit losses
totaling $21,000 at March 31, 2022 and municipal securities had an allowance
for credit losses totaling $15,000.
Loans HFI
Average loans
held for investment (“HFI”) increased $15.3 million, or 0.8%, over the fourth quarter of 2021
and decreased $80.8
million, or 4.0%, from the first quarter of 2021. Excluding SBA PPP loans, average
loans HFI increased $18.8 million compared to
the fourth quarter of 2021, and increased $115.9
million compared to the first quarter of 2021.
Compared to the fourth quarter of
2021, the increase in average loans (excluding SBA PPP loans) reflected
growth in commercial loans (primarily institutional),
residential loans, HELOCs, and consumer loans (indirect auto). Compared
to the first quarter of 2021, we realized growth in
commercial loans, construction loans, residential mortgages, and consumer
loans (indirect auto).
New loan production strengthened in
the latter part of the first quarter of 2022 resulting in period end loan growth of $54 million
over the fourth quarter of 2021. Period-end
increases were realized in most loan categories with the largest growth
in commercial loans (primarily institutional) and consumer
loans (indirect auto).
Without compromising our credit standards
,
changing our underwriting standards, or taking on inordinate interest rate risk,
we
continue to closely monitor our markets and make minor adjustments as necessary.
Credit Quality
Overall credit quality is strong and continues to improve.
Nonperforming assets (nonaccrual loans and other real estate) totaled $2.7
million at March 31, 2022 compared to $4.3 million at December 31, 2021
and $5.5 million at March 31, 2021.
At March 31, 2022,
nonperforming assets as a percentage of total assets totaled 0.06% compared
to 0.10% at December 31, 2021 and 0.14% at March 31,
2021.
Nonaccrual loans totaled $2.7 million at March 31, 2022, a $1.6 million decrease
from December 31, 2021 and a $2.8 million
decrease from March 31, 2021.
The $4.4 million increase in classified loans over the fourth quarter of 2021,
reflects one loan
relationship that is in the loan workout process and has been reserved
for at March 31, 2022.
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, 2022, the allowance for credit losses for HFI loans totaled $20.8
million compared to $21.6 million at December 31,
2021 and $22.0 million at March 31, 2021.
Activity within the allowance is detailed in Note 3 to the consolidated financial
statements.
At March 31, 2022, the allowance represented 1.05% of HFI
loans and provided coverage of 761% of nonperforming
loans compared to 1.12% and 500%, respectively,
at December 31, 2021, and 1.07% and 411%, respectively,
at March 31, 2021.
At March 31, 2022, the allowance for credit losses for unfunded commitments
totaled $3.0 million compared to $2.9 million at
December 31, 2021 and $3.0 million at March 31, 2021.
The allowance for unfunded commitments is recorded in other liabilities.
Deposits
Average total
deposits were $3.714 billion for the first quarter of 2022, an increase of $164.9 million,
or 4.6%, over the fourth quarter
of 2021 and $474.6 million, or 14.6%, over the first quarter of 2021.
Growth over the fourth quarter of 2021 was primarily
attributable to an increase in seasonal public fund deposits. Compared to the first quarter 2021,
strong growth occurred in our
noninterest bearing deposits, NOW accounts, and savings account balances.
Over the past few years, we have experienced strong core
deposit growth, in addition to growth related to multiple government
stimulus programs in response to the Covid-19 pandemic, such
as those under the CARES Act and the American Rescue Plan Act.
Given these increases, the potential exists for our deposit levels to
be volatile into 2022 due to the uncertain timing of the outflows of the stimulus related
balances, in addition to the frequency and
degree to which the Federal Open Market Committee (FOMC) raises the overnight
funds rate. It is anticipated that current liquidity
levels will remain robust due to our strong overnight funds sold position.
The Bank continues to strategically consider ways to safely
deploy a portion of this liquidity.
We monitor
deposit rates on an ongoing basis and adjust, if necessary,
as a prudent pricing discipline remains the key to managing our
mix of deposits.
MARKET RISK AND INTEREST RATE
SENSITIVITY
Market Risk and Interest Rate Sensitivity
Overview.
Market risk arises from changes in interest rates, exchange rates,
commodity prices, and equity prices.
We have risk
management policies designed to monitor and limit exposure to market
risk and we do not participate in activities that give rise to
significant market risk involving exchange rates, commodity prices, or
equity prices.
In asset and liability management activities, our
policies are designed to minimize structural interest rate risk.
Interest Rate Risk Management.
Our net income is largely dependent
on net interest income.
Net interest income is susceptible to
interest rate risk to the degree that interest-bearing liabilities mature
or reprice on a different basis than interest-earning assets.
When
interest-bearing liabilities mature or reprice more quickly
than interest-earning assets in a given period, a significant increase in
market rates of interest could adversely affect net interest
income.
Similarly, when interest-earning
assets mature or reprice more
quickly than interest-bearing liabilities, falling market interest rates could
result in a decrease in net interest income.
Net interest
income is also affected by changes in the portion of interest-earning
assets that are funded by interest-bearing liabilities rather than by
other sources of funds, such as noninterest-bearing deposits and shareowners’
equity.
We have established
what we believe to be a comprehensive interest rate risk management policy,
which is administered by
management’s Asset Liability Management
Committee (“ALCO”).
The policy establishes limits of risk, which are quantitative
measures of the percentage change in net interest income (a measure of net
interest income at risk) and the fair value of equity capital
(a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change
in interest rates for maturities from one
day to 30 years.
We measure the potential
adverse impacts that changing interest rates may have on our short-term
earnings, long-
term value, and liquidity by employing simulation analysis through the use of
computer modeling.
The simulation model captures
optionality factors such as call features and interest rate caps and floors imbedded
in investment and loan portfolio contracts.
As with
any method of gauging interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology used by
us.
When interest rates change, actual movements in different categories
of interest-earning assets and interest-bearing liabilities, loan
prepayments, and withdrawals of time and other deposits, may deviate significantly
from assumptions used in the model.
Finally, the
methodology does not measure or reflect the impact that higher rates may have
on adjustable-rate loan clients’ ability to service their
debts, or the impact of rate changes on demand for loan and deposit products.
40
The statement of financial condition is subject to testing for interest rate shock
possibilities to indicate the inherent interest rate risk.
We prepare
a current base case and several alternative interest rate simulations (-100,+100, +200,
+300, and +400 basis points (bp)), at
least once per quarter, and report the analysis to
ALCO, our Market Risk Oversight Committee (“MROC”), our Enterprise Risk
Oversight Committee (“EROC”) and the Board of Directors.
(The -200bp rate scenario was not modeled starting in the second half of
2019 due to the low interest rate environment below 2.00%). We
augment our interest rate shock analysis with alternative interest rate
scenarios on a quarterly basis that may include ramps, parallel shifts, and a flattening
or steepening of the yield curve (non-parallel
shift).
In addition, more frequent forecasts may be produced when interest rates are particularly
uncertain or when other business
conditions so dictate.
Our goal is to structure the statement of financial condition so that net interest earnings at risk over
12-month and 24-month periods
and the economic value of equity at risk do not exceed policy guidelines
at the various interest rate shock levels. We
attempt to
achieve this goal by balancing, within policy limits, the volume of floating-rate
liabilities with a similar volume of floating-rate assets,
by keeping the average maturity of fixed-rate asset and liability contracts
reasonably matched, by managing the mix of our core
deposits, and by adjusting our rates to market conditions on a continuing
basis.
Analysis.
Measures of net interest income at risk produced by simulation analysis are
indicators of an institution’s short-term
performance in alternative rate environments.
These measures are typically based upon a relatively brief period, and do not
necessarily indicate the long-term prospects or economic value of the institution.
ESTIMATED CHANGES
IN NET INTEREST INCOME
(1)
Percentage Change (12-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
Policy Limit
-15.0%
-12.5%
-10.0%
-7.5%
-7.5%
March 31, 2022
27.0%
20.1%
13.2%
6.4%
-7.4%
December 31, 2021
36.6%
27.2%
17.8%
8.7%
-6.2%
Percentage Change (24-month shock)
+400 bp
+300 bp
+200 bp
+100 bp
-100 bp
Policy Limit
-17.5%
-15.0%
-12.5%
-10.0%
-10.0%
March 31, 2022
46.8%
35.3%
23.9%
12.8%
-9.9%
December 31, 2021
55.0%
40.5%
26.1%
12.2%
-11.1%
The Net Interest Income (“NII”) at Risk position indicates
that in the short-term, all rising rate environments will positively impact
the
net interest margin of the Company,
while a declining rate environment of 100bp will have a negative impact on the net interest
margin. These metrics became less favorable in rising rate scenarios
compared to the prior quarter as slightly longer duration assets
were purchased. The percent change in NII became less favorable in the down
rate scenario as the NII base increased due to higher
rates and now has more room to fall. All scenarios are within policy.
The measures of equity value at risk indicate our ongoing economic value
by considering the effects of changes in interest rates on all
of our cash flows by discounting the cash flows to estimate the present value of
assets and liabilities. The difference between these
discounted values of the assets and liabilities is the economic value of equity,
which in theory approximates the fair value of our net
assets.
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, 2022
20.2%
16.2%
11.5%
6.3%
-14.7%
December 31, 2021
31.5%
24.6%
16.5%
8.2%
-19.0%
EVE Ratio (policy minimum 5.0%)
18.9%
18.0%
16.9%
15.9%
12.3%
(1) Down 200, 300, and 400 bp rate scenarios have been excluded due to the
current interest rate environment.
41
At March 31, 2022, the economic value of equity was favorable
in all rising rate environments and unfavorable in a falling rate
environment. EVE metrics became less favorable in a rising rate environment
due to longer duration investments purchased in the
investment portfolio, and became more favorable in the rates down
scenario as our nonmaturity deposits became more valuable as
rates rose.
EVE is currently in compliance with policy in all rate scenarios.
As the interest rate environment and the dynamics of the economy continue to change,
additional simulations will be analyzed to
address not only the changing rate environment, but also the change
in mix of our financial assets and liabilities, measured over
multiple years, to help assess the risk to the Company.
LIQUIDITY AND CAPITAL
RESOURCES
Liquidity
In general terms, liquidity is a measurement of our ability to meet our
cash needs.
Our objective in managing our liquidity is to
maintain our ability to meet loan commitments, purchase securities or repay deposits and
other liabilities in accordance with their
terms, without an adverse impact on our current or future earnings.
Our liquidity strategy is guided by policies that are formulated and
monitored by our ALCO and senior management, which take into account
the marketability of assets, the sources and stability of
funding and the level of unfunded commitments.
We regularly evaluate
all of our various funding sources with an emphasis on
accessibility, stability,
reliability
and cost-effectiveness.
Our principal source of funding has been our client deposits, supplemented
by our short-term and long-term borrowings, primarily from securities sold under
repurchase agreements, federal funds purchased and
FHLB borrowings.
We believe that the cash
generated from operations, our borrowing capacity and our access to capital resources
are
sufficient to meet our future operating capital and funding requirements.
At March 31, 2022, we had the ability to generate
$1.477 billion in additional liquidity through all of our available resources (this
excludes $790 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, 2022, we believe the
liquidity available to us was sufficient to meet our on-going needs
and execute our business strategy.
We view our
investment portfolio primarily as a source of liquidity and have the option to pledge the portfolio
as collateral for
borrowings or deposits, and/or sell selected securities.
The portfolio primarily consists of debt issued by the U.S. Treasury,
U.S.
governmental and federal agencies, municipal governments,
corporate bonds, and asset-backed securities.
The weighted average life
of the portfolio was approximately 3.63 years at March 31, 2022, and the available
for sale portfolio had a net unrealized pre-tax loss
of $31.5 million.
Our average overnight funds position (defined deposits with banks plus
Fed funds sold less Fed funds purchased) was $873.1 million
in the first quarter of 2022 compared to an average net overnight funds
sold position of $789.1 million in the fourth quarter of 2021
and $814.6 million in the first quarter of 2021.
The increase over the fourth quarter of 2021 was primarily due to growth in our
seasonal deposits.
The increase compared to the first quarter 2021 was driven by strong core deposit growth,
in addition to pandemic
related stimulus programs.
We expect our
capital expenditures will be approximately $8.0 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
Average short
term borrowings totaled $32.4 million for the first quarter of 2022 compared to $46.4
million for the fourth quarter of
2021 and $67.0 million for the first quarter of 2021. The variance over both prior
periods was primarily 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.
42
We have issued two
junior subordinated deferrable interest notes to our wholly owned
Delaware statutory trusts.
The first note for
$30.9 million was issued to CCBG Capital Trust I in
November 2004, of which $10 million was retired in April 2016.
The second
note for $32.0 million was issued to CCBG Capital Trust II in
May 2005.
The interest payment for the CCBG Capital Trust I
borrowing is due quarterly and adjusts quarterly to a variable rate of three-month
LIBOR plus a margin of 1.90%.
This note matures
on December 31, 2034.
The interest payment for the CCBG Capital Trust II borrowing is due
quarterly and adjusts quarterly to a
variable rate of three-month LIBOR plus a margin of 1.80%.
This note matures on June 15, 2035.
The proceeds from these
borrowings were used to partially fund acquisitions.
Under the terms of each junior subordinated deferrable interest note, in the event
of default or if we elect to defer interest on the note, we may not, with
certain exceptions, declare or pay dividends or make
distributions on our capital stock or purchase or acquire any of our capital
stock.
We continue to evaluate
the impact of the expected
discontinuation of LIBOR on our two junior subordinated deferrable
interest notes.
During the second quarter of 2020, we entered into a derivative cash
flow hedge of our interest rate risk related to our subordinated
debt.
The notional amount of the derivative is $30 million ($10 million of the CCBG Capital Trust
I borrowing and $20 million of the
CCBG Capital Trust II borrowing).
The interest rate swap agreement requires CCBG to pay fixed and receive variable (Libor
plus
spread) and has an average all-in fixed rate of 2.50% for 10 years.
Additional detail on the interest rate swap agreement is provided in
Note 5 – Derivatives in the Consolidated Financial Statements.
Capital
Our capital ratios are presented in the Selected Quarterly Financial Data
table on page 32.
At March 31, 2022, our regulatory capital
ratios exceeded the threshold to be designated as “well-capitalized”
under the Basel III capital standards.
Our capital ratios are presented in the Selected Quarterly Financial Data
table on page 32.
At March 31, 2022, our regulatory capital
ratios exceeded the threshold to be designated as “well-capitalized”
under the Basel III capital standards.
Shareowners’ equity was $372.1 million at March 31, 2022 compared to $383.2
million at December 31, 2021 and $324.4 million at
March 31, 2021.
During the first quarter of 2022, shareowners’ equity was positively impacted by net income
of $8.5 million, a $0.2
million decrease in the accumulated other comprehensive loss for our
pension plan, a $1.4 million increase in the fair value of the
interest rate swap related to subordinated debt, net adjustments totaling $0.5 million
related to transactions under our stock
compensation plans, and stock compensation accretion of $0.2 million.
Shareowners’ equity was reduced by common stock dividends
of $2.7 million ($0.16 per share) and a $19.1 million increase in the
unrealized loss on investment securities.
At March 31, 2022, our common stock had a book value of $21.94 per diluted
share compared to $22.63 at December 31, 2021
and
$19.22 at March 31, 2021.
Book value is impacted by the net after-tax unrealized gains and losses on AFS investment
securities.
At
March 31, 2022, the net loss was $23.6 million compared to a net loss of $4.5
million at December 31, 2021 and a $1.2 million net
gain at March 31, 2021.
Book value is also impacted by the recording of our unfunded pension liability through other
comprehensive
income in accordance with Accounting Standards Codification Topic
715.
At March 31, 2022, the net pension liability reflected in
other comprehensive loss was $13.0 million compared to $13.2 million
at December 31, 2021 and $47.1 million at March 31, 2021.
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 2021 Form
10-K “Critical Accounting Policies” and include the
weighted average discount rate used to measure the present value of the pension
liability, the weighted
average expected long-term
rate of return on pension plan assets, and the assumed rate of annual compensation
increases, all of which will vary when re-measured.
The discount rate assumption used to calculate the pension liability is subject to
long-term corporate bond rates at December 31
st
.
The
estimated impact to the pension liability based on a 25-basis point increase
or decrease in long-term corporate bond rates used to
discount the pension obligation would decrease or increase the pension
liability by approximately $4.6
million (after-tax) using the
balances from the December 31, 2021 measurement date.
OFF-BALANCE SHEET ARRANGEMENTS
We are a party
to financial instruments with off-balance sheet risks in the normal
course of business to meet the financing needs of our
clients.
At March 31, 2022, we had $763.9 million in commitments to extend credit
and $5.0 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.
43
If commitments arising from these financial instruments continue to
require funding at historical levels, management does not
anticipate that such funding will adversely impact our ability to meet our on-going
obligations.
In the event these commitments
require funding in excess of historical levels, management believes current
liquidity, advances available from the
FHLB and the
Federal Reserve, and investment security maturities provide a sufficient
source of funds to meet these commitments.
Certain agreements provide that the commitments are unconditionally
cancellable by the bank and for those agreements no allowance
for credit losses has been recorded.
We have recorded
an allowance for credit losses on loan commitments that are not
unconditionally cancellable by the bank, which is included in other
liabilities on the consolidated statements of financial condition and
totaled $3.0 million at March 31, 2022.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the Consolidated
Financial Statements included in our 2021 Form 10-K.
The preparation of our Consolidated Financial Statements
in accordance with GAAP and reporting practices applicable to the banking
industry requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses,
and to disclose contingent assets and liabilities.
Actual results could differ from those estimates.
We have identified
accounting for (i) the allowance for credit losses, (ii) valuation of goodwill, (iii) pension
benefits, and (iv) income
taxes as our most critical accounting policies and estimates in that they
are important to the portrayal of our financial condition and
results, and they require our subjective and complex judgment as a result of
the need to make estimates about the effects of matters
that are inherently uncertain.
These accounting policies, including the nature of the estimates and types of
assumptions used, are
described throughout this Item 2, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and
Part
II, Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations included
in our 2021 Form 10-K.
44
TABLE I
AVERAGE
BALANCES & INTEREST RATES
Three Months Ended
March 31, 2022
December 31, 2021
March 31, 2021
Average
Average
Average
Average
Average
Average
(Dollars in Thousands)
Balances
Interest
Rate
Balances
Interest
Rate
Balances
Interest
Rate
Assets:
Loans Held for Sale
$
43,004
$
397
3.75
%
$
62,809
$
522
3.29
%
$
106,242
$
970
3.70
%
Loans Held for Investment
(1)(2)
1,963,578
21,811
4.50
1,948,324
22,296
4.54
2,044,363
22,483
4.46
Taxable Securities
1,056,736
2,889
1.10
987,700
2,493
1.00
528,842
1,863
1.41
Tax-Exempt Securities
(2)
2,409
10
1.60
3,380
17
2.07
3,844
25
2.61
Federal Funds Sold and Interest Bearing
Deposits
873,097
409
0.19
789,100
300
0.15
814,638
213
0.11
Total Earning Assets
3,938,824
25,516
2.63
%
3,791,313
25,628
2.68
%
3,497,929
25,554
2.96
%
Cash & Due From Banks
74,253
73,752
68,978
Allowance For Credit Losses
(21,655)
(22,127)
(24,128)
Other Assets
275,353
284,999
278,742
TOTAL ASSETS
$
4,266,775
$
4,127,937
$
3,821,521
Liabilities:
NOW Accounts
$
1,079,906
$
86
0.03
%
$
963,778
$
72
0.03
%
$
985,517
$
76
0.03
%
Money Market Accounts
285,406
33
0.05
289,335
34
0.05
269,829
33
0.05
Savings Accounts
599,359
72
0.05
573,563
71
0.05
492,252
60
0.05
Other Time Deposits
97,054
33
0.14
101,037
36
0.14
102,089
39
0.15
Total Interest Bearing Deposits
2,061,725
224
0.04
1,927,713
213
0.04
1,849,687
208
0.05
Short-Term Borrowings
32,353
192
2.40
46,355
307
2.63
67,033
412
2.49
Subordinated Notes Payable
52,887
317
2.40
52,887
306
2.26
52,887
307
2.32
Other Long-Term Borrowings
833
9
4.49
1,414
12
3.50
2,736
21
3.18
Total Interest Bearing Liabilities
2,147,798
742
0.14
%
2,028,369
838
0.16
%
1,972,343
948
0.19
%
Noninterest Bearing Deposits
1,652,337
1,621,432
1,389,821
Other Liabilities
72,166
114,657
111,050
TOTAL LIABILITIES
3,872,301
3,764,458
3,473,214
Temporary Equity
10,518
13,339
21,977
TOTAL SHAREOWNERS’ EQUITY
383,956
350,140
326,330
TOTAL LIABILITIES, TEMPORARY
AND SHAREOWNERS’ EQUITY
$
4,266,775
$
4,127,937
$
3,821,521
Interest Rate Spread
2.49
%
2.52
%
2.77
%
Net Interest Income
$
24,774
$
24,790
$
24,606
Net Interest Margin
(3)
2.55
%
2.60
%
2.85
%
(1)
Average Balances include net loan fees, discounts and premiums and nonaccrual loans.
Interest income includes loan fees of $0.2 million, $0.4
million and $1.2 million for
the three months ended March 31, 2022, December 31,
2021 and March 31, 2021, 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, 2021.
Item 4.
CONTROLS AND PROCEDURES
At March 31, 2022, the end of the period covered by this Form 10-Q, our
management, including our Chief Executive Officer and
Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the
Securities Exchange Act of 1934).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded
that, as of the end of the period covered by this report these disclosure controls and procedures
were effective.
Our management, including our Chief Executive Officer
and Chief Financial Officer, has reviewed
our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934).
During the quarter ended on March 31, 2022,
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 2021 Form 10-K, as updated in our subsequent
quarterly reports. The risks described in our 2021 Form
10-K and our subsequent quarterly reports are not the only risks facing us. Additional
risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating
results.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosure
Not Applicable.
Item 5.
Other Information
None.
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
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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: May 4, 2022